Investments abroad: how can taxation be made easier?

In the text Taxation of Gains and Income AbroadIn this article, we deal with the difficulties faced by individuals in holding financial investments abroad directly, given the complexity of Brazilian taxation. For our clients who are tax residents in Brazil, the most common alternative for making investments abroad is to set up a company. offshoreor private investment companyfor this very purpose.

The aim of this text is to give guidance to those interested in investing financial resources abroad without the insecurity and hassle of the complex procedures common to this type of investment. In addition to a compliance much simpler, current legislation also allows for deferral of Brazilian taxation on gains and income, which is why this alternative is so widely used.

Private Investment Company (PIC): what it is and what it's for

Private Investment Company (PIC) is the general term used to describe legal entities incorporated abroad with the aim of holding and managing financial investments. The individual, who is a tax resident in Brazil, holds the position of shareholder of the PIC, with the right to receive profit distributions or a return on their capital. They may also hold the position of director of the PIC, in order to maintain control of the company's management. Nothing prevents several people from being shareholders (all the members of a family, for example). And that only some of them are directors (parents, or a trusted person).

The financial resources held by the PIC are held in custody by a financial institution abroad. Some Brazilian banks have branches abroad for this purpose, but there are also foreign banks that provide the same service. The directors are in charge of making decisions about the application of the funds, in the interests of PIC and its shareholders. There is also nothing to stop this task being delegated to managers or specialized financial consultants, whether they are from the custodian financial institution or not. There are managers and consultants who provide their services from Brazil, even if the funds are located abroad.

Investments abroad - PIC and favored tax jurisdiction (FTJ)

A PIC is usually set up in a jurisdiction offshoreThis is also known as a "tax haven" or favored tax jurisdiction (FTJ). The IRS maintains a list of JTFs on the SRF Normative Instruction no. 1.037/2010. The main reasons for choosing JTFs to constitute PICs rather than jurisdictions onshoreas is the case in Brazil, are as follows:

Zero or low income taxation

PIC is not subject to income tax in its jurisdiction, either on its profits or on distributions to its shareholders, or at least it is subject to much more favorable taxation than in Brazil;

Legal stability

The legal system in these jurisdictions is usually much more stable, so as to provide certainty that, in the event of disputes, contracts will be respected. In the case of some dependencies of the United Kingdom (British Virgin Islands, for example), the final court of law is the Privy CouncilUK court with stable, century-old case law;

Political stability

As a significant part of the local population in these jurisdictions is employed in tourism or in activities related to the provision of services linked to PICs and other entities (lawyers, accountants, financial professionals), the political interest in changing local rules abruptly is much lower, for example, than in Brazil;

Greater simplicity and flexibility

The legislation of JTFs tends to respect the autonomy of the will more than in Brazil, allowing for greater flexibility in drawing up contracts, wills and other legal acts or businesses. The bureaucracy involved in opening and registering a PIC, for example, is substantially less than that involved in opening and registering an equivalent legal entity in Brazil.

In summary, the first advantage of holding financial investments through a PIC is the use of a neutral and stable jurisdiction to organize the ownership and management of investments. The second is the simplification of Brazilian tax and exchange obligations, as we'll see below.

Investments abroad - How to declare a PIC under Brazilian law

We've already had the opportunity to talk on this blog about how declaring assets abroad and in greater depth, how to calculate the acquisition cost of assets acquired in foreign currency. The concepts described there also apply to holding shares in a PIC abroad, summarized below in the part that matters for filing the income tax return (DIRPF):

• The shares of a PIC must be classified in the assets and rights sheet of the DIRPF in the same way as the shares of any other company. The code of the jurisdiction in which the PIC is located must be identified;
• the acquisition cost of the shares corresponds to the capital contributed by the individual to the PIC. The original value in foreign currency must be kept in memory;
• The acquisition cost in foreign currency must be converted into reais and the conversion must be reported in the DIRPF at the exchange rate published by the Central Bank for the date of acquisition. That is, the date on which the funds were contributed to the PIC as payment for its share capital; and
• the origin of the funds used in the capital contribution must be tested. In a nutshell: (i). if the funds were sent from Brazil abroad, then the rule of origin in Reais must be applied. Or (ii). if the funds were earned and kept abroad, then the rule of origin in foreign currency must be applied.

Within the scope of the DIRPF, as long as the financial resources remain invested in the PIC, the information on the acquisition cost must be repeated. The PIC's gains, losses, income or expenses do not affect the amount reported by the shareholder in their DIRPF.

On the new contribution of funds to PIC's share capital

In the event of a new contribution of funds as the PIC's share capital, the above procedure must be repeated for the new contribution. After repeating the procedure, it must be added to the cost already declared. It is advisable to document the facts as a way of proving to the tax authorities the amount reported in the DIRPF.

Withdrawals of funds from the PIC in favor of the shareholder can be made by way of profit distribution or return of capital (reduction or liquidation of the investment):

• in the case of profit distributions, these are subject to mandatory monthly payment (carnê leão), at progressive rates of up to 27.5%;
• in the case of a return of capital, the rules for capital gains in foreign currency apply, where any positive difference between the total amount received and the corresponding acquisition cost is taxed at lower rates, from 15% to 22.5%. If only part of the capital returns to the shareholder, then the acquisition cost must be written off proportionally.

It's worth noting that, in any case, Brazilian taxation applies whether the funds are repatriated to Brazil or not. In other words, if the individual redeems investments from the PIC and transfers their value as profit or return on capital to a bank account abroad belonging to the individual, the IRPF taxable event occurs immediately, even if the funds are spent abroad. It is enough for the individual to have the funds transferred by the PIC available.

Comments on the impact of asset movements on the CBE

It is worth remembering the need to inform the Central Bank of the assets and rights held abroad by a person who is a tax resident in Brazil. This information must be passed on through the declaration of Brazilian capital abroad (CBE). The comments in our post on "How to declare assets abroad".

To report shares in a PIC, the current CBE Declarant's Manual contains some comments about the asset "Companies - Equity participation". Basically, for cases in which the PIC's capital participation is greater than 10%, some information of an accounting nature is requested on the base date (usually December 31). Information is also requested on the company's net profits abroad and the profit distributed in the base period. There is no need to report transactions involving the purchase or sale of assets belonging to the PIC. This is only required if the PIC invests in other companies, either directly or indirectly.

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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