Note that on 29 November 2022 major changes have been introduced to cost contribution agreements (see here).
- Cost contribution agreements (“CCAs”) allow for the sharing of costs among companies of the same corporate group.
- Brazil adopts the OECD definition of CCAs. However, the rules applicable to CCAs in Brazil are restrictive.
- Any mistakes in CCAs will lead to higher taxes and hefty penalties.
- It is strongly recommended that CCAs involving Brazilian subsidiaries be reviewed by local lawyers.
What is a cost contribution agreement?
A cost contribution agreement (also known as a cost sharing agreement (“CCA”) is a contract made to allow companies within the same corporate group to share the contributions for the development of new products, services or intellectual property rights or the operation of different entities that make up the group.
Brazil’s Federal Revenue Department (“RFB”) has adopted the definition of cost contribution agreement formulated by the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017. The Guidelines provide as follows:
“A CCA is a contractual arrangement among business enterprises to share the contributions and risks involved in the joint development, production or the obtaining of intangibles, tangible assets or services with the understanding that such intangibles, tangible assets or services are expected to create benefits for the individual businesses of each of the participants”.
Further, the RFB follows the position described in the Guidelines in relation to entities that merely supply services but do not receive an interest in the output of the cost sharing agreement – in these cases, the service provider is to be compensated for the services on an arm’s length basis which is external to the cost sharing agreement. The RFB also adopted the Guidelines’ classification of cost sharing agreements into two types: CCAs for development and CCAs for services.
For there to be a cost sharing agreement for the purposes of Brazilian tax law the agreement must set out:
- the division of costs and risks directly relating to the development, production or acquisition of goods, services or rights;
- the contribution of each company (which has to be consistent with the benefits expected or actually received individually by each company);
- the benefit, specifically, to each company of the group (if it is not possible to assume that the company may expect any benefit from the shared activity, then the company will not be considered part of the cost sharing agreement);
- the terms for reimbursements (the refunds of the costs relating to the effort or relinquishment incurred in carrying out an activity with no additional profit share);
- the “collective character of the advantage” offered to all the companies in the group (that is, the document has to contain equal terms to the entities that are part of the group);
- the payment for the activities, regardless of their actual use (that is, the activities may simply be made available to the other companies in the group); and
- the provision of terms that any company, under the same circumstances, would be interested in retaining the services.
In addition to these criteria, the RFB confirmed that every CCA must be a formal written document providing the total incurred costs in such way that allows the assessment of the proportionality of the contributions and benefits of each company in the group.
Are all the costs provided in the CCA deductible?
- “necessary, normal and usual”;
- paid by the party claiming the benefit;
- proved by the party claiming the benefits if audited by the RFB;
- “calculated in accordance with reasonable and objective criteria”;
- described in a written document signed by the parties (together with their respective calculations);
- related to the actual expense of each company and the total price paid for the goods and services.
The main entity sharing the costs must also:
- share the costs and expenses “identically” among the entities that are part of the arrangement (always in accordance with the set sharing criteria);
- account for the amounts to be reimbursed as receivables; and
- have a separate set of accounts for all matters directly relating to the sharing of administrative expenses.
How are the different services and intellectual property rights taxed by the RFB?
Where the services and intellectual property rights are sufficiently described in the CCA and the invoicing by the Brazilian entity, then each type of service and intellectual property right will be taxed according its applicable rules (see further here).
What about transfer pricing issues?
Care should be taken in relation to transfer pricing rules that may apply to the CCA, including at the Brazilian end (see further here).
Due to the strict requirements imposed by the RFB on the validity of CCA and deductibility for the purposes of IRPJ and CSLL. Cost contribution agreements that have a Brazilian party should be carefully drafted and reviewed by a Brazilian lawyer prior to being finalised.
Last modified: November 8, 2023