The Brazilian government recently introduced changes to the Brazilian tax law; Provisional Measure (MP) 1.171/23 was published last 30 April 2023, amending the country’s taxation system. On 07 July, the lower house approved these tax reforms.
The MP discusses changes on two main things: taxation of income earned abroad and updates on the value of the exemption range in the monthly IRPF (Individual Income Tax). Changes in the overseas income tax cover financial investments, controlled entities, trusts and updates on the value of assets and rights. In brief, Brazilian tax residents must pay income tax on their foreign investments, whether the income is returned to the country.
According to Bolder Group’s Head of Growth, Jeroen van Zanten, “Business-led corporate, operational, and/or financial restructuring, within Brazil or internationally, may be needed to address the impacts of the current tax reforms.”
Brazil’s new tax rates for overseas income
Tax residents in Brazil will compute their overseas income tax independent of other income and capital gains in their DAA (Annual Adjustment Statement), starting 1 January 2024, when MP 1.171/23 enters into force.
Below are the new progressive tax rates of income from overseas investment (up to 22.5 per cent, no deductions) under the new MP:
|Income Range (BRL)||Tax Rate (%)|
|Up to 6,000||0%|
|6,001 to 15,000||15%|
Financial investments covered by these new tax rates include:
- Bank deposits
- Deposit certificates
- Investment fund quotas
- Financial instruments
- Insurance companies
The earnings, computed in the DAA, will be taxed upon effective receipt of yields by the individual; for example, at the time of the financial instrument’s redemption, maturity, liquidation or settlement, etc.
Moreover, under the MP, Brazil established rules, for the first time, on tax imposition of Brazil trusts abroad. The provisional measure states that the trust’s assets and rights will be owned by the founder and be passed only to the beneficiary at the time of distribution or the founder’s death (whichever occurs first). Income or capital gains generated from the trust’s assets and rights will be considered earnings of the beneficiary and subject to the IRPF (income tax).
The MP also authorises natural persons in Brazil to update the value of assets and rights abroad and include this information in the DAA.
MP 1.171/23 will also implement anti-deferral rules on foreign-controlled entities that Brazilian individuals own. Incomes from these controlled entities will automatically be taxed based on the annual balance sheet of the entity every 31 December. Note that this rule applies only to Brazilian-owned entities controlled in jurisdictions considered as tax havens. The mandatory taxation does not apply to profits generated until 31 December 2023.
Gains earned from the differences in currency exchange rates will also now be taxed. Previously, these gains were tax-exempt.
What this means, and how we can help
The updates on the Brazilian tax system primarily affect Brazilian businesses, investors and managers with cross-border activities, like trusts and funds. The measure may mean increased tax liabilities for Brazilian companies in foreign markets and Brazil tax residents. Consequently, the new tax regime also means increased reporting and compliance requirements for businesses and individuals.
To mitigate the impact of these changes, van Zanten recommends: “Individuals and companies should assess the possible consequences, and reconsider their corporate structures, value chains, transfer pricing and financing of their Brazilian operations.”
Bolder Group is a global corporate and funds administrator and compliance solutions provider that has helped businesses, managers and individuals in various jurisdictions seamlessly navigate new tax rules. Amid Brazil’s new tax measures, Bolder can assist Brazil tax residents or asset managers with international business activities in restructuring their investments and implementing effective compliance procedures to ensure good standing with the tax authorities. This includes assistance in tax payments, tax returns and reporting of financial statements.
Reach out to our experts for more information about the changes in the Brazil tax regime and how this affects your international business.