Brazil is a jurisdiction home to individuals with significant wealth. Due to political and economic instability, wealthy individuals often use foreign jurisdictions to protect part of their assets. For decades, having assets in international banks that were not registered before the Brazilian authorities was very common among Brazilians, even though it was considered a crime.
Nowadays, however, after the alignment of national policies with the international initiatives of tax transparency, control of base erosion and profit shifting – led by the G20 and OECD – Brazilian individuals have been invited to review their compliance with tax rules and their wealth management has been an important part of this procedure.
The recent reopening of the Brazilian tax amnesty programme exemplifies this process. In view of the latest changes in international rules, which led to a greater transparency regarding financial assets, Brazilians are currently facing a new challenge: to manage assets held internationally with full disclosure to Brazilian tax authorities.
Brazil has a complex tax system, and any transaction requires careful analysis: errors or inaccuracies can lead to heavy fines and sanctions by the Treasury. Therefore, investment in private wealth management advisory can represent important savings to a private client through compliance with the tax system.
Furthermore, estate planning has been in full development in the last few years in Brazil. The country has good opportunities for companies and professionals that intend to offer their capabilities to wealthy individuals.
Individuals residents in Brazil are taxed on their worldwide income, and non-residents are taxed exclusively on their income sourced in Brazil. The residence of the income payer determines the source of the income, regardless of where the work is performed.
To be considered an individual resident in Brazil, a foreigner living in Brazil should meet one of these requirements: hold a permanent visa or hold a temporary visa on the date of arrival in Brazil while: (1) working under a labour agreement; (2) residing in Brazil for more than 183 days (not necessarily consecutive) in any given 12-month period; or (3) obtaining a permanent visa or a labour agreement before the 184th day of residence in Brazil, within a 12-month period.
There are no special tax conditions or concessions for foreigners living permanently or temporarily in Brazil.
All departing foreigners (holders of temporary visas, with labour agreements or permanent visas) or Brazilians that decide to live permanently or temporarily abroad should notify the Brazilian Federal Revenue of their departure and file an individual income tax return regarding the period from 1 January up to the departure date. In this case, a federal tax clearance certificate must also be presented.
Afterwards, the foreigner or Brazilian citizen is no longer considered resident in Brazil and as of that moment all income and gains earned in Brazil will be taxed at source (at a flat rate of 25 per cent), except on financial investments, which are taxed at the same rates applicable to Brazilian residents, as described below.
i Income tax
Every year, by the end of April, the Brazilian individual taxpayer must file a tax return form declaring all income and gains received in the previous tax year (1 January to 31 December), including prizes, bonds, wages, commissions and other kinds of remuneration. The taxable income is very broad and includes everything that is directly or indirectly connected with work or assignment remuneration packages (salaries, 13th month salaries, bonuses, premiums, tips and other gratuities and allowances of any kind).
Stock option agreements are not covered by special tax legislation.
There is no legal option to obtain a deadline extension for filing tax return forms, and each late filed form is subject to an interest charge (calculated according to the financial market, which in Brazil can represent more than 10 per cent per year) and penalty (25 per cent at minimum). All income tax due shall also be paid until such deadline or in six instalments, with interest.
Income tax in Brazil has a lower rate than in other jurisdictions. On the other hand, the tax basis is higher because there are only few tax deductions and there are certain incomes that are segregated to be taxed without any deduction. Education expenses, for example, may be deducted to the limit of 3,561,50 reais. For dependants (e.g., children, stepchildren or spouse), the limit is 2,275,08 reais per person, per year.
The income tax rates are progressive and follow a table that changes with the effect of inflation on Brazilian currency (the progressive table):
Monthly income (BRL)
1,903.99 up to 2,826.65
2,826.66 up to 3,751.05
3,751.06 up to 4,664.68
There are exceptions to the income tax progressive rates, such as capital gains, interest and revenue derived from financial instruments and income derived from the stock market.
As a general tax regime, entities withhold all payment to individuals on the amount calculated according to the progressive rates. On their annual income tax return, individual taxpayers declare all revenues from the preceeding calendar year together with the entire amount withheld. After considering income, taxes withheld and authorised deductions of expenses, taxpayers verify the actual annual income tax and pay or request a reimbursement of the difference from the taxes already paid during the previous year.
When an individual receives payment of revenue from another individual (or from a foreign individual or entity) he or she has to calculate the corresponding taxes according to the progressive table, and perform a provisional payment. The provisional amount in a year will be considered in the following year’s tax return (as described above) for the income tax withheld on payments received from Brazilian entities.
There are no special tax rules for shareholders or quota-holders of closely held corporations or private limited liability companies.
Care must be taken to ensure that shareholders’ or quota-holders’ transactions are perceived to be on an arm’s-length basis and, therefore, not deemed to be disguised profit distributions, which are subject to income tax.
The following tax exemptions are worth mentioning:
- a equipment, clothing, board and transport provided free of charge by the employer, or the difference between the amount charged for these items and the market value;
- b reimbursement of relocation costs when moving to a different area at the request of the employer;
- c allowances to cover expenses when working outside the location in which the work is normally performed;
- d indemnities in general, including indemnities for work-related accidents;
- e contributions made by the employer to private social security programmes on behalf of employees;
- f dividends received from a Brazilian corporate entity; and
- g increase of corporate capital in kind.
ii Capital gains tax
With some exceptions, capital gains of individuals resident in Brazil are taxed at a progressive rate of 15 per cent to 22.5 per cent, depending on the total amount of the gain. This applies to assets and rights located both in Brazil and abroad.
There may be, however, an exemption (considered on a monthly basis) depending on the asset or right being sold where the sale price is less than certain thresholds. The sale of an individual’s principal residence is also exempt up to a certain amount.
Capital gains of non-resident individuals are subject to withholding tax of 15 per cent to 25 per cent, except for financial income held in bank accounts in Brazil, which may be subject to lower rates. Additionally, earnings from real estate rentals located in Brazil, received by non-residents, are subject to income tax withheld at source at a flat rate of 15 per cent.
This tax is also applied to foreigners abroad if the assets are located in Brazil; worth considering especially in real estate sales and investments in Brazilian companies.
For capital gains earned in reais, the variation of the exchange rates from the moment of acquisition to the point of sale will be considered on the calculation of the tax basis.
In case of capital gains earned in foreign currency, the variation of exchange rates will not be considered. The calculation will apply only to the exchange rate at the point of sale.
iii Other taxes
Despite it being in the Constitution, Brazil does not have a wealth tax. However, there is an ongoing discussion among the political parties about its creation.
Gift and inheritance tax is an estate tax that cannot be higher than 8 per cent. Each state has a different rate but, in general, Brazilian states apply a 4 or 5 per cent rate calculated over the asset’s market value or in case of interests in privately held companies, the net equity value of the company.
The taxpayer, in this case, is the donor. However, if the donor is not a Brazilian resident, the donee should pay the tax. This also applies if the donor and donee are not Brazilian residents, but the gift is located in Brazil.
iv Reopening of the Brazilian tax-amnesty programme
Following the G20 and OECD initiatives on tax transparency and compliance, in 2016 Brazil enacted the special regime for tax and exchange legislation (RERCT),2 which allows individuals eligible to join this special regime to report their non-declared assets held abroad during the period referred to in the programme.
This ‘tax amnesty’ was reopened in 2017.3 The main goal of the programme is to offer the opportunity to Brazilian taxpayers to regularise their tax affairs without facing criminal prosecution. In the first instance, they would pay a one-off tax charge of 15 per cent, plus a 100 per cent penalty of the income tax due.
The absence of a proper report of assets held abroad may contribute to many crimes, such as tax evasion, money laundering and forgery of documents, which can result in severe fines and even reclusion.
In addition to paying 15 per cent income tax on the value of the offshore assets, those taking advantage of the reopened programme would have to pay an increased penalty of no more than 100 per cent penalty, but 135 per cent over the same tax amount.
The term to declare to the programme ended on 31 July 2017.
v Cross-border issues
In addition to estate and capital-gains related taxes, all investments and funds sent abroad are subject to taxation in Brazil. Revenues derived from financial investments, as the relevant interests, are taxed separately and are not considered in the annual tax return. Therefore, the taxpayer cannot use personal deductions (or losses in other financial investment) to reduce income tax. A taxpayer will pay income tax on a financial investment’s revenues at a rate that will not consider the global annual income and any deduction.
In 2016, the Brazilian Federal Revenue included the payment of tourism services in the withholding income tax of individuals at the rate of 25 per cent. This means that even tourism services provided abroad are subject to the income tax.
Revenues derived from abroad are also taxed in case of capital gain and on the progressive income tax table referred to in Section II.i.
Dividends received from a Brazilian entity are exempt, but dividends received from abroad are subject to taxation according to the progressive table.
As mentioned in Section II.ii above, revenues from abroad are separated into two categories: amounts originally invested in reais and amounts originally invested in US dollars. All amounts originally invested in reais abroad are subject to exchange rate tax.
vi Regulatory issues – the Brazilian Central Bank
Brazil has a Central Bank (BACEN), which controls all foreign exchange transactions performed therein. The negotiation of all types of currency is made directly by financial institutions that are authorised by the BACEN, which registers all funds remitted abroad.
The individual considered a Brazilian tax resident, who holds assets abroad, with a total market value of US$100,000 or higher as of December 31 of each year, is entitled to submit the Brazilian Central Bank Assets Information: no tax is due in view of this statement. Failure to provide the information requested by the BACEN may result in a penalty of up to 250,000 reais and the individual may also face criminal charges.
Furthermore, foreign nationals holding assets in Brazil must also register them with the BACEN. The foreign national must first request his or her individual or corporate taxpayer’s number (CPF or CNPJ, respectively) from the registry, after registering his or her personal information with the registry of individuals or companies in Brazil (CADEMP). As soon as the CPF of the individual or CNPJ of the entity is issued, all financial operations are ready to be performed. In the case of loans granted to individuals resident in Brazil, the applicable registry of the Brazilian Central Bank System (SISBACEN) is the Electronic Declaratory Registration and Financial Operations (RDE-ROF), while in case of assets held in Brazil such as corporate stock, the relevant registry of the SISBACEN is the Foreign Direct Investment Registration System (RDE-IED).
In the case of foreign individuals who die owning investments in Brazil, all heirs and successors thereof must have their own registries. In this case, the same CADEMP procedure shall be performed by each heir or successor. The change of registration of the investment in the case of death of the principal investor shall involve the simultaneous operations required by regulatory exchange control rules. These simultaneous operations require the issuance of foreign exchange agreements; however, they do not involve the effective liquidation of resources, since there is no issuance of payment order from abroad and the delivery of the coin is ‘symbolic’ (symbolic foreign exchange transactions).
vii Fiscal obligations and taxes on succession
The estate of a deceased person is separately taxed in Brazil as an specific entity: as it is a universality of assets and obligations, it is liable for all relevant due taxes on any tax event.
All taxes due in view of Brazilian legislation until the date of death are met by the estate. If the estate has not yet been submitted to the probate proceedings, the relevant taxes are paid accordingly and as per the assets’ value. However, if the assets have already been probated, the legal representative for the deceased’s estate do not respond for the payment of the due taxes. In this case, the successors must request to the federal authorities the cancellation of the deceased’s individual taxpayer’s registry (CPF/MF). The heirs are only responsible for the payment of all taxes due after the probate proceeding and division of the assets. Such responsibility is limited to the amount received from the estate by each heir.
It is important to bear in mind the risk of capital gain in the estate procedure after an individual dies. When property rights are transferred by means of probate proceeding, the assets, in general, are transferred by cost (acquisition value, as stated in the deceased’s tax return). However, there is also the option to re-evaluate the asset by market value (provided by authorised real estate agents). In this case, there may be a capital gain in comparison to the acquisition value that triggers capital gain taxes. The taxpayer is the estate (if still existent) or the heirs at a rate of 15 per cent.
i Introduction to succession in Brazil
In Brazil, individuals may dispose of their assets by means of a testament or by means of the legitimate succession, which is determined by law. However, Brazilian legislation determines that there is a portion of an individual’s inheritance that must be divided among its successors – the legitimate succession.
The legitimate succession determines that the first individuals to be considered in the succession line are the descendants, who compete with the surviving spouse (depending on the marital regime, as per the section below). Subsequently, the next kin in the succession line as per Brazilian legislation are the ascending relatives, who also compete with the spouse (if existent). The collateral relatives are the last kin to be included in the legitimate succession. As per Brazilian law, all such individuals are entitled to at least 50 per cent of the deceased’s assets.
The inheritance is shared between the deceased’s descendants and the spouse according to the number of heirs; the status of the spouse is the same as of the descendants. Therefore, if there is one spouse and three children, the inheritance shall be divided into four parts. It is important to note that all descendants participate in the inheritance – even adopted children or children born out of wedlock.
If there are no descendants, the ascendants (i.e., the parents) may compete with the surviving spouse for the inheritance. In this case, the surviving spouse may continue to live in the real property owned by the deceased that was used as their daily residency, as long as it is the sole property of such nature. The surviving spouse may only benefit from the inheritance if he or she was not divorced or separated from the deceased, either judicially or in fact for more than two years. Only if there are no descendants and ascendants may the surviving spouse solely benefit from the legacy.
The collateral relatives until the fourth degree (siblings, aunts or uncles, cousins, great-uncles or aunts) may benefit from an inheritance if there is no surviving spouse, descendants and ascendants. In this case, the closest degree of kinship of collateral relatives exclude the most distant ones, i.e., siblings take precedence over aunts and uncles in receiving the legacy.
ii Marital regimes
The most common marital regime is the partial communion of assets, by means of which all assets acquired after the date of marriage are common to both spouses – therefore, all assets acquired before the marriage are considered the individual property of each spouse.
However, if the spouses do not wish to accept the partial communion of assets regime, a prenuptial agreement shall be executed at the date of marriage. The first marital regime, in this case, is the universal communion of assets, when all current and previous assets acquired by the spouses are common to both. The second regime, that of the total separation of assets, determines that all current and future assets of the couple are considered the individual property of each spouse. This regime is mandatory if: (1) one spouse is older than 70 years; (2) all parties depend on judicial authorisation to wed; (3) one of the spouses is a widow or widower with children from a deceased individual whose assets have not yet been settled; (4) one of the spouses is a widow or widower to a marriage that was cancelled within 10 months of the deceased’s death; (5) one of the spouses is divorced and the estate has not yet been settled; or (6) the marriage is between the tutor, guardian or trustee of the other spouse.
Furthermore, a companion is considered by Brazilian law as a legitimate family member – the automatic marital regime for this institution is the partial division of assets. However, the parties may decide to adopt a different type of regime upon the execution of a companionship agreement.
Brazilian law now provides for same-sex marriage, as in May 2017 the Superior Court extended the current inheritance procedures to include same-sex partnerships, which means that all companions (heterosexual or same-sex) may benefit from a spouse or partner’s inheritance in the event of death.
iii Cross-border issues
In Brazilian law, regardless of the nationality of an individual, the succession rights are governed by the law of the country in which the deceased was last domiciled. Hence, in the case of death of an individual whose last residence was established in Brazil, whether he or she is not, in fact, of Brazilian nationality, his or her assets (whether located in Brazil or abroad) will be divided among the successors according to Brazilian law. This will be the case even if the successors are not resident in Brazil.
On the other hand, in the case of individuals resident outside of the country who hold assets in Brazil, the succession will be governed by the law of the deceased’s last domicile. If the succession law of the deceased’s country is not favourable to his or her Brazilian spouse or children, the latter may request the succession to be regulated by the Brazilian law.
Furthermore, the Brazilian judiciary has exclusive jurisdiction over the probation of all assets located in Brazil. In this sense, the Brazilian judge shall apply the relevant foreign law; if the assets are spread across multiple locations in Brazil, the competent judge will be the one where the majority of them are concentrated.
In recent years it has become very common for Brazilian individuals to protect their assets for many reasons, including from high taxes in Brazil. Several Brazilian individuals, while trying to protect their assets, set up several corporate and tax structures during their lifetime – such as limited liability companies, corporations, corporate structures established among family members, etc. The incorporation of companies that separate assets to be held by spouses, siblings and descendants is quite usual in our jurisdiction.
However, common foreign structures, such as trusts, are not very common in Brazil, mainly because they are not often recognised, since Brazil has a civil law system. Since the incorporation of trusts involves the remittance of proceeds abroad and having a separate capital structure from Brazil, they are not often used by our citizens, who usually prefer the most ordinary structures, such as local companies or even setting up smaller companies abroad.
Additionally, trusts are not recognised by civil law jurisdictions, such as Brazil and many other Latin American countries. Since the local legislation does not typify the trust structure, it becomes rather difficult to propose such structures to Brazilian individuals who have never had contact therewith. Brazilians are more comfortable with structures they are familiar with and tend to prefer foundations when considering asset protection.
IV WEALTH STRUCTURING & REGULATION
i Commonly used vehicles and tax regimes for wealth structuring
Private clients in Brazil are allowed to set up either domestic or international vehicles, such as companies or investment funds for wealth structuring.
The holding companies are the most common vehicle domestically used for property planning, for the following reasons:
- a real estate contributions (as capital contributions) are not subject to a real estate transaction tax (ITBI);4
- b distribution of dividends by Brazilian companies is tax-free;
- c it is possible to make contributions in kind to increase corporate capital with cost value. In this case the cost value will be equal to the declared values of an individual’s last income tax declaration, avoiding payments of taxes over the capital gain;
- d it is possible to define succession agreements in the articles of association or by-laws of the holding company; and
- e holding companies improve the governance of family businesses.5
Another option for investments are the exclusive investment funds that are also a common domestic structure that private clients choose as an alternative to preserve the family heritage.
Usually individuals are taxed only in the event of receiving amounts from the fund, whether income or capital gains for sale of quotas.6 However, when a fund is invested in fixed assets, individuals are taxed for the anticipated profit every six-month period, without any deduction (losses are not deducted from future tax payments).
Even in the wealthiest families in Brazil, it is quite common for individuals to make investments in a specific fund with the aim of insurance called VGBL (only offered by licensed financial institutions) as a practical solution for succession purposes that allows the individual to invest in the following circumstances:
- a in the event of the investor’s death or incapacity, the resources are made available to the elected beneficiaries, either with prompt full payment or monthly payments, without incurring in a grace period or in legal and judicial costs;
- b the beneficiaries may be changed at any time;
- c the investment must be reported in the income tax declaration, but it is excluded from the investor’s assets; and
- d investments in funds created with the aim of insurance, VGBLs and PGBLs,7 are taxed as payments from the fund. In the first instance tax is levied on income and in the second instance the total amount, including the amount invested, is taxed.
It is also usual for Brazilian private clients to create funds and companies outside the Brazilian jurisdiction, as wealth structuring vehicles to investments, since this kind of structure defers the Brazilian income tax while the assets remain outside Brazil.
In addition, those vehicles provide a way to access more sophisticated structures that are not legally recognised in Brazil.
ii Legal and tax treatment for wealth structuring vehicles
With regard to wealth structuring and planning, high net worth Brazilian individuals are no different from individuals in other parts of the world. They share the same will to protect, preserve and enhance their wealth.
Notwithstanding, the Brazilian Constitution and laws derive from Roman law, the civil law model of absolute ownership, which represents a barrier to the existing structures such as trusts and other sophisticated arrangements that would provide the mechanism through which they could achieve such goals under Brazilian jurisdiction.
As a result of this legal non-recognition and, taking into account forced heirship rules in Brazil, trusts, funds and foundations incorporated outside Brazil are commonly used as wealth structuring and estate planning, thereby allowing greater flexibility in allocating assets and defining rights and obligations among the individual’s heirs.
Heretofore, and differently from other countries, Brazil did not adopt a full controlled foreign corporation (CFC) regime. Profits earned by foreign corporations controlled by Brazilian individuals are not subject to Brazilian income tax until such profits are actually distributed and received inside the country.
Not so long ago, it was quite common for Brazilians investors to simply invest outside Brazil, in this manner obtaining a tax deferral, but also avoiding the reporting requirements. From now on, hiding foreign assets will be much more difficult, since Brazil has recently signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters during the signing ceremony held at the G20 Summit in Cannes, France, in November 2011 and also executed several tax information exchange agreements (TIEAs)8 that will start to exchange automatic tax information in 2018.
Nevertheless, by doing such wealth planning abroad, as per Section II.iv above, if the sum of investment abroad9 is equivalent to US$100,000 or more, Brazilian individuals are obligated to report such assets to the BACEN.
Finally, all the foreign assets must be declared on an annual basis to the Brazilian Federal Revenue.
iii Anti-money laundering regime
As a result of several international conventions, e.g., the Vienna Convention, the Palermo Convention, the UN Convention against the Financing of Terrorism, the UN Convention against Corruption and the Financial Action Task Force (FATF) 40+9 Recommendations, among others, the Anti-Money Laundering (AML) Regime Law No. 9.613/98 was created in Brazil, defining money laundering crimes in broader terms than in some other jurisdictions, setting out the legal and preventive measures, the system for reporting suspicious activities, and the procedures for international cooperation.
After the corruption scandal known as Mensalão, in 2005, that involved the purchase of congressional votes by the ruling political party in Brazil, several of the defendants had money laundering charges dropped due to the fact that the Brazilian AML law at the time required actual knowledge of the origin of the funds by the Brazilian authorities.
Because of that incident, in July 2012, an amendment to the AML Law was signed (Law No. 12.683/2012), changing the definition of money laundering as the concealment of proceeds of any crime or misdemeanour, no matter the graduation, also excluding the requirement of actual knowledge of the origin of the illicit fund.
The AML Law created an obligation for individuals and companies to keep internal controls, in the case of an eventual administrative inspection, of relevant transactions, to clarify the identification of clients and confirm if the transactions carried out are compatible with the net worth involved.
The AML Law has also created an obligation to report any suspicious information verified by any party in a transaction. All suspicious information, as determined by the AML Law, has to be reported to the Council for Financial Activities Control (COAF), a financial intelligence unit linked to the Ministry of Finance that is actively involved in international initiatives related to the prevention of money laundering and financing of terrorism.
The Complementary Law No. 105 signed in 2001 introduced new rules on bank secrecy and extended the access powers of the COAF. In addition, Law No. 10.701, signed in 2003, created a national register of bank accounts and provided the COAF with even more power to obtain information from third parties.
V CONCLUSIONS & OUTLOOK
Despite the political crisis that began in March 2014 with Operation Car Wash, which implicated the highest levels of power in political and business corruption, Brazil has been trying to establish itself as a country with a suitable environment for the internationalisation of numerous Brazilian companies and also for the many foreign companies that have started to operate in the Brazilian market.
Not only are the current president and the former presidents, Luiz Inácio Lula da Silva and Dilma Rousseff, accused of corruption in this scandal, but traditional wealthy families such as the Odebrecht family are also involved. On the other hand, this also means that the country no longer permits such irresponsible behaviour.
Private clients now have the opportunity to declare whatever assets held outside Brazilian borders they might not have declared before with the amnesty in force, affording them a very good opportunity to review and improve the wealth structure and estate planning, according to the new transparency regime.
Brazil offers an ideal opportunity for advisory professionals in wealth and succession planning to turn the focus to every different vehicle and structure that complies with the current rules.
It is also possible that Brazil will face some relevant reforms in its tax law regime to comply with the OECD rules, so that it keeps following the path to be among the countries with a solid environment for international investors.
1 Silvania Tognetti is a partner at Tognetti Advocacia.
2 Law no. 13,254/16.
3 Law no. 13,428/17.
4 Real estate transactions are subject to a municipal tax (ITBI) at a rate of 2 per cent to 3 per cent, depending on the municipality where the real state is located, with the exemption of its incorporation to the patrimony of a legal entity as its object is not real estate business.
5 For instance, succession disputes and assets verifications are very usual when individuals participate directly in family business.
6 The Brazilian Federal Administrative Court (CARF) has recently issued a precedent confirming that the capital gains arriving from investment funds are only subject to taxation in the redemption of the investment, at a 15 per cent income tax rate (Precedent No. 2202-01.591).
7 A PGBL is used to reduce the income tax due on the annual tax return, because it is deducted from the total amount of taxes to be paid.
8 Brazil has signed eight TIEAs, accordingly to the Exchange of Tax Information Portal: http://eoi-tax.org/jurisdictions/BR#agreements>
9 It is required to report the market value of the foreign assets or, when it is not available, the net worth of the companies held outside the Brazilian jurisdiction.