Key changes in the Legislation Regarding Intellectual Property Agreements
New Central Bank Rules
Law No. 14,286 of December 29, 2021 (“Law 14,826”), the new legal framework for the foreign exchange market in Brazil, entered into force on the last December 30. As a result, the Central Bank of Brazil (“Bacen”) issued a series of regulations to regulate Law 14,826.
There were five BCB Resolutions, all dated December 31, 2022. BCB Resolution No. 277, which regulates the foreign exchange market. BCB Resolution No. 278, which regulates foreign credit and direct foreign investment operations, as well as the provision of information to Bacen. BCB Resolution No. 279, which regulates Brazilian capital abroad. BCB Resolution No. 280, which defines resident and non-resident (to be applied to individuals and legal entities). Finally, BCB Resolution No. 281 regulates transitional provisions to be observed in foreign credit and direct foreign investment operations, as well as the provision of information to Bacen.
Among the changes brought about by BCB Resolution No. 278 is the simplification of the registration of foreign capital in Brazil with Bacen. The provision of information on foreign capital is now required only in the following situations:
- foreign credit greater than US$1,000,000.00 (one million United States dollars) or its equivalent in other currencies;
- financed the importation of goods or services exceeding US$500,000.00 (five hundred thousand United States dollars) or its equivalent in other currencies, with a payment period greater than 180 days;
- prepayment of exports and foreign financial leasing in excess of US$1,000,000.00 (one million United States dollars) or its equivalent in other currencies, and with a payment term of more than 360 days;
- direct foreign investment with transactions exceeding US$100,000.00 (one hundred thousand United States dollars) or its equivalent in other currencies; and
- investment in the portfolio of non-residents in Brazil.
Royalties, technical, and similar services are no longer on the list. However, the records of royalties, technical and similar services, foreign operating leasing, rent, and charter contracts are no longer subject to registration, and those carried out prior to the effectiveness of this Resolution, are exempt from being updated, but must remain available for consultation for a period of one year after the entry into force of the Resolution. In other words, registrations that have already been made remain valid and do not need to be updated (even if changes occur in the underlying transaction) and must remain in effect for at least one year from the date of the Resolution. After this date, they may be canceled. Finally, the previous regulation stated that registration with Bacen would only be possible using the information from the INPI’s registration certificate number. Obviously, as registration with Bacen is no longer necessary, the INPI annotation is also no longer required for the remittance (although the company authorized to operate in the foreign exchange market may eventually ask for such documentation).
Finally, the Law 14.826 expressly revoked the provisions of article 14 of Law 4.131/62 and the article 50 of Law 8.383 which, in short, prohibited the remittance of royalty payments for the use of patents of invention and trademarks between a branch or subsidiary of a company established in Brazil and its headquarters established abroad or when the majority of the company’s capital in Brazil belonged to the owners of royalty receipts abroad. In this last case, the remittance was authorized only in accordance with the deductibility limit, which was also revoked by the Law 14.286.
INPI make changes to simplify the annotation and registration of technology contracts
On December 30, 2022, the Brazilian Patent and Trademark Office (“BPTO” or “INPI”) published SEI INPI No. 0747049, which establishes several changes in technical understandings and legal aspects regarding the process of annotation and registration of technology transfer agreements in Brazil.
The document was the result of discussions and recommendations suggested by the Licensing Executive Society (LES) Brazil, of which the partner Paula Mena Barreto is vice president, together with the International Chamber of Commerce (ICC-Brazil).
After analyzing the topics on the agenda, the INPI’s final decisions to simplify the annotation and/or registration system for technology agreements in Brazil were, in summary, as follows:
- Admission of digital signatures without an ICP-Brasil certificate, also waiving the need for “e-notarization” and “e-apostille” (however, the consular apostille/legalization requirement remains in the case of physical documents signed abroad);
- Waiver of initials on all pages of contracts and annexes, petitions, and electronic forms (statement of veracity of documents and information will be sufficient);
- Elimination of the requirement for two witnesses when the contract specifies that the signature will take place in a Brazilian city;
- It will no longer be required to present by-laws, articles of association, articles of incorporation, and the last amendment to the corporate purpose and consolidated legal representation of a Brazilian legal entity;
- Admission of non-patented technology licensing (know-how); and
- The removal of obstacles to the registration of contracts whose purpose is pending applications for patents, industrial designs, and trademarks, in order to enable the payment of royalties agreed between the contracting parties.
Thus, these changes that simplify the process of annotation and registration of technology agreements at the INPI contribute to the increase of investments and the development of technology in Brazil.
New Transfer Pricing Rules and Impacts to Intellectual Property Contracts
On December 29, 2022, Provisional Measure (MP) No. 1,152/2022 was published, introducing new Transfer Pricing rules in line with the OECD Guidelines.
According to the Federal Government, one of the main objectives of the new Transfer Pricing rules is to adhere to the Arm’s Length Principle and mitigate the problems arising from the recent change in US tax policy, which restricted the Foreign Tax Credit (FTC), faced by US companies investing in Brazil, and avoid tax collection losses. Moreover, the new Transfer Pricing rules are part of the requirements for Brazil to become a member of the OECD.
The new rules become effective on January 1, 2024. However, companies may opt for early adoption as of January 1, 2023, if they wish.
The National Congress must pass the MP 1552/2022 into law within 120 days, or it will lose its force..
Among the main novelties brought by the MP 1,152/2022, we highlight:
Comparability analysis based on functions performed, assets used, and risks assumed;
- Profit-based methods, i.e., Net Transaction Margin method (MLT) and Profit Split (MDL), in addition to unspecified methods;
- The “most appropriate method” rule, with a general preference for the Comparable Uncontrolled Price method (PIC);
- Specific provisions that are applicable to transactions with: commodities, intangibles, services, cost-sharing agreements, business restructurings, and financial transactions (including loans and advances, financial guarantees, insurance contracts, and cash pooling).
The new rules set forth in the MP put an end to the current limits on the deductibility of passive royalties and the need to register contracts with the INPI for deductibility purposes since the MP expressly revoked article 74 of Law 3,470/58, articles 12 and 13 of Law 4,131/62, and article 50 of Law 8,383/91, among other legal provisions. Therefore, the deductibility limits based on pre-defined percentages, between 1% and 5%, depending on the type of industry and technology, according to the Finance Ministry’s Ordinances, such as MF Ordinance No. 436/58, will no longer be applicable.
The determination of the remuneration for intangibles, generally through royalties or license fees (in some cases, service fees), will be based on the comparability criteria established in the legislation in accordance with the OECD’s Arm’s Length Principle, which seeks market comparables in transactions between unrelated parties to determine the appropriate percentage for deductibility purposes (or revenue recognition, in the case of active royalties).
It is worth noting that the repeal of items “d” to “g” of the sole paragraph of art. 71 of Law 4.506/64 will put an end to doubts over the deductibility of royalties paid by companies in Brazil to their parent companies abroad, a highly controversial topic between the Federal Tax Authorities and taxpayers.
However, the MP determines that royalties and service fees for technical, scientific, administrative, or similar assistance are not deductible when paid (i) to entities resident or domiciled in a country with favored taxation or that are beneficiaries of a privileged tax regime, as per articles 24 and 24-A of Law 9430/96; or (ii) to related parties, when the deduction of the amounts results in double non-taxation under the hypotheses defined in the MP.
It is important to note that a Normative Ruling by the Brazilian Federal Revenue Office is still pending and will be issued to regulate the new MP.
In fact, the MP introducing the new Transfer Pricing rules in the OECD standard, together with the Central Bank and BPTO changes described above, facilitates the business environment for Brazilian companies and foreign investors, as well as fosters access to new technologies for the country at a more efficient and much less bureaucratic cost.
Finally, it is recommended that companies in Brazil review their contracts with their related parties or entities located in tax havens or subject to privileged tax regimes, adapting to the new Transfer Pricing rules as of January 1, 2004, unless they opt for early adoption for calendar year 2023.
Partner, Co-Head of Tax and Co-Leader of the Latin America Practice Group at DLA
Paula Mena Barreto
Intellectual Property and Data Protection Partner
Roberto Vianna do R. Barros
Banking and Finance Partner