Brazilian government tries to rush through foreign income tax Bill

The new Bill No.4.173/2023 was submitted to the Chamber of Deputies on 28 August under the 'constitutional urgency' procedure. This requires the two legislative houses – the Chamber of Deputies and the Federal Senate – to vote successively on the proposal within 45 days. If approval has not been given by then, all other normal business of the respective house will be suspended until a final vote is held. If approved by parliament and the president, the Bill will take effect from 1 January 2024.

Financial investments, as defined by the Bill, include any financial transaction outside the country, including interest-bearing bank deposits, crypto-assets, digital wallets and insurance policies whose principal and income are redeemable by the insured or its beneficiaries. Brazilian residents receiving the associated income will be able to offset income tax paid abroad if a treaty or reciprocity agreement exists, and provided the foreign tax is not subject to refund, reimbursement or compensation in the foreign country.

Foreign tax credits cannot be carried forward or back to other tax years, but individuals will be able to offset their operating losses against income from the same type of business, or from profits from other entities controlled abroad. Anti-deferral rules will apply to Brazilian tax residents on profits earned by foreign-controlled entities.

Taxpayers will be given the option to treat a controlled entity as transparent for Brazilian tax purposes, in which case the entity's assets and rights will be taxed as if held by the individual directly.

Trust income and capital gains will be taxed by the person deemed to be the holder on the date of the chargeable event. Revocable trusts will be automatically treated as the personal property of the settlor, and will become personal property of the beneficiaries only when distributed to them. For irrevocable trusts, transfer of ownership from the settlor to the beneficiary may be designated before distribution if the settlor irrevocably assigns ownership over the trust assets to the trust. Trustees must provide the settlor or beneficiaries with the financial resources necessary to pay the tax obligations in Brazil.

Sources

• Trench Rossi Watanabe & Baker McKenzie
• Baker McKenzie (Provisional Measure No. 1171/23, May 2023)