Last Sunday, April 30th, Provisional Measure no. 1,171/23 was published, which significantly changed the rules for the taxation of investments held by individuals abroad.
As of January 1, 2024, it will be up to the individual resident in the country to compute, separately from other income and capital gains, the income arising from (i) financial investments, (ii) profits and dividends from offshore companies and (iii) assets and rights held in trust abroad based on progressive tax rates, as indicated below:
| Yield | Rate |
| Up to R$ 6,000.00 | 0% |
| Between R$ 6,000.00 and R$ 50,000.00 | 15% |
| Whatever exceeds R$ 50,000.00 | 22,5% |
Taxation of financial investments
The income from financial investments abroad will follow the general provision, with progressive rates of up to 22.5%, as per the table above, without deductions.
Such earnings will be computed in the Annual Adjustment Statement ("DAA") and taxed when effectively perceived by the individual, at the time of redemption, amortization, disposal, maturity, or liquidation of the financial investment (cash basis).
The Provisional Measure brings an exemplary definition of financial applications and income, being them:
- Financial investments: bank deposits, certificates of deposits, investment fund shares, except for those treated as foreign controlled entities, financial instruments, insurance policies, investment certificates or capitalization operations, credit card deposits, retirement or pension funds, fixed income and variable income securities, derivatives, and corporate interests, except for those treated as foreign controlled entities.
- Income: exchange variation of the foreign currency against the local currency, interest, premiums, commissions, premiums, discounts, profit sharing, dividends, and gains from secondary market negotiations.
The capital gains earned by individuals residing in Brazil on the sale, write-off, or liquidation of assets and rights located abroad, which do not constitute financial investments, remain subject to the progressive tax rates, between 15% (gains up to R$5M) and 22.5% (gains over R$30M), provided for in article 21 of Law 8.981/95.
Profits and dividends from offshore companies
The Provisional Measure innovates by providing for the automatic annual taxation of profits earned by subsidiaries abroad, regardless of their internalization, when (a) located in a country or dependency with favored taxation or beneficiary of a privileged tax regime, as per art. 24 and art. 24-A of Law no. 9430, dated December 27, 1996; or (b) have their own active income lower than 80% of the total income.
Points of attention:
- The profits taxed at the end of the year using the table above will be incorporated into the acquisition cost of the subsidiary, and when effectively distributed to the controlling individual, will reduce the acquisition cost of the investment, and will not be taxed again.
- The Provisional Measure does not oblige the taxation of the "stock" of profits, so much so that it expressly states that the profits calculated until December 31, 2023 by controlled companies abroad should only be offered for taxation when they become available.
- The profits earned by individuals resident in Brazil, in entities controlled abroad, which do not fit into the hypotheses (a) e (b) above, are subject to the rules currently in effect, according to which these profits must only be subject to income tax when they are effectively made available (cash basis).
Trusted Assets and Rights
In general terms, the Provisional Measure establishes rules that treat the Trust as transparent for tax purposes in Brazil, with regard to the recognition of assets, timing and criteria for declaration between the settlor and beneficiaries, and applicable taxation. Thus:
- assets held by trusts abroad will be considered as remaining under the ownership of the settlor, and the tax rules will be applied according to the type of asset;
- assets held by the Trust will be transferred to the beneficiary upon distribution or upon the death of the settlor, whichever occurs first, and shall be considered for tax purposes as a gift or succession, respectively;
- in the annual adjustment declaration of the individual residing in Brazil, each of the assets and rights that are the object of the Trust must be declared.
Updating the value of assets abroad
As a transition mechanism, the Provisional Measure allows the individual residing in Brazil to update the value of the assets and rights abroad informed in his/her declaration to the market value, on December 31, 2022, and the difference will be taxed by income tax at a 10% rate.
This option may be exercised jointly or separately for each asset or right abroad, in the manner and timeframe established by the Brazilian IRS, and the tax must be paid until November 30, 2023. In the case of controlled entities, this update can also be made for calendar year 2023, with payment of the tax at the definitive rate of 10% until May 30, 2024.
Revocations
The Provisional Measure revoked relevant legal provisions related to the subject:
- Exemption of the capital gain from exchange variation on the alienation of assets abroad originally acquired in foreign currency; and
- Exemption from income tax on the sale, liquidation or redemption of assets located abroad and financial investments, acquired as a non-resident.
Provisional Measure no. 1,171/2023 came into effect on May 1, 2023. In compliance with the Federal Constitution, for it to take effect as of 2024, it must be converted into law by the National Congress within 60 days, extendable for another 60 days.
Click here to access Provisional Measure 1,171/2023 in its entirety.
For further information, please contact Barcellos Tucunduva Advogados' Tax Department ([email protected]).