The Brazilian Federal Revenue Service consolidated the understanding that U.S. LLCs with non-U.S. resident ownership and treated as fiscally transparent entities may be characterized as a privileged tax regime.
Although the Tax Ruling was issued in the context of individual income tax (IRPF), the matter also deserves attention from a transfer pricing perspective.
With Law No. 14,596/2023, Brazil’s new transfer pricing framework maintained and reinforced the application of transfer pricing rules to transactions carried out with entities located in low-tax jurisdictions or benefiting from privileged tax regimes, even in the absence of a typical corporate relationship between the parties.
In practice, this may impact transactions such as:
– royalty payments to LLCs holding intangible assets;
– administrative or technology service agreements;
– intercompany loans and interest payments;
– import and export transactions;
– international distribution structures;
– cost-sharing agreements;
– compensation for the use of software, platforms, and intellectual property;
– corporate reorganizations involving foreign assets.
In many cases, companies that previously did not consider themselves subject to transfer pricing rules may now be required to demonstrate compliance with the arm’s length principle and prepare specific documentation.
In practice, structures involving LLCs may require a broader review of:
– the tax classification of the counterparty (for example, assessing whether the LLC is treated as a transparent or opaque entity abroad and whether it may be characterized as a privileged tax regime in Brazil);
– transfer pricing documentation (including master file, local file, and evidence supporting arm’s length compliance);
– functional analysis and economic substance (evaluating functions performed, risks assumed, assets used, and the entity’s actual economic presence abroad);
– policies related to interest, royalties, services, cost sharing, and intercompany charges (to validate whether compensation is aligned with market conditions);
– risks of IRPJ/CSLL adjustments (especially in cases where the Brazilian tax authorities understand that the amounts charged do not reflect arm’s length standards).
The classification of foreign entities is no longer just a discussion related to asset protection or succession planning. It now directly impacts the tax governance of groups operating across borders.
Given this scenario, Brazilian companies transacting with LLCs should review their structures, intercompany agreements, and transfer pricing policies before closing their respective tax obligations.
Drummond Advisors has a specialized Transfer Pricing & Cross-Border team available to assist companies in assessing the potential impacts arising from Brazil’s new transfer pricing rules, including the review of international structures involving LLCs, intercompany agreements, transfer pricing documentation, and compliance with the arm’s length principle under Brazilian legislation and OECD guidelines.
Written by Adriana Lemos, Transfer Pricing & Cross-Border Strategy Lead at Drummond Advisors