Draft Law no. 108 (“PLP 108/24”) comprises the major revision of the Brazilian tax code, was approved last Tuesday, August 13, 2024, by the Chamber of Deputies and will be forwarded to Senate for discussion.
In addition to establishing the transition between the current tax system, PLP 108/24 brings relevant proposals regarding the Estate, Inheritance and Gift Tax (the “ITCMD”), as well as the inter vivos transfers of real estate tax (the “ITBI”), which will be renamed as the Tax on the Transfer of Real Estate by Onerous Act.
We have listed the major topic and changes:
v Private Pension Plans (PGBL and VGBL)
PLP 108/24 seeks to resolve the issue concerning the assessment of the ITCMD on distribution of private pension plans, in both programs currently available to investors: PGBL and VGBL.
According to the base text approved by the Chamber of Deputies, ITCMD shall be fully applicable to the amount invested in PGBL, due to its predominantly pension-oriented nature.
With respect to VGBL, due to its predominantly insurance-oriented nature, ITCMD would only apply to contributions made within the 5 (five) years preceding the death of its settlor, thereby aiming to avoid aggressive succession planning.
The matter is currently under review by the Supreme Court.
v Reorganization and other Corporate Acts
PLP 108/24 also aims to curb corporate transactions between related individuals that result in disproportionate benefits without a legitimate business purpose, by levying the ITCMD on a reduced rate (one-third of the maximum applicable).
Among the corporate acts that may be affected by this new rule include distributions of dividends disregarding the pro rata shareholding, spin-offs reorganizations, and similar transactions.
v Usufruct
The PLP imposes ITCMD in transactions where the income/revenue to which the usufructuary are entitled is paid to the bare owner, without consideration.
v Transfer and Debt Forgiveness among Related Parties
PLP 108/24 provides for the assessment of ITCMD on transfers among related parties in cases where there is no proof of financial capacity to pay the agreed price, as well as in cases of debt forgiveness.
v Tax Base on Transactions involving Shares of Privately Held Companies
For the purposes of calculating the ITCMD on transactions involving gift, estate and inheritances of shares issued by a non-publicly traded company, the tax base shall adopt a methodology assessing its market value, such as the company’s cash generation (e.g., discounted cash flow). For real estate holding companies, PLP 108/24 requires that the market value of the underlying real estates shall be assessed.
v Taxation in Cross-border Gifts, Estates and Inheritances
In the cases of gifts or inheritance of real estates in Brazil, ITCMD will be levied even if the donor (or deceased) is domiciled abroad. For real estates located abroad, PLP 108/24 confirms the taxation on overall estate without addressing the issue of double taxation when the transaction is equally taxed in another state.
Similarly, for other assets (shares, fund units, etc.), ITCMD will apply to those located in Brazil or abroad, even when the donor or deceased is domiciled abroad.
The OECD has recently issued a new Model Convention to extend the efforts to eliminate double taxation on with respect to taxes on gifts, estates and inheritances within its member countries.
v Wealth Tax on High-Net-Worth Individuals
PLP 108/24 also provides that taxpayers classified as holders of large estates, (to be further defined) will be taxed by ITCMD at the maximum rate determined by the Senate Chamber, which currently is 8%.
