The Brazilian Presidency sanctioned, on March 16, 2016, Law No. 13,259/16, which converted into law the rules of Provisional Measure No. 692 of September 22, 2015 ("MP 692/15").
The final wording of Law 13,259/16 provided progressive rates for the levy of Personal Income Tax on capital gains earned as a result of the disposal of assets and rights of any nature. The progressive rates are the following:
- 15% over gains that do not exceed R$ 5,000,000.00;
- 17.5% over gains that exceed R$ 5,000,000 but do not exceed R$ 10,000,000.00;
- 20% over gains that exceed R$ 10,000,000.00 but do not exceed R$ 30,000,00.00; and
- 22.5% over gains that exceed R$ 30,000,000.00
We highlight that the referred tax rates also apply for disposal of an asset or right located in Brazil performed by non-resident individuals or legal entities.
In case of a disposition in parts of the same asset or right, from the second operation on, as long as it is performed up to the end of the subsequent calendar-year to the first operation, the capital gain must be added to the gains earned in the previous transactions for purposes of calculating the Income Tax based on the progressive rates described above. In this scenario, the tax paid with respect to the previous transactions must be deducted from the amount of the final tax due.
For such purposes, Law 13,259/16 states that the shares or quotas of a same legal entity are part of the same asset or right.
It is important to note that paragraph 2 of Article 5, initially included in the Bill of Law of Conversion of MP 692/15, has been vetoed by the Presidency. Such rule provided that the new tax rates would be applicable for disposals occurred as from January 1, 2016. However, this provision has been vetoed based on Article 62, paragraph 2, of the Federal Constitution, which provides that a Provisional Measure that implies in the imposition or increase of taxes (except the so-called "regulatory" taxes) will only produce effects in the subsequent financial year if it is converted into law up to the last day of the year in which it was enacted.
Therefore, we believe there are good arguments to support that the new tax rates apply only for disposals occurring as from January 1, 2017.
Law 13,259/16 also amended the rule for the taxation of profits earned abroad by foreign companies which are associated to Brazilian resident legal entities, originally provided for in Law 12,973/14.
In this sense, the new law introduced Article 82-A to Law 12,973/14, which provides that the associated entity in Brazil may elect to tax the profits earned by foreign associated companies based on an "accrual basis", i.e., upon calculation of the profits on the balance sheet of the foreign associated company.
We note that the general rule provided in Article 81 of Law 12,973/14 provided that the taxation of profits earned by a foreign associated company was based on a "cash basis", i.e., upon effective distribution of the profits to the Brazilian associated company.
We understand that, according to the new rule introduced by Law 13,259/16, the Brazilian associated company may opt for the accrual or cash basis and, in the first case, we understand that there are arguments to support that it would be subject to the rules of calculation of foreign tax credit applicable to foreign controlled companies. Therefore, the associated company in Brazil could register as foreign tax credit the Income Tax paid by the associated company in its country of domicile, as well as eventual Withholding Income Tax over dividends distributed to the Brazilian associated company.
It is important to highlight that the referred election for the accrual basis is yet to be regulated by the Federal Revenue Department of Brazil.
We are at your disposal to aid you in case of any further doubts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.