Problem:
Pharma, an Illinois company, has established a subsidiary in Brazil to manufacture various pharmaceuticals for sale in Brazil. Pharma has entered into a patent agreement with the subsidiary. Under the terms of the agreement, Pharma's Brazilian subsidiary is to make annual royalty payments to Pharma's Chicago bank account equal to 12 percent of the subsidiary's total annual receipts from the sale of the products in Brazil. The 12 percent annual receipts also coincidentally equal 12 percent of Pharma's registered capital in Brazil. Pharma has forwarded all of the documentation needed to register Pharma's U.S. patents to the Brazilian subsidiary, but so far no one in Brazil has followed the local procedures to verify that the U.S. patents are valid in the United States. How much of its annual royalty payments under the licensing agreements will Pharma receive after taxes? The key issue is whether the payments are considered to be royalties under the patent licensing agreement or whether they are considered to be the repatriation of profits and dividends earned on registere d capital under Article 43 and subject to a special tax. This could have a significant impact on the amount of profits received by Pharma. See Profits Remittance Law, Articles 11, 12, 13, and 43 and note 2 on p. 585 below.