New law introduces changes to the remittance of royalties abroad

Last year ended on a positive note for IP transactions involving the remittance of royalties abroad.  Law 14,286 was published on 30 December with the objective of simplifying and modernising Brazilian foreign exchange regulation, notably in relation to operations involving Brazilian capital abroad and foreign capital in Brazil.  

This new law, which is part of the Central Bank’s innovation agenda, will come into force on 30 December 2022 - one year after its official publication. It will launch important changes to some of the conditions and limitations related to the remittance of royalties, arising from IP contracts, abroad.

Two major changes should be highlighted.

First, the registration formalities of IP-related contracts. Typically, an IP contract (eg, a technology transfer agreement or a patent and trademark licence agreement) is registered at the National Institute of Industrial Property (INPI) in order to:  

• be binding on third parties;
• permit the remittance of royalties abroad; and
• allow tax deduction of the amounts paid as royalties.

In other words, the INPI’s approval of such agreements is vital not only for Central Bank registration (making overseas remittance of payments feasible), but also for a licensee to classify the amounts disbursed as allowable expenses.

Law 14,286 changes this requirement by establishing that the remittance abroad in the form of royalties, scientific, administrative and technical assistance depends only on proof of payment of income tax. Registering the contract at both the INPI and the Central Bank will no longer be required. Additionally, the need to submit proof of validity of Brazilian patents and trademarks and other documents considered essential to ensure remittance of royalties at the Central Bank, as well as company registration, shall no longer be necessary. Only proof of income tax payment will be required.

Even though the remittance of royalties abroad will be viable regardless of any registration, Law 14,286 does not revoke mandatory registration of IP contracts at the INPI for tax deduction purposes.

Second, the law alters limits to the amount of royalties to be remitted abroad. According to Brazilian tax legislation, contracting parties are responsible for respecting the tax deduction limits established in Ordinance 436/58 dated 30 December 1958. For instance, depending on what is filed, it is possible to deduct between 1% and 5% of the revenue generated by the exploitation of a licensed technology. The same rule applies to the remittance of royalties abroad. There may formerly have been a reason for this limitation, but currently it makes Brazil less attractive to foreign investors.

Law 14,286 revokes limits on the remittance of royalties abroad, even when the transaction involves companies from the same economic group (ie, payments by a subsidiary to its parent company or to a company that holds the majority of the capital of the Brazilian company). Hence, the Central Bank can no longer limit royalty payments to 5% of the revenue generated by the exploitation of a licensed technology, for instance. Nevertheless, Law 14,286 does not revoke the limits established in Ordinance 436/58 for tax deduction purposes.

These changes represent significant improvements to Brazilian tax legislation concerning royalties arising from IP contracts, particularly given that Brazil is in the process of joining the Organisation for Economic Co-operation and Development.