On November 12, 2013, Provisional Measure n. 627 ("MP
627/2013") was published, which, among other relevant changes
in Brazilian Income Tax Legislation, changed the way investments
abroad are taxed when held by Brazilian-resident individuals.
In accordance with such new rules, individuals shall recognize and anticipate the payment of income tax over the profits obtained abroad through controlled foreign corporations ("CFC").
Starting on January 1st, 2015, the profits deriving from a CFC will be considered as made available to Brazilian resident individuals at the closing of the CFC's taxable year and will be subject to Income Tax in Brazil if:
I – the CFC is located in a tax haven or subject to a beneficial tax regime; or
II – the CFC is subject to "sub-taxation" (a regime which taxes resident companies at a nominal tax rate below 20%); or
III – the Brazilian resident individual does not possess the relevant incorporation documents and subsequent changes, registered in relevant public offices, which identify the other shareholders of the CFC.
The lists of tax havens and beneficial tax regimes are contained in Normative Instruction n. 1,037, dated June 7, 2010 (in Portuguese). The applicable tax is the Individual Income Tax ("IRPF"), calculated on the basis of the progressive monthly rates, which must be paid up until the last day of the month following the deemed availability of the CFC's profits, and this shall be included in the taxpayer's Annual Income Tax Return.
By the time the dividends deriving from the CFC are actually paid to the individual, any accrued gain deriving from the positive variation in the foreign currency's exchange rate between the amount that was subject to tax under the CFC rules and the amount effectively distributed as a dividend, if any, will be taxed as a capital gain to the Brazilian resident individual.
The profits regulated by these rules will be considered as income for purposes of IRPF at the rate of the individual's ownership in the CFC, and they must be calculated in the financial statement (or statements) issued by the company abroad in the course of the calendar year. Their conversion to Reais shall be made at the exchange rate, for sale, on the day of the financial statements in which they are calculated by the CFC abroad.
Such rules are applicable to Brazilian resident individuals, which alone or together with other related parties (either individuals or legal entities, resident in Brazil or abroad), hold more than 50% of the voting shares of the CFC.
For purposes of such rules, these are considered as related parties to the Brazilian resident individual shareholder:
I – any individual that is a relative to, or married to or a companion of the shareholder;
II – a company of which a director or administrator is a relative to, or married to or a companion of the shareholder;
III – a company of which the shareholder is partner, shareholder or administrator;
IV – any individual that is a partner, advisor or administrator of an entity of which the Brazilian individual is a shareholder or partner; and
V – any individual or entity, resident in Brazil or abroad, that is associated with any entity of which the Brazilian resident individual shareholder is partner, either in the form of a consortium or condominium, as determined by Brazilian legislation, in any venture.
Any participation of 10% or more in the voting capital of a company will meet the minimum shareholding requirements for items III to V above.
For other investments abroad performed by Brazilian resident individuals, it will be maintained the taxation on income, profits and gains on a cash basis.
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.