Until March 2008, only Instituto Brasileiro de Resseguros - IRB (a company under the control of the Brazilian Federal Government) could provide reinsurance cover to Brazilian insurance companies.
From April 2008, Complimentary Law 126/2007 revoked the monopoly on Brazilian reinsurance activities and opened the Brazilian reinsurance market to companies other than IRB, including foreign companies. As such, reinsurance companies are now able to provide reinsurance cover to Brazilian insurance companies as one of the following types of reinsurer:
I. Local reinsurer: a reinsurance company incorporated in Brazil, operating under Brazilian insurance/reinsurance regulatory supervision (Superintendência de Seguros Privados - SUSEP), exclusively providing reinsurance and retrocession;
II. Admitted reinsurer: a foreign reinsurer authorised by SUSEP to provide reinsurance in Brazil; the reinsurer must have a representative office in Brazil. This authorisation allows the admitted reinsurer to operate in Brazil on a continual basis; or
III. Eventual reinsurer: a foreign reinsurer authorised by SUSEP to provide reinsurance in Brazil on an infrequent basis; the reinsurer does not require a representative office in Brazil.
In general, local reinsurers are subject to corporate income tax at 45% and a 4.65% PIS/COFINS on gross premiums less claims paid. Before the recent Brazilian Tax Authority ruling n. 62/2017 (“Solução de Consulta” or “SC62”) in January 2017, a representative office of an admitted insurer was subject to corporate income tax at 34% on the profits generated from the services provided to the foreign reinsurer and would broadly be exempt from PIS/COFINS on the service fees received from the foreign reinsurer. The representative office was not considered to be undertaking reinsurance activities, merely representing the foreign reinsurer at SUSEP and undertaking local customer related activities, preparatory or ancillary activities associated with the reinsurance business of the foreign reinsurer.
In SC 62, the Brazilian Tax Authorities assert that their view is that the activities of such representative offices are not merely representing the foreign reinsurer at SUSEP, undertaking local customer related activities, preparatory or ancillary activities associated with the reinsurance as the reinsurer’s local representative has sufficient authority to conclude contracts with local insurers/reinsurers on behalf of the foreign reinsurer. Accordingly, it is the Brazilian Tax Authorities’ view that a Brazilian PE of the foreign reinsurer is created by the activities of the local representative on behalf of the foreign reinsurer and as such, the reinsurance business profits attributable to this PE should be subject to tax on the same basis as local reinsurers.
The potential impact of this ruling for admitted reinsurers is summarised below:
|Description||Tax burden before SC62||Tax burden after SC62|
|Corporate income taxes (IRPJ tax and CSLL tax)||None||45% over|
|PIS tax and COFINS tax||None||4.65%|
|Taxes levied on payment of reinsurance premiums to foreign reinsurer||Withholding income tax, 2% (25% over 8% of reinsurance premium); PIS
tax and COFINS tax: 1.53% (9.25% over 15% of reinsurance premiums, grossed up
PIS tax and COFINS tax basis calculation)
In light of the uncertainty created by SC62, we recommend that admitted reinsurers operating in Brazil undertake a risk assessment to understand the level of risk associated with the following:
(a) the Brazilian representative office representing the foreign reinsurer at SUSEP for legal purposes (with respect to civil aspects, receiving consumption related claims from Brazilian customers and others) and reporting information relating to the operations of the foreign reinsurer in Brazil to SUSEP; and
(b) the strength of the representative office's commercial relationships with Brazilian customers, the representative office facilitating the underwriting of
reinsurance policies (risk acceptance and claims incurred) and the
representative office undertaking auxiliary activities associated with the
underwriting of the reinsurance policies with no authority to resolve any
issues on behalf of the foreign reinsurer.
On the basis of the outcome of this risk assessment, the foreign reinsurer could take the following actions:
I. File a lawsuit asserting the non-existence of Brazilian permanent
establishments in respect of the foreign reinsurance operations. This would
also give the foreign reinsurer the benefit of certainty over the Brazilian
tax treatment of the Brazilian reinsurance operations; and / or
II. Evaluate and amend the operating model of their foreign reinsurance
operations in Brazil to ensure compliance with the legislation (and SC62) in
force and to mitigate the risk of the Brazilian Tax Authority making a tax assessment in respect of a Brazilian PE of the foreign reinsurer.
Edilberto Salge - firstname.lastname@example.org
Celso Alcantara - email@example.com
Carlos Guilherme Sefrin - firstname.lastname@example.org
Helio Hanada - email@example.com