Investing in Brazil: 3 suggestions to the IRS for non-resident investors

When I started this blog on November 1, 2018, my motivation was the indignation I felt at the difficulties imposed by the Brazilian state on people with an interest in investing in BrazilThey could organize themselves and maintain regular relations with the tax authorities. We have so many controls that the result is chaos and insecurity, against the interests of the country itself. 

Not all of these difficulties were directly linked to the work I do. The first studies I did of what had been published on the Internet about permanent departure showed that the problem was not taxation itself, but the unpleasant surprises encountered by those who wanted to keep their money invested after leaving Brazil.

The hope with the blog was to offer information to the public to generate an understanding of the cause of problems like this, and perhaps one day have enough say to collaborate on a bigger solution. In that sense, I was pleasantly surprised last week. 

A meeting was scheduled this morning with the Coordinator of Taxes on Income, Assets and Financial Operations of the Brazilian Federal Revenue Service, Fabio Cembranel, and Tax Auditor Alexandre Akio Lage Martins. Fabio Cembranel represented the Undersecretary for Taxation and Litigation at the Brazilian Federal Revenue Service, Sandro Serpa.

The aim was to discuss the three main points that, at least in my opinion, get in the way of non-residents wanting to invest in Brazil:

• the impossibility for Brazilians living abroad to regularly maintain their investments and financial investments in Brazil;

• the difficulties of Domiciled Abroad Accounts (CDE); and

• the higher cost, under the general regime, of maintaining non-resident investments on the stock exchange.

I haven't kept track of the number of people I've assisted with the above problems, but it's possible that it was at least a hundred people in 2020 alone. And I believe that these people deserve a solution to these problems of an institutional and non-partisan nature.

The purpose of this text is to explain what suggestions I have made to the IRS for each of the above problems. They will be formalized later today, and this text will be updated if and when I receive a response. Please, if you have any new suggestions or comments, we'd be happy to hear from you, either as a comment at the bottom of this page or by e-mail at contato@tersi.adv.br. 

A) The inability of Brazilians living abroad to regularly maintain their investments and financial investments in Brazil

In this text I describe in detail what I've called the "non-resident's dilemma", in which taxpayers can only comply with the IRS's demands if they close their financial investments in the country, due to regulatory failures on the part of the Central Bank and the National Monetary Council. Basically, the infralegal rules were not well thought out to cater for Brazilians who leave Brazil permanently.

The law allows non-resident investors to choose between two tax regimes: the general regime and the special regime.

The general regime is equivalent to the treatment of resident investors, and is the alternative that best suits the vast majority of investors, mainly Brazilians who have moved abroad in search of work and intend to continue keeping and investing in Brazil, sometimes out of preference, sometimes because of the desire to return one day. The rules of this regime are laid down in articles 78-80 of Law 8.981/1995Articles 85-87 of the IN RFB 1.585/2015.

The special regime is designed to grant tax benefits to large investors (sovereign wealth funds, pension funds, etc.) who decide to invest in the country, provided they do not reside in tax havens. This regime is provided for by articles 80-82 of Law 8.981/1995 e art. 34 of Law 9.532/1997Its tax treatment is governed by articles 88-99 of the same law. IN RFB 1.585/2015.

It is up to the National Monetary Council (CMN) to regulate the requirements to be met in order to enjoy this special regime. A CMN Resolution 4.373/2014 has this objective. It requires non-resident investors to keep a register with BACEN and CVM, operated by a financial institution, which will act as the investor's proxy in everything they decide to do (articles 2-4). The strictness of this regime means that market institutions charge dearly for this responsibility: I have already quoted R$ 3-5 thousand/month for a second-tier institution to maintain this register. These terms are certainly suitable for the large institutional investors for whom the rule is intended, and totally impossible to meet for smaller investors.

The main problem is that, despite the fact that the CMN must regulate the requirements for the special regime, Article 1 of CMN Resolution 4.373/2014 established the same rules for all investors, including those for whom the special regime is inappropriate. Basically, non-resident investors are obliged to register for any type of investment other than savings accounts or CDBs (and private pension plans, subject to different regulations). 

As a result, any individual who decides to live abroad will no longer be able to keep their investments on the stock exchange, or even in direct Treasury bonds or fixed-income investment funds, despite the fact that the law created the general regime for this purpose. For these investors, the cost of the 4.373 Investor registration is excessive, and it is impossible to validly opt for the general regime.

In practice, these investors are restricted to investments in savings accounts and CDBs, and even then with additional costs due to another regulation, on the Domiciled Abroad Account (CDE - see separate topic below). Most of them prefer not to inform paying sources (banks and brokers) that they are no longer resident, which means they are in an irregular situation with the IRS. It is worth noting that the general regime for financial investments does not imply paying more or less tax than the resident situation, so we are not talking about a loss to the Treasury, just an excessive compliance cost, which does not depend on a change in the law to be corrected.

A best solution would be to reform CMN Resolution 4.373 to make it restricted solely and exclusively to those wishing to take advantage of the tax benefits provided for in the articles 80-82 of Law 8.981/1995 e art. 34 of Law 9.532/1997according to articles 88-99 of IN RFB 1.585/2015.

For investors who want to remain in the general regime, an alternative with the lowest possible compliance costs needs to be offered, possibly regulated in its own Resolution or as a separate chapter in a new Resolution. In any case, the change does not depend on Congress to be implemented.

It's worth making an important comment here: correcting this problem doesn't depend directly on the Internal Revenue Service, but on the Central Bank or the Ministry of the Economy. The big difficulty is that the Central Bank directly supervises the banks in the interests of the public, but not directly the account holders. The biggest stakeholder in the non-resident investor's regular tax collection is the IRS. That's why I don't see any real solution to this problem without the IRS and the Central Bank working together.

B) The difficulties of Domiciled Abroad Accounts (CDE)

In this text deals specifically with special bank accounts for foreign residents. A Circular no. 3.691/2013Article 168-186 provides for excessive regulatory costs for the mere maintenance of current accounts by non-residents, the so-called CDEs. The current regulatory framework was created in the 1990s by Gustavo Franco, then president of the Central Bank, in response to money laundering and currency evasion scandals that resulted in the Banestado CPI. 

Despite the worthy objective, there was no adequate monitoring of the cost of compliance that the measure meant for those who wish to keep their financial resources in Brazil honestly, or at least a discussion about the adequacy of these controls to the technological and institutional evolution of the last 20 years.

Under the current rules, a Brazilian who ceases to be a tax resident in Brazil is obliged to notify the bank where he or she holds a current account of this change in status. The bank, in turn, is obliged to close the current bank accounts and, if it is interested, open a CDE for the client. The CDE can only be opened at branches authorized to handle foreign exchange. The Central Bank's regulations assume that every operation involving the inflow or outflow of funds into the CDE, even in Brazilian reais, is an operation involving the outflow or inflow of foreign currency into Brazil (money entering the CDE is an outflow of foreign currency, and money entering is an inflow of foreign currency). 

The bank is obliged to demand documentation from its client as if this cash inflow/outflow at the CDE were a foreign exchange transaction, and to send the data to the Central Bank every day. In other words, the receipt of any amount that exceeds R$ 10,000 in a single transaction (a civil servant's pension, rent accumulated over several months and paid in a single lump sum, compensation, etc.) must be reported immediately to the Central Bank. It's a very low amount, and redundant with Coaf's function.

As it stands, almost no bank offers CDE as a financial product to its clients, since: (i). there is a risk of reputational exposure for the bank in any breach of the Central Bank's rules, which are much stricter than normal; and (ii). the cost of compliance to meet the Central Bank's rules means that the bank makes a loss by offering CDE to its clients. To give you an idea, from what we found with the banks that currently offer CDE, Itaú Personnalité charges R$ 1,000/month in maintenance fees. Santander doesn't charge as much for maintenance, but demands R$ 800 per transaction over R$ 10,000. Bradesco, Safra, Banco do Brasil and Caixa Econômica Federal simply don't offer the account to their customers, except in exceptional situations (if the amounts invested are very high, for example). For citizens who have moved abroad in search of work and just want to keep a savings account, it's an impossible situation, and the person is simply in an irregular situation.

A possible solution that would perfectly serve the Central Bank's interests would be for the bank, as soon as it is notified by the client, to mark the account as being held by a non-resident, and only require additional documentation in specific cases defined by the regulations, in line with Coaf's actions. As the Central Bank already keeps track of the daily balances of current accounts through Cosif, it is perfectly possible to produce reliable statistical estimates. And CDE movements abroad would continue to be subject to the current exchange controls, so as to allow the client, if necessary, to present documentation on the lawful origin of the funds invested.

It is worth noting that the existing rule goes against what is intended by the PL 5.387/2019 (the "Foreign Exchange PL")The approval of the Foreign Exchange Bill will require a review of this regulatory framework. A change does not seem to require congressional approvalBut this point deserves a more in-depth analysis.

C) Higher cost, under the general regime, to maintain non-resident investments on the stock exchange

Even if the general regime were available to non-residents, there is still an extra regulatory cost compared to residents. According to art. 85, §§2-3 of IN 1,585/2015, non-resident investors who decide to invest in the stock exchange or in gold as a financial asset (on or off the stock exchange) under the general regime must have a legal representative appointed from among the institutions authorized by the Executive Branch to provide this service in order to collect income tax on the net gain from the transactions they make. In this case, the tax authorities may demand tax from the legal representative instead of the taxpayer.

Because of the tax liability, banks and brokerage houses would certainly charge a lot to do the calculation for their clients, discouraging investment in the stock market. Taxpayers who want to calculate and pay their own taxes don't have this option, because revenue code 5286 doesn't allow income tax to be paid by CPF, only by CNPJ.

The simplest solution to this problem would be to give the non-resident investor the option, not the obligation, to file an income tax return reporting only income from sources in the territory, without reporting assets and income abroad. In the United States, where something like this is possible, the advantage of filing a tax return is to avoid the 30% IRRF tax on gross income in exchange for taxing income at a progressive rate, taking advantage of the same deductions that are available to residents. In the Brazilian case, the procedure can serve to avoid the need for a legal representative to collect the tax. In this case, the IRS would need to create a specific collection code, so that the non-resident is not mistaken for a tax resident in Brazil.

As this is an accessory obligation, the change does not require consideration by CongressThe only thing left to do is reform the regulations. Article 79, §2 of Law 8.981/1995 authorizes the Executive Branch to "exclude certain categories of investors from the obligation" to set up a legal representative in Brazil. Paragraph 1 of the same article makes it possible to exclude the tax liability of the legal representative if this liability is attributed to a third party, which means that the Executive also has the power to regulate how this would be possible, in order to guarantee tax collection for the Treasury.

These were the suggestions I made after observing the experience of several clients. If you have any other suggestions, or would like to propose new content, please comment below, or send an e-mail to contato@tersi.adv.br.

Count me in!

A big hug.

Check out more posts on taxation and estate planning at information for residents abroad.

This text about investing in Brazil was prepared by Vinícius Tersi Advocacia, a law firm specializing in International Tax Consulting.