Transfer of Employees Between U.S. and Brazilian Employers

1. Transfer of Employees Between U.S. and Brazilian Employers Renata Neeser, White & Case LLP Maria Isabel Tostes da Costa Buena, Mattos Filho Advogados Andrea Bazzo Lauletta, Mattos Filho Advogados Donald Dowling, Jr., White & Case LLP John Lillis, White & Case LLP

2. Introduction • Over-arching issues of expatriate structure (see newsletters in materials) • Expatriate structure • Expatriate checklist • Applicable employment law • Choice-of-law clauses (and problems) • In any secondment or assignment of one or more employees from a U.S. employer to a Brazilian affiliate (or to Brazil generally), or alternatively, from a Brazilian employer to a U.S. affiliate (or to the U.S. generally), one must consider the tax consequences to the U.S. or Brazilian home country employer and the to the individual employees. BRAZIL-U.S. TRANSFER OF EMPLOYEES

3. Issues for Employers Transferring Employees to a Host Country • Will the home country employer be treated as engaged in business in the host country and subject to host country income tax as a result of the presence of one or more employees in the host country? • Are there host country income tax return filing obligations for the home country employer? • Are there any host country estimated income tax payments or other periodic income tax payment obligations imposed on the home country employer? • Will the home country employer become subject to any host country requirements to withhold income taxes on payments made to the transferred employee or employees? • Are there host country withholding tax return filing obligations? • Are there periodic payment obligations of withheld tax? • When must withholding tax returns be filed with the host country tax authorities? • Will the home country employer be subject to any host country obligations to pay social security taxes or other employment taxes (e.g., unemployment insurance)? BRAZIL-U.S. TRANSFER OF EMPLOYEES

4. U.S. Tax Treatment of Brazilian Employers Transferring Employees to the U.S. • Will the Brazilian employer be treated as engaged in business in the U.S. and subject to U.S. income tax as a result of the regular presence of one or more employees in the U.S.? • Yes. The regular presence of one or more employees of a Brazilian employer in the U.S. could result in the Brazilian employer being considered engaged in a U.S. trade or business. If this were to happen, then the Brazilian employer would be required to file U.S. tax returns and pay U.S. income tax. • Will the Brazilian employer become subject to any U.S. requirements to withhold taxes on payments made to the transferred employee or employees? • Yes. If the Brazilian employer were considered to be engaged in a U.S. trade or business, then it would be required to withhold taxes on payments made to employees transferred to the U.S. BRAZIL-U.S. TRANSFER OF EMPLOYEES

5. U.S. Tax Treatment of Brazilian Employers Transferring Employees to the U.S. (Cont’d) • Will the Brazilian employer be subject to any U.S. obligations to pay social security taxes or other employment taxes? • Yes. If the Brazilian employer were considered to be engaged in a U.S. trade or business as a result of the regular presence of employees in the U.S., then it would be obligated to pay social security taxes and unemployment insurance on compensation paid to U.S.-based employees. • There is no tax treaty between the U.S. and Brazil that would provide additional protection for the Brazilian employer. • Most tax treaties provide a higher threshold before employers are considered to be engaged in a U.S. trade or business or maintaining a permanent establishment in the U.S. (e.g., excludes actions of independent agents). • Absent an applicable treaty, the threshold for establishing a permanent establishment or engagement in a U.S. trade or business is relatively low. BRAZIL-U.S. TRANSFER OF EMPLOYEES

6. Brazilian Tax Treatment of U.S. Employers Transferring Employees to Brazil • Will the U.S. employer be treated as engaged in business in Brazil and subject to Brazilian income tax and withholding requirements on payments made to employees transferred to Brazil as a result of the regular presence of one or more employees in Brazil? • Brazilian law is not definitive in its characterization of whether a non-Brazilian company will be subject to Brazilian corporate income tax. • Although it is possible in theory that a U.S. employer may transfer employees (dependant on their business visas) to Brazil on an informal basis, in practice, a non-Brazilian employer would typically establish a Brazilian affiliate and transfer employees to such Brazilian affiliate to carry out its business. • The Brazilian affiliate, however, would be subject to Brazilian corporate income tax and would be obligated to withhold taxes on payments made to the transferred employees. • If payments are made to the transferred employees by the U.S. employer for services unrelated to the business of the Brazilian affiliate, then the Brazilian affiliate has no obligation to report and withhold taxes on such payments. BRAZIL-U.S. TRANSFER OF EMPLOYEES

7. Brazilian Tax Treatment of U.S. Employers Transferring Employees to Brazil (Cont’d) • Will the U.S. employer be subject to any Brazilian obligations to pay social security taxes or unemployment insurance? • The U.S. employer would not be required to pay social security taxes in Brazil as the Brazilian affiliate would be obligated to pay social security taxes and unemployment insurance, as well as withhold any income taxes on payments made to transferred employees. BRAZIL-U.S. TRANSFER OF EMPLOYEES

8. U.S. Tax Treatment of Employees Transferring from a Brazilian Employer to the U.S. • Will the Brazilian person be subject to U.S. income tax? • Yes. The Brazilian employee will be taxed on his or her income that is attributable to the services rendered from within the U.S. In addition, the Brazilian employee may become treated as a tax resident of the U.S. • If the Brazilian employee renders services from within the U.S. the Brazilian employee will become subject to U.S. tax on the income attributable to the U.S. services rendered and required to file U.S. tax returns. • In addition, generally, if the individual is physically present in the U.S. for more than 31 days in a tax year and present in the U.S. more than a total of 183 days in the current year and previous two years (but counting only 1/3 of the days present in the immediately preceding year and 1/6 of the days present in the U.S. in the second preceding year), then the employee will become a U.S. tax resident and taxed on the same basis as U.S. citizens (i.e., all worldwide income is taxed). • However, if the Brazilian employee can claim a nationality of a country that has a tax treaty with the U.S., he or she may be able to claim treaty benefits. • Will the Brazilian person be subject to U.S. social security taxes? • Yes. The Brazilian employee will be subject to U.S. social security taxes for his or her income that is attributable to the U.S.-based services. BRAZIL-U.S. TRANSFER OF EMPLOYEES

9. Brazilian Tax Treatment of Employees Transferring from a U.S. Employer to Brazil • Will the U.S. person be subject to Brazilian income tax? • As a rule, the employee will be subject to a Brazilian income tax according to the rules applied to a Brazilian resident when such residency is characterized, as follows: • Permanent visa or temporary visa and temporary visa with a contract service agreement, or • Temporary visa and present in Brazil for more than 183 days within a one-year period. • If the employee is characterized as a Brazilian resident, he or she will be subject to Brazilian income tax on his or her worldwide income. • Payments received by the transferred employee from the Brazilian affiliate will have income taxes withheld at the source. • If a transferred employee who is characterized as a Brazilian resident receives payment from its U.S. employer for services unrelated to the business of the Brazilian affiliate, then the employee is required to report and pay Brazilian income tax on such payment. • If the employee is not treated as a Brazilian resident, it will be subject to income tax if he/she renders services directly to a Brazilian entity and receives fees from the Brazilian entity under an individual service agreement, according to the rules applicable to non Brazilian residents. • Will the U.S. person be subject to Brazilian social security taxes? • Yes. If the transferring employee is characterized as a Brazilian resident, then he or she will be subject to Brazilian social security taxes. BRAZIL-U.S. TRANSFER OF EMPLOYEES

10. Recommended Approach • Secondment Agreement • The host country company and the home country employer enter into a written secondment agreement with respect to the transferred employees. Pursuant to such secondment agreement: • Activities of the transferred employee are conducted under dominion and control of the host country company officers. • The employee engages solely in activities related to the business of the host country company and does not render services for the home country employer during the term of the secondment. • The employee does not hold himself or herself out as a representative of the home country employer during the secondment (e.g., business cards). • Host country company withholds taxes imposed by host country and host country company manages tax reporting and withholding. • If the employee is retained on the home country employer’s welfare or other benefit or retirement plans, then the host country company should reimburse all such costs if possible. BRAZIL-U.S. TRANSFER OF EMPLOYEES

11. Recommended Approach (Cont’d) • Affiliate Services Agreement • If it is intended that the employee to be seconded perform certain services with respect to the business of the home country employer while in the host country, consider having the host country company enter into a services agreement with the home country employer pursuant to which the host country company would render those services. • Host country company would receive compensation (with a profit element) for the services under the contract. • The employee seconded to the host country company may then perform those services as a representative of the host country company during the term of the secondment. BRAZIL-U.S. TRANSFER OF EMPLOYEES

12. Example 1: Brazilian Commercial Bank Seconds Employee to U.S. Affiliate • Brazilian commercial bank executes Secondment Agreement and Affiliate Services Agreement with U.S. affiliate. • Employee engages in U.S. affiliate’s business (including tasks under the Affiliate Services Agreement) under dominion and control of U.S. affiliate’s officers. • U.S. affiliate reports and withholds taxes imposed by U.S. tax law (including income and social security taxes). • U.S. affiliate reimburses Brazilian commercial bank for any welfare/ retirement plan contributions paid by Brazilian commercial bank to employee during the secondment. • Brazilian commercial bank is not considered to be operating a U.S. trade or business and is not subject to U.S. income tax or social security tax law. • The employee is subject to U.S. income and social security taxes. The secondment arrangement does not shield the individual from the U.S. tax net. • However, the individual is no longer a Brazilian tax resident, and is not subject to Brazilian income tax after filing a Definitive Departure Statement or after not returning to Brazil after 12 consecutive months.He/she might pay income tax in Brazil only as a non Brazilian resident, taxed on Brazilian source income • The Brazilian Commercial bank shall remain obligated to collect the social security taxes. BRAZILIAN COMMERCIAL BANK (HOME COUNTRY) Employee Secondment Agreement Affiliate Services Agreement U.S. AFFILIATE (HOST COUNTRY) BRAZIL-U.S. TRANSFER OF EMPLOYEES

13. Example 2: U.S. Investment Bank Seconds Employee to Brazil • U.S. investment bank executes Secondment Agreement and Affiliate Services Agreement with Brazilian affiliate. • Employee engages in Brazilian affiliate’s business (including tasks under the Affiliate Services Agreement) under dominion and control of Brazilian affiliate’s officers. • Brazilian affiliate reports and withholds taxes imposed by Brazilian tax law. • Brazilian affiliate may not be permitted to reimburse U.S. investment bank for any welfare or retirement plan contributions paid by the U.S. employer. • U.S. investment bank is not considered a Brazilian tax resident. • The employee will be subject to Brazilian income tax on all of his or her worldwide income when he or she is characterized as a Brazilian resident. U.S. INVESTMENT BANK (HOME COUNTRY) Employee Affiliate Services Agreement Secondment Agreement BRAZILIAN AFFILIATE (HOST COUNTRY) BRAZIL-U.S. TRANSFER OF EMPLOYEES

14. THANK YOU BRAZIL-U.S. TRANSFER OF EMPLOYEES