New bill marks another chapter in the taxation of offshore assets in Brazil

The Brazilian government’s latest proposal maintains rules introduced by Executive Orders No. 1,171/2023 and No. 1,172/2023 while also introducing new ones

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Published on October 4, 2023

On August 28, 2023, the effects of two executive orders (MPs) that sought to change rules regarding the taxation of offshore assets held by individuals residing in Brazil (No. 1,171/2023 and No. 1,172/2023) expired after Brazil’s Congress determined not to analyze them within the legal timeframe. On the following day, the government submitted Bill (PL) No. 4,173/2023 in an attempt to approach the matter once again.

Generally speaking, Bill No. 4,173/2023 maintains the provisions of MP No. 1,172/2023 – particularly regarding the progressive income tax on financial investments abroad held by individuals and on profits earned by controlled entities. The bill has also maintained provisions for the mandatory taxation of the profits earned by some of these controlled entities, irrespective of whether any profits were received by individuals in Brazil.

The key changes Bill No. 4,173 seeks to introduce are outlined below:

Financial investments abroad made by individuals directly

	Bill No. 4,173/2023
Taxation of controlled entities’ income	Controlled entities’ taxed profits must be stated as a credit for dividends receivable. This cost must be deducted when dividends are paid out (disregarding any foreign exchange rate changes for the period). Controlled entities’ income, dividends, and income of investees in Brazil and/or gains and earnings in Brazil can be deducted as long as they are taxed at a rate of 22.5% or higher.

Investments in controlled entities abroad

	Bill No. 4,173/2023
Taxation of controlled entities’ income	Controlled entities’ taxed profits must be stated as a credit for dividends receivable. This cost must be deducted when dividends are paid out (disregarding any foreign exchange rate changes for the period). Controlled entities’ income, dividends, and income of investees in Brazil and/or gains and earnings in Brazil can be deducted as long as they are taxed at a rate of 22.5% or higher.
Calculating controlled entities’ income	Accounting must comply with the Brazilian GAAP – this also applies to entities organized as investment funds. The controlled entities’ income, dividends, and investees’ income in Brazil and/or gains and earnings in Brazil can be deducted, provided they are taxed at a rate of 22.5% or higher.
Tax calculation	Income tax paid abroad can be deducted up to the applicable tax limit in Brazil.
Possible ways for controlled entities to be considered fiscally transparent:	Assets that controlled entities hold abroad must be stated as directly held by individuals. Each asset is taxed according to its nature. This option is exercised for each asset and is irrevocable and irreversible for as long as the individuals hold the controlled entities abroad. In circumstances where there is more than one partner or shareholder, this option must be exercised by all of those residing in Brazil. Assets and rights transferred by individuals (or by controlled entities held by individuals) to other controlled entities that are not declared fiscally transparent must be assessed at market value upon their transfer. The difference in value will be treated as the individual’s income and thus subject to income tax (IRPF).

Offsetting losses (applicable to financial investments and controlled entities)

Bill No. 4,173/2023

Losses that can be offset

Losses linked to financial investments abroad may be offset with earnings from transactions of the same nature – but only a single time.
If losses are higher than revenue, the exceeding value can be offset with the controlled entities’ profits and dividends relevant to the same reporting period.
Any remaining accrued losses may be offset in subsequent reporting periods with gains arising from other financial investments.

Trusts

	Bill No. 4,173/2023
Settlor’s obligations	If the settlor is alive, or if the trust’s beneficiaries are aware of it, they must amend the trust documents in a way that requires the trustee to follow the bill’s provisions within 180 days of it being published as a law.

Asset value restatement

	Bill No. 4,173/2023
Asset value restatement	Any revenues/losses resulting from exchange rate changes between the date the sum is taxed (December 31, 2023) and the date of the actual receipt will not be subject to taxation/deduction.

Repeals

Bill No. 4,173/2023

Repeals and validity of changes

The repeal of the rules that currently grant exemptions for capital gains from the sale of foreign assets acquired as a non-resident and for gains resulting from changes in exchange rates on assets originally purchased in foreign currency has been upheld. However, it is now explicitly stated that these changes will only come into effect from January 1, 2024 (rather than immediately, as previously provided for in MP No. 1,171/2023).

For further information, please contact Mattos Filho’s Private Client practice area.