ANALYSIS · Latin America

Expanding business to USA from Brazil: how profits get home without a treaty

How dividends, interest, royalties and service fees leave a US subsidiary should decide the structure before the first entity is formed.

Rendal Post Analysis Desk · Published November 4, 2026

Expanding business to USA from Brazil raises one question that should come before the choice of state, bank or legal form: how does the money come back? Brazil does not appear on the IRS list of US income tax treaties, which moves from Belgium directly to Bulgaria. In our reading, that gap should shape the subsidiary from day one, because dividends, interest, royalties and service fees raise different questions under US withholding rules and, for related-party dealings other than plain dividends, under Brazil's Law 14.596 of 2023. Design the flows first, then fit the entity around them.

What the missing treaty costs

Treaties give residents of partner countries reduced rates or exemptions on certain US-source items. Without one, the IRS says the tax applies "in the same way and at the same rates" shown in the relevant return instructions. Publication 515 supplies the number: a foreign recipient of most kinds of US-source income faces a 30% tax, and a reduced rate or exemption may apply where a treaty exists with the recipient's home country. Its notes on Hungary and Russia show the default: once treaty relief ended or was suspended, agents applied the statutory 30%. That suggests a Brazilian parent should plan from 30% and have its adviser confirm each item, since the rule covers most types of income, not all.

The duty to collect usually sits with the US payer. In most cases, the US person making the payment must withhold, and Publication 515 calls that agent "personally liable" for the tax. If the agent fails to withhold and the payee does not pay, both are liable. Withholding runs on the gross amount with no deductions, so at that rate thirty cents of each dollar is withheld whatever margin sits behind it. It also reaches beyond wire transfers: a payment counts as made when the recipient realizes income, even with no transfer of cash, and settling a person's debt with its creditor counts as paying that person. In our reading, a subsidiary that covers a bill owed by its Brazilian parent may have created a withholding event without anyone noticing. States add another layer, since the IRS warns that many of them tax income sourced within their borders.

Four routes, different questions

Publication 515's worked examples show dividends, interest and royalties moving through this system, each on stated assumptions. In our reading, a dividend is the plainest route, with no price to defend, since the methods in Brazil's law compare prices, margins and profit splits in related-party dealings. Also in our reading, timing is the main variable, and legal form affects it: a US partnership must withhold on a foreign partner's share of income subject to withholding even when that share stays undistributed. That suggests a corporate subsidiary gives more control over when distributions trigger withholding.

In our reading, interest is harder to defend, because Law 14.596 tests both its form and its rate. Under Article 27, a related-party loan can be treated, wholly or partly, as capital, based on its economic features and the options realistically open to the parties. Article 28 weighs the borrower's credit risk, including implicit group support. Article 29 then caps the return: a lender lacking financial capacity or control over the risks is limited to a risk-free rate, tied to low-risk government bonds in its functional currency, while one with both is limited to a risk-adjusted rate. In our reading, a parent loan to a new US subsidiary needs a credit analysis and evidence that the parent manages the risk, beyond a signed note.

Royalties turn on who builds the asset. Article 21 allocates results from intangibles according to contributions, especially relevant functions and significant risks, and says bare legal title earns nothing by itself. On the US side, Section 482 requires income from a transfer or license of intangible property to be "commensurate with the income attributable to the intangible." That leaves a founder licensing a Brazilian brand with a live question: if the US team does the work that builds its American value, how much should still flow to the parent?

On the material we reviewed, service fees are the least settled route on the withholding side. Publication 515 ties the tax to US-source income, and the text available to us does not say where a fee for work done by a Brazilian team is sourced, so that is the first question for counsel. When source depends on facts unknown at payment, the agent must withhold enough to cover 30% of the amount later found taxable. On the Brazilian side, Article 23 places board meetings, consolidated reporting and similar shareholder activity outside the definition of a beneficial service, and Article 24 counts all service costs under cost-plus while barring markup on pure pass-through costs. If a fee does face gross withholding, in our reading the tax falls on reimbursed costs as well as margin, which would make a cost-plus fee heavier than its markup implies.

Two tax authorities, no shared referee

Law 14.596 applies to Brazilian companies that deal with related parties abroad, and it names a controller and its controlled entities as related. A controlled transaction covers any commercial or financial relationship, direct or indirect, under any form of contract or series of deals. Paper does not settle the matter: when documents diverge from behavior, Article 7 describes the transaction from the facts and the parties' actual conduct.

In our reading, adjustments mostly run one way. A Brazilian company must adjust upward when non-compliance leaves its tax base too low, so we would expect a parent that gives its subsidiary free management time or a cheap loan to carry exposure. Article 18 also bars adjustments that shrink the base or enlarge a tax loss, with two exceptions: compensatory adjustments made in the required form and deadline, and outcomes of dispute mechanisms under double tax agreements Brazil has signed. Meanwhile, Section 482 lets the IRS reallocate gross income, deductions, credits and allowances among commonly controlled businesses. We think the missing treaty bites hardest here. If the IRS decides a royalty or fee paid to Brazil was too high, the income may stay in Brazil's base, and the treaty exception looks unavailable given the IRS list. The remaining tool in the text we reviewed is the compensatory adjustment, which the parties must make by the close of the calendar year of the transaction.

If required information is missing, Article 34 lets the authority allocate unevidenced functions, assets and risks to the Brazilian entity and rely on reasonable estimates. Article 35 sets fines that include 0.2% of gross revenue per month or fraction for late filing and 5% of transaction value for failing to answer an audit request on time, with a floor of R$20,000 and a ceiling of R$5,000,000. In our reading, that floor means even small first-year charges deserve real paperwork.

Let the flows pick the structure

A disregarded entity deserves a second look. A single-owner entity that is not a corporation may be disregarded, which makes its owner the payee of payments it receives, and a foreign owner brings withholding into play unless a reduced rate applies. We would settle that with counsel before the first customer invoice. A holding company in a treaty country may look like a shortcut, but treaty relief varies by country and item, claims can carry further conditions such as limitation on benefits, and Brazil's law reaches indirect dealings. That suggests it adds a jurisdiction without removing the pricing test.

In our reading, handing existing American customers to the new subsidiary could count as a business restructuring, where compensation considers transferred profit potential if unrelated parties would have been paid. A parent guarantee of a US bank line has specific rules: Article 30 treats extra funding obtained because of the guarantee as a capital contribution with no fee due, and Article 31 caps a service-type fee at 50% of the benefit beyond implicit group support, absent a reliable showing that another approach fits better.

What to do before you incorporate

Start with a one-page map of every payment you expect between the two companies. For each flow, name the payer, the recipient, the assumed 30% US withholding, the likely method from Article 11 and the document that will prove it. Have US and Brazilian advisers run the model together, because the sources behind this article do not address how Brazil taxes these receipts, whether it credits US withholding, or what the subsidiary pays in US income tax. Those answers could reorder the routes, so do not choose a flow on withholding alone.

Sign intercompany agreements before the first payment, then make sure daily conduct matches them. Set up the withholding file early: collect the appropriate Form W-8 and plan for Forms 1042 and 1042-S, noting that the IRS requires its IRIS portal to e-file 2026 Forms 1042-S, due March 15, 2027. Train whoever approves payments in the subsidiary to flag anything paid on the parent's behalf.

Book a pricing review well before year-end, since the compensatory window closes with the calendar year, and in our reading a true-up that raises a charge may itself trigger withholding. Then have counsel check the Brazilian tax authority's implementing rules, which the law leaves to it and which sit outside this analysis. With no treaty to fall back on, in our reading the structure you choose on day one is the protection you control.