Are the private pension plans PGBL ("Plano Gerador de Benefícios Livres") and VGBL ("Vida Gerador de Benefícios Livres") good options for financial and succession planning?

The main issues concerning private pension plans relate to income tax levied on amounts to be redeemed in the future and inheritance and donation tax (“ITCMD”) on succession planning.

The main difference between PGBL and VGBL is how income tax is levied on such plans.  In the case of the PGBL, income tax levied on the total value received at redemption and, in the case of VGBL, income tax is levied on the yield between the amount invested and the value received at redemption.

Additionally, the amounts invested in the PGBL can be deducted from income tax declared in the income tax returns, limited to 12% of the annual gross income. Also, depending on the elected tax option (progressive/regressive) and the period in which the amount invested is maintained, there are advantages related to the tax rates, which can vary from 35% to 10%.

The main concern is related to the death of participants/insured and the subsequent transfer of private pension plan to the respective heirs and/or beneficiaries without additional tax costs.

Even though some States in Brazil, such as Minas Gerais, Goiás, Paraná and Rio de Janeiro, illegally attempt to tax ITCMD on PGBL/VGBL, these plans are still a good option for financial and succession planning.

The first advantage is the exemption of the opening of the estate (Article 79 of Law No. 11.196/2005), avoiding court expenses or legal fees. For that purpose, these plans are treated as life insurance and, therefore, considered savings.

Since they are not part of the inheritance, the amounts received by the heirs/beneficiaries in case of death of the participants/insureds are not subject to ITCMD.

Sao Paulo State expressly confirmed in its legislation the non-taxation of ITCMD on private pension plans (Article 6º, I, "e", Law No. 10.705/2000, according to Tax Ruling No. 5.678/2015), as did the States of Acre, Espírito Santo, Mato Grosso, Santa Catarina and Tocantins.

On the other hand, some States have issued laws expressly taxing the amounts received from private pension plans (Minas Gerais, Goiás, Paraná and Rio de Janeiro). As there are good arguments to defend the non-taxation of ITCMD, taxpayers in those States may challenge the collection of such tax in administrative or judicial proceedings.

In this sense, courts have already ruled on non-taxation of ITCMD on the amounts received from private pension funds in case of participants/insured's death.

Finally, we emphasize that one should seek financial and legal advice to choose the best and most suitable succession planning to guarantee the reserve of funds in the future.

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.