New rules change taxation on income from assets abroad

Provisions affect Brazilian residents who receive earnings from financial investments, controlled companies or trusts abroad

On April 30, Provisional Presidential Decree No. 1,171/2023 was published in an extra issue of the Official Gazette, providing for the long-awaited adjustment of the Individual Income Tax (IRPF) brackets. However, in order to mitigate the ensuing revenue loss, the same act proposed a major change in the taxation of assets held outside Brazil.

Read more: Federal Government adjusts Income Tax brackets and increases exemption limit

The provisions of the decree are far-reaching, affecting the profits of individuals tax-resident in Brazil made from financial investments, controlled companies (including offshores) and trusts abroad.

How such earnings are taxed

At present, capital gains from investments abroad are taxed according to the following progressive brackets:

Income	Tax rates
Up to BRL 5 million	15%
BRL 5 million to BRL 10 million	17,5%
BRL 10 million to BRL 30 million	20%
BRL 30 million or more	22,5%

Current regulations also provide for an exemption for small-value gains not exceeding BRL 35,000.

In relation to controlled foreign companies, their profits and dividends are taxed monthly once they are made available by means of the so-called "carnê-leão", with progressive tax rates that can go up to BRL 27.5%.

What does the decree prescribe?

According to the new rules, as of January 1, 2024, individuals considered tax resident in Brazil will be required to report in their Annual Income Tax Return (DAA) the following earnings made from investments abroad apart from other income and capital gains:

1. Financial investments,

2. Profits and dividends from controlled companies; and

3. Assets held in trusts.

The Individual Income Tax (IRPF) shall be levied on those earnings at the following progressive rates, with no possibility of deduction:

Income	Tax rates
Up to BRL 6,000	0%
BRL 6,000 to BRL 50,000	15%
BRL 50 mil or more	22,5%

Check out a few rules specific to each of those income types:

1. Financial investments

Earnings from financial investments must be reported in the tax return and they shall be taxed upon redemption, amortization, disposal, maturity, or settlement.

Keep in mind that the rules define "earnings" not only as investment yields, but also as gains arising from:

• exchange rate,
• interests,
• awards,
• comissions,
• premiums,
• discounts,
• profit sharing,
• dividends and gains on secondary market trading, including gains on the sale of non-controlled entities' shares on foreign stock exchanges.

2. Controlled foreign companies

The new rules state that, as of 2024, profits recorded by the following controlled foreign companies shall be automatically taxed on December 31 of each year, and the "carnê-leão" system will no longer apply:

Companies and other entities abroad, with or without legal personhood, in which the individual taxpayer holds:

Controlled corporations that meet one or more of the following criteria:

special voting rights in the deliberations of the entity or power to elect or dismiss the majority of its administrators; or     individually or together with other related persons (e.g. spouse or relative up to the third degree), more than 50% interest in the entity's capital or rights to earn profits or receive assets in the event of liquidation.

Company located in a favored taxation country (offshore) or benefiting from the special tax treatment of articles 24 and 24-A of Law No. 9,430/1996; or     Company whose active income is less than 80% of its total income, excluding royalties, interest, dividends, equity interests, rents, investments and financial intermediation, and capital gain - except in the sale of equity interests or permanent assets acquired more than two years ago.

Under the new taxation system, profits shall be assessed, irrespective of their distribution, on an individual basis, in the annual balance sheet of the controlled foreign company. Earnings must be converted into local currency at the exchange rate of the US dollar in effect on the last business day of December.

Profits reported in the annual return will be considered as additional acquisition cost of the investment and will not be taxed a second time when distributed to the controlling owner.

It is worth mentioning that profits earned until December 31, 2023 will only be taxed when they become available, and the decree allows tax losses incurred as of 2024 to be offset.

3. Trusts

Aiming at granting look-through status to such arrangements, assets of trusts abroad must be reported under “Goods and Rights” in the income tax return of the settlor, whose earnings will now be taxed according to the new rules set out by the decree. The transfer of the assets to beneficiaries (cestui) may be considered gift or inheritance, depending on whether they have been distributed during the settlor’s lifetime or on account of their death.

The decree provides that the assets shall be considered transferred to the beneficiary of the trust when:

• they are effectively distributed, in which case the assets will be taxed as gift; or
• the settlor dies, in which case the assets will be taxed as inheritance (mortis causa succession).

Starting from 2024, income and capital gains from assets administered by the trust will be considered earned by their holder on the corresponding date and will be subject to Individual Income Tax (IRPF), as per the rules applicable to the holder.

Other provisions

Individuals tax resident in Brazil may adjust the value of the assets abroad reported in their tax returns to their corresponding market value in force on December 31, 2022. In doing so, the Individual Income Tax will be levied on the acquisition cost difference at a 10% rate, and this tax must be paid by November 30, 2023.

Broadly speaking, this option applies to financial investments, real estate, vehicles, aircrafts, vessels, and interests in controlled entities.

For controlled foreign companies, individuals who opt for the December 31, 2022 value adjustment may separately adjust the market value for the period ranging from January 1, 2023 to December 31, 2023. In this case, the corresponding income tax will be levied at a 10% rate, which must be paid by May 31, 2024.

Entry into force

It should be noted that, although Provisional Presidential Decrees (‘Medidas Provisórias’) are immediately effective as of the date of their publication, their effects only last 60 days and may be renewed once for the same period.

After a maximum of 120 days, its provisions will cease to be in force unless the National Congress approves it and makes it law.

Therefore, investors should keep up to date with the legislative process of signing the decree into law to carry out their tax planning.

Tax optimization for individual taxpayers and offshore companies

DPC has a team dedicated to providing tax consultancy services to investors, individual taxpayers, and offshore owners who wish to optimize the taxation on their profits while maintaining compliance with the latest regulations. Talk to our experts at: dpc@dpc.com.br.