Law amends tax rules on investments abroad and exclusive funds in Brazil

Changes affect income tax on offshore companies and investments in closed-end funds

On December 13, Law No. 14,754/2023 was issued. Resulting from the conversion of Bill No. 4.173/2023 into law, the regulation changes the income tax (IR) for individuals with financial investments, controlled entities and trusts abroad, while also introducing a new taxation system for investment funds in Brazil.

The rule, effective from January 1, 2024, primarily impacts income from offshore companies and investments in closed-end funds. Check out the main changes below.

Foreign income for individuals tax resident in Brazil

Financial investments

Starting from January 1, 2024, individuals tax resident in Brazil will have their earnings from investments abroad subject to annual taxation in the Annual Tax Return (DAA). The tax applies to financial investments and profits/dividends from controlled entities (offshore companies).

For upcoming returns, the Income Tax (IRPF) on such earnings will be fixed at a rate of 15%, and no amount will be deductible from the calculation base. Taxes paid in countries with a double taxation treaty with Brazil can be offset. Additionally, the law provides for the possibility of offsetting capital losses against capital gains for a reduction of the total taxable income.

Capital gains resulting from the sale, derecognition, or liquidation of assets and rights abroad, which are not considered financial investments, will remain subject to the existing tax rules.

The law also classifies crypto assets and digital portfolios as financial investments, a topic that will be further regulated by the Federal Revenue Service.

Controlled entities (offshore companies)

An anti-deferral rule has been put in place for the taxation of controlled entities abroad. Starting in 2024, the profits earned by these entities, calculated as of December 31 of each year, will be subject to a fixed rate of 15%, even if they are not distributed.

Earnings retained up to December 31, 2023, will be taxed only when dividends are paid out and will be calculated using the cash method of accounting. Individuals may irrevocably report the entity's assets as their own, which, effectively allows taxes to be levied only when earnings and gains have been received.

Trusts abroad

The new act has regulated trusts, a form of investment which was not recognized under the previous legislation. According to the new provisions, this type of investment is governed by foreign law, with the settlor being defined as an individual who allocates his or her assets or any other transferable rights to constitute a trust by means of a deed.

Assets must be reported by the holder of the trust in his or her Annual Tax Return, at acquisition cost. Earnings and capital gains are subject to income tax, per the principle of "tax transparency."

Earnings and capital gains produced by the trust will be subject to the Income Tax on the date of the taxable event, taking into account changes in ownership such as donation or inheritance, which will be subject to the Estate and Gift Tax (ITCMD).

Adjustment in the value of assets and rights abroad

Individuals tax resident in Brazil have the option to adjust the value of the assets and rights abroad reported in their Annual Tax Report for the calendar year 2022 to market value on December 31, 2023. Upon making this choice, they must tax the difference at the definitive rate of 8% and make the payment by May 31, 2024.

The exemption from capital gains tax (GCAP) on the sale or redemption of assets and rights abroad, acquired by a non-tax resident in Brazil, has been revoked, as has the method for calculating capital gains on assets in foreign currency

Investment funds in Brazil

Periodic taxation (‘come-cotas’)

Taxation on closed-end funds (those that prevent shares/units of ownership from being redeemed at any time) are now subject to the periodic 'come-cotas' system, previously applied to open-end funds. As a result, every six months (in May and November), the Federal Revenue Service will charge the equivalent of the Income Tax (IR) due on such investments, subject to withholding tax (IRRF).

In the past, investments in closed-end funds were only taxed upon redemption. If no profits were redeemed, no tax would be charged. Under the new system, however, even investments that have yet to yield a profit will be taxed.

Exceptions to the ‘come-cotas’

It is important to note that the law provides for an exemption from this taxation system for funds that invest, directly or indirectly, at least 95% of their owners’ equity in:

• Equity Investment Funds (FIP);
• Exchange Traded Funds (ETF), with the exception of Fixed Income ETFs;
• Credit Rights Investment Funds (FIDC);
• Real Estate Investment Funds (FII) and Investment Funds in Agribusiness Production Chains (Fiagro);
• Infrastructure Equity Investment Funds (FIPs-IE) and Equity Investment Funds in Economic Production Intensive in Research, Development and Innovation (FIPs-PD&I);
• Investment funds referred to in Law No. 12,431/2011.

The funds above will remain subject to income tax withholding (IRRF) at a 15% rate on the date of distribution of income, amortization, or redemption of shares/membership units.

Transitional Rules

On December 15, the Federal Revenue Service issued transitional rules for the new taxation system for investment funds.

According to the normative ruling issued by the agency, earnings calculated up to December 31, 2023 will not be subject to periodic taxation but to withholding tax (IRRF) at a 15% rate. Payments can be made in cash by May 31, 2024, or in 24 monthly installments, each not less than 1/24 of the total tax assessed, adjusted by the Selic rate at a monthly interest rate of 1%.

Alternatively, individuals resident in Brazil may pay in advance the withholding income tax levied on the earnings produced by such investments, and enjoy an 8% reduction in the rates. It should be noted, however, that this process is divided into two stages, depending on the date on which the income was assessed:

Income assessment date	Payment method
Income up to 11/30/2023	Four equal installments, due on 12/29/2023, 01/31/2024, 02/29/2024 and 03/29/2024.
Income from 12/01/2023 to 12/31/2023	The tax will be withheld on the last business day of May 2024.

Tax support for investors

DPC has a specialized team dedicated to providing tax support for investors and owners of offshore companies who seek to optimize the taxation of their profits, ensuring compliance with tax regulations amid legislative and regulatory changes. Reach out to our experts at: dpc@dpc.com.br.