The individual tax rates on capital gains in Brazil have been increased (Law 13,259/2016, published on March 17, 2016, being the conversion of Provisional Measure 692/2015, published in September 2015). Because the tax rules for resident individuals generally apply to nonresidents, the tax rate increases may also apply to both nonresident corporations and individuals.

Prior to Law 13,259/2016, a flat rate of 15% applied to capital gains realized by individuals. Provisional Measure ('PM') 692/2015 sought to impose progressive income tax rates on capital gains with a top rate of 30%. When converting the Provisional Measure into law, Congress amended the brackets and rates, as summarized in the following table.

Under Law 13,259/2016, for example, a gain of (in total) R$ 6 million is taxed at 15% for the first R$ 5 million and taxed at 17.5% for the last R$ 1 million.

With the promulgation of Law 13,259/2016, certain issues surrounding the law's application remain unclear. Two significant issues include: (i) whether the tax rate changes also apply to nonresidents; and (ii) the effective date of the rate changes.

Nonresidents

Nonresidents are subject to Brazilian tax when they dispose (or are deemed to dispose) of assets located in Brazil. Tax treaties with Brazil typically do no restrict this taxation.

Law 13,259/2016 refers to resident individuals and does not specify its effects (if any) on the treatment of nonresidents. This leaves the law's application to nonresidents unclear, particularly for nonresident entities. As a general rule, however, nonresidents are subject to the same tax rules as resident individuals.

An amendment was submitted to exclude nonresidents from the tax rate changes, but it was rejected. Because the risk of the rate increases remains, nonresidents should carefully review transactions involving assets located in Brazil for potential exposure to the new, higher rates on disposal. The rate change could affect transactions ranging from cross-border corporate mergers and acquisitions to real property sales.

Effective date

Under PM 692/2015, the tax rate changes take effect on January 1, 2016. Under the Brazilian Constitution, however, the tax increase established under PM 692/2015 could only apply beginning January 1, 2016, if PM 692/2015 converted into law in 2015, which was not the case. Because Law 13,259/2016 does not alter PM 692/2015's effective date, the January 1, 2016 effective date conflicts with the Brazilian Constitution. The Brazilian Revenue has meanwhile indicated it will not seek to apply the new rates prior to 2017. At the time of finalization of this Alert, it was as yet unclear how the Revenue intends to formalize this approach.