General aspects of federal taxation of the legal entities in Brazil17 de September de 2019 | Publications
Income Tax and Social Contributions (CSSL, PIS, COFINS)
- There are 3 (three) systems of calculating the Corporate Income Tax: (i) the Presumed Profit (“Lucro Presumido”); (ii) the Actual Profits (“Lucro Real”); and (iii) Tax Authorities’ Assessment of Profits (“Lucro Arbitrado”).
- In addition to the Corporate Income Tax, there are three social contributions which the company must pay: (i) the Social Contribution on Profits (CSSL), which is a social contribution that funds the Social Security System, assessed on the net corporate profits before the Income Tax; (ii) the Social Integration Tax (PIS), which is a revenue-based contribution to fund Social Security; and (iii) the Social Contribution Tax (COFINS), which is also assessed based on the company’s monthly revenue. As a general rule, the calculation of such social contributions depends on the Income Tax system elected by the company.
Tax Authorities’ Assessment of Profits is not an option of the taxpayers but rather a “penalty” imposed by the Tax Authorities when the company does not follow the accounting methods and does not keep properly its fiscal books and records.
Presumed Profit System
- The Presumed Profit system may be elected by companies which has accrued a maximum gross revenue of R$ 78,000,000.00 (seventy eight million Reais) in the latest calendar year, or the equivalent to R$ 6,500,000.00 (six million five hundred thousand Reais) per month of activity, in case the company was in operation for less than 12 months.
- It has two advantages: (a) the company may save tax if the actual profit is higher than the calculated under the Presumed Profit system; and (b) bookkeeping requirements are less stringent.
- The option to calculate the Income Tax by using the Presumed Profit system is available to taxpayers only once a year, and such an option, as a general rule, may not be changed during the entire fiscal year. The election is exercised by means of the payment of the first – or sole – due tax amount share. Notwithstanding the foregoing, Brazilian Internal Revenue Service has adopted the understanding that the election of the Income Tax system is exercised with the payment of the Federal Social Contributions to fund the Social Security (PIS and COFINS) – that is prior to the payment of the first – or sole – Income Tax amount share.
- Under the Presumed Profit system, the Income Tax is accrued in a quarterly basis, that is to say on March 31st, June 30th, September 30th and on December 31st of each fiscal year.
- The taxable basis of the Income Tax calculated under the Presumed Profit System is presumed and the taxable basis will be calculated using rates, which varies according to the type of the activity performed by the company.
- Accordingly the taxable bases would be: a) 8% of the revenue related to the sales of products or goods in case the company´s activities is the sale of goods, with the deductions of the sales canceled and the goods returned, being observed other legal criteria for defining the taxable basis; b) As for the services providers, as a general rule, the taxable basis would be met by using the rate of 32% on the revenue arising out of the services. There are exceptions to this rule, such as the medical care services and certain types of clinical laboratories.
- Income Tax will be levied at the rate of 15% (fifteen per cent) over the presumed taxable basis obtained as described above . The company will be subject to an additional income tax on the taxable basis amount that excides R$ 20,000.00 (twenty thousand Reais) for each month of the respective quarter. Such additional tax shall be levied at a rate of 10% (ten per cent).
- CSLL’s taxable basis for companies under the Presumed Profit system is equivalent to 12% (twelve per cent) of the gross revenue quarterly accrued in what regards the sales of goods and products. As for the render of services, CSLL’s taxable basis is 32% (thirty two per cent) of the revenue quarterly accrued
- CSLL is levied at a rate of 9% (nine per cent).
- PIS and COFINS will be levied respectively at rates of 0.65% and 3% upon the monthly gross revenue amount, regardless of its accounting classification. Companies under the Presumed Profit system are subject to the cumulative rule of PIS and COFINS
Actual Profits System
- The other system to calculate the corporate Income Tax is the Actual Profit system (“Lucro Real”). Such system is mandatory to companies which, among others:
(a) have gross revenues which excide R$ 78 million within a year, or proportionally to the number of months, when the company has started operations in less than one year;
(b) receives profits, earnings or capital gains from abroad; or
(c) are under tax benefits such as Income Tax exemption or reduction;
(d) render services related to credit, like management of credits, accounts payable and receivables, risk selection, factoring.
- The taxable basis for the Income Tax in the Actual Profits’ system is the company’s actual profit, which is the company’s net profit (considered as the algebraic sum of operational profit, of non-operational results and of corporate participations) corresponding to the base period, adjusted by additions, exclusions and compensations provided by the Law. The due tax amount is calculated by applying a rate of 15% (fifteen per cent) over the taxable basis – company’s net profit.
- The surtax is levied on the taxable basis amount that excides R$ 20,000.00 (twenty thousand Reais) multiplied by the number of months comprised in the calculation period at a 10% (ten per cent) rate.
- CSLL is levied at a rate of 9% (nine per cent) over the taxable basis mentioned above.
- The PIS and COFINS follow the non-cumulative rule concerning companies under the Income Tax Actual Profit system as established by Laws n. 10,637/02 and n. 10,833/03. In these cases, the rates applicable are respectively 1.65% and 7.6% on gross revenues. Under the non-cumulative rule the company may have some tax credits against its PIS and COFINS debits regarding some of its costs and expenses, as well as regarding the PIS and COFINS due on importation (PIS-Import and COFINS-Import).
- Very small companies (those which annual gross revenue is equal or less than BRL 360.000,00) and Small Companies (that have a yearly gross revenue which exceeds BRL 360.00,00 up to BRL 4.800.000,00) have also the possibility to choose the Special Unified Tax Payment Procedure – in Portuguese SIMPLES, which involves the unified payment of Corporate Income Tax, PIS, COFINS, CSLL, Social Contributions and Excise Tax. In some cases SIMPLES includes also the Value Added Tax on Sales – ICMS and/or the Services Tax – ISS.
- Nevertheless, companies are not able to apply for the SIMPLES if, among others: (i) any of its quotaholders is a company; (ii) if any of its quotaholders is domiciled abroad; (iii) the company is a branch, agency or representative in Brazil of a foreign company domiciled abroad; (iv) that are incorporated as a corporation; (v) that have debts with the Social Security or with the Federal, State or Municipal Tax Authorities and with no injunction relief to dismiss the tax collected; (vi) in which the quotaholder has equity in another company equivalent to more than 10% of the corporate capital, and the annual gross revenue of such company is greater than BRL 4.800.000,00; (vii) if the company´s quotaholder is the manager or the equivalent of another company which yearly gross revenue exceeds BRL 4.800.000,00.