Strong winds of change are blowing in Brazil’s direction. On 12 November 2013, Provisional Measure 627/2013 (MP 627/2013) was published, which, among other tax changes, significantly altered how Brazilians will be taxed on their investments abroad when using offshore structures, especially private investment companies (PICs). MP 627/2013 has to be passed into law within 120 days of publication.1 Brazil was one of the few Latin American countries that had not yet implemented strict rules on foreign investments by national taxpayers; it is now aligned with the international trend in expanding the country’s tax base by enacting a new regime for controlled foreign corporations (CFC).
Expanding the tax base
Even before the creation of this new CFC regime, Brazil had been taking a more pro-active stance on tax collection by enhancing controls and improving the legislation promoting transparency with respect to funds abroad, as per the new Brazilian anti-money laundering law (Law 12, 683/2012). The Central Bank of Brazil has also taken a hard line on the oversight of Brazilian capital sitting offshore by strengthening the rules with respect to periodic reporting, which is mandatory for Brazilian individuals who hold more than USD100,000 outside the country. Such reporting was said to be purely for statistical purposes, but it has now proven to be an important source of information and may have well been the inspiration for the new CFC regime.
The new regime
In accordance with the new rules in MP 627/2013, individuals will recognise and anticipate the payment of income tax over profits obtained abroad through CFCs. The change will be enforceable as of 1 January 2015, but discussions are ongoing as to the extension of its application to different types of vehicles commonly used by Brazilian investors.
As per MP 627/2013, the profits deriving from a PIC will be presumed available to Brazilian-resident individuals whenever a balance sheet is issued by the PIC if: (i) the PIC is located in a low-tax jurisdiction or subject to a beneficial tax regime (both pursuant to Normative Instruction 1037/2010); or (ii) the PIC is subject to ‘sub-taxation’, a regime that taxes resident companies at a nominal tax rate below 20 per cent; or (iii) the Brazilian-resident individual does not possess the relevant incorporation documents and subsequent changes, registered in relevant public offices, which identify the other shareholders of the PIC.
The applicable tax is the individual income tax (IRPF), calculated on the basis of the progressive monthly rates, which must be paid by the last day of the month following the date that the PIC’s profits were presumed available (date of the balance sheet), and this will be included in the taxpayer’s annual income tax return. The top IRPF rate is currently 27.5 per cent.
IRPF is applied to profits that are ‘presumed’ to be available to the shareholder, but not necessarily distributed. Once the actual distribution of profits occurs, if there is any gain accrued in view of the foreign currency exchange rate variation, an additional capital gains tax at the rate of 15 per cent is applicable.
This new CFC regime is applicable to Brazilian-resident individuals who, alone or together with other related parties (either individuals or legal entities, resident in Brazil or abroad), hold more than 50 per cent of the voting shares of the PIC. MP 627/2013 establishes a broad concept of ‘related parties’.
It is also worth mentioning that the Brazilian government approved a new measure at the end of 2013 that increased the tax on financial transactions (IOF) to 6.38 per cent on transactions in foreign currencies by the use of debit cards, withdrawals from a Brazilian checking account in ATMs outside Brazil, purchase of travel cheques and transferring funds to pre-paid cards. Surprisingly, the publication of these rules coincided with the year-end holidays and the peak of summer vacation time in Brazil.
Adding to MP 627/2013, discussions have revived around a possible tax amnesty and/or a new wealth tax, and an eventual increase of inheritance and gift tax rates. In such a scenario, one may wonder what would be the more efficient allocation strategy between having investments concentrated locally in Brazil or abroad.
For now, Brazilian investors are anxiously waiting to learn of the opportunities for planning in order to mitigate the effect of MP 627/2013 on existing structures. Such opportunities will be more openly discussed with investors once the new regime is passed into law and the respective regulations are approved. In the meantime, professionals specialising in wealth planning are looking to countries that have undergone similar anti-avoidance tax reforms recently as a source of inspiration for alternative solutions. However, there is still a great deal of uncertainty as to how the new rules will be applied. Key issues being discussed are: the nature of the investment vehicle, control and the concept of profit.
- 1At the time of writing, MP 627/2013 had not been passed into law. If MP 627/2013 is not passed into law within the 120-day period, it will lose effect. A new provisional measure will then have to be issued, which will also be subject to the 120-day time frame; the date the legislation will be in effect will change accordingly. During January 2014, the Brazilian legislature was in recess, and these days will be added to the original 120-day countdown
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