Sao Paulo declares irrevocable trust assets are liable to gift taxes

Tuesday, 30 May 2023
The Sao Paulo tax authority, Sefaz-SP, has issued its first ruling on the imposition of estate and gift tax (ITCMD) on resident beneficiaries of irrevocable trusts.
Brazilian Reals

The ruling was produced in response to an inquiry from the Brazilian beneficiary of an irrevocable trust formed in December 2017 by capital investment from a foreign company. The settlor was also a beneficiary, and the trust was set up to continue for 150 years unless modified by a later deed.

Sefaz-SP based its analysis partly on the second article of the Hague Convention on the Law Applicable to Trusts and on their Recognition, even though Brazil is not a signatory to it, and partly from academic expert input. It was advised that the assets transferred by the settlor to the trust do not become part of the trustee's assets but remain under the trustee's control for the benefit of the beneficiary, and that the actual recipient of the rights over these assets would always be the beneficiary. The fact that the assets were settled free of charge made them a gift.

The authority duly concluded that the settled assets become liable to ITCMD as soon as the settlor nominated a Brazilian beneficiary, who thereby became the holder of the rights provided by the trust deeds.

Sefaz-SP also stated that ITCMD applies despite the contrary ruling of the Brazilian Supreme Court in Extraordinary Appeal no.851.108/SP, which stated that imposing the tax on assets received as inheritance or donation from a foreign donor was unconstitutional. Sefaz-SP instead asserted that article 4 of Law No.10.705/2000, which governs ITCMD in Sao Paulo State, creates a legally valid obligation to tax donations from foreign donors to residents of the state.

  • In April, Brazil's government published Provisional Measure No. 1171/23 decreeing that a foreign trust's assets will be deemed to remain the settlor's property until their distribution to a beneficiary or the settlor's death, whichever occurs first.


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