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01 June 2023

Brazil adopts new rule on individual taxation of financial investments, controlled entities and trusts held abroad

Provisional Measure 1,171/23 (PM 1,171), published on 30 April 2023, aims to amend certain tax provisions dealing with Brazilian individual taxation on financial investments, controlled entities and trusts held abroad, in addition to updating the monthly progressive tax rates applicable to individuals.

The PM is a type of Decree, signed and published by the President, with the power of a Law that needs to be approved by the Congress within 60 calendar days from publication (that is extendable by another 60 calendar days) to be enacted as law.

1. Taxation of investments held abroad by individuals residing in Brazil

If the PM 1,171is approved the into Law, as of 1 January 2024, financial investments, profits and dividends from controlled foreign entities (e.g., Holding Offshore, Private Investment Companies, "PICs") must be reported separately from domestic income and capital gains in the individual income tax return (DIRPF).

  1. Income derived from financial investments held abroad
  • This income would be subject to income tax annually at certain rates:
    • 0% on income up to BRL 6,000
    • 15% on income between BRL 6,000 and 15,000
    • 22.5% on income that exceeds BRL 15,000
  • Income will be reported on the DIRPF and subject to income tax upon availability (i.e., redemption, amortization, disposal, maturity or liquidation)
  • The provisional measure provides examples, such as:
    • Financial investments — bank deposits, deposit certificates, credit card deposits, fixed and variable income securities, derivatives, among others
    • Income — remuneration derived from financial investments, including those resulting from foreign currency exchange variation, interest, premiums, commissions, goodwill, among others
  1. Foreign subsidiaries
  • Profits earned by foreign entities are subject to Brazilian taxation at the rates applicable to financial investments held abroad (item 1.a above)
  • Taxation will be levied on profits generated from 1 January 2024 onward, and will be due on 31 December of each year
  • Profits accrued up to 2023 will be taxed only upon availability
  • The concept of subsidiaries includes offshore holdings, PICs, investment funds, foundations, covering nonincorporated entities
  • Losses generated from 1 January 2024 onward can be offset
  • The above rules now apply to subsidiaries that are located in countries with favorable taxation (i.e., tax havens) or privileged tax regimes or that earn passive income above 20% of their total income
  1. Trusts abroad
  • The settlor of a trust must declare assets and rights, passing them to the beneficiary only upon distribution or upon the settlor's death
  • Transfers to beneficiaries carried out during the life of the settlor will be treated as donations, whereas they would be treated as causa mortis transmissions (i.e., made in contemplation of death) in case of an inheritance
  • Assets and rights taxed at the settlor's level must follow the rules applicable to financial investments held abroad (item 1.a) or to foreign subsidiaries (item 1.b)
  1. Update on value of assets and rights held abroad
  • Assets and rights held abroad that were stated on the DIRPF FY 2022 (filed until 31 May 2023) may have their values updated
  • Gains on these updates will be subject to 10% income tax rate, which must be paid by 30 November 2023
  • Brazilian individuals with interests in foreign subsidiaries, whether or not covered by the new rule, will be able to update their amounts until 31 December 2023, taxing any gains at a 10% rate with tax payments due on 31 May 2024

2. Update of the monthly progressive table for individuals

The provisional measure also updates the applicable rates for income earned by individuals as of May 2023, increasing the exemption range from BRL 1,903.98 to BRL 2,112.00.

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For additional information with respect to this Alert, please contact the following:

EY Assessoria Empresarial Ltda, São Paulo

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

Document ID: 2023-0982

 

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