Federal Supreme Court rules out levying income tax on donation or estate

In two recent decisions, the highest court of Brazil opposed the collection of Income Tax by the Federal Government

Two recent rulings by the Brazilian Federal Supreme Court (STF) held that the Federal Government should not collect Income Tax (IR) on capital gains from goods and rights inherited or received as donation if the Estate and Gift Tax (ITCMD) has already been levied on those items and there is no appreciation in value that would warrant the extra collection.

The ITCMD, whose rates vary by state, is collected from the recipient or heir who has been granted ownership over a property or right.

In Interlocutory Appeal (ARE) 1387761, published on March 1, the justices ruled, by majority vote, that the Federal Revenue Service must not collect income tax from donors for goods and property given as advancement or ademption (i.e. gifts donated with the intention that their value will be deducted from the heir’s share of the estate after the giver's death). The synopsis of the decision reads as follows:

"This Court understands that the income tax should be levied on assets and rights that gave rise to a pecuniary gain, whether in economic or legal terms (RE 172.058, Justice Rapporteur Marco Aurélio). Gifts given as an advance on the heir’s share of the estate do not represent an income on the part of the giver. […] To allow the collection of income tax in this case would ultimately lead to undue double taxation in relation to the Estate and Gift Tax (ITCMD)."

The justices held that the situation could end up giving rise to undue double taxation, since the income tax should only be levied if there is an income resulting from appreciation, which is not the case when it comes to gifts donated as inheritance advance.

In another decision, published on March 6, in RE 943075, the Supreme Court dismissed the motions filed by the National Treasury, and declared a mistrial regarding the issue of the levy of income tax on inherited real estate. The Court’s rejection of the appeal upheld the lower court’s decision, which was adverse to the claims of the tax authorities, as it held that since there is no capital gain, the Income Tax that was being levied in the case had the same taxable event and tax base as the ITCMD, thus resulting in double taxation.

By law, a taxpayer can choose to declare its goods and rights at market value or at the original value. If the transfer of ownership is declared at market value, the positive balance resulting from appreciation (capital gain) will be subject to the income tax. It is worth pointing out that the ITCMD tax is levied on the market value of whatever was transferred.

Tax compliance for individuals

Counting on the support of a team that is always up to date with the current tax environment ensures compliance and peace of mind for taxpayers. Contact DPC's Individual Tax Department for putting the best practices in place for your individual and family planning: dpc@dpc.com.br.