February 02, 2005 | By Keith Martin in Washington, DC

BRAZIL moved in December to tax foreigners on gains in the value of shares in their Brazilian subsidiaries caused by fluctuating exchange rates.

The government has been attempting since 2002 to collect both income taxes and a social contribution tax on net profits — called a CSLL tax — from foreign parent companies on the appreciation in share value in their Brazilian subsidiaries caused by exchange rate variations. The US dollar appreciated 8.5% against the Brazilian real from January to June last year, but lost 7% in value measured over the entire year. The government based its past collection efforts on a directive that the Brazilian tax department issued in 2002.

Most companies have been able to avoid payment because of court decisions that such taxes much be based on a law rather than a tax department directive. 

Therefore, the government moved last month to provide a proper legal basis by imposing the taxes through a decree, number 232, that appeared in a special edition of the official gazette on December 30.
Under the decree, CSLL tax must be paid on capital gains due to exchange rate variations starting in April 2005. Income taxes will also have to be paid starting in January 2006. 

The government also moved in December to stimulate investment in new plant and equipment. Law No. 11,051, enacted at year end, increased the depreciation rate for machinery and equipment from 10% a
year to 25% a year. The faster writeoffs only apply to machinery and equipment purchased between October 2004 and December 2005.