Good Law: find out about the benefits for companies that invest in research, development and innovation

Law benefits businesses focused on technological development and fosters competitiveness

By Rita Araújo

Regarded as the main instrument for fostering innovation and technological advancements in Brazil, Law No. 11,196/2005 – aptly nicknamed ‘the Good Law' – has been contributing greatly to the strengthening of the productive sector in Brazil.

The law grants tax benefits to private companies that invest in research, development and innovation (R&D&I), particularly to those operating in the manufacturing, agricultural, IT and service industries.

Which companies can benefit from the Good Law?

The law’s benefits apply to companies that have R&D&I projects in place, either on-going or to be started, aimed at:

• the development of new products, processes or services, or
• the technological improvement of products, processes or services already offered in the market but with added functions or characteristics that increase their quality or productivity.

It should be noted that the benefits apply to companies operating under the Actual Income Method (‘Lucro Real’) that remain in their good standing with the tax authorities.

What is the deadline for application?

According to the Ministry of Science, Technology and Innovation – MCTIC, the application form containing information on activities for technological research and innovation must be filed by July 31 of each year through the following website: https://forms.mctic.gov.br/.

What benefits are granted?

The Good Law created several tax benefits for R&D&I activities, among which are the following:

Special tax schemes for IT and export companies

The Good Law established two special taxation arrangements: the Special Tax Scheme for the IT Services Export Platform (Repes) and the Special Tax Scheme for the Acquisition of Capital Goods for Export Companies (Recap).

Both of which allow the waiver of certain social security contributions – namely the PIS/Pasep and Cofins – levied on the gross income from domestic sales of IT-related products and capital goods, such as machinery and equipment.

Said tax schemes also provide for the waiver of import-related social contributions (PIS/Pasep-importação and Cofins-importação) whenever assets are imported directly to be added to the company’s property, plant & equipment (PP&E).

Deduction of R&D&I expenses for calculating IRPJ and CSLL

When calculating their corporate income tax (IRPJ) and social contribution on net income (CSLL), companies that invest in technological research and innovation development may deduct the sum of their R&D&I expenses, according to the following classification:

• operating expenses, pursuant to the IRPJ legislation;
• payment for the performance of R&D&I contracts signed in Brazil with universities, research institutes, or independent inventors; and
• amounts transferred to small-sized companies for the performance of R&D&I services.

IPI reduction on machinery and equipment

The rates of the Tax on Manufactured Products (IPI) are reduced by up to 50% on goods purchased exclusively for R&D&I projects.

Full depreciation of tangible assets

Companies that invest in machinery and equipment for use in R&D&I projects can accelerate their depreciation.

Thus, for the purpose of IRPJ and CSLL calculation, these tangible assets may be fully depreciated in the same year of acquisition.

Accelerated amortization of intangibles

For the purposes of calculating the corporate income tax (IRPJ), the law allows for the accelerated amortization of expenses with intangible assets pertaining exclusively to R&D&I activities stated under the beneficiary's deferred assets. This amortization is performed through deductions as operating costs or expenses in the corresponding assessment period.

Zero Withholding Income Tax on trademarks and IPs

The Withholding Income Tax (IRRF) rate on remittances abroad for the registration and protection of trademarks, patents and cultivars is reduced to zero.

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Below is a table with a brief breakdown of the benefits:

Good Law (Law No 11,196/2005)
Benefits granted
Special tax schemes Repes and Recap	IT and export companies benefit from the waiver of the PIS/Pasep and Cofins taxes on goods purchased or imported for their PP&E.
IRPJ and CSLL: 60% to 80% deduction of R&D&I expenses	An additional exclusion from the tax base allows for a 20,4% to 27,5% recovery of R&D&I expenses.
+ 20% for IP and cultivar-related expenses	Additional deductions for expenses pertaining to IPs and cultivars can stack onto the ones above, for up to a 100% exclusion, which represents a 34% recovery of the amounts invested.
IPI: 50% reduction	The rate of the Tax on Manufactured Products (IPI) on goods purchased exclusively for R&D&I projects is halved.
Full depreciation and accelerated amortization	Full depreciation of tangible assets and accelerated amortization of intangibles allow for a faster recovery of the investments made.
IRRF: 100% reduction	The Withholding Income Tax on remittances abroad for the registration and protection of trademarks and IPs is reduced by 100%.
ICT Partnerships: 50% to 250% deduction	50% to 250% deduction on net profit from R&D&I expenses for projects carried out in partnership with scientific and technological institutions (ICT).

Specialized consulting services for tax optimization

In order to enjoy the full benefits of the Good Law, companies must comply with the requirements set out in the act and under Decree No 6,260/2007. If the activity is legally defined as R&D&I, the corresponding expenditures must be recorded with as much clarity and precision as possible, and backed by supporting documents that leave no room for doubt.

The dedicated services provided by Domingues e Pinho Contadores ensure that the best practices are put in place so that our clients can benefit from the tax reliefs in force and optimize their tax liabilities. Contact our specialists at: dpc@dpc.com.br.