Since the Lula government took power in Brazil at the beginning of the year, it has been looking for opportunities to increase tax revenue to drive the focus on its social agenda, which encompasses support to families with low or no income.
On April 30, 2023, a provisional measure – or medida provisória (MP) – was introduced by the Brazilian government that both expands the exemptions range for individual income tax and modifies the rules for taxation of income earned by Brazilian residents through assets and investments held abroad, which had previously been exempt from income and capital gains taxes.
As a result of this development, at IQ-EQ we’ve been seeing a growing number of Brazilian family offices, lawyers, investment managers and advisors looking for assistance with international fund and corporate structures.
While we’re receiving enquiries as to our services in a number of reputable international financial centres (IFCs), including Jersey, Ireland, the Cayman Islands and Luxembourg, the Brazilian Federal Revenue Service is now blacklisting any jurisdiction offering a corporate tax rate of less than 17%. As such, Luxembourg is standing in a particularly favourable light.
This interest largely relates to international portfolios including both liquid and illiquid strategies, making hybrid funds a popular solution.
To garner more insight into the MP and what it means for Brazilian tax residents with international investments, we spoke to GETA co-founder Gabriel Hercos, a Deloitte-qualified tax attorney from São Paolo who has worked almost 20 years in Brazil. Gabriel has worked with many institutions and family offices in that time, advising on tax and wealth planning.
“Taxation of income earned abroad by Brazilian tax residents is the main focus of the regulation, including financial investments, controlled entities, and trusts,” explained Gabriel. “The MP seeks to make taxation more uniform for investments in Brazil and abroad, aligning with the international taxation rules of the Organization for Economic Co-operation and Development (OECD).”
What does this change mean in practical terms?
Clarifying some of the practical implications of the proposed law, Gabriel said:
“From January 1, 2024, a person resident in Brazil must declare in their annual adjustment return (DAA), separately from other income and capital gains, the returns on capital invested abroad in the form of financial investments, profits and dividends from controlled entities and trust assets and rights.
“The new rules define widely what constitutes ‘financial investments’. Bank deposits, deposit certificates, investment fund quotas, financial instruments in general, insurance policies, and other similar investments are all included. Interest income is also widely defined, such as remuneration from financial investments, including foreign currency exchange variation against the national currency, interest, premiums, commissions, goodwill, discounts, profit sharing and dividends. Taxes will be due for these returns when effectively received, be that at redemption, amortization, disposal, maturity or liquidation stage.
“Regarding entities controlled abroad by tax residents in Brazil,” Gabriel continued, “the proposed law states that the taxation of profits is calculated, from January 1, 2024, on December 31 of each year. The rule is anti-deferral, which is why the tax incidence is to be determined annually rather than depending on the availability of income to controlling individuals. In other cases, taxation would only occur upon the effective receipt of amounts by the holder.
The impact on trusts
In an unprecedented way for Brazil, the MP establishes basic rules on trusts and their taxation.
“According to the MP, the assets and rights of the trust remain under the ownership of the settlor after its establishment, passing to the beneficiary at the time of the trust’s distribution or the settlor’s death, whichever occurs first,” elaborated Gabriel.
“Income and capital gains relating to the assets and rights subject to the trust, earned from January 1, 2024, will be considered earned by the holder on the respective date and subject to tax.
“As of January 1, 2024, any act of disposal of assets or rights of the trust in favor of the beneficiary, such as the provision of possession, usufruct or ownership of goods and rights, will have the legal nature of transfer free of charge by the settlor to the beneficiary. Donation if it occurred during the life of the settlor, or transmission causa mortis if resulting from the settlor’s death.”
International options remain attractive
Gabriel concluded that “Brazil-based investors and asset managers must now await the final version of the law after amendments that members of Congress may propose. Despite the increased internal political pressure, it is still being determined if the new proposed law will pass without any amendments or if it will pass at all.
“In any case, investors should not consider the law an impediment to continue investing abroad. The constitution of entities and direct investments in international jurisdictions are still vital tools for effective wealth and succession planning. Indeed, trusts and other structures represent a reliable way of holding and protecting assets abroad, including real estate, investment portfolios, as well as luxury assets such as planes and boats.”
Speak to IQ-EQ
Whether you’re an LP or GP assessing your international investment options following the introduction of Brazil’s MP, IQ-EQ is here to help – with a global service offering and offices in all of the world’s leading IFCs.
Get in touch today to find out more and discover how we could support your international structuring requirements.
You may also find the following useful in assessing where best to domicile your international investments going forward:
- IQ-EQ Fund Domiciliation Report – Overview of the most popular jurisdictions for alternative funds to guide fund managers in the selection process
- Where do we ‘trust’? The balancing act of choosing domiciles for your wealth structures
