A part of Provisional Measure No. 1,171 of April 30th, 2023 (“MP”) changes the rules applicable to investments and assets held abroad by residents of Brazil.
Because it is an MP, the effects of the measure can last up to 120 days if it is not converted into law by Congress. Because of this, most of these investments will only be affected in 2024 if the text of the MP is converted into law as it currently stands.
The points highlighted in the MP will be addressed in the following topics. For more information, please contact us in our communication channels.
Investments held directly by individuals
In this type of investment – which includes financial investments and the dividends receipt from entities abroad, for example –, the MP proposed an annual income tax (“IRPF”) on the earnings obtained from these investments.
Consequently, taxpayers must report in their annual tax statements the income earned annually through investments abroad, subject to the following rates:
- 0% on the part of the income that does not exceed R$ 6.000;
- 15% on the part of the income that exceeds R$ 6.000 but does not exceed R$ 50.000; and
- 5% on the part of the income that exceeds R$ 50.000.
A special attention should be given to the fact that these rates will be applied progressively. In other words, only the part totalizing R$ 4.000 will be taxed at 15% if the annual income amounts to R$ 10,000, for example.
In relation to investments that are redeemed during a calendar year, the taxpayer must pay the IRPF on his earnings in the following month in which they are redeemed. The rules would remain unchanged, however, for assets abroad that are redeemed and are not a financial investment (such as real estate, for example).
Additionally, the exchange variation on investments will also be considered as earning generated by the investments held abroad.
Investments held through a foreign entity
One of the most important changes brought by the MP is the taxation, as of December 31st of each year, of profits earned by entities located abroad that are controlled by individuals residing in Brazil. To this end, the applicable rates on the taxation of these entities are equal to those applicable on individuals who hold investments abroad.
Following the definition found in the MP, a foreign entity will be considered controlled by an individual residing in Brazil if it:
- Holds, directly or indirectly, the majority of voting power in resolutions in the entity or the power to change the governing body of that entity; or
- Holds, directly or indirectly, more than 50% of the membership interests, the rights to receive the entity’s profits or receive assets when liquidated. In this case, the percentage may be determined jointly if the investor holds interests or rights jointly with other members of his family nucleus or other individuals and/or legal entities that are related to interests in Brazilian entities.
In addition, only entities that (i) are located in low tax jurisdictions or jurisdictions with a “privileged tax regime” or (ii) have an annual passive income greater than 20% are subject to IRPF.
The MP also provides for the IRPF rates when profits are made available by a controlled entity abroad that is not specified in the previous paragraph.
As it is applied to individuals, the calculation of earnings obtained by the controlled entity abroad will include the exchange variation from the acquisition of assets until the moment they are calculated.
Investments held in a Trust
Another matter addressed by the MP is the definition of the nature of assets and earnings held abroad through a Trust.
From the point of view of the MP, the settlor of the Trust is considered, for tax purposes, as the owner of the assets held by the Trust, regardless of whether it is revocable, discretionary or not. This ownership would be transferred to the beneficiaries at the time of distribution of the assets, whether the settlor is alive or not.
Therefore, all earnings obtained by the assets of a Trust will be subject to IRPF according to the rules applicable to who is considered its owner according to the tax law. Additionally, all asset transfers that occur in a Trust will be considered as a gratuitous donation from the donor to the beneficiary.
In addition, the MP considered, for the first time in the Brazilian law perspective, the Trust as a transparent entity for tax purposes. Thus, the legally considered owner of the Trust must submit separately in its annual return all investments held by the Trust and, consequently, collect the taxes due on the calculation of earnings generated by these investments.
Possibility of updating to market value
In parallel with the changes, the MP made it possible for taxpayers to receive a reduced rate if they update the values of these same investments.
In this way, individuals affected by the MP will be able to update the value of these investments in their annual returns based on the market value on December 31st, 2022. Thus, they will pay taxes subject to the rate of 10% on the difference between the historical cost of acquisition and the stated market value, which must be paid by November 30th, 2023.
For controlled foreign entities, however, it will be possible to carry out a separate update based on the market value between January 1st, 2023 and December 31st, 2023, being the corresponding tax due by May 31st, 2024.
Practical considerations
Brazilian taxpayers may consider whether it would still be advantageous to maintain investments through foreign entities considering the changes brought by the MP. Even if the MP is converted to a law, it is still possible to attest that maintaining investments through a foreign entity is still more worthwhile, which are:
- Tax on Financial Operations (“IOF”) on foreign wire transfers – the rate for wire transfers to foreign entities being 0.38% in comparison to the 1.1% applicable to individuals;
- Possibility of deferral – it is still possible to benefit from the tax deferral with the MP, and income taxes must only be collected at the end of the year, regardless of whether the profits were realized throughout the year. In contrast, individuals will have to pay income taxes from the moment the same profits are realized;
- Expenses deduction – it is possible to deduct expenses incurred during the calendar year and taxes paid abroad (expenses incurred in subsidiaries can be accumulated) when calculating the earnings at the end of the year. In addition, profits and dividends originating from subsidiaries located in Brazil can also be used for this deduction;
- Succession and estate planning – foreign entities do not seek to offer only tax benefits but the diversification opportunity of the investor’s assets and his succession planning as well. From this perspective, these entities make it possible the transfer of the investor’s assets abroad to their heirs in a more efficient way, which also may be tailor-made, taking into account the particularities of the investor and his family nucleus.
Moreover, the annual accounting of foreign entities also becomes of paramount importance for investors who choose to invest through them. In this regard, it is important that the accounting of these entities follow the international accounting standards to meet the requirements of both the authorities in the investor’s country of residence and the jurisdiction where the entity is located.
It is also recommended that the accounting documentation be prepared in a bilingual format to ensure greater accessibility by the authorities in both jurisdictions.
Source: Palácio do Planalto (available only in Portuguese)
Published on May 15, 2023