Brazil’s Congress reviews bill on taxing undistributed profits of offshore entities

The Finance and Taxation Commission of Brazil’s House of Representatives has approved Bill No. 3,489/2021, which would subject the profits of offshore companies located in tax havens (known as ‘Favorable Tax Jurisdictions’ – FTJs) or companies under the Privileged Tax Regime (PTR) to income tax, irrespective of whether or not such profits are distributed to its shareholders that are Brazilian tax residents.

Currently, Brazilian tax legislation determines that income from investments in offshore companies (even when located in FTJs or under the PTR) is only taxed in Brazil when made available to partners who are individual tax residents in the country.

Bill No. 3,489/2021 thus determines that earnings from investments in offshore companies would be subject to income tax when recorded on the company’s balance sheet, irrespective of whether they are made available to partners who are tax residents in Brazil.

Doubts surround the bill’s wording

Even though Bill No. 3,489/2021 seeks to introduce a concept in line with tax legislation initiatives with other countries, there are certain doubts about its wording in relation to sensitive technical aspects, such as:

• The deadline for the affected companies to prepare and submit their balance sheets;
• How prior-year income will be treated, should the bill pass;
• Which entities abroad would be subject to this rule; and
• How the bill’s provisions apply under certain circumstances involving indirect interest.

Importantly, at this stage, Bill No. 3,489/2021 has only been approved by the House of Representatives’ Finance and Taxation Commission – meaning it is yet to have any legal effects.

Next steps

The bill still will be analyzed by commissions specifically appointed to do so in the House of Representatives. If these commissions unanimously approve it, the bill will then be debated in the Federal Senate before being passed on to the President for approval or veto.

If not unanimously approved or even in the event that 52 members of the House of Representatives appeal against the bill, it will be sent back to a general debate amongst all members of the House for further discussions. In this case, the legislative process will start over.

For more information on this topic, please contact Mattos Filho’s Private Client and Tax practice areas.