Impacts of Brazil’s tax reform on individuals

On July 6, 2023, Brazil’s House of Representatives approved Constitutional Amendment Bill (PEC) No. 45/2019.

Although PEC No. 45/2019 mainly concerns a major tax reform regarding goods and services, it has also addressed important aspects of taxation for individuals. Some of the most important changes being debated relate to the following subjects:

Progressive taxation of inheritance and donations

• The Brazilian Constitution establishes that Brazil’s states may levy Tax on Inheritance and Donations (ITCMD) at rates of up to 8%. Some states currently charge ITCMD at fixed rates (as is the case in Sao Paulo, where there is a fixed 4% rate), while others already have an established progressive tax rate regime.
• PEC No. 45/2019 establishes that all Brazilian states would necessarily have to introduce a progressive tax rate regime for inheritance or donations.
• It is important to note that this proposed change does not affect the current 8% rate cap. Moreover, it is worth mentioning that the PEC does not present any criteria or standards that the states must follow – it simply requires states that have not adopted progressive rates to review their rules.

Donations by non-residents and inheritance of assets located abroad

• In March 2021, Brazil’s Federal Supreme Court (STF) ruled against the levy of ITCMD on inheritance and gifts/donations received from abroad.
• Essentially, the Supreme Court’s ruling argued the Brazilian Constitution did not allow for ITCMD to be levied on (a) donations carried out by non-Brazilian residents; or (b) offshore assets inherited by Brazilian residents.
• PEC No. 45/2019 is significant in this context as, if approved, it would establish that ITCMD may be collected on both situations described above. In case of donations from non-residents, the Brazilian state where the donee resides would be allowed to collect the ITCMD, or the state where the asset is located (in case both donee and the donor are non-residents).
• In cases involving inherited offshore assets, the PEC would also authorize ITCMD to be collected by the state where the deceased was domiciled; or when the deceased was a non-resident, by the state where the heir or legatee resides.

Aircraft and marine vessel registration tax

• PEC No. 45/2019 establishes that a registration tax currently levied on land-based vehicles (IPVA) will also be charged on aircraft and marine vessels. However, some exceptions may apply – such as for agricultural aircraft and aircraft certified to provide air services to third parties; vessels owned by legal entities with a license to provide water transport services; or vessels owned by an individual or legal entity that undertakes industrial, artisanal, scientific or subsistence fishing activities.

Urban Property Tax (IPTU)

• The PEC’s text provides for the possibility of municipal governments to update the IPTU calculation base in accordance with a law each municipality would have to enact – there is currently no express provision in the Constitution in this sense.

Income Tax

• PEC No. 45/2019 also provides that Brazil’s Executive Branch must submit a bill addressing income tax reform to Congress within 180 days of the PEC taking effect.

Despite the House of Representatives’ approval of PEC No. 45/2019, please note that none of its amendments are currently effective. As per regular procedures applicable to any proposed constitutional amendment in Brazil, PEC No. 45/2019 will now be sent to Senate for analysis.

For further information on Brazil’s tax reform, please contact Mattos Filho’s Tax and Private Client practice areas.