I’ve been dealing with many cases where Brazilians wanting to move offshore, or, already live in a different country, wanting to regulate their situation with the Brazilian Federal Revenue. Seeking to help this people, two things still amaze me: the lack of clear information to those who wish to do things correctly and regulated, and also the lack of coordination between the Brazilian Federal Revenue (BRF) and the Federal reserve (BACEN), the competent public entities. Nothing makes the life of the people who don’t want to live in Brazil easy, they’re moving away but still wish to maintain its assets, such as bonds and real estates.
The purpose of this article is to support those who are making the tough decision to leave the country and don’t want to leave loose ends, I also wish to share my personal experience and of our office with the practical problems faced by brazilians in their exit process. It’s important to inform in especial, what is possible to do in the prevention level, so that the FISCO don’t raise questionings in the future if the person actually leave the country and therefore should pay taxes over their offshore incomes.
What is a tax purpose exit
It could be understood as the loss of the tax resident condition in Brazil. As tax resident the taxpayer should accomplish the obligations of:
- Submit all of his incomes to taxation by the income tax, whether earned in Brazil or abroad.(“universal based taxation”);
- Present every year the personal income tax declaration (DIRPF) to inform the referred incomes to the RFB and also provide data about its assets and rights, in Brazil and abroad.
- In case the set of assets in your name exceed the one hundred thousand USD limit, present to the BACEN the declaration of brazilian capital abroad (DCBE).
With the tax purpose exit, a date is set on which the taxpayer stop being a tax resident in Brazil, and becomes a non-resident. The non-resident is, from the date determined, released from presenting the DIRPF and the DCBE. He should only submit to brazilian taxation the income earned in the Brazilian territory. Subject to taxation at source (that is, for assets located in Brazil, the respective rents, interest, capital gain, etc.).
It is worth saying that the same person can be tax resident in two or more countries. Therefore, the fact that a person moves to another country and becomes a tax resident there has no impact on Brazil, for further information on this subject, see section “Possibility of double tax residence” below and our text “Living in Brazil and another country, double tax residence, brazilian deals and reciprocity”.
Requirements to stop being a tax resident in Brazil
Before formalizing the tax purpose exit, it is necessary to know which requirements of Brazilian legislation must be filled for a person stop being a tax resident in Brazil (and, when returning to the country, don’t become a tax resident again). These requirements are different for those who are brazilians and for those who are foreigners:
For the brazilian:
- Permanently don’t live in Brazil.
- Residing abroad, should not provide services as an employee to municipalities or offices of the Brazilian government located abroad.
- If return to Brazil, do not do it with a “definite spirit” of staying here.
For the foreigner:
- Do not enter Brazil with a permanent visa
- If enter with the temporary visa:
- Do not convert it into the permanent;
- Do not maintain employment;
- Do not act as a scholarship doctor under the “Mais Médicos” program (Law No 12.871/2013)
- Do not remain in the country for more than 183 consecutive days or not,within any twelve months period.
- If remain in Brazil; should do so by providing services as an employee to municipalities or foreign government offices located in Brazil.
As you can see, the brazilian legislation presumes the foreigner’s tax residence based on objective elements, such as visa category and the length of stay in the country. The brazilian, however, should reside “on a permanent basis” abroad and without the “definite spirit” to remain in Brazil. These subjective criteria are linked to the interest of maintaining economic and social ties with Brazil, and don’t depend on the length of stay. For instance, keeping a house, join a club, work, manage a company and develop social activities (philanthropy, sports, etc.) are indications of a active life in Brazil. In other words, “take roots”. In the opposite direction, coming to Brazil to visit the family on the holidays or just making a turism trip, does not qualificate, singly, tax residency in Brazil.
Many people asked me if a brazilian remains more than 12 consecutive months becomes a non-resident automatically, and if so should return to Brazil before the 12 months absence to “don’t take the risk” to become a non-resident. We understand that this is not the case. We understand that the automatic application of the 12-month rule (art. 3º, inc. V, of the normative instruction SRF nº 208/2002). It is a legal presumption that the brazilian lost interest in staying a tax resident in Brazil, that can be removed by other elements. The RFB itself in non-binding opinion, already presented this understanding (Query solution DISIT/SRRF 08 No 262/2009).
Because of this subjectivity, it is perfectly possible for a Brazilian to withdraw from the country, live years abroad and still can be considered a tax resident in Brazil. In these terms, the brazilian legislation, distinguishes between “temporary exit” and “permanent exit”.
What is a temporary exit and a permanent exit
The temporary exit from Brazil, occurs when the person leaves the brazilian territory and remains abroad without formalizing to the brazilian IRS that he was absent. A normal situation that occurs this is when a person decides to move abroad without knowing if will be able to settle there, so it may have to return to Brazil in the future.
The tax consequence of this, during the first 12 months after leaving, the individual continues to be considered a tax resident in Brazil. In this case, the person must remain out of the country for 12 consecutive months, so it can be considered a non-resident. If nothing else takes away this legal presumption, the person who wishes to regularize his situation towards the brazilian IRS, can use this rule to defend that it became a non-resident after 12 consecutive months of absence in the country, even if has lost all the deadlines to formalize the tax exit.
The definitive country exit, in the other hand, characterize itself when a person leaves the brazilian territory and complies, within the legal deadlines, the formal requirements for it to be considered a non-resident. In this case, the taxpayer loses the condition of tax resident immediately, on the date informed for his departure.
Wherefore, observe the legal deadlines is a important requirement to set when the loss of the tax resident condition starts to have an effect. The legal deadlines to observe are explained in the section “How to formalize the tax exit” below.
How to formalize the tax exit
The tax legislation foresee two obligations to be fulfilled towards the RFB to formalize the tax exit: (I) the definitive exit communication (CSD) and (II), if that’s the case, the definitive country exit statement (DSDP). Beyond all this, the taxpayer should inform to the income-paying sources in Brazil the loss of the tax resident condition.
The tax exit communication (CSD)
The CSD is a electronic form that informs to the RFB (I). The date of the loss of the tax residence condition in Brazil;(II) if there is, the name and social security number of the dependents who must accompany the taxpayer(for example, wife and underage kids), and (III), if is the case, the name, social security number and address of the prosecutor named by the taxpayer to carry on with any procedures towards the RFB. The main function of the CSD is to allow the taxpayer to put his affairs in order before the DSDP delivery period.
Note that, for the definitive exit hypothesis, the date to be informed in the CSD is the date which the taxpayer effectively left the country. To those in temporary exit, the date to be informed is that which the taxpayer completed 12 consecutive months of absence after leaving the country. The same date will be applied to the taxpayer dependents informed in the CSD.
The CSD form also allow to identify the social security number (CPF) or the national register of legal entities (CNPJ) of the income-paying sources, so that communication letters are automatically prepared to inform them about the new taxpayer situation, examples of income paying sources are the banks and stockbrokers who custody the investments, the INSS, the administrator of the private pension plan, and every other entity that pays the taxpayer earnings.
This is important, because the income-paying sources have an obligation to inform the RFB the withholding income tax (IRRF) when paying the earnings, the collection codes and rates of the IRRF could be different to residents and non tax residents(for further details about htis see the section “Tax treatment of the non-resident” below). Thus in case the income-paying source is not informed, the taxpayer will be treated by the RFB as tax resident.
Therefore, if the paying source is not informed, the taxpayer may be treated by RFB (Federal Revenue of Brazil) as a tax resident. The proof of delivery of the information to the paying source is a proof instrument to avoid this consequence, even if the paying source continues to collect the IRRF (Income Tax Withheld at Source) incorrectly.
The appointment of an attorney at the CSD (Definitive Country Exiting Communication) is optional and declaratory. It does not meet the need to grant a power of attorney. Its function is to allow the Tax Authorities to communicate directly with the attorney during an inspection of the information of those who make the tax exit. In some situations, tax law makes the individual’s attorney responsible to the Tax Authorities for the collection of taxes, usually when not withheld by the paying source (for example, because the paying source was not informed that the taxpayer was not a tax resident in the Brazil).
The CSD (Definitive Country Exiting Communication) must be submitted by the last day of February of the year following the year of departure. This means that, for those who left Brazil in 2019, the CSD should be delivered by 02.29.2020. For those who leave Brazil in 2020, the CSD must be delivered by 02.28.2021.
What happens when the CSD delivery time is missed?
It is not possible to deliver a CSD late, as the (RFB Federal Revenue of Brazil) only makes the electronic form available during the delivery period. This way, those who left Brazil in 2019 and did not transmit the CSD until February 29, 2020 will no longer be able to do so, just as those who left in 2020 should transmit the CSD until February 28, 2020. The consequence of the non-delivery of the CSD on time is that the taxpayer will be considered a tax resident in Brazil during the following 12 months of absence, exactly as in the case of temporary exit.
The legislation gives the same consequence for the hypothesis of temporary exit and for the hypothesis of definitive exit with loss of term. Even so, we did not find an explicit provision stating that whoever misses the delivery deadline is obliged to present the CSD in the following year, stating the date on which he completed 12 months of absence.
In any case, it is recommended to deliver the CSD, mainly as a way of proving to the paying sources the loss of the status of tax resident in Brazil until the DSDP (Definitive Country Exiting Statement) cannot be delivered.
Definitive Country Exiting Statement (DSDP)
The DSDP is a special type of income tax return. It covers the period between the 1st of January and the date of the loss of the status of tax resident in Brazil, informed in the CSD and in the DSDP itself. For this reason, the income earned by the taxpayer who ceased to be a tax resident in Brazil at the end of his period of tax residence in Brazil (that is, in the period between January 1 and the date of his departure) is reported. Subsequent earnings, already earned as a non-resident, should not be reported.
During the period from January 1 to the date of loss of the status of tax resident in Brazil, the taxpayer is subject to the same tax regime as other residents, being entitled to the same deductions and tax benefits.
For those who decided to leave Brazil in 2020, this declaration must be submitted in March and April 2021, within the same delivery deadline as the other income tax returns. For those who left Brazil in 2019, the DSDP should be delivered soon, during the months of March and April 2020.
What happens when the DSDP delivery time is missed?
Unlike CSD, DSDP can be delivered after the deadline. In this case, in addition to paying any tax and legal additions for the delay, the taxpayer is subject to the fine of (i). R$ 165.74; or, if greater, (ii). 1% of the amount of tax due per month of delay, up to the limit of 20%. The amount of tax due is that informed in the declaration delivered late. The DSDP may be transmitted within 5 years after the normal delivery period.
It is worth mentioning that the described fine will only apply if no declaration is submitted within the legal deadline. If a declaration was delivered on time, but if it was necessary to rectify it, there is no fine. This is true even if the original statement was a normal DIRPF (Natural Person’s Income Tax) and the rectifier was a DSDP.
The importance of communicating the sources of tax exit payments?
As mentioned in the previous topic, regarding the completion of the CSD, the taxpayer has the obligation to inform the income-paying sources in Brazil that he has lost his status as a tax resident in the country. If this does not occur, the paying sources will continue to report to the RFB (Federal Revenue of Brazil) income withholding as a resident. This can cause data inconsistencies in the RFB (Federal Revenue of Brazil) system, and hence the risk that the RFB (Federal Revenue of Brazil) will consider that the taxpayer has returned to being a tax resident in Brazil.
In our practical experience, the RFB (Federal Revenue of Brazil) has required proof that each paying source has been informed of the tax exit as a condition for allowing the undue tax pending write-offs on behalf of the taxpayer. This occurs even in cases where there is abundant evidence that the taxpayer has ceased to reside in Brazil more than five years ago.
What happens to the CPF (Brazil’s Social Security Numbers) of those who become non-residents?
The individual who was a tax resident in Brazil and made his tax exit does not stop having his CPF active, nor does he change his CPF number. The CPF is a permanent identification number.
With the formalization of the tax exit, what happens is that the taxpayer registration in the CPF is updated with the status of non-resident. In situations where the exit is not formalized properly, and the paying sources continue to inform RFB (Federal Revenue of Brazil) about the payment of income under the tax resident code in Brazil, the CPF can become:
pending regularization: in the event of failure to submit the income tax return or definitive exit declaration, when the Federal Revenue Service assumes that the taxpayer was a tax resident in Brazil and, therefore, was obliged to submit it; or
suspended: a CPF is suspended when there is a registration inconsistency (for example, for noncompliance with electoral obligations or divergence in the information in different documents).
For those with CPF pending regularization, who was in fact a tax resident in Brazil and failed to submit the declaration, the simple delivery, with collection of taxes and corresponding additions, is sufficient to regularize the registration situation. But, if the taxpayer was a non-resident and is in this situation, it will be necessary to document the fact for the RFB (Federal Revenue of Brazil) to lower the pending issue
For those with suspended CPF, regularization depends on the presentation of documents to the Federal Revenue Service, listed by regulation.
It is worth mentioning that even individuals who have never been tax residents in Brazil are also required to have a CPF if (i). practice real estate operations in Brazil; (ii). have bank, savings or investment accounts; (iii). operate in the financial or capital markets in Brazil; or (iv). possess goods and rights subject to public registration or specific registration, such as real estate, vehicles, boats, etc. Therefore, maintaining a regular CPF and being considered a non-resident are different things.
Financial assets in Brazil – what the tax outflow may imply
Foreign exchange legislation establishes several restrictions for non-residents who maintain or acquire financial assets in Brazil. For this reason, the tax outflow has the consequence that, in addition to tax obligations, also from a foreign exchange, banking and financial point of view, the change to non-resident status has relevant consequences.
The first is in relation to maintaining bank accounts. In order to maintain financial resources invested in Brazil in national currency, non-residents are required to maintain an account domiciled abroad (CDE) in a financial institution in Brazil. This means that the taxpayer will be required to close his bank account and open a new bank account for 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.
Due to our analysis of the legislation and also our practical experience, the Central Bank imposes much higher regulatory costs on CDE, so that banks tend to have little interest in opening new accounts, even for customers with good relationships. Thus, the opening of the non-resident account is one of the items of study in a tax exit plan in Brazil. For more details about the CDE, we recommend reading the text “Current account for non-residents: why is it so difficult to open one?”.
Bank accounts domiciled abroad accept financial investments in savings and CDBs (Bank Deposit Certificates) without additional regulatory costs. In order to invest funds in other financial assets in the financial and capital markets, such as shares, investment fund shares and fixed or variable income securities, the legislation requires registration of non-resident investors with the Central Bank and CVM (Security and Exchange Commission of Brazil). This special situation is known as “Investor 4373”, due to the fact that the rules of the regime are currently provided by the Central Bank in Resolution No. 4.373/2014
For Investor 4373, it is mandatory to appoint a financial institution authorized by the Central Bank as a proxy for financial investments in the financial and capital markets. Note that the attorney informed in the CSD is an individual, and is not to be confused with the attorney for Investor 4373.
Registering as an Investor 4373 implies additional regulatory costs, but a more favorable tax treatment (see “Special situation for non-residents – financial and capital markets”, below). Thus, the costs and benefits of maintaining financial resources in Brazil after the tax exit need to be carefully analyzed.
Tax treatment of non-residents – general rule
The non-resident must submit to Brazilian taxation only the income or capital gains earned from a Brazilian source. Nothing received from a source abroad may be taxed by Brazil. In general, the tax must be withheld and paid to the Tax Authorities by the paying source (IRRF), but there are some cases in which it can be collected by the taxpayer himself or by his attorney. In both cases, each income or capital gain is taxed separately, and there is no obligation to file an income tax return after the fact or make adjustments due to other income earned in the same period.
The most relevant tax changes for those who leave the status of tax resident in Brazil and become a non-resident are as follows:
income from work, with or without employment, retirement, pension or service provision: 25% IRRF, without progression. Note 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;
rent or lease income: 15% IRRF, without progressivity. In the case of rental properties, some deductions are applicable when determining the IRRF calculation base, which are also applicable to the resident;
financial income: as a rule, 15% IRRF, without progressivity. There are, however, specific situations for which different rates apply;
capital gains on the sale of real estate, equity interests, etc .: progressive rates of 15% to 22.5% of IRRF, depending on the value of the capital gain, just like the tax resident in Brazil;
dividends: 0% IRRF, just like the tax resident in Brazil, which is exempt;
income from rural activity: 15% IRRF, without progressivity. Unlike the tax resident in Brazil, it is not possible to offset losses from previous years or to arbitrate the calculation base so that it corresponds to 20% of rural activity revenues.
For non-residents who remain residing in one of the countries or favored tax dependencies (tax haven), the IRRF will be 25% in the above cases, except for dividends. The 25% rate is applicable as a general rule also to other cases provided for in tax legislation, with few exceptions.
Another important change is the tax collection date. For tax residents in Brazil, the amount of tax withheld by the source or paid by the taxpayer must be paid to the Tax Authorities by the end of the month following receipt of the income. For non-residents, the IRRF must be paid on the same date as the taxable event, under penalty of already incurring fines and interest on arrears as of the following day.
Special situation for non-residents – financial and capital markets
We can affirm that the situation of the non-resident investor in the financial and capital markets is that of the greatest mismatch between the regulations of the Central Bank and the Federal Revenue. Under tax legislation, non-resident financial investments may be subject to the “general regime” or the “special regime”. In very general terms, it can be said that (i). the general regime is equivalent to the tax resident in Brazil, and (ii). the special regime is a favored tax treatment that corresponds to that of Investor 4373, already mentioned.
In the general regime, non-residents are subject to the same tax rules for income tax provided for tax residents in Brazil, in relation to:
income from fixed income financial investments and investment funds;
net gains from operations carried out on stock, commodity, futures and similar exchanges;
net gains from the sale of gold, a financial asset, and from operations carried out in the futures market, over the counter;
income earned on swap operations; and
income earned on COE (Structured Operations Certificates).
The general regime also extends to non-resident individuals the same exemptions as tax-resident individuals in Brazil (dividends, income from letters of credit for real estate or agribusiness, etc.). It is also mandatory to appoint a proxy for a non-resident taxpayer who invests in the financial and capital markets, designated among the institutions authorized to operate by the Central Bank to provide such a service.
Individuals and legal entities resident or domiciled in countries and dependencies with favored taxation are obligatorily subject to the general regime, according to the list of Normative Instruction RFB No. 1.037/2010, already mentioned.
In practice, the general regime is the exception, not the rule. Resolution No 4.373/2014 only provides for the possibility of investing in the Brazilian financial and capital markets through the treatment of Investor 4373, which corresponds to the special regime. As far as we can verify, the legislation established by the Central Bank was silent on the possibility of maintaining the financial investments of non-residents without fulfilling the other formalities of Investor 4373. For this reason, only Investors 4373 residing or domiciled in countries and dependencies with taxation (except sovereign wealth funds) are subject to the general regime.
Under the special regime applicable to Investor 4373 who is not resident or domiciled in a tax haven, taxation is as follows:
|Lace Item||Special Regime Rate||Tax resident rate in Brazil (if applicable)|
|Income from public securities acquired as of 02.16.2006, as well as from exclusive investment fund shares for non-residents who hold at least 98% of the portfolio in public securities||0%||22.5% -15%, depending on the investment period|
|Income from marketable securities acquired as of January 1, 2011, subject to public distribution, issued by (i). private legal entities not classified as financial institutions and (ii). of FIDCs constituted in the form of a closed condominium, whose origin of the portfolio is not a financial institution, which meet specific legal requirements||0%||22.5% -15%, depending on the investment period|
|Gains on operations carried out on stock exchanges, commodities, futures and similar sources, including when dealing with quotas of index funds||Free||15% or 20% (day-trade) or 25% -15% (fixed income index funds)|
|Gains from operations with gold, financial assets, off-market||Free||15% ou 20% (day-trade)|
|Income and gains produced by the guaranteed real estate bill (LIG)||Free||Free|
|Income and gains produced by investment funds whose shareholders are exclusively foreign investors||Free||Not applicable|
|Income earned on investments in FIP, FICFIP and FIEE (specific requirements met)||0%||15%|
|Income earned on investments in FIP-IE and FIP-PD & I (specific requirements met)||0%||15% ou 0%|
|Income earned on investments in investment funds and funds in quotas of investment funds with portfolio in debentures||0%||0% (individual)|
|Income and gains produced by quotas of the Fixed Income Index Fund whose regulation determines that its portfolio of financial assets has a renegotiation period greater than 720 days||Free||15%|
|Income from investments in equity investment funds (FIA)||10%||15%|
|Income from swap operations, registered or not on the stock exchange||10%||22.5% -15%, depending on the investment period|
|Income from operations carried out in futures markets, off-market||10%||15% ou 20% (day-trade)|
|Income from fixed income investments||15%||22.5% -15%, depending on the investment period|
|Gains on joint operations that allow predetermined earnings to be obtained, carried out on the stock, commodity, futures and similar markets, as well as in the over-the-counter market||15%||22.5% -15%, depending on the investment period|
|Other income realized in the organized over-the-counter market or on the stock exchange, and in 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, in view of the cost charged by financial institutions for maintaining registration of Investor 4373. The cost is justified by the complexity of fulfilling obligations imposed by the competent authorities (the Central Bank, the CVM and the RFB) and the responsibility assumed by the institution as the taxpayer’s attorney before each authority. For small investors, it is unlikely that the treatment of Investor 4373 will be feasible.
Possibility of double 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 above apply only to Brazil. The United States, for example, considers every US citizen a tax resident in the United States, even though it has never stepped on that country’s territory. Because each jurisdiction establishes different tax residence rules, it is perfectly possible for the same person to be a tax resident in two or more countries.
For those who wish to make the fiscal exit from Brazil, this means that (i). obtaining tax residence in another country does not make a person non-resident in Brazil; and (ii). it is not necessary for a person to prove residing in another country in order to stop being a tax resident in Brazil. From the Brazilian point of view, what matters is to comply with the procedures for temporary or permanent departure.
An exception to this rule is the case in which the taxpayer transfers his tax residence to a country or favored tax dependency (“tax haven”) or privileged tax regime (Law nº 12.249/2010, art. 27). For these cases, the tax exit should take effect only from the date the taxpayer can prove that:
started to live in fact in the country or dependency, that is, has effectively stayed there for more than 183 days, consecutive or not, in a period of 12 months, or that the habitual residence of his family and most of your assets are located there; or
there he is liable to tax on all income from work and capital, with proof of the effective payment of that tax.
The purpose of the described exception is to prevent the tax outflow from being used solely and exclusively to artificially reduce tax payments to Brazil, by formally moving the tax residence to a country where it is assumed that the person’s income will not be taxed. The list of tax havens and privileged tax regimes was provided for by RFB in 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 entered into international agreements with other states with the aim of avoiding 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 their application depends on a detailed analysis of the specific case and is not automatically recognized by the RFB, as it depends of proof.
Therefore, moving abroad and becoming a tax resident of another country does not exempt the taxpayer from the procedures to formalize the tax exit from Brazil. To understand this question in more detail, we recommend reading the text “Living in Brazil and in another country: Dual Tax Residency, Brazilian Agreements and Reciprocity”.
Consequences of not formalizing the tax exit – DIRPF
Tax residents in Brazil have their income taxed on a universal basis, while for non-residents, only income from a source located in the Brazilian territory will be taxed. For those who left Brazil without formalizing their tax exit, the fact implies the obligation to report annually to the DIRPF their income abroad, as well as the assets acquired there in their own name or together with their spouse or partner (depending on the matrimonial property scheme), even if he 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 may be offset against tax due in Brazil in some circumstances, up to the limit of the Brazilian tax amount. This will depend on the existence of an agreement between the two jurisdictions or recognition of the reciprocity of treatment (that is, 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 calculated on the sale of a house may be credited against the tax due in Brazil for the referred sale within the same calendar year.
For the end of the tax requirements and legal additions, it is worth noting that the IRPF decay period is 5 years, so that the RFB does not authorize the rectification of individual income tax returns transmitted before the said period. Thus, the declarations subject to rectification are those referring to the 5 most recent years, that is, during the year 2020, of the declarations of the calendar years from 2015 to 2019. The previous period can no longer be rectified.
If the tax authorities identify the omission of assets and income, the amount of tax due may be required with an official fine, in the amount of 75% of the tax due. This fine can be increased to 150%, depending on the finding of fraud, fraud or simulation, and can also be increased if the taxpayer fails to provide information to the inspection.
In the limit, if it is proved that the failure to submit information to the DIRPF on income and assets abroad was not due to error or fault, but to the intent to totally or partially exempt from paying taxes, the omission of assets and income in the individual income tax return may be subject to the provisions of art. 2, item I, of Law 8.137/1990, punished with detention, from 6 months to 2 years, and a fine. The limitation period for said criminal conduct is 4 years, and its punishment is extinguished by the full payment of debts (Decree-Law nº 2.848/1940, art. 109, inc. V; Law nº 10.684/2003, art. 9º, §2).
Consequences of not formalizing the tax exit – DCBE
The DCBE is a statement administered by the Central Bank for statistical purposes, with no connection with the tax obligations administered by the RFB. It contains data on assets held abroad at December 31st of each year, in the case of the annual declaration.
Are required to deliver the DCBE individuals or legal entities residing, domiciled or headquartered in the Country who have, on the base date of December 31 of each year, assets or rights of any nature held abroad that total an amount equal to or greater than U$ 100,000.00 (one hundred thousand United States dollars), or its equivalent in other currencies. The residency criterion coincides with the tax residency, so that any tax resident in Brazil that meets the mentioned requirement will be required to deliver the DCBE. Hence the importance of formalizing the tax exit.
It should be noted that, for purposes of calculating said limit, the value of the individual assets is not taken into account, but their totality. If the sum of the individual assets exceeds this limit, all of them must be declared. For assets and values held in a joint deposit account or that otherwise belong to a condominium for two or more individuals or legal entities, this limit must be determined in view of the full value of the assets held in these situations, regardless of the number of holders of the account or tenants, and each of them, if a tax resident in Brazil, must inform their participation in the asset or value (that is to say: the full amount of the balance in the deposit account or other asset, used in determining the limit is informed mandatory, and the 50% interest of the holder in said account).
The administrative penalties for the DCBE are as follows:
fine of 1% (one percent) of the amount subject to the declaration, up to the limit of R$ 25.000,00, for non-compliance with the deadlines provided for the rendering of the declaration. Such fine will be reduced in case of (i). delay of 1 to 30 days in providing the declaration, in which case the fine will correspond to 10% (ten percent) of the estimated amount; and (ii). delay of 31 to 60 days in providing the declaration, in which case the fine will correspond to 50% (fifty percent) of the estimated value;
fine of 2% (two percent) of the amount subject to the declaration, up to the limit of R$ 50.000,00, for the incorrect or incomplete provision of information within the legal term;
fine of 5% (five percent) of the amount subject to the declaration, up to the limit of R$ 125.000,00, for failure to provide the declaration or failure to submit supporting documentation to the Central Bank of Brazil of the information provided; and
a fine of 10% (ten percent) of the amount subject to the declaration, up to the 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 the DCBEs for calendar year 2007 and following.
In addition to the administrative penalties referred to above, it is important to mention the possibility of imputing the crime of evasion of foreign currency, attributed to “who, in any capacity, promotes, without legal authorization, the outflow of currency or currency abroad, or keep undeclared deposits in it with the competent federal department”. Such criminal conduct is subject to the penalty of imprisonment, from 2 (two) to 6 (six) years, and a fine, and the period of prescription for said conduct is 12 years (Law No. 7.492/1986, art. 22, sole paragraph; Decree-Law nº 2,848/1940, art. 109, inc. III).
For informational purposes only, criminal conduct of “hiding or concealing the nature, origin, location, disposition, movement or ownership of assets, rights or values arising, directly or indirectly, from a criminal offense” (crime of “money laundering”) is also punishable capital”), if the referred conducts follow the conducts for the omission of rents or assets or for the avoidance of foreign exchange, mentioned above. Said penal type, treated autonomously from the others, provides for the penalty of imprisonment, from 3 (three) to 10 (ten) years, and a fine, and its term of prescription is 16 years (Law nº 9.613/1998, art. 1st; Decree-Law No. 2.848/1940, Article 109, item II).
Automatic exchange of tax information between Brazil and the United States and with other countries
It is important to note that Brazil and the United States have entered into two international agreements aimed at the exchange of tax information: (i). the Tax Information Exchange Agreement, ratified by Brazil in 2013; and (ii). the Agreement for the Improvement of International Tax Compliance and FATCA Implementation, 2015. As far as we are concerned, the second of these agreements allowed the automatic exchange of information between the Internal Revenue Service and the Federal Revenue of Brazil, provided to these bodies by Financial Institutions.
The United States has undertaken to provide Brazil with information on tax residents in Brazil with accounts in the United States since the calendar year 2014. The information to be passed on to the RFB is as follows: (i). identification of the Account Holder (both individual and corporate) and the Reporting Financial Institution in the United States; (ii). the relevant account number; (iii). the total gross amount of interest paid to the Deposit Account Holder and the total gross amount of American source dividends paid or credited to the relevant account; and (iv). the total gross amount of other American source income paid or credited to the relevant account, provided that the information disclosed is predicted as reportable by United States domestic law.
Brazil 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) very similar to FATCA. As each country involved in the CRS has assumed different responsibilities, the timeframes for exchanging information need to be analyzed country by country. In general, Brazil has committed to exchange information with other countries from 2018.
Bearing in mind that the effective implementation of these mechanisms is recent and depends on an initiative on the part of Brazil, we are unable to assess the level of preparation of the Brazilian tax authorities for the use of data received automatically when crossing information from the DIRPF (fine mesh). It is recommended, however, that the regularization of assets and income kept abroad for those who have not adequately informed them.
I also recommend reading the text with guidelines on the topic “how to declare assets abroad”, updated content that will help keep you up to date with the Tax Authorities. In this blog you will always find relevant and updated information on the topic, in addition to guide you to avoid problems with the tax authorities and other authorities. Feel free to tell us your experience, share the content with other friends who need guidance and contact us via email firstname.lastname@example.org, or click here to send a message via WhatsApp now.