The Brazilian Tax Bill (14.754/2023) was recently approved by Congress and confirmed by the President. The bill will introduce changes to the taxation of investments made abroad by individual Brazilian taxpayers. The new regime will come into force on 1 January 2024.
The following are the main changes included in the bill:
ALL CONTROLLED FOREIGN ENTITIES (CFES)
- CFEs that generate passive income exceeding 40% of their total income will be taxed at a flat rate of 15% annually whether or not profits are distributed
- Profits must be determined on an annual balance sheet prepared in accordance with Brazilian commercial accounting standards
- Under the new regime, the term ‘entity’ will include private investment companies, investment funds, segregated portfolio companies, foundations, trusts and other non-incorporated entities
- For companies, with segregated unit classes or shares, each class will be considered a separate entity
- There is an option to update the value of assets and rights abroad reported in the income tax return, to the market value on December 31 2023 at the definitive tax rate of 8%, payable by May 2024
- There is an option for an entity to apply for transparent tax treatment in Brazil. However this option cannot be reversed at a later date
TRUSTS
- Trusts will be considered transparent for fiscal purposes
- For revocable trusts, the settlor will be the responsible for all reporting requirements and for the payment of taxes
- For irrevocable trusts, the beneficiaries will be responsible for all reporting requirements and for the payment of taxes. In the case where the beneficiaries are not yet entitled to receive distributions, the responsibility with fall to the trustee
- Within 180 days from the introduction of the new regime, trust deeds must be amended to include provision that obliges the trustee to comply with the new tax regime
- The settlor or beneficiary must request the trustee to provide the financial resources and information necessary to facilitate the payment of taxes and compliance with other tax obligations
In addition to Bill 14.754/23, there is a second bill of law (PEC45) due to come into force early in 2024 which will introduce a new progressive taxation on inheritance and donations (ITCMD), as well as allowing taxation on donations received abroad. Currently Brazilian states can levy taxation charges of up to 8%. Some currently charge ITCMD at a fixed rate, such as Sao Paulo where there is a fixed rate of 4%; others have already introduced a progressive tax rate regime. Under PEC45 all states would need to have a progressive ITCMD tax regime of between 2% and 8%.
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