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Additional Updates on Withholding Tax on Lease Payments

In aftermath of Normative Instruction 1658, which blacklisted Ireland as a “tax haven” and raised many concerns about the impacts in the Brazilian aviation industry, the federal authorities issued today Normative Instruction 1662 as a result of pressure from the Brazilian operators. The intention was to make sure that payments to Irish operating lessors would remain exempted from withholding tax, but the new Normative Instruction seems to be unable to sort out the issue as the wording is unclear.

At first reading, one could understand that the withholding rate changed from 25% to 15% on operating lease amounts and paid to entities located in any tax haven by any operator, except for airlines, who would not deduct withholding tax under any circumstance (i.e. under finance or operating leases with lessors located in anyjurisdiction). Such exemption for airlines will be valid until December 31, 2022.

However, the language of Normative Instruction 1662 is dubious and inconsistent with the Central Bank rules that authorize the remittance of funds from Brazilian lessees to foreign entities. As a result, the new Instruction might not help at all.

 It is our knowledge that one Brazilian airline filed a claim before a federal court and obtained an injunction to refrain from deducting withholding tax on payments due to Irish lessors until the end of 2016. It is likely that other operators will adopt a similar strategy while the change of law and additional adjustments continues, but if therules remain as currently issued, most likely outcome is the restructuring of operating lease structures with the considered lower tax jurisdiction.

Felsberg’s Aviation and Tax Law Departments are available to assist clients in this matter. For more information please contact: João Paulo Servera (jpservera@felsberg.com.br), Thiago Medaglia (thiagomedaglia@felsberg.com.br) and Marcela Correa (marcelacorrea@felsberg.com.br).

FELSBERG ADVOGADOS

AVIATION DEPARTMENT

This article is of a solely informative nature, and does not contain any opinion, recommendation or legal advice from Felsberg Advogados concerning the subject matter covered.

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