Brazil: Report from Congress Committee proposes changes to the taxation rules for individuals investing abroad
August 15th, 2023,
On August 8, 2023, the Joint Committee of the two houses of the Brazilian Congress approved and made public a Report of a Provisional Measure No 1,172, of 2023 (“MP”), that provides new rules for the minimum wage in Brazil and incorporated the main changes on the taxation rules for individuals investing abroad, provided in Provisional Measure 1,171/23.
We highlight below the main changes dealing with individual taxation on offshore financial investments, controlled entities, PICs and trusts:
As of 1 January 2024, financial investments, profits, and dividends (including currency exchange rate variations) derived from controlled foreign corporations (“CFC”) will be subjected to income tax annually at rates of 15% to 22.5%, charged on the end of each calendar year, regardless of any distribution or payment to the investor. Companies and other entities such as investment funds, trusts and foundations controlled by Brazilian individuals. The proposed CFC rules will apply to a CFCs: (i) in a backlisted jurisdiction or subject to privileged tax regimes; or (ii) if its active income is less than 60% of the total income (active income does not include royalties, interest, dividends, equity interest, property leases, capital gains arising from assets held for less than two years, and financial investments).
Profits earned before January 2024 will remain subject to taxation in Brazil upon actual payment/distribution to the Brazilian resident individual.
Regarding offshore fiduciary arrangements (trusts and foundations), the settlor shall be considered the direct holder of the underlying assets (whether a PIC or a bank account or a financial investment) during his/her lifetime, or before distribution to beneficiaries. The profits, dividends and income are subject to new rules established for foreign investments set forth in the MP. Distributions received by beneficiaries would be treated as donation (during the life of the settlor) or inheritance.
Individuals will be allowed to update the marked value of their offshore assets subject to income tax at a fixed rate of 10%, on the difference from the acquisition cost. Certain relevant tax exemptions would be revoked as of January, 2024, such as: (i) on income and capital gains deriving from offshore assets acquired by a non-resident individual who further gained a resident status; and (ii) capital gains tax on foreign exchange variation in offshore assets (from date of acquisition to the time of disposal).
The MP will proceed for analysis of the Houses and must be approved by August 28, 2023.