The country's new government is moving quickly to tighten the rules around Private Investment Companies. Read on to find out why it's likely to make life more difficult for investors using these vehicles to manage offshore assets.
Brazil's new government has made rapid progress in its desired aim to change a raft of the country's tax laws and regulation, and now the country's congress is studying reforms to the regime that governs PICs.
PICs – the acronym for Private Investment Companies – are the investment vehicles that many wealthy Brazilians use to manage offshore assets. The structure offers various tax efficiencies and are simple both to establish and maintain, being a form of wealth management that is light on regulation, but authorities are now looking to make changes to the rules to tighten both reporting and increase tax rates on these PICs.
It's too soon to say for certain what the eventual form of the regulatory and tax changes will be, but some changes to the current 'extreme light touch' system of PICs seems almost certain. The Brazilian government having made it clear that it desires greater granularity of reporting of offshore wealth held by Brazilians, has shown its ability to create a core bloc of vote in the congress and the senate to get its reform agenda approved.
The rapid growth in PICs has been caused, in part, by the popularity of offshore investing among Brazil's wealthy in recent years and has become a widely used tool among the country's family offices and multi-family offices. As local fixed income returns plunged to levels not seen since the introduction of the Plano Real, private banking clients have been seeking returns in new asset classes. As well as driving a large increase in the allocation of domestic portfolios to Brazilian equities and other risk assets, this investment dynamic also led to large increases in portfolio outflows to international assets, to increase diversification and returns.
PICs were the vehicle of choice for much of this flow of capital into offshore investments because they can hold many types of assets and currencies. As well as being flexible in terms of what can be included within the fund, there was very little reporting requirement: annual statements were self-reporting and taxation levels were low-to-non-existent if capital gains were retained in the offshore account.
We believe that the reporting requirements will be tightened soon and individuals or families that have established such PICs will need to provide documentation and statements about what assets are being held and what returns are being generated. As with all regulatory and legislative change, the biggest challenge for compliance with the new rules will be in 'year one', and authorities and advisors will be scrutinising new filings to make sure that what is now being reported is coherent and consistent with previous submissions. Any issues or discrepancies between the filings between the two regimes could potentially lead to fines and / or new tax levies.
TMF Group is already speaking to family offices and multi-family offices about the implications of changes to PIC regulations. Although we don't expect that any reforms will be introduced with retrospective enforcement – the new rules will be applied for the 2024 reporting cycle – we think that proactive management of this issue is crucial. Not only will the changes complicate future reporting seasons, but those working on integrating PIC accounts into existing domestic tax filings will need to ensure the data flow is consistent with previous filings.
How we can help
TMF Group is uniquely placed to help family offices with these new demands on compliance. We structure these PICs (offshore domiciles) for clients and have a comprehensive understanding of the underlying structures – as well as the regulatory, tax and compliance regimes that underpin the use of these offshore PIC vehicles. We also have a large onshore presence in Brazil, with local experts on the ground helping Brazil's family offices and multi-family offices successfully comply with emerging PICs requirements.
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