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Brazil update: Impacts of Provisional Measure 1,171/2023 – taxation of earnings accrued abroad
A provisional measure 1,171/2023, introduced by the Brazilian Federal Government on April 30, 2023, brings significant changes to the taxation of financial investments, controlled companies, and trusts held abroad by Brazilian citizens. This update aims to analyse the main impacts of this measure.
Enforceability of the Provisional Measure (PM):
PMs are normative texts with the force of law, issued by Brazil’s Executive Branch. The measures must be approved, modified, and/or rejected by the Brazilian Congress to become an ordinary law.
PMs that address surcharges or the creation of taxes only take effect in the subsequent year after becoming law and, as such, would come into effect in 2024.
- Earnings from financial investments up to 2023
As is well aware, the Brazilian legal system already considers the taxation of earnings from financial investments abroad. Taxation rules related to capital gains were applied, with rates ranging from 15% to 22.5%.
“Art. 21. The capital gain received by an individual arising from the disposal of goods and rights of any nature is subject to the levy of the income tax under the following rates:
I – 15% (fifteen per cent) on the portion of gain that does not exceed BRL 5,000,000.00 (five million Brazilian reais)
II – 17.5% (seventeen point five per cent) on the portion of gain that exceeds BRL 5,000,000.00 (five million Brazilian reais) and does not exceed BRL 10,000,000.00 (ten million Brazilian reais)
III – 20% (twenty per cent) on the portion of gain that exceeds BRL 10,000,000.00 (ten million Brazilian reais) and does not exceed BRL 30,000,000.00 (thirty million Brazilian reais)
IV – 22.5% (twenty-two point five per cent) on the portion of gain that exceeds BRL 30,000,000.00 (thirty million Brazilian reais).”
2. Financial investments earnings starting from 2024
The new PMs maintain the taxation of earnings from financial investments abroad under the same rules. The rates differ slightly, but the most significant change is in the thresholds for taxation.
With the new PM, there will be a few differences in the rates, but the most relevant aspect are the changes in the thresholds, as follows:
- 0% for income up to BRL 6,000.00 per year
- 15% for income between BRL 6,000.01 and BRL 50,000.00 per year
- 22.5% for income above BRL 50,000.00
Therefore, different from what the Executive Branch states, there were existing rules for the taxation of such earnings, being that, with the new model, the earnings that were taxed at the rate of 15% (applied for income up to BRL 5 million) may be taxed at the rate of 22.5% (that will be applied for income above BRL 50 thousand in 2024).
Taxation of orofits and dividends earned by controlled companies abroad
- Taxation of profits and dividends up to 2023
Foreign profits and dividends received from companies are subject to Brazilian Income Tax. Taxation is made using progressive rates ranging from 0% to 27.5%.
- Taxation of profits and dividends starting from 2024
The new measure aims to eliminate the deferral of taxation on profits earned by individuals through foreign entities. Taxation will occur annually on December 31, regardless of dividend distribution, with rates ranging from 0% to 22.5%.
- Control of profits earned up to 31 December 2023
Profits earned by foreign entities before the measure’s enforcement will be taxed only when available, using the rates in force at that time.
- Losses offset
Losses calculated by foreign entities can only be offset against profits of the same entity, with no time limitation or update provision.
- Deduction of tax owed abroad
Taxpayers may deduct income tax paid abroad by the controlled company up to the limit of the tax owed in Brazil. The specific requirements and implications of this provision need to be analysed on a case-by-case basis.
Rules for trusts
Trusts, previously unregulated in Brazil, are now subject to specific regulations. Settlors must declare all assets and tax all trust earnings, unless the beneficiary has already declared the trust to Brazilian authorities.
Update rules for the value of goods and rights
Taxpayers have the option to update the value of goods and rights abroad to their market value on December 31 2022.
The difference between the updated value and the acquisition cost can be taxed at a rate of 10%.
Final notes
The changes brought by the PMs have a significant impact on investments abroad and require a review of models and structures.
It is recommended to evaluate the impacts individually and consider factors such as foreign exchange hedge and equity consolidation for succession planning.
Professional assistance from multidisciplinary experts in international tax matters can help navigate these changes effectively.
Please click here to read more.
For more information, please contact:
Marcos Vinicius de Freitas Gutierres
Tax Director at PP&C Auditores Independentes
E : mvf.gutierres@ppc.com.br
T : 55 11 3883-1600
W : www.ppc.com.br
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