EN 
BR Over the last 16 years, I have been involved in advising people who are having difficulties organizing their assets or planning their businesses. In particular, I have dealt with cases of Brazilians (or foreigners in Brazil) wanting to move to live abroad or, already living abroad, wanting to regularize their assets before the Brazilian tax authorities. Situations I see most often:
- who finds a career opportunity to live and work abroadBut he doesn't know what will happen to his bank account and financial investments in Brazil if he leaves the country permanently;
- those who retire to live abroad for lifestyle reasonsand discovers that he will have to pay taxes in Brazil and abroad, and wants to know if leaving the country for good has any influence on this;
- who already live and work abroad and continues to file income tax returns in Brazil, but ignoring the duty to report foreign assets and incomeand therefore wondering if leaving the country for good is a solution;
- who want to resume their life in BrazilHe is insecure about declaring again to the Internal Revenue Service that he has far more assets than he had when he left Brazil, because he left the country definitively in the past.
Every year that I see Brazilians and foreigners, two constants become clearer: lack of clear information to do everything on a regular basis, and lack of coordination between the Brazilian Federal Revenue Service (RFB) and the Central Bank (BACEN)They are responsible for providing guidance on the Declaration of Final Departure from the Country (DSDP) and related issues.
The aim of this text is to answer the initial questions of those who have just discovered that they are leaving the country for good and have no idea what the possible consequences will be for their income and assets, in order to avoid the risks and costs of an irregular situation with the tax authorities. For those who want to delve deeper into some aspect of the problem, each topic will include a link to a more detailed text on the aspect in question.
Part 1: Why make the Declaration of Final Departure from the Country?
My experience, comparing the situation in Brazil with that in other countries, is that the procedure for ceasing to be a tax resident in Brazil has become unnecessarily complicated. The Internal Revenue Service regulations deal with the issue in a very confusing way. Therefore, before explaining the procedure for the Declaration of Final Departure from the Country (DSDP) itself, it is worth explaining the context surrounding it.
The first objective here, therefore, is to clarify some concepts for those who don't want to take a wrong step. In this text, however, we're only going to consider the issues surrounding tax exits, without going too deeply into dual tax residence, the subject of another text.
What is a tax exit?
A "tax output" can be understood as the loss of tax resident status in Brazil. Being a tax resident in Brazil basically means that the bond between the taxpayer and the Brazilian state is strong enough for the taxpayer to be obliged to:
- subject all income, whether it comes from Brazil or abroad, to income tax in Brazil;
- submit an annual personal income tax return (DIRPF) to the Federal Revenue Service, in the form of an Annual Adjustment Statement (DAA), informing income and assets in Brazil and abroad; and
- submit an annual or quarterly declaration of Brazilian capital abroad (DCBE) to the Central Bank, informing of assets abroad if the minimum limit is exceeded (currently one million US dollars).
With the tax exit, a date is set in which the taxpayer ceases to be a tax resident in Brazil and becomes considered a non-resident. This means that, from the moment the tax exits:
- territorial taxation: after the tax exit, Brazil can only tax income earned by in Brazilian territory.
- there is no income tax return to file: for the year of the tax exit, the Declaration of Final Departure from the Country (DSDP) is submitted. In subsequent years, there are no more Brazilian income tax returns to file.
- there is no declaration of brazilian capital abroad to submit: the Central Bank only requires the DCBE from those who are tax residents in Brazil on the base date of the declaration (usually December 31). If a person has made a tax exit, there is no more DCBE to submit.
I repeat: there is currently no obligation under Brazilian law for non-residents to file income tax returns or other declarations, even if they have assets and income from Brazil. In June 2020, we suggested to the Receita Federal introduce the non-resident investor declaration in BrazilThe aim is to make it easier to invest in the stock market in Brazil, but nothing has come of it so far.
Requirements for ceasing to be a tax resident in Brazil
Before making the Declaration of Definitive Departure from the Country, it is necessary to know which requirements of Brazilian law must be met. There are some differences between the situation of Brazilians and the definitive departure of foreigners in Brazil who want to move to live abroad:
Requirements for the Brazilian
- do not reside in Brazil on a permanent basis;
- residing abroad, does not provide services as a salaried employee to municipalities or departments of the Brazilian government located abroad;
- if you return to Brazil, don't do it with "definite mood" to stay here.
The Braziliansso, must reside "permanently" abroad and have no "definitive intention" of remaining in Brazil.
In practice, the choice of this subjective criterion causes a lot of doubt in practical application. For now, it's worth sticking to the more basic notion that, when leaving the country, the Brazilian's intention must be to get rid of the main ties with Brazil in order to live outside the country. After leaving the country for tax purposes, Brazilians may visit Brazil occasionally, but their return should not denote an intention to settle in Brazil again.
Requirements for Foreigners in Brazil
- not entering Brazil on a permanent visa1The "permanent visa" is still called that in tax legislation. Currently, however, migration law uses the expression "temporary visa with residence permit" to refer to this type of visa.;
- if you enter Brazil on a temporary visa (for example, as a tourist):
- not convert it into a permanent visa;
- no employment relationship;
- not acting as a scholarship doctor under the More Doctors Program2Law 12.871/2013.;
- nor stay in the country for more than 183 days, consecutive or not, within any 12-month period;
- if they remain in Brazil, do so by providing services as an employee to foreign government agencies or departments located in Brazil.
Foreignersin this context, should pay attention to the type of visa they have when they arrive in Brazil. For those who have converted their visa into a foreigner's registration (i.e. for those who have the RNE, the national foreigner's registration), the visa no longer exists. This raises some questions.
We have argued that Brazilian legislation presumes that a foreigner has acquired tax residency on the basis of objective elements, such as the category of their visa and their length of stay in the country. However, no special rules have been created for the situation of foreigners who decide to stop being tax residents in Brazil.
For this reason, once the foreigner no longer has a visa but an RNE, we have argued that the tax exit of foreigners follows the same requirements as the tax exit of BraziliansThis is based on the subjectivity of "definite intent". This makes it possible for the foreigner to submit the Declaration of Definitive Departure from the Country without losing the RNE, at least at first.
Some people I've seen have asked me if having dual citizenship, i.e. being Brazilian and Portuguese, for example, affects this analysis. For those with dual citizenship, the fact of being a Brazilian national is enough to apply the same requirements as a Brazilian above.
The above requirements apply both so that a person ceases to be a tax resident in Brazil and so that, if they return to the country, they do not become a tax resident again.
Temporary departure, permanent departure and length of stay in Brazil
O length of physical stay in Brazil is the element that usually raises the most doubts in the process of the Declaration of Final Departure from the Country, to the point of asking whether there is a "Declaration of Temporary Departure from the Country" (none).
The number of days in the country is an objective criterion used by several countries (the United States, Portugal and the United Arab Emirates, to name just three). In Brazil, it is taken into account when foreigners acquire tax residency with a temporary visa, as seen above, and in international agreements to avoid double taxation. But Brazilian tax legislation is rather timid on this subject.
Many people have asked me if a Brazilian who stays outside Brazil for 12 consecutive months becomes a non-resident automatically, and therefore must always return to Brazil before completing 12 months of absence so as not to "run the risk" of becoming a non-resident. Our position has been that this is not the case.
The criterion of Brazilian tax legislation, in our view, is "definite mood". Keeping a house, joining a club, working, running companies and carrying out social activities (philanthropy, sport, etc.) are signs of an active life in Brazil, even when the time spent physically there is no longer continuous. In other words, they are examples of elements that "put down roots".
On the other hand, coming to Brazil just to visit relatives for the end of the year festivities or to go sightseeing are not enough, on their own, to qualify for tax residency in Brazil.
We believe that the application of the 12-month rule is not automatic3Art. 3(V) of SRF Normative Instruction no. 208/2002. It is merely a legal presumption that the Brazilian has lost interest in remaining a tax resident in Brazil, which can be ruled out by other factors. The RFB itself, in a non-binding opinion, has already expressed this view4DISIT/SRRF 08 Consultation Solution No. 262/2009.
Due to this subjectivity, it is perfectly possible for a Brazilian to leave the country, live abroad for years and still be considered a tax resident in Brazil, as Carf considered in 2020, including in the Leandro de Aguiar Case5Ac. 2301-007.136, CARF, 2nd S., 3rd Chamber, 1st Ord. T., rel. p/ vote Cons. João Maurício Vital, majority, j. 04.03.2020.. In these terms, Brazilian legislation distinguishes between "temporary exit" e "final exit".
What is temporary leave?
Temporary departure from Brazil, or temporary exitoccurs when the person leaves Brazilian territory and stays abroad without formalizing to the tax authorities that they have left. A normal situation in which this occurs is when a person decides to move abroad without knowing whether they will be able to settle there, and so may have to return to Brazil in the future.
The tax consequence of this is that, for the first 12 months after leaving the country, the individual is still considered a tax resident in Brazil. In this case, the individual must remain absent from the country for 12 months consecutive years to be considered a non-resident.
If nothing else dispels this legal presumptionIf you want to make a Declaration of Permanent Departure from the country and regularize your situation with the tax authorities, you can use this rule to argue that you have become a non-resident after 12 consecutive months of absence from the country, even if you've missed all the deadlines to formalize your tax exit.
What distinguishes temporary release from permanent release
The definitive departure from the country, according to IRS regulations, is characterized when a person leaves Brazilian territory and complies, within the legal deadlines, with the formal requirements for being considered a non-resident. In this case, when the taxpayer makes the Declaration of Final Departure from the Country, he loses the status of tax resident in Brazil immediately, on the date informed for his tax departure.
Therefore, observing the legal deadlines is an important requirement for defining the date on which the loss of tax resident status in Brazil takes effect.
Part 2: How to make the Declaration of Final Departure from the Country
The tax legislation provides for two obligations to be fulfilled before the RFB in order to formalize the tax exit: (i). the Communication of Final Departure (CSD) and (ii). a Declaration of Final Departure from the Country (DSDP). In addition, the taxpayer must inform the sources of income in Brazil of the loss of tax resident status.
First phase: submission of the Communication of Final Departure from the Country (CSD)
The Communication of Final Departure from the Country, or CSD, is a electronic form filled in on the RFB website itself. Currently, it contains some basic information about the loss of tax resident status in Brazil, before the deadline for submitting the Declaration of Final Departure from the Country (DSDP) begins. The CSD informs:
- the date of loss of tax resident status in Brazil;
- if any, the name and CPF number of dependents who must accompany the taxpayer (e.g. wife and minor children);
- if applicable, the name, CPF and full address of the attorney-in-fact appointed by the taxpayer to carry out any procedures before the RFB. The main function of the CSD is to allow taxpayers to put their affairs in order before the DSDP submission period.
Note that, in the case of permanent departure, the date to be informed in the CSD is the date on which the taxpayer actually left the country. For those who do temporary exitThe date to be entered is the day following that on which the taxpayer completed 12 consecutive months of absence after leaving the country. The same date will apply to the taxpayer's dependents informed in the CSD.
Letters of communication to paying sources
The CSD form also makes it possible to identify the CPF or CNPJ of the paying sources in Brazil, so that communication letters can be prepared automatically to inform them of the taxpayer's new situation. Sources of payment in Brazil are, for example, banks and brokerage houses that hold financial investments, the INSS, the private pension plan administrator and any other entities that pay income to the taxpayer.
This is important because of Brazilian taxation of non-residentsThis is because paying sources are obliged to inform the RFB of withholding income tax (IRRF) on income payments. The withholding tax codes and rates may be different for tax residents and non-residents.
Thus, if the source of payment is not informed, the taxpayer may be treated by the RFB as a tax resident. The proof of delivery of the information to the source of payment is instrument of proof to avoid this consequence, even if the source of payment continues to pay the IRRF incorrectly.
The appointment of a proxy in the CSD is optional and declaratory. It does not replace the need to grant a power of attorney. Its function is to allow the tax authorities to communicate directly with the proxy during an inspection of the information of the person making the tax exit. In some situations, tax legislation makes the individual's attorney-in-fact liable to the tax authorities for the payment of taxes, generally when they have not been withheld by the source of payment (for example, because the source of payment was not informed that the taxpayer was not a tax resident in Brazil).
The CSD must be submitted by last day of the month February of the year following the year of departure. This means for those who left Brazil in 2023The CSD must be delivered by 29.02.2024. For those leaving Brazil in 2022, the CSD should have been delivered by 28.02.2023.
Effects of missing the CSD deadline
O website RFB does not allow the CSD to be delivered one year after the deadline. The electronic form is only available during the deadline. Therefore, those who left Brazil in 2022 and have not transmitted the CSD by 28.02.2023 will no longer be able to do soIn addition, those who left in 2023 must transmit the CSD by 29.02.2024.
The regulations give the same consequences for temporary release as for permanent release with loss of time.6SRF Normative Instruction 208/2002Article 2, point V.. This implies that the consequence of failing to submit the CSD on time is that the taxpayer will be considered a tax resident in Brazil for the following 12 months of absence, as in the case of temporary departure.
We don't agree with this reasoning, because it is the law that chooses the criterion for losing tax residency, not the IRS. What matters for the loss of tax residency is the situation of an individual's social and economic ties with Brazilian societynot the fulfillment of a formality within an arbitrary deadline set by the RFB, no matter how justified it may be.
Even so, it is advisable to submit the CSD on time. This is a way of proving to paying sources that you have lost your tax resident status in Brazil while the DSDP cannot be submitted. This can prevent incorrect data about the taxpayer from being sent to the IRS.
If I left Brazil several years ago, do I have to hand in the CSD?
No. The purpose of the CSD is to allow taxpayers to get organized before they are obliged to submit the Declaration of Final Departure from the Country (DSDP). If the deadline for submitting the DSDP has passed, the only thing left to do is to submit it, paying a fine for the delay. In this case, it is no longer possible to file the CSD for the year in which the tax exit took place. For whom has not made the declaration of definitive departure from Brazil having left more than 5 years ago, you should ask the Receita Federal to update your CPF details.
Second phase: submitting the Declaration of Final Departure from the Country (DSDP)
The Declaration of Final Departure from the Country, or DSDP, is a special income tax return. This covers the period between January 1st and the date of loss of tax resident status in Brazil, informed in the CSD and in the Final Exit Declaration itself.
It's a "broken year" statementDuring this period, the taxpayer is subject to the same tax regime as other residents, and is entitled to the same deductions and tax benefits. For the rest of the year, they are already considered under the new status non-resident tax and is subject to non-resident taxation.
The Declaration of Final Departure from the Country reports the income earned by the taxpayer who ceased to be a tax resident in Brazil during the end of their period of tax residence in Brazil (i.e. the period between January 1st and the date of their departure). Subsequent income earned as a non-resident should not be reported.
For those who have decided to leave Brazil in 2023, the Final Exit Declaration must be submitted in March and April 2024, at the same time as the other income tax returns. For those who left Brazil in 2022, the Definitive Exit Declaration had to be delivered during the months of March and April 2023.
How to fill in the Declaration of Final Departure from the Country (DSDP)
As this is a special income tax return, the procedure for how to make the Declaration of Final Departure from the Country is very similar to that of a normal income tax return (called a "declaração anual de ajuste", or DAA). Below are just the differences:
- Exit" tab: this form only exists in the DSDP, not in the DAA. It contains the same information as that filled in on the CSD (date of tax exit and appointment of a tax resident attorney in Brazil);
- Assets and Rights tab and Debts and Encumbrances tab: since it is a "broken year" declaration, these forms inform the situation of the assets on December 31st of the previous year (or on the date of acquisition of the status of tax resident in Brazil, if it occurred in the same calendar year as the DSDP) and the date of the tax withdrawal. There is no information on what happened to the assets after the taxpayer became a non-resident;
- Carnê Leão" and Variable Income files: only the months of tax residence in Brazil can be filled in;
- without simplified discount: For those who are used to receiving income tax refunds when submitting their annual tax return, the DSDP may come as a surprise. Only legal deductions can be taken, which can greatly affect the amount of tax to be paid or refunded;
- no installments: the law does not allow you to pay the difference in tax payable in up to 8 (eight) installments, as with the DAA. Instead, the tax must be paid in a single installment by the deadline for submitting the DSDP.
These are small differences, but they reveal a logic of their own. There are some practical difficulties in filling in the DSDP because of this. For example, the information provided by banks and brokers covers the whole year, not just the period covered by the DSDP.
Another point is that the forms relating to the "carnê leão" (used for non-salaried work, income from abroad and rents) and Variable Income cannot be filled in with information about the period of non-residence, which could lead to problems with the "malha fina".
In short, there was a lack of design thinking on the side of Receita Federal and Serpro (the public company responsible for creating computer programs for the RFB) when preparing the DSDP layout.
Letters of communication to paying sources
As mentioned in the previous topic on filling in the CSD, taxpayers are obliged to inform sources of income in Brazil that they have lost their tax resident status in the country. If this does not happen, the paying sources will continue to report the withholding of income as a resident to the RFB. This can cause data inconsistencies in the RFB system, and hence the risk that the RFB will consider that the taxpayer has once again become a tax resident in Brazil.
In our practical experience, the RFB has demanded proof that each source of payment has been informed of the tax exit by the definitive exit declaration as a condition for allowing undue tax arrears to be written off in the taxpayer's name. This occurs even in cases where there is abundant evidence that the taxpayer has ceased to reside in Brazil for more than five years.
What happens if you miss the deadline for submitting the Final Exit Declaration?
Unlike the CSD, the Declaration of Final Departure from the Country can be delivered after the deadline has passed. In this case, in addition to paying any tax and legal surcharges for the delay, the taxpayer is subject to fine of (i). R$ 165.74; or, if higher, (ii). of 1% of the amount of tax due per month of delay, until the 20% limit. The amount of tax due is that reported on the declaration filed late. The Declaration of Final Departure from the Country can be submitted up to 5 years after the normal submission deadline.
It is also possible to rectify an annual tax return (DAA, the "normal" income tax return) to replace it with a DSDP. In this case, there is no penalty for late filing, but there may be differences in the tax to be paid with a penalty and interest for late payment.
Part 3: What changes after the Declaration of Final Departure?
Unfortunately, it's not enough to be sure of how to make the Declaration of Final Departure from the Country, but also what the consequences will be afterwards. I have answered many questions about the status of the CPF, how the taxation of Brazilian income changes and also how to maintain bank accounts, financial investments and send foreign exchange remittances from abroad to Brazil and vice versa.
There are various myths about these issues, which makes the decision on compliance with the legislation a more complex topic than it should be.
What happens to the CPF of someone who becomes a non-resident when making the Declaration of Final Departure from the Country
Individuals who were tax residents in Brazil and made their Declaration of Final Departure from the Country does not stop having an active CPF, nor does it change its CPF number. The CPF is a permanent identification number.
With the formalization of the tax exit, what happens is that the taxpayer's CPF record is updated with the status non-resident. In situations where the exit is not properly formalized, and the paying sources continue to inform the RFB of the payment of income with the tax resident code in Brazil, the CPF may become:
- pending regularization: in the event of failure to file an income tax return or final exit tax return, when the IRS assumes that the taxpayer was a tax resident in Brazil and was therefore obliged to file one; or
- suspended: a CPF is suspended when there is a registration inconsistency (for example, for non-compliance with electoral obligations or divergence in the information of different documents).
In order to check your CPF registration status, the RFB offers a free service in which the "Proof of CPF Registration Status“.
For those whose CPF is pending regularization, were in fact tax resident in Brazil and failed to submit the declaration, simply submitting it and paying the corresponding taxes and surcharges is enough to regularize the registration situation. However, if the taxpayer filed the Declaration of Final Departure from the Country and was a non-resident, but is still in this situation, it will be necessary to provide documentary proof of this fact to the RFB in order to clear the pending situation.
For those whose CPF has been suspended, regularization depends on presenting the documents listed in the regulations to the Receita Federal.
It is worth mentioning that even individuals who have never been tax residents in Brazil are also obliged to have a CPF:
- practicing real estate operations in Brazil;
- have bank, savings or investment accounts;
- operate in the financial or capital markets in Brazil;
- own assets and rights subject to public registration or a specific register, such as real estate, vehicles, boats, etc.
Therefore, maintaining a regular CPF and being considered a non-resident are different things.
Non-resident tax treatment: how much tax do you pay if you make a Declaration of Permanent Departure?
Non-residents must only submit to Brazilian taxation income earned in Brazilian territory that is subject to taxation at source (i.e. for assets and rights located in Brazil, the respective rents, interest, capital gains, etc.).
It is perfectly possible for the same person to be tax resident in two or more countries. That's why, the fact that a person moves to another country and becomes a tax resident there has no impact on Brazil.
Non-resident tax treatment - general rule
Regarding non-resident taxationNormally, the tax must be withheld and paid to the tax authorities by the source of payment (IRRF), but there are some cases in which it can be paid by the taxpayer himself or by his attorney. In both cases, each income or capital gain is taxed separatelyThere is no obligation to file an income tax return after the fact, nor to make adjustments due to other income earned in the same period.
The most relevant tax changes for those who make the Declaration of Final Departure from the Country and leave the status of tax resident in Brazil to become non-resident are as follows:
- income from work, with or without employment, retirement, pension or services rendered: 25% of IRRF, without progressivity. It should be noted that, at this rate, the IRRF of 25% may be higher than the IRRF of the tax resident at the progressive rate of up to 27.5% applicable to the resident;
- rental or leasing income: 15% of IRRF, without progressivity. In the case of property rentals, some deductions apply to the calculation of the IRRF base, which also apply to residents;
- financial income: as a rule, 15% of IRRF, without progressivity. There are, however, specific situations for which different rates apply;
- capital gains on the sale of real estate, shareholdings, etc: Progressive IRRF rates of 15% to 22.5%, depending on the amount of the capital gain, just like tax residents in Brazil;
- dividends: 0% of IRRF, just like a tax resident in Brazil, who is exempt;
- income from rural activity: 15% of IRRF, without progressivity. Unlike tax residents in Brazil, it is not possible to offset losses from previous years or arbitrate the calculation basis so that it corresponds to 15% of the income from rural activities.
Another important change is the tax payment date. For tax residents in Brazil, the amount of tax withheld at source or paid by the taxpayer must be paid to the tax authorities by the end of the month following receipt of income. With the Declaration of Final Departure from the Country, for non-residents, the IRRF must be paid on the same date as the taxable event, under penalty of late payment fines and interest from the following day.
Special rule: Non-residents in "tax havens"
For non-residents who maintain residence in one of the countries or dependencies of favored taxation (tax haven), o IRRF will be 25% in the above cases, except for dividends. The rate of 25% applies as a general rule to the other hypotheses provided for in tax legislation, with a few exceptions.
The other rules, such as the tax payment date, remain the same.
Non-resident bank account: biggest concern brought about by the tax exit
The experience I've had with the Declaration of Final Departure from the Country (DSDP) shows that the main problems don't stem from the DSDP itself, but from the difficulties people have maintaining bank accounts in Brazil after formalizing their tax departure. This is an area that shows the lack of coordination between the IRS and the Central Bank, and one that deserves to change as soon as possible.
Foreign exchange legislation establishes various restrictions for non-residents who hold or acquire financial assets in Brazil. For this reason, the tax exit has the consequence that, in addition to tax obligations, the change to non-resident status signed in the Declaration of Definitive Exit from the Country also has significant consequences from a foreign exchange, banking and financial point of view.
The first is in relation to maintaining bank accounts. In order to keep financial resources invested in Brazil in national currency, non-residents who have made a Declaration of Definitive Departure from the Country are obliged to keep foreign domiciled account (CDE) in a financial institution in Brazil. This means that the person making the tax withdrawal will be obliged to close their bank account and opening a new bank account for a person domiciled abroad.
The new account can be opened with the same bank or any other financial institution authorized to operate in the foreign exchange market by the Central Bank.
From our analysis of the legislation and also from our practical experience, the Central Bank imposes much higher regulatory costs for CDE, so that banks are often not very interested in opening new accounts, even for clients with good relationships. As a result, opening a non-resident account is one of the items to be studied in a tax exit planning from Brazil.
The bank accounts of people domiciled abroad allow financial investments in savings accounts and CDBs without additional regulatory costs.
Financial investments in Brazil: the richer you are, the easier it is to invest
We can say that investing in Brazil for non-residents is the area with the biggest mismatch between the regulations of the Central Bank and the Federal Revenue Service. Under tax legislation, non-residents' financial investments after the Declaration of Final Departure from the Country may be subject to the "general regime" or the "special regime".
In very general terms, it can be said that:
- the "general regime" equates the non-resident with the tax resident in Brazil, so that the tax exit implies neither an increase nor a reduction in a person's taxation;
- the "special regime" is a favored tax treatment granted to special investors (the "4373 Investor"). In order to enjoy the benefits, these special investors must be willing to invest large sums in the financial and capital markets.
As will be seen, practice makes this subject more difficult than it should be.
General regime for financial investments: "look, but don't taste"
Under the general regime, non-residents are subject to the same income tax rules as tax residents in Brazil, in relation to:
- income from fixed-income financial investments and investment funds;
- net gains from transactions carried out on stock, commodities, futures and similar exchanges;
- net gains earned on the sale of gold, a financial asset, and on transactions carried out on over-the-counter futures markets;
- income from swap transactions; and
- income earned from COEs (Structured Operations Certificates).
The general regime also extends to non-resident individuals the same exemptions as tax resident individuals in Brazil (dividends, income from real estate or agribusiness bills of credit, etc.). It is also compulsory for non-resident taxpayers to appoint a legal representative in order to invest in the stock market. This legal representative is responsible for collecting income tax on transactions carried out on the stock exchange, and must be appointed from among the institutions authorized by the Central Bank to provide this service (i.e. it must be a bank or brokerage house).
Individuals and legal entities resident or domiciled in countries and dependencies with favorable taxation ("tax havens") are also subject to the general regime.7The list of "tax havens" can be found in art. 1 of the RFB Normative Instruction No. 1.037/2010..
In practice, however, the regulations of the National Monetary Council (CMN), which is linked to the Central Bank and the Securities and Exchange Commission (CVM). has prevented investors from being able to maintain their regular financial investmentswithin the general regime. This is despite the legal provision for this regime and the fact that the Internal Revenue Service regulations are in order. This becomes clearer when we try to understand the special "Investor 4373" regime.
Special regime for financial investments: special for the few
In order to invest funds in other financial assets in the financial and capital markets, such as shares, investment fund quotas and fixed or variable income securities, the regulations of the National Monetary Council (CMN) require the investor to register with the Central Bank and the Securities and Exchange Commission (CVM).8See Resolution 4.373/2014.. This special situation is known as "Investor 4373", because the rules of the special regime are currently set out in CMN Resolution 4.373/2014.
How special is the taxation of Investor 4373
| Lace item | Special Regime Rate | Tax resident rate in Brazil (individual) |
|---|---|---|
| Income from public securities acquired as from 16.02.2006, as well as from shares in exclusive investment funds for non-residents that have no minimum 98% of the portfolio in public securities | 0% | 22.5%-15%, depending on the investment period |
| Income from bonds or securities acquired as from 01.01.2011, subject to public distribution, issued by (i). private legal entities not classified as financial institutions and (ii). FIDCs set up as a closed condominium, whose portfolio originator is not a financial institution, which meet specific legal requirements | 0% | 22.5%-15%, depending on the investment period |
| Gains on transactions carried out on stock, commodities, futures and similar exchanges, including index fund quotas | Exempt | 15% or 20% (day-trade) or 25%-15% (fixed-income index funds) |
| Gains on over-the-counter transactions with gold, a financial asset | Exempt | 15% or 20% (day-trade) |
| Income and gains from guaranteed real estate bills (LIG) | Exempt | Exempt |
| Income and gains produced by investment funds whose shareholders are exclusively foreign investors | Exempt | Not applicable |
| Income earned on investments in FIP, FICFIP and FIEE (subject to specific requirements) | 0% | 15% |
| Income earned on investments in FIP-IE and FIP-PD&I (subject to specific requirements) | 0% | 15% or 0% |
| Income earned on investments in investment funds and funds in quotas of investment funds with a debenture portfolio | 0% | 0% |
| Income and gains produced by shares in a Fixed Income Index Fund whose regulations stipulate that its portfolio of financial assets has a renegotiation period of more than 720 days | Exempt | 15% |
| Income from investments in equity investment funds (FIA) | 10% | 15% |
| Income from swap transactions, whether or not registered on the stock exchange | 10% | 22.5%-15%, depending on the investment period |
| Income from operations carried out on over-the-counter futures markets | 10% | 15% or 20% (day-trade) |
| Income from fixed-income financial investments | 15% | 22.5%-15%, depending on the investment period |
| Gains on combined operations that enable predetermined returns to be obtained, carried out on the stock, commodities, futures and similar exchanges, as well as on the over-the-counter market | 15% | 22.5%-15%, depending on the investment period |
| Other income realized on the organized over-the-counter market or on the stock exchange, and on Structured Operations Certificates (COE) | 15% | 22.5%-15%, depending on the investment period |
From experience, the special regime is advantageous for non-resident investors with a considerable investment in the financial and capital markets, given the cost charged by financial institutions for maintaining the 4373 Investor register.
The cost is justified by the complexity of complying with the obligations imposed by the competent authorities (the Central Bank, CVM and RFB) and the responsibility assumed by the institution as the taxpayer's attorney before each authority.
For Investor 4373, it is mandatory to appoint a financial institution authorized by the Central Bank as proxy in relation to financial investments in the financial and capital markets. It should be noted that Investor 4373's attorney-in-fact is a bank authorized by the Central Bank to do so, and not the attorney-in-fact informed in the Declaration of Final Departure from the Country.
Criticism of the Central Bank: don't get in the way of the general system
The experience I've had with the Declaration of Final Departure from the Country (DSDP) shows that the main problems don't stem from the DSDP itself, but from the difficulties people have maintaining bank accounts in Brazil after formalizing their tax departure. This is an area that shows the lack of coordination between the IRS and the Central Bank, and one that deserves to change as soon as possible.
In practice, the general regime is the exception, not the rule. A Resolution 4.373/2014 only provides for the possibility of investing in the Brazilian financial and capital markets through the Investor 4373 treatment, which corresponds to the special regime.
Registering as a 4373 Investor entails additional regulatory costs, but more favorable tax treatment. Therefore, the costs and benefits of keeping financial resources in Brazil after the tax exit need to be carefully analyzed. Unfortunately, this cost is often at least, R$ 2 thousand (two thousand Reais) per month for maintenance. This is despite the fact that the Central Bank has dispensed with appointing the bank as the investment's custodian agent, as well as its attorney-in-fact.
The cost of Investor 4373 is compatible with the purpose of the special regime: to convince large investors to bring dollars into Brazil and invest in the financial and capital markets. It was a choice of public policy approved by law, which can be debated or opposed at the ballot box.
The main point is that, with the power to regulate only the special regime, the CMN (and the Central Bank, in its regulations) have run roughshod over the law, requiring expensive registration for all investors, large or small. This is the cause of non-residents' problems with maintaining investments, and one of the reasons why individuals fail to comply with tax legislation.
Part 4: "I don't regret a thing": the risks taken by those who don't make the Declaration of Final Departure from the Country
Knowing what to do to comply with legislation is only one side of the coin. The other side, which clients often ask about, is knowing what could happen if everything goes wrong. Often, for example, we meet clients who are worried about what will happen inside the airport as soon as they pass through customs and enter Brazil.
Like so many examples in our country, little is known about the real risks of regularizing one's life, nor whether the initiative to do the right thing can lead to more problems than following the wrong path. The aim of this final part is to make this panorama as clear as possible for those wishing to submit the Declaration of Final Departure from the Country.
Possibility of dual tax residence
Each state has the power to set its own rules for defining who is or is not a tax resident in its jurisdiction. The rules set out in the previous sections are those laid down by Brazilian law. The United States, for example, considers every American citizen to be a tax resident in the United States, even if they have never set foot in that country's territory.
Because each jurisdiction has different tax residence rules, it is perfectly possible for the same person to be tax resident in two or more countries.
For those wishing to make a Declaration of Final Departure from Brazil, this means that (i). obtaining tax residency in another country does not make a person a non-resident in Brazil; and (ii). it is not necessary for a person to prove residency in another country in order to cease to be a tax resident in Brazil. From the Brazilian point of view, what matters is complying with the temporary or permanent exit procedures.
Exception to the rule
An exception to this rule is the case in which the taxpayer transfers his tax residence to a favored tax country or dependency ("tax haven") or privileged tax regime9Law No. 12.249/2010, art. 27.. In these cases, the tax exit should only take effect from the date on which the taxpayer can prove that:
- has become a de facto resident of the country or dependency, i.e. has actually stayed there for more than 183 days, consecutive or not, in a period of 12 months, or that their family's habitual residence and the majority of their assets are located there; or
- is subject to tax on all income from work and capital, with proof of actual payment of this tax.
The purpose of this exception is to prevent tax avoidance from being used solely and exclusively to artificially reduce tax payments to Brazil by formally changing tax residence to a country where it is presumed that the person's income will not be taxed. A list of tax havens and privileged tax regimes was provided for by the RFB in the RFB Normative Instruction No. 1.037/2010. For those who do not wish to move to one of the countries or dependencies on the list, it is not necessary to prove the acquisition of residence abroad.
Brazil has signed international agreements with other states with the aim of avoid a double taxation, the list of which is available on the RFB website. These agreements establish rules that allow a person to be considered a tax resident of only one of the two states of the agreement (the "tiebreaker rules"), but its application depends on a detailed analysis of the specific case and is not automatically recognized by the RFB, as it depends on proof.
Therefore, moving abroad and becoming a tax resident of another country does not exempt the taxpayer from the procedures for formalizing the tax exit from Brazil.
Consequences of not formalizing the tax exit: Receita Federal do Brasil
Tax residents in Brazil have their income taxed at universal basesFor non-residents, only income from sources located in Brazil will be taxed. For those who left Brazil without making the Final Exit Declaration and formalizing their tax exit, this implies the obligation to report their assets and income abroad annually in the annual adjustment declaration (DAA).
Assets acquired abroad in one's own name or jointly with a spouse or partner (depending on the property regime) should also be declared, even if the spouse or partner is not a tax resident in Brazil.
This does not necessarily mean that the same tax must be paid twice, once in each country. Income tax due abroad can be offset against tax due in Brazil in some circumstances, up to the limit of the amount of Brazilian tax. This will depend on the existence of an agreement between the two jurisdictions or recognition of reciprocity of treatment (i.e. that even without an agreement, one country would allow the tax paid in the other country to be offset).
For example, the tax paid abroad on the capital gain on the sale of a house can be credited against the tax due in Brazil for that sale within the same calendar year.
Regarding the IRPF limitation period
For the purposes of demanding tax and legal additions, it is worth noting that the IRPF statute of limitations is 5 yearsAs a result, the RFB does not authorize the rectification of personal income tax returns submitted before this deadline. Therefore, the returns that can be rectified are those for the 5 most recent fiscal years, i.e. during 2023, from the 2018 to 2022 calendar years. The previous period can no longer be rectified.
If the tax authorities identify omission of assets and incomethe amount of tax due may be demanded with an ex-officio fine of 75% tax due. This fine can be increased to 150%It can also be increased if the taxpayer fails to provide information to the tax authorities.
At the end of the day, if it is proven that the failure to report income and assets abroad in the DIRPF was not the result of an error or fault, but of intent to avoid paying tax, in whole or in part, the omission of assets and income in the individual income tax return may be subject to the provisions of article 2, item I, of the Code of Criminal Procedure. Law 8.137/1990punishable by imprisonment from 6 months to 2 yearsand a fine. The statute of limitations for this criminal conduct is 4 years, and its punishability is extinguished by full payment of the debts10Decree-Law No. 2.848/1940art. 109, inc. V; Law no. 10.684/2003Article 9, paragraph 2..
Consequences of not formalizing the tax exit: Central Bank of Brazil
The DCBE is a declaration administered by the Central Bank for statistical purposes, with no connection to the tax obligations administered by the RFB. It contains data on assets held abroad as at December 31st of each year, in the case of the annual declaration.
They are obliged to deliver DCBE's resident natural or legal personsIn addition to the above, there shall be a number of companies domiciled or headquartered in Brazil that have, on the base date of December 31st of each year, assets or rights of any nature held abroad that total an amount equal to or greater than US$1,000,000.00 (one million United States dollars), or its equivalent in other currencies.
It is worth mentioning that, until 2019, the amount was lower, US$ 100,000.00 (one hundred thousand dollars). The residency criterion, until 2002, coincided with tax residency, so that every tax resident in Brazil who met the aforementioned requirement was obliged to submit the DCBE. From 2023, the Central Bank created its own concept of currency residence for the foreign exchange marketbut still without a specific declaration. Hence the importance of making the Declaration of Final Departure from the Country and formalizing the tax exit.
It should be noted that, for the purposes of calculating this limit, the value of the assets is not taken into account individually, but their totality. If sum of individual assets is higher than this limit, all of them must be declared.
For assets and valuables held in a joint deposit account or otherwise owned in condominium by two or more individuals or legal entities, this limit must be calculated based on the full value of the assets held in these situations, regardless of the number of account holders or joint owners. In addition, each of them, if they are tax resident in Brazil, must inform their participation in the asset or value (in other words: inform the full value of the balance in the deposit account or other asset, used in the calculation of the mandatory limit, and the 50% participation of the holder in said account).
The administrative penalties for DCBE are as follows:
- 1% fine (one percent) of the amount subject to the declaration, up to a limit of R$25,000.00, for failure to comply with the deadlines set for providing the declaration. This fine will be reduced in the event of (i). a delay of 1 to 30 days in submitting the declaration, in which case the fine will correspond to 10% (ten percent) of the amount stipulated; and (ii). a delay of 31 to 60 days in submitting the declaration, in which case the fine will correspond to 50% (fifty percent) of the amount stipulated;
- 2% fine (two percent) of the amount subject to the declaration, up to a limit of R$50,000.00, for incorrect or incomplete provision of information within the legal deadline;
- 5% fine (five percent) of the amount subject to the declaration, up to a limit of R$125,000.00, for failure to provide the declaration or to submit supporting documentation to the Central Bank of Brazil for the information provided; and
- 10% fine (ten percent) of the amount subject to declaration, up to a limit of R$250,000.00, for providing false information to the Central Bank of Brazil.
It is worth mentioning that it is possible to transmit late or rectify DCBEs for the calendar year 2007 and onwards on the Central Bank's own website.
Imputation of the crime of currency evasion
In addition to the administrative penalties mentioned above, it is important to mention the possibility of being charged with the crime of currency evasion, attributed to "anyone who, in any capacity, promotes, without legal authorization, the exit of currency or foreign exchange abroad, or keeps deposits therein that are not declared to the competent federal office".
This criminal conduct is punishable by imprisonment from 2 (two) to 6 (six) years and a fine, and the statute of limitations for this conduct is 12 years11Law no. 7.492/1986, art. 22, sole paragraph; Decree-Law No. 2.848/1940Article 109, III..
For information purposes only, the criminal conduct of "concealing or disguising the nature, origin, location, disposition, movement or ownership of assets, rights or values derived, directly or indirectly, from a criminal offense" (the crime of "money laundering") is also punishable, if this conduct follows the conduct of omitting income or assets or evading foreign currency, mentioned above. This type of crime, which is dealt with separately from the others, carries a penalty of imprisonment from 3 to 10 years and a fine, and has a limitation period of 16 years12Law no. 9.613/1998, art. 1; Decree-Law No. 2.848/1940art. 109, inc. II)..
"How did you find me?": the automatic exchange of information between Brazil and other countries
Since 2010, in a move initiated by the United States, international agreements have been signed to exchange information between tax authorities. The aim is to allow the exchange of information to be used for tax and criminal purposes. Since then, a network of agreements has been formed in which Brazil has participated since 2014 (with the United States) and 2018 (with the rest of the world).
Brazil and the United States have signed two international agreements aimed at exchanging tax information:
- o Agreement for the Exchange of Tax Informationratified by Brazil in 2013;
- o Agreement to Improve International Tax Compliance and Implement FATCA, 2015.
As far as we are concerned, the second of these agreements allowed for the automatic exchange of information between the Internal Revenue Service and the Brazilian Federal Revenue Service, provided to these bodies by Financial Institutions. The United States has undertaken to provide Brazil with information on Brazilian tax residents with accounts in the United States since calendar year 2014. The information to be passed on to the Receita Federal is as follows:
- identification of the Account Holder (both individual and legal entity) and the Reporting Financial Institution in the United States;
- the relevant account number;
- the total gross amount of interest paid to a Deposit Account Holder and the total gross amount of U.S. source dividends paid or credited to the relevant account; and
- the total gross amount of other U.S. source income paid or credited to the relevant account, provided that the information to be provided is foreseen as reportable under U.S. domestic law.
Convention on Mutual Administrative Assistance in Tax Matters
Brazil has also signed the Convention on Mutual Administrative Assistance in Tax Matters with other countries under the Common Reporting Standard (CRS), a G-20 initiative organized by the OECD (Organization for Economic Cooperation and Development) which is very similar to FATCA. As each country involved in the CRS has taken on different responsibilities, the deadlines for exchanging information need to be analyzed on a country-by-country basis. In general, Brazil has committed to exchanging information with other countries from 2018.
Given that the effective implementation of these mechanisms is recent and depends on initiative on the part of Brazil, we have no way of assessing the level of preparedness of the Brazilian tax authorities to use data received automatically in the cross-checking of DIRPF information (fine mesh). It is recommended, however, that the regularization of assets and income held abroad for those who have not properly reported them.
I also recommend reading the text with guidelines on the subject "how to declare assets abroad", up-to-date content that will help keep you up to date with the tax authorities.
On this blog you will always find relevant, up-to-date information on the subject and guidance on how to avoid problems with the tax authorities and other authorities. Feel free to tell us about your experience, share the content with other friends who need guidance and contact us by e-mail at contato@tersi.adv.br or via WhatsApp. Click here to send a message now.
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References:
- 1The "permanent visa" is still called that in tax legislation. Currently, however, migration law uses the expression "temporary visa with residence permit" to refer to this type of visa.
- 2
- 3Art. 3(V) of SRF Normative Instruction no. 208/2002
- 4DISIT/SRRF 08 Consultation Solution No. 262/2009
- 5Ac. 2301-007.136, CARF, 2nd S., 3rd Chamber, 1st Ord. T., rel. p/ vote Cons. João Maurício Vital, majority, j. 04.03.2020.
- 6SRF Normative Instruction 208/2002Article 2, point V.
- 7The list of "tax havens" can be found in art. 1 of the RFB Normative Instruction No. 1.037/2010.
- 8
- 9Law No. 12.249/2010, art. 27.
- 10Decree-Law No. 2.848/1940art. 109, inc. V; Law no. 10.684/2003Article 9, paragraph 2.
- 11Law no. 7.492/1986, art. 22, sole paragraph; Decree-Law No. 2.848/1940Article 109, III.
- 12Law no. 9.613/1998, art. 1; Decree-Law No. 2.848/1940art. 109, inc. II).
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