Brazil clarifies how reinsurance companies are taxed

By DLA Piper on October 18, 2018

By: Alex Jorge, Leonardo Rzezinski, Rosana Gonzaga Jayme, Humberto Lucas Marini, Renato Lopes da Rocha and Marcella Hill

The Brazilian Tax Revenue has published Private Letter Ruling No. 91/2018, as a response by the General Coordination of Taxation (COSIT), which revokes Private Letter Ruling No. 62/2017.

The Response to Consultation No. 91/2018, issued in August, clarifies the way in which reinsurance companies are taxed, according to their different ways of operation in Brazil.

I – REINSURANCE OPERATIONS IN BRAZIL

COSIT has issued in this Private Letter Ruling the tax treatment to be applied to reinsurance activities in Brazil.

According to Section 4 of Supplementary Law No. 126/2007, reinsurers can be identified as legal entities, national or foreign, as follows:

local reinsurer: reinsurer headquartered in Brazil incorporated as a corporation (sociedade anônima – “S.A.”), with sole purpose of carrying out reinsurance and retrocession;
admitted reinsurer: a foreign reinsurer, with a representative office in Brazil, which has been registered by the insurance supervisory authority as such upon compliance with the requirements established in the Supplementary Law and with the applicable rules to carry-out reinsurance and retrocession activities in Brazil, and
occasional reinsurer: a foreign reinsurer headquartered abroad, without a representative office in Brazil, which has been registered by the insurance supervisory authority as such upon compliance with the requirements established in the Supplementary Law and with the rules applicable to reinsurance and retrocession activities in Brazil.

II – TAXATION OF REINSURERS

Last year, COSIT said, in Private Letter Ruling No. 62/2017, that admitted reinsurers should be taxed similarly to local reinsurers. However, according to new Private Letter Ruling No. 91/2018, an admitted reinsurer will only be taxed as a local reinsurer when the activities are carried out by a legal representative who is in fact exercising the full binding authority granted by the admitted reinsurer. Please note that, pursuant to Resolution CNSP No. 168/2007, the legal representative of the representative office is given the authority to represent the admitted in Brazil, which may or may not be exercised in practice.

On the other hand, Private Letter Ruling No. 62/2017 provided that only payments to an occasional reinsurer would be taxed as importation of services, subject to withholding income tax (imposto de renda retido na fonte − IRRF) and taxes on revenue and imported services (PIS-importation and COFINS-Importation). However, according to new Private Letter Ruling No. 91/2018, IRRF and taxes on revenue and imported services are applicable to both an occasional reinsurer and to an admitted reinsurer that carries out limited activities through the representative office.

The changes brought by Private Letter ruling No. 91/2018 arise from an official letter sent by SUSEP to the Brazilian Tax Revenue, inforing the tax authorities that even though the applicable regulation gives the legal representative of the representative office powers to bind the admitted reinsurer in Brazil, in practice there are representative offices of admitted reinsurers that only carry out commercial representation for the admitted reinsurer, being used solely for the relationship with SUSEP, sorting out regulatory issues or providing technical and commercial support to the reinsurer based abroad. Therefore, such legal representatives do not, in fact, have any commercial or operational autonomy to underwrite business, execute agreements, or receive or pay premiums or claims. Such core activities are carried out only by the admitted reinsurer abroad and not in Brazil.

Upon receiving this information on the way admitted reinsurers in fact operate in Brazil, the Brazilian Tax Revenue distinguished the legal representatives of the admitted reinsurers that use their binding authority in Brazil from those that carry out limited activities in support of the admitted reinsurer’s business.

In cases where legal representatives use their binding authority to bind the admitted reinsurer, the admitted reinsurer will be taxed as a local reinsurer. This means that, if a reinsurance agreement is executed by the legal representative of the admitted reinsurer’s representative office in Brazil, the premium payable to the admitted reinsurer will attract the same taxation due as in cases where the placement was made to a local reinsurer. On the other hand, if the representative office is not being used for such core activities (ie, final underwriting decisions and executions of reinsurance agreements), then taxation on premium payable to the admitted reinsurer will follow the rules applicable to occasional reinsurers.

The taxation of reinsurers is summarized in the table below, which compares the differences between Consultation No. 62/2017 and the new Consultation No. 91/2018.

	Private Letter Ruling No. 62/2017	Private Letter Ruling No. 91/2018
IRPJ – Corporate Income Tax	The local reinsurer and the admitted reinsurer are subject to the IRPJ, calculated by the taxable profit.	The local reinsurer and the admitted reinsurer that has binding authority carried out by a legal representative with full powers in Brazil are subject to IRPJ, calculated by the taxable profit.
CSLL – Social Contribution on Net Profits	The local reinsurer and the admitted reinsurer are subject to CSLL applicable to the insurance companies.	The local reinsurer and the admitted reinsurer that has the binding authority carried out by a legal representative with full powers in Brazil are subject to CSLL applicable to insurance companies.
PIS – Social Integration Program	The local reinsurer and the admitted reinsurer are excluded from the PIS non-cumulative bookkeeping method. The revenue related to rendering of services in reinsurance to a cedent based in Brazil are subject to the Social Integration Program with a tax rate of 0.65%.	The local reinsurer and the admitted reinsurer that has the binding authority carried out by a legal representative with full powers in Brazil are excluded from the PIS non-cumulative bookkeeping method. The revenue related to rendering of services in reinsurance to a cedent based in Brazil are subject to the Social Integration Program with a tax rate of 0.65%.
COFINS – Tax for Financing Social Security	The local reinsurer and the admitted reinsurer are excluded from the non-cumulative bookkeeping method for COFINS, applying a tax rate of 4%.	The local reinsurer and the admitted reinsurer that has the binding authority carried out by a legal representative with full powers in Brazil are excluded from the non-cumulative bookkeeping method for COFINS. The revenue related to rendering of services in reinsurance to a cedent based in Brazil are subject to the tax rate of 4%.
IRRF – Withholding Income Tax	The earnings relating to the operation of the occasional reinsurer, when paid, credited, delivered, used or sent abroad, are subject to IRRF, at a tax rate of 25%. The basis for calculation of IRRF is over 8% of the paid reinsurance premiums ceded abroad.	The earnings relating to the operation of the occasional reinsurer and the admitted reinsurer with a representative office that works only in accessory activities in Brazil when paid, credited, delivered, used or sent abroad are subject to IRRF, at a tax rate of 25%. The basis for calculation of IRRF is over 8% of the paid reinsurance premiums ceded abroad.
PIS-Importation	The importation of reinsurance service by a cedent based in Brazil is a PIS-Importation taxable event, with a tax rate of 1.65%. The taxpayer is the cedent that contracts the reinsurance service from the occasional reinsurer. The calculation basis for PIS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad.	The importation of reinsurance service by a cedent based in Brazil is a PIS-Importation taxable event, with a tax rate of 1.65%. The taxpayer is the cedent that contracts the reinsurance service from the occasional reinsurer or the admitted reinsurer with a representative office that works only in accessory activities in Brazil. The calculation basis for PIS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad.
COFINS-Importation	The importation of reinsurance service by a cedent based in Brazil is a COFINS-Importation taxable event, with a tax rate of 7.6%. The taxpayer is the cedent that contracts the reinsurance service from the occasional reinsurer. The calculation basis for COFINS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad.	The import of reinsurance service by an assigner based in Brazil is a COFINS-Importation taxable event, with a tax rate of 7.6%. The taxpayer is the assigner that hires a reinsurance service from the eventual reinsurer or the admitted reinsurer with a representative office that works only in accessory activities in Brazil. The calculation basis for COFINS-Importation is over 15% of the reinsurance premiums ceded abroad on amount paid, credited, delivered, used or remitted abroad.