Paulo Victor Vieira da Rocha, Murilo Jakuk Ferreira Lopes and Marina da Silva Fernandes of VRMA Advogados discuss the effects of the Provisional Measure No 1.152/22 regarding the deductibility of royalties from the corporate income tax assessment basis.

1. Introduction

This paper aims to analyze the very recent modifications on Brazilian legislation regarding the limits imposed to the deductibility of royalties from the corporate income tax assessment basis. Brazilian legislator have introduced these limits in the legal system due to historical reasons, seeking to prevent tax evasion. However, these limits were very widely set and affected an enormous range of taxpayers who entered in transactions with any feature of a tax planning and even less of an abusive tax planning nor tax evasion. Finally, nowadays, these limitations are being reviewed by Provisional Measure No 1.152/22 that intend to extinguish them and improve other mechanisms to prevent tax abuses, such as Transfer Pricing Rules.

2. Historical perspective

The restrictions regarding the deductibility of royalties were introduced into the Brazilian legal system by Article 74 of Law No. 3,470/58, determining that royalties could be deducted for the exploitation of industrial and commercial trademarks and invention patents, for technical, scientific, administrative or similar assistance, but up to a maximum rate of 5% of the revenue derived from the sale of the respective goods.

Also, Article 74, paragraph 1, added that the percentages allowed for the deduction should be established and reviewed periodically by act of the Minister of Finance, considering the types of production or activities, according to the degree of essentiality of the intangible goods in consideration of which the royalties are paid. Observing the degree of essentiality, the Ordinance of the Ministry of Finance No. 436/58 set forth percentages of limit that range from 1% to 5%, according to the business activity.

In addition, in 1964, Law No. 4,506 provided that, as a rule, the deduction of royalty expenses for the calculation of the corporate tax basis is admitted "when necessary for the taxpayer to maintain the possession, use or enjoyment of the good or right that produces the income." However, in its paragraphs it sets forth that royalties paid to abroad shall not be deductible.

The Supreme Court analyzed the relationship between Article 74 of Law No 3,470/58 and Article 71 of Law No 4,506/64 and decided that the last one did not revoke the first, in such way that both were in force and there was a specialty relationship between them. Law Act n. 4,560/64 is a special rule and Law Act n. 3,470/58 is the general rule. Accordingly, that limitation applies to royalties paid to abroad and to Brazilian companies as well.

All these provisions took place in a context of avoiding tax evasion and abusive international tax planning. At the time, it was a common practice that foreign controllers and Brazilian subsidiaries signed technology transfer licensing agreements, in order for Brazilian companies to pay large amounts of royalties to the controller, instead of having profits and paid dividends (which were both taxable at that time). Thus, in the past, there was enough justification to limit the payment of royalties to abroad, in order to prevent tax evasion.

The problem is that this limitation was too broad and affected companies that did not practice abusive international tax planning, or the one that did not practice international planning at all. In fact, this limitation affected companies that only needed to pay for using intangible assets – remunerable trough royalties – to develop their activities.

Concerning the limitation imposed to royalties paid to Brazilian companies, it is possible to assume that, back then, it was not very common the payment of royalties to Brazil, since the technologies were mostly imported. This fact could justify the absence of distinguishing between payments of royalties to abroad and to Brazil.

Despite the historical justifications, nowadays the Brazilian context is very different. Indeed, tax legislation provides for other mechanisms to prevent abusive international planning, such as Transfer Pricing rules and the lists of countries considered as tax heavens or with favored taxation.

In this new scenario, the inconsistency of these limitations was noticed by the Brazilian legislator that, in 2022, issued the Provisional Measure No 1.152, amending the legislation of the corporate tax to improve Transfer Pricing rules, fully repealing the provisions that set forth limits on the deductibility of royalties for payments made to beneficiaries in Brazil and abroad

3. The Provisional Measure No 1152/22

Being more specific, Provisional Measure No 152/22 coped with royalties subject revoking Article 74 of Law No. 3,470/58 and Article 12 of Law No. 4,131/62 and other related articles that ruled the maximum deduction limit of 5% of the gross revenue related to the product manufactured or sold with the use of the trademark, patent, technical assistance, etc.

As well, it revoked Article 52 and Article 71, subparagraphs "d" to "g" of Law No. 4,506/62 that ruled the impossibility of deduction of expenses with royalties and technical assistance when: i) paid by a Brazilian branch to another establishment of the same company, which is established abroad; ii) by a Brazilian subsidiary to the direct or indirect parent company abroad; iii) for partners, shareholders and legal representatives of the payor. There are some other related restrictions and limitations, but these are the main situations.

Initially, the original text of the Provisional Measure was published on 12/29/2022, then it went to the Joint Commission of the Congress (commission with members of the Senate and the House of Representatives) where it was submitted to some amendments. Then, in 02/06/2023, the Provisional Measure was sent to the house of representatives, where its text was finally approved on 04/13/2023 and thus sent to the Senate. Currently this is still in the Senate, awaiting to the start of the next steps of the deliberative procedure in this organ.

We must clarify that Provisional Measures are norms with the force of law acts in a narrow sense (acts of the parliament) edited by the President of the Republic (executive branch) in situations of relevance and urgency. Despite producing immediate legal effects, Provisional Measures need subsequent appreciation by both the Houses of the National Congress (Lower House and Senate) to become definitively an ordinary law.

The initial term of validity of a Provisional Measure is 60 days and is automatically extended for the same period if the vote is not concluded in both Houses of the National Congress – what has already happened.

The legislative procedure of a Provisional Measure consists of:

i)    Publication of the text of the Provisional Measure in the Official Gazette, then the deadlines related to its validity and its processing in the National Congress begin to be counted;
ii)    The President of the Congress, within 48 hours after the publication of the Provisional Measure, designates a Joint Commission formed by 12 Senators and 12 Deputies, responsible for previously analyzing the constitutional requirements of relevance and urgency that justify this form of legislative instrument, besides its scope and financial and budgetary suitability;
iii)    After being analyzed by that Joint Commission, the Provisional Measure is forwarded to the Plenary of the Chamber of Deputies, as a general rule, considered the initiating House of the legislative process. The discussion and votes about the measure can imply: its rejection, its approval in full, or its approval of the conversion bill (approval with amendments)
iv)    After the Chamber of Deputies, the text is sent to Federal Senate for deliberation;
v)    If the Senate approves the text received from the Chamber of Deputies with modifications, such modifications go to the analysis of the Chamber of Deputies. The amendments promoted by the Senate can be accepted or rejected by the Lower Chamber and, if approved, the measure must be sent for presidential sanction (if the conversion bill is approved) or for promulgation (if what is approved is the original text of the Provisional Measure).
vi)    In the case of approval of the Provisional Measure, the matter is enacted and converted into ordinary law by the President of the Board of the National Congress, not being subject to sanction or veto, as is the case with conversion bills. However, in case of a Provisional Measure is approved in the form of a Conversion Bill, it must sent to the President of the Republic for sanction or veto it. It will be up to the National Congress to decide about a veto and, thus, to conclude the legislative process upholding or revoking the veto.

In sum, it is a complex procedure, set forth to include the exercise of powers of both the Executive and the Legislative branch of the State power of the Brazilian Republic and it aims both on meet the urgent needs of the President but also to respect the innate capacity of Congress to legislate.

Finally, besides all of that, in February 24th , 2023, Normative Instruction RFB No. 2.132/2023 was published, which governs the taxpayer's option to apply the new rules brought by MP No. 1152/2022, for transactions occurring in the calendar year from 2023.

Among the main forecasts of IN RFB nº 2132/2023, we highlight the one that determines: for the purposes of calculating the Corporate Income Tax (IRPJ) and Social Contribution on Profit (CSLL) for the months of the calendar year 2023 prior to the exercise of the option, the taxpayer must adopt the new rules for deducting royalties. If the taxpayer has adopted the new procedure, but has not made the option for it in the electronic platform of the tax administration in the Digital System (e-cac), the taxpayer must correct the respective Federal Tax Debt and Credit Statements (DCTF) already presented and the respective bookkeeping in order to make it in compliance with the royalty deductibility limits provided for in the legislation previously in force.

4. Final considerations

As exposed, Provisional Measure 1.152 has the potential to drastically change the scenario of royalties deductibility in relation to Corporate Income Tax. Besides that, these changes may already be implemented in the current fiscal year. The next steps to be taken by the taxpayes now depend on the last stages of the legislative process.


Paulo Victor Vieira da Rocha
Partner, VRMA Advogados
Professor, Instituto Brasileiro de Direito Tributário, State of Amazonas University, Post-doctoral research fellow São Paulo University

Murilo Jakuk Ferreira Lopes
Associate, VRMA Advogados

Marina da Silva Fernandes
Associate, VRMA Advogados