On March 30, 2020, the President of Brazil enacted the Provisional Measure No. 930 (MP 930) which, among other relevant aspects, provides the inclusion, in the basis of corporate income tax and social contribution on net profits, of currency exchange fluctuations on investments of financial institutions (and others authorized to operate by the Brazilian Central Bank – Bacen) in controlled foreign companies, connected with hedge transactions.
As per the MP 930, this inclusion should be made from 2021 on, as follows:
(i) for 2021, 50% of the currency exchange variation;
(ii) from 2022 on, 100% of the currency Exchange variation.
In principle, the inclusion of the referred currency exchange fluctuations in the calculation of IRPJ and CSLL should make the hedge gains or losses neutral in the above indicated percentages.
We point out that, with this measure, it is also allowed the offset of negative currency exchange fluctuation on such investments with revenues resulting from hedge transactions for tax purposes in the future. Moreover, MP 930 does not include investments in foreign affiliate companies, but only in controlled foreign companies. Finally, it is legally doubtful whether the fact that part of the foreign currency exchange fluctuation in controlled foreign companies’ investments is object of a hedge transactions could imply in characterization of taxable income.
The Brazilian Federal Revenue will issue regulations to detail how the above will be applied.
In addition, for financial institutions with judicial liquidation or bankruptcy being decreed after 03/30/2020, MP 930 provides that relevant balance of credits arising from tax losses carryforwards and negative CSLL calculation base resulting from hedge operations on investments of controlled companies abroad should be deemed as presumed tax credit. For this purpose, relevant credits should be originated transactions in the period from 01/01/2018 to 12/31/2020. This possibility must be applied until 12/31/2022.
Our tax practice is available for any clarification required and to assist in respect of the above measures.