Foreign exchange rules update facilitates remittance of royalties abroad

With the purpose of reviewing and updating the set of rules related to the foreign exchange market, Brazilian Congress passed, under the sanction of the Presidency of the Republic, Law No. 14,286/21 on December 30, 2021 (the “New FX Market Law”).

The New FX Market Law revises the most fundamental rules of the Brazilian exchange market and, equally important, introduced significant modifications to the rules concerning (i) Brazilian capital abroad, (ii) foreign capital in Brazil, and (iii) the submission of control and statistical macroeconomic information to the Brazilian Central Bank (“BACEN”).

Although already valid, the New FX Market Law will only come into force on December 30, 2022, allowing enough time for the market to become acquainted with the new legal framework and start tapping into the greater flexibility that the New FX Market Law is expected to offer. In this regard, the remittance of royalties abroad will be favored as a result of the new rules, as follows:

• Revocation of the limit for remittance of royalties by a Brazilian affiliate or subsidiary to its parent company abroad (payments between subsidiaries and controlling companies)

One of the innovations brought by the new legal framework refers to the elimination of the long-standing limit for the remittance of royalties by a branch or subsidiary of a company established in Brazil to its parent company based abroad (payments between controlled and controlling companies).

To date, the statutory rules still in place prohibit the remittance of royalties between foreign subsidiaries and their parent companies abroad in amounts exceeding the Corporate Income Tax (“IRPJ”) deductibility limit, which ranges from 1% to 5% of the net revenue of the products manufactured or sold, depending on the nature of the remittance.

The limits related to IRPJ deductibility would apply, in principle, to royalty expenses for patent exploitation, trademark use, technology transfer (know-how), or technical, scientific, administrative, or similar assistance.

As of December 30, 2022, such restrictive rule will no longer be in force, as a result of the alteration introduced to article 9 and the repeal of article 14 and its sole paragraph, both from Law 4,131/62.

• Remittance of royalties and prerogative of deduction of such expenses no longer depend on registration with the Central Bank

Furthermore, it is worth noting that the remittance of royalties will no longer require prior registration with BACEN. Likewise, no registration is required in connection with the deduction of such expenses for tax purposes.

The revision of the existing exchange and tax restrictions on the remittance of royalties is a welcome change, as it is aligned with the Brazilian legal system updating process, eliminating bureaucratic control activities and thus freeing up the inflow of innovation and technology to Brazil.

Demarest’s Banking, Tax, and Intellectual Property practices are entirely available to provide support on the analysis of consequential practical impacts on their clients’ operations.