Yes but the regulation excessively restricts the non-resident investor’s freedom.
We often receive questions about how to maintain regular financial investments after making the tax outflow, especially when the intention is not to redeem them and keep them invested in Brazil.
The Federal Revenue and the Central Bank, unfortunately, do not collaborate on this issue, which makes the presenting task a simple and easy solution quite difficult. We recognize that this is far from ideal and we sincerely want that to be the change in our legislation.
To fully understand this lack of collaboration affects practice, it helps to keep in mind that we have two different problems:
- From a tax point view, the IRS respects that each taxpayer, after submitting the final exit declaration, communicates the paying sources (banks and brokers) of their tax exit so that they retain the income tax with the non-resident’s code. Despite establishing the obligation, the tax legislation does not provide for a fine for failure to notify the tax source to the paying sources.
If the taxpayer fails to comply with the obligation to report, the paying source will continue to report annually to the Federal Revenue the gains and income earned with the tax resident code. Due to the Revenue positioning in relation to the issue, the practical consequence is that the paying source can only be held responsible by the Federal Revenue for the payments made after being communicated, even if they were made incorrectly. Accordingly, we understand that the letter of communication to the paying source serves as proof of the taxpayer’s exemption from liability for errors by the paying source after the letter was delivered.
A second consequence is that the annual adjustment declaration is mandatory for tax residents in Brazil who have earned income beyond a certain level (currently, R$ 40 thousand per year). If the paying sources continue to report income as a resident, and such income exceeds this threshold, the taxpayer registration with the CPF may change from “regular” to “pending regularization”, and will remain so until the tax return is filed income.
We have already had the experience of CPF’s regularizing described without jeopardizing the tax exit but the procedure requires personal attendance at a Federal Revenue’s specific unit, with the proof presentation of residence abroad and communication to the paying sources, even if out of season.
It’s also worth adding that, under the general regime, the non-resident’s financial investments are subject to the same taxation as the tax resident in Brazil. Thus, with a few exceptions, the tax outflow is neutral in terms of the amount of tax due on the income from financial investments held in Brazil. At least for this type of non-resident income, the tax authorities are not being directly harmed.
- From an exchange point of view, however, the issue is more complex. Although the tax legislation provides for a general regime and a special regime for non-resident investors, the current Central Bank’s regulation are quite restrictive. As a rule, non-residents can’t invest in savings, CDBs and private pension only. For the investments in the financial and capital markets, the investor must comply of Resolution no. 4.373/2014 (register as “Investor 4.373”), which correspond to the special regime of tax regulation.
Although the special regime has a more favorable taxation than that of the resident, with several exemptions, it’s a regime aimed at institutional investors, not individuals. In it, a financial institution becomes a proxy for the investor, and charges fees for maintaining the compliance require by the Central Bank and the Securities and Exchange Commission (CVM – Comissão de Valores Imobiliários). As far as we know, the maintenance is currently in the range of R$ 3-5 thousand per month, which is prohibitive for the most people who decide to live in another country without redeeming their financial investments in Brazil.
Foreign exchange legislation is primarily concerned with the supervision of the financial and foreign exchange markets, so that those most affected by regulation are banks and brokers, not customers. Thus, what we have observed is that banks and brokers do not usually have adequate information to offer their clients who are no longer tax residents in Brazil. nor a clear policy on how to proceed. From our experience, we have already heard of:
- institutions that preferred that their clients did not formalize having informed them of the fact that they had left the country, under penalty of terminating the relationship; and
- institutions that made it possible to maintain the investments made as a resident but that do not allow new applications to be made.
In both cases, we believe that these institutions continue to report their income to the Federal Revenue under the tax resident code in Brazil, which refers to the problems that we have already described in relation to the CPF. These situations are irregular, and unfairly punish those who want to organize their business properly.
It is our opinion that exchange rate regulation is the main responsible for this scenario. At this point, the current rules act against the objective of facilitating the access of small investors to the financial and capital markets, and hinder the Brazilian market development. It would be advisable that, before restricting freedoms, the Central Bank, the CVM and the Federal Revenue should communicate with each other, each within the scope of its competence, and listen to the participants in the financial and capital markets on the issue.
I also recommend reading the text with guidelines on the theme “Declaration of Definitive Departure from the Country in 2019: what you should know”, in which the differences between the general and the special regime are dealt with in greater detail.
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