SUBJECT

 MP 1,172 of 2023

PL 4,173 of 2023

Capital invested abroad

Income earned from capital invested abroad, in the form of financial investments, profits and dividends from controlled entities and assets and rights held in trusts must be included in the Annual Adjustment Statement (“DAA”).

Income will be subject to income tax at rates ranging from 0% to 22.5% (0% for income up to R$ 6,000.00, 15% for the portion between R$ 6,000.00 and R$ 50,000.00 and 22.5% for what exceeds R$ 50,000.00) and no deduction will be made from the calculation base.

Automatic taxation will take place on December 31st of each year, including any exchange rate variations on the investment.

The text kept the previous provisions unchanged.

Financial investments abroad

Income earned must be calculated in the DAA and will be subject to income tax (rates between 0% and 22.5%) in the calculation period in which it is actually received by the individual, on redemption, amortization, disposal, maturity or liquidation.

The MP also states what is considered to be financial investment or income:

I - financial investments abroad - for example, interest-bearing bank deposits, interest-bearing certificates of deposit, crypto-assets, digital portfolios or current accounts with income, investment fund quotas, with the exception of those treated as controlled entities abroad, financial instruments, insurance policies whose principal and income are redeemable by the insured or their beneficiaries, investment certificates or capitalization operations, retirement or pension funds, fixed-income and variable-income securities, derivatives and shareholdings, with the exception of those treated as controlled entities abroad; and

II - income - remuneration produced by financial investments abroad, including, for example, foreign currency exchange variation or cryptocurrency variation against the national currency, income on deposits in digital portfolios or interest-bearing current accounts, interest, premiums, commissions, goodwill, discounts, profit sharing, dividends and gains on secondary market trading, including gains on the sale of shares in non-controlled entities on foreign stock exchanges.

The exchange variation gains in connection to deposits in a current account or debit or credit card abroad will not be subject to Individual Income Tax (“IRPF”), provided that the deposits are not remunerated and are held in a financial institution abroad that is known and authorized to operate by the monetary authority of the country in which it is located.

The exchange variation of foreign currency in kind will not be subject to IRPF up to the limit of currency disposal in the calendar year equivalent to US$ 5,000.00. Foreign exchange gains from the sale of foreign currency in kind whose sale value exceeds the above limit will be subject to IRPF at a maximum rate of 22.5%.

Individuals who declare income may deduct from the IRPF due the income tax paid in the country of origin of the income, provided that: (i) the compensation is provided for in an international agreement or convention signed with the country of origin of the income; or (ii) there is reciprocity of treatment in relation to income produced in the country. The tax credit paid abroad will be converted to the day the tax is paid.

The text specifies that financial investments abroad are deemed to be any financial transactions outside the country.

The text also includes in the definition of financial investments credit operations, including the lending of financial resources, in which the debtor is resident or domiciled abroad.

The text stipulates that tax paid abroad and not deducted in the calendar year cannot be deducted from the IRPF due in subsequent or previous calendar years.

Controlled Foreign Companies (CFCs)

Profits made by entities controlled abroad by individuals resident in Brazil will be taxed on December 31st of each year, provided that (i) the controlled entities are located in a country or dependency with favorable taxation or are beneficiaries of a privileged tax regime¹, or (ii) they calculate their own active income² of less than 60% of their total income.

In the case of companies, investment funds and other entities abroad with classes of quotas or shares with segregated assets, each class will be considered a separate entity.

Subsidiaries that do not fall within the above hypotheses will continue to be taxed at the time they are effectively made available.

The following deductions may be made: (i) the losses calculated in the balance sheet by the controlled entity itself, relating to periods after the effective date of the Provisional Measure; (ii) the portion corresponding to the profits and dividends of its investees which are legal entities domiciled in Brazil; and (iii) the income tax paid abroad by the controlled entity and its investees, levied on the profit computed in the tax base referred to in this article, up to the limit of the tax due in Brazil. Profits from indirect subsidiaries in Brazil will also be excluded from the tax base, as long as they are taxed at a rate equivalent to the maximum of the new rule (22.5%).

The exchange rate variation of the principal invested in foreign subsidiaries will make up the capital gain realized by the individual when the investment is sold, written off or liquidated, including through a return of capital.

The calculation of the profit of the controlled entity abroad must follow Brazilian commercial legislation, for each direct and indirect subsidiary and indicating the year in which the profits originated.

The text establishes that the gain or loss from the exchange rate variation between (i) the amount in national currency of the profit taxed on December 31 and recorded as the acquisition cost of the dividend credit receivable and (ii) the amount in national currency of the dividend subsequently received, will not be taxed or deducted when calculating IRPF.

The portion corresponding to the profits and dividends of its investees which are legal entities domiciled in the country and the income and capital gains of other investments made in the country may be deducted from the profit of the controlled legal entity, directly or indirectly, provided that they are taxed by the Withholding Income Tax (“IRRF”) at a rate equal to or greater than 22.5%.

If the foreign controlled entity earns income or capital gains in Brazil that have not been excluded from the profit subject to income tax, the IRRF paid in Brazil on this income and capital gains may be deducted from the income tax due on the profit of the foreign controlled entity.

Alternatively, the individual may choose to declare the assets and rights held by the controlled entity abroad as if they were held directly by the individual, considering that:

I - it may be exercised in relation to each controlled entity, direct or indirect, separately;

II - it will be irrevocable and irreversible for as long as the individual holds the controlled entity abroad; and

III - when there is more than one partner or shareholder, the option must be exercised by all those who are individuals resident in the country.

Individuals who opt for the above tax regime in relation to shareholdings held on December 31, 2023 must:

I - indicate their option in the DAA to be filed in 2024, on time, for the calendar year 2023, to take effect on January 1, 2024;

II - replace, on the assets and rights sheet of the same DAA, the interest in the entity with the underlying assets and rights, and allocate the acquisition cost to each of these assets and rights, taking into account the proportion of the value of each asset or right in relation to the total value of the entity's assets on December 31, 2023; and

III - tax the income earned as of January 1, 2024 from the assets and rights, and apply the rules set out in the new Law, in the case of financial investments abroad, or the specific provisions set out in the legislation in accordance with the nature of the income.

In addition, individuals who opt for this tax regime in relation to holdings in controlled entities acquired after January 1, 2024 must exercise their option in the first DAA after the acquisition.

Finally, assets and rights transferred for any reason by the individual, or by a controlled entity owned by the individual under the above tax regime, to another controlled entity in relation to which the option for the tax regime has not been exercised, must be valued at market value at the time of the transfer and the amount of the difference calculated in relation to their acquisition cost will be considered income of the individual subject to IRPF taxation at the time of the transfer, in which case the rate provided for in the legislation will be applied in accordance with the nature of the income.

Compensation of losses

No specific provision for compensation of losses.

The text makes it possible to offset losses on financial investments abroad, only once, when duly proven by appropriate and suitable documentation.

If the value of the losses in the calculation period exceeds the gains, this portion of the losses can be offset against profits and dividends from controlled entities abroad, which have been computed in the DAA in the same calculation period.

If, at the end of the calculation period, there is an accumulation of losses that have not been offset, these losses can be offset against income informed in the DAA in subsequent calculation periods.

Trusts abroad

Assets and rights that are the object of a trust abroad will be considered as:

I - remaining under the ownership of the settlor after the establishment of the trust; and

II - passing to the ownership of the beneficiary at the time of distribution by the trust to the beneficiary or the death of the settlor, whichever occurs first.

Trusts will be “transparent” for income tax purposes, the assets and rights subject to the trust must be declared directly by the holder in the DAA, at the acquisition cost. However, the transfer to the beneficiary may be deemed to have occurred prior to the settlor's death if the settlor irrevocably relinquishes the right to a portion of the trust's assets.

Income and capital gains relating to the assets and rights covered by the trust earned by the holder will be subject to taxation at rates of 0% to 22.5%.

Distributions to beneficiaries will be understood as donations, if they occur during the settlor’s lifetime, or as inheritance, if they result from the settlor’s death.

The trustee must make available to the settlor or beneficiaries, as applicable, the financial resources and information necessary to enable the payment of tax and the fulfillment of other tax obligations in the country.

Application of the same trust rules to similar contracts, such as some American foundations.

The text stipulates that the settlor of the trust, if alive, or the beneficiaries of the trust, if they are aware of the trust, must, within 180 days of the date of publication of the Law, amend the trust deed or the respective letter of wishes to include wording that irrevocably and irreversibly obliges the trustee to comply.

In the case of trusts in which the settlor is deceased or has lost powers to amend the trust and the beneficiaries do not have the power to amend the deed or letter of wishes, the beneficiaries must send the trustee a formal notice regarding the obligation to comply with the new rule and request that the information and financial resources necessary to comply with the provisions of the law be made available.

Failure to comply with the new rules does not remove the duty to fulfill the main and ancillary tax obligations of the settlor or beneficiary, as the case may be.

Updating the Value of Assets and Rights Abroad

Possibility of updating the cost value of assets and rights abroad reported in the DAA, subject to a 10% tax on capital gains.

The following may be updated: financial investments, real estate in general or assets representing rights over real estate, vehicles, aircraft, boats and other movable property subject to registration in general, even if held in fiduciary sale, and holdings in controlled entities.

Jewelry, precious stones and metals, works of art, antiques of historical or archaeological value, pets or sporting animals and genetic material for animal reproduction, subject to registration in general, even if in fiduciary alienation, cannot be the object of the update.

For tax purposes, the assets and rights will be updated to their market value on 06.30.2023. Specifically for the purposes of updating the acquisition cost of foreign subsidiaries for the period from January 1 to December 31, 2023, the exchange rate of December 31, 2023 should be used.

The option may be exercised jointly or separately for each asset or right abroad and the tax must be paid by November 30, 2023.

No deductions, percentages or reduction factors may be applied to the calculation base, rate or amount due for the tax referred to in this article.

The taxpayer may also choose to update the value of assets and rights that are the subject of a trust in relation to which the individual is defined as the owner.

The text provides for the possibility of updating the values of assets and rights abroad, only once, to December 31, 2023.

Deposits in current accounts and on debit and credit cards, which are not remunerated, cannot be updated.

For the purposes of calculating the value of assets and rights, the text establishes the use of the exchange rate for the last working day of December 2023, and the tax must be paid by May 31, 2024.

The gain or loss from the exchange rate variation between the value in national currency of the profit taxed on December 31, 2023, and recorded as the acquisition cost of the dividend credit receivable and the value of the dividend received later will not be taxed or deducted when calculating the IRPF.

Capital Gain Exemptions

Maintenance of the exemption, in the updating of assets abroad with payment of tax, on the portion of the exchange variation of income originally earned in foreign currency.

Provision for the rule of anteriority for revoking income tax exemptions, that is, they are revoked as of January 1, 2024.

The text maintained the exemption related to the exemption of foreign exchange gains in the update of assets’ acquisition costs.

The revocation of the exemption for all other exchange variation gains originally earned in foreign currency is maintained.

Revocation of exemptions

Repeal of the exemption from income tax on gains from the sale, liquidation or redemption of assets located abroad or representing rights abroad, as well as financial investments, acquired in any capacity as a non-resident.

The text maintained the repeals.