Tax Newsletter: Cost Sharing – Reimbursement by expense apportionment shall not subject to taxation

Through Consultation Solution no. 139/2021, the Brazilian Federal Revenue Service – RFB reinforces the understanding that companies participating in economic groups and centralizing back-office services should not collect taxes on the amounts received as reimbursement from interconnected and/or controlled companies that are the ‘takers’ of these services. The operation is not subject to IRRF (15%), CIDE (10%), PIS (1.65%) and COFINS (7.6%), since these amounts do not correspond to sales or profit for tax purposes.

Considering the growth of relationships amongst companies belonging to the same corporate group, despite the lack of specific legislation, Brazil needed to adapt to the new context that replaced the traditional model, of companies acting independently. This contractual modality, which is conventionally called cost-sharing agreements, is a business arrangement that is usually carried out amongst companies of the same economic group, which consists of the centralization, in one of them, of the administrative activities (i.e. accounting, human resources, information technology, etc.) used by the others.

In this type of contract, one of the companies in the group concentrates these activities (“parent company”), incurring the costs of executing or making available the services that benefit the other companies in the group, to be later reimbursed by the benefited company (equity recovery), according to pre-established apportionment criteria.

To avoid wrongful taxation, companies in this situation must be careful to formalize the apportionment agreement in the contract, demonstrating that the objective is not to obtain profit – as would occur in an ordinary service provision contract – observing the characteristics outlined in Inquiry Solution No. 08/2012 and COSIT Divergence Solution No. 23/2013, so that the operation is considered valid and legitimate.

Furthermore, it is essential that the companies that provide back-office services must observe some requirements to avoid any inquiries from the tax authorities, such as: (i) formal execution of an apportionment agreement, clearly describing its purpose; (ii) demonstrate the effective cost and allocation of expenses, based on accounting principles; and (iii) the activities developed shall not be characterized as “end-activity” of the participating company.

It can be observed, therefore, that despite the favorable positions taken by the RFB and by the Administrative Council of Tax Appeals – CARF, the agreement for apportionment and sharing of expenses is an instrument of delicate compliance and must be drawn up by a qualified professional and a specialist on the subject.

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