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Investments abroad: How to make the taxation easier?

In the text “Taxation of earnings and incomes abroad”, we explain the struggles of the individual to directly keep financial investments abroad, knowing about the complexity of the brazilian taxations laws. To our clients that are tax residents in Brazil, the most used alternative to invest financial resources abroad, is to constitute a offshore society or private investment company, just for that purpose.

The objective of this text is to give orientations to those who have interest in investing abroad without the insecurities and discomfort of the complex procedures described in the article about how to measure and state the income. Besides a much simpler compliance, the current legislation also allows the deferral of Brazilian taxation on earnings and income, that’s the reason why this alternative is so used.

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

Private Investment Company (PIC) is the general term used to describe legal entities incorporated abroad with the objective to keep and manage financial investments. The individual entity, tax resident in Brazil, holds the position of shareholder of the PIC, entitled to receive profit distribution or return on the invested capital. It can also accumulate the function of Director of the PIC, in order to keep control of managing the society. Nothing prevents several people to be shareholder (for example all members of a family) and just few of them are directors (the parents or a trusted person).

The financial resources held by the PIC, are held in custody with a financial institution abroad. Some brazilian banks keep branches offshore for that purpose, but there are also foreigners banks that provides the same service. The decision on the application of resources is made by the directors, in the interest of PIC and its shareholders. There is also nothing to prevent this assignment from being delegated to specialized financial managers or consultants, whether they’re from the custodian financial institution or not. There are managers and consultants who provide their services from Brazil, even though the resources used are located abroad.

PIC and favored tax jurisdiction

A PIC is usually constituted in a offshore jurisdiction, also known as “tax haven”, or favored tax jurisdiction (JTF). The IRS keeps a list of JTF’s on the normative instruction SRF no. 1.037/2010. The main reasons to choose a JTF to incorporate a PIC instead of the onshore jurisdiction like Brazil, are the followings:

  • Zero or low income taxation: The PIC is not subjected, in its jurisdiction, to income taxation, either on their profits or for distributions to shareholders, or at least it is subject to a much more favorable taxation than the brazilian;
  • Legal stability: the legal system in these jurisdictions are often much more stable, ensuring that, in case of conflicts, contracts will be respected. In the case of a few U.K some UK dependencies (British Virgin Islands, for example), the last judicial instance is the Privy Council, UK court with centuries-old stable case law;
  • Political stability: As a relevant part of the local population of these jurisdictions is employed in tourism or in activities related to the provision of services related to PICs and other entities (lawyers, accountants, professionals in the financial sector), the political interest in abruptly changing local rules is much lower, than in Brazil;
  • Greater simplicity and flexibility: the JTF legislation tends to respect the autonomy of will more than in Brazil, allowing greater flexibility to elaborate contracts, wills and other legal acts or businesses. The bureaucracy for opening and closing down a PIC, for example, is substantially smaller than that for opening and closing down an equivalent legal entity in Brazil.

In short, the first advantage in maintaining financial investments applied through a PIC is the utilization of a neutral and stable jurisdiction to organize ownership and management of the investments. The second is the simplification of Brazilian tax and foreign exchange obligations, as we will see below.

How to state a PIC under the brazilian law

We already had the chance to write in this blog how to state assets abroad and, with greater depth, how to determine the acquisition cost of assets acquired in foreign currency. The concepts described there also apply to holding shares of a PIC abroad summarized below in the part that matters for filing the income tax statement (DIRPF):

  • The shares of a PIC must be classified in the DIRPF assets and rights file exactly like 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 PIC. Memory of the original value in foreign currency must be maintained;
  • The acquisition cost in foreign currency must be converted into reais (BRL) and informed in the DIRPF at the sales exchange rate disclosed by the Central Bank for the acquisition date, that is, the date when the financial applications in the PIC were made in order to make a capital contribution.
  • The origin of the funds used in the capital contribution must be tested. In summary: (i). if the funds were remitted from Brazil to abroad, the rule of origin in BRL should be used, or (ii). if the funds were obtained and maintained abroad, the rule of origin in foreign currency should be used.

Within the scope of DIRPF, as long as the financial resources remain invested in PIC, the informations on the cost of acquisition must be repeated. PIC’s gains, losses, incomes or expenses does not affect the amount informed by the shareholder in its DIRPF.

In the case of a new contribution of resources as PIC’s share capital, the above procedure must be repeated for the new contribution, and added to the cost already declared. It is recommended to document the facts that have occurred, as a way of proving to the tax authorities the amount informed in the DIRPF.

Withdrawals of resources from PIC in favor of the shareholder can be made as profit sharing or return on capital (reduction or liquidation of investment):

  • In the case of profit distributions, these are subjected to mandatory monthly payment (payment booklet), at progressive rates up to 27.5%;
  • in the case of return of capital, the rules of capital gains in foreign currency are applied, in which 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 is returned to the shareholder, a proportional write-off of the acquisition cost must be made.

It is worth mentioning that, in any case, Brazilian taxation applies whether the funds are repatriated to Brazil or not. That is to say, if the individual redeems investments from PIC and transfers their value as a profit or return on capital to a bank account abroad belonging to the individual, the taxable event of the IRPF occurs immediately, even if the resources are spent in outside. It is enough that the individual has availability of the resources transferred by PIC.

Comments on reflexes of asset movements at CBE

It is worth remembering that the assets and rights abroad owned by a tax resident in Brazil must be reported to the Central Bank through the declaration of Brazilian capital abroad (CBE). In this regard, the comments in our post on “How to declare assets abroad” are valid.

To inform the shares of a PIC, the CBE 2018 Declarant Manual contains some comments regarding the asset “Companies – Equity participation”. Basically, for cases in which the participation in the capital of PIC is greater than 10%, some information of an accounting nature is required on the base date (normally December 31). Information is also requested about the company’s net profits abroad and the profit distributed in the base period. The purchase and sale transactions of assets belonging to PIC do not need to be informed, only if PIC invests in other companies, directly or indirectly.
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Vinicius Tersi é advogado, especialista em Direito Tributário Internacional.

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Elaborado por 3MIND – Especialistas em marketing jurídico

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