MP 1.171/2023: radical change to tax investments abroad

Yesterday, April 30, 2023, the Federal Government published the Provisional Measure no. 1.171/2023which took the market by surprise. With the clear aim of "taxing investments abroad" in order to increase revenue to compensate for the new income tax exemption band, this Provisional Measure established that, from January 1st, 2024For the purposes of this article, individuals who are tax residents in Brazil will be subject to income tax on income earned from financial investments, profits and dividends from controlled entities and assets and rights subject to trust abroad.

A the federal government's justification for the measure is to follow the recommendation of the Organization for Economic Cooperation and Development (OECD). Although there are jurisdictions that have rules of this type, it is clearly a new way of taxing investments abroad without a thorough assessment of how taxation should be carried out. We have already mentioned how investments abroad have today, in Brazil, a taxation of earnings and income abroad problematic.

What has been planned to tax investments abroad

Both income earned from financial investments such as those from foreign subsidiaries and respective capital gains will now be taxed separately from other income and gains in the income tax return. If Provisional Measure No. 1.171/2023 is converted into law as it stands, these incomes and gains will be subject to progressive taxation of:

• 0% for annual incomes of less than R$6,000.00;
• 15% for the portion of income above R$6,000.00 and below R$50,000.00; and
• 22,5% for income exceeding R$ 50,000.00.

In the case of financial investments abroad, taxation will take place when they are made available to the individual, i.e. when they are redeemed, amortized, sold, mature or liquidated.

In the case of controlled entities based in "tax haven" or subject to a privileged tax regime or that have a majority of passive income (e.g. the private investment companies), profits generated as of January 1, 2024 will be taxed at the end of each year based on the foreign subsidiary's annual balance sheet, and losses calculated after the effective date of this provisional measure and prior to the respective calculation of profits may be deducted. Profits and dividends from investee companies domiciled in Brazil may also be deducted.

It should be noted that the accumulated profits up to December 31, 2023, calculated according to the financial statements of off-shorewill only be taxed at the new rates when they are actually made available to the controlling individual.

This provisional measure, in the terms proposed yesterday, unfortunately, ends the benefit of the tax deferral granted to offshore structures for financial investments (as private investment companies), through which the profits earned by these offshore entities would only be taxed when they are effectively made available to the controlling Brazilian tax resident individual, making it possible to optimize the reinvestment of profits in the structure itself.

MP 1.171/2023: other relevant issues

Using "tax havens" for investments abroad could become less advantageous

Option to update investments to market value paying 10% tax

On the other hand, this provisional measure opened up the possibility of updating the market value of assets and rights held abroad (such as financial investments, real estate, vehicles, aircraft, vessels and holdings in controlled entities), by paying 10% on the capital gain (difference between the acquisition cost in the DIRPF and the market value on December 31, 2022), if the payment is made by November 30, 2023. For holdings in controlled entities, it would be possible to restate the value to market value on December 31, 2023 by paying IRPF 10% on the difference.

Revocation of 2 important exemptions

In addition, this provisional measure also repeals two exemptions that currently exist in relation to assets held abroad. The first is the exemption on exchange variation on investments abroad that originate in foreign currency. Revoking this exemption has an impact on taxing investments abroad, especially those who have earned income from working abroad and want to keep it protected from the devaluation of the real against the dollar and other currencies.

The second is the IRPF exemption on capital gain on the sale of assets acquired as a non-residentThis had already been proposed in Bill 2.337/2021 and was not approved by the Chamber of Deputies. Revoking this exemption greatly affects those who have built up assets abroad as non-residents and wish to transition to tax resident status in Brazil.

Taxation of trusts and private foundations abroad

It is also worth mentioning that this provisional measure establishes, for the first time, the taxation of trusts and private foundations offshoreincluding establishing that the distributions of the trust to the beneficiaries has the nature of a gratuitous transfer, consisting of a donation, if it occurred during the lifetime of the settlor of the trust (settlor) or transmission cause of deathif after his death.

Taxing investments abroad: a few comments

As the conversion of Provisional Measure No. 1.171/2023 into law depends on the approval of the National Congress, the content of this provisional measure may still be modified during its passage through Congress. In addition, under the terms of Article 62 of the Federal Constitution, provisional measures are effective for 60 days, extendable for a further 60 days only once, and must be considered within this period by Congress for conversion into law or rejection.

This is not the first time that the Federal Government has tried to tax income earned by individuals from controlled entities offshoreThe following can be cited Bill no. 2.337/2021 (nicknamed Income tax reform), o Bill no. 3.489/2021, a Provisional Measure no. 627/2013But none of them has had enough support to move forward in Congress so far. It is not yet certain, therefore, that this initiative to tax investments abroad will succeed.

Regardless, in addition to following the progress of this Provisional Measure in Congress, we will be analyzing the issue in greater detail over the next few days to see if there are any loopholes or interpretative biases that could be used in the taxpayer's favor.

We are at your disposal for further information.

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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