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.
