Brazil's National Congress Passes New Rules For Certain Offshore Investments And Brazilian Investment Funds - Capital Gains Tax

The Chamber of Deputies and the Federal Senate approved Bill 4,173/2023, establishing new tax rules for investments held by individuals abroad, including so-called offshore companies and trusts.
This bill incorporates almost all of the provisions of Provisional Measure 1.184/2023, which introduces, among other things, the "come-cotas" regime for certain closed-end investment funds. Current law only provides for the "come-cotas" regime for open-end investment funds.
As the bill has already been approved by both chambers of Congress, the approved text will have the force of law after presidential sanction.

Investment Funds Established in Brazil

1. Periodic Taxation Regime ("Come-Cotas") - Closed-End Funds

General Rule: As of 1 January, 2024, income earned by closed-end investment funds will also be subject to the "come-cotas" periodic taxation regime in May and November, at a rate of either 15% ("long-term funds") or 20% ("short-term funds").
Taxation of "stock": The law provides for the taxation of "stock" (i.e. income earned by investment funds up to 31 December 2023). The taxpayer has the following options:
- Taxation at the rate of 15% to be paid in a single instalment on 31 May, 2024; or
- Taxation at the rate of 15%, paid in instalments over 24 months from 31 May, 2024 (instalments adjusted by SELIC); or
- "Anticipation of payment" at a rate of 8%, whereby income calculated up to 30 November, 2023 must be paid in 4 monthly installments (29 December, 2023, 31 January, 2024, 26 February, 2024 and 29 March, 2024) and income calculated between December 1, 2023 and 31 December, 2023 must be paid in cash in May 2024.

1. Exceptions: Bill 4.173/2023 provides some situations in which the "come-cotas" regime will not be applicable.

Non-resident investors:"Come-cotas" will not apply to non-resident investors who invest in the country under the terms of the regulations of the National Monetary Council (CMN), unless they are residents of, or domiciled in, a tax haven.
Specific regimes for FIPs, FIDCs, FIAs and ETFs: The "come-cotas" regime will not apply as long as the funds qualify as an investment entity (i.e., investment decisions are made by professional management, not directly by the quotaholders) and fulfill the following additional requirements:
- FIP and ETS: Portfolio allocation based on the regulations of the Securities and Exchange Commission (CVM)
- FIDC:at least 67% of its portfolio must be allocated to "credit rights"
- FIA: at least 67% of its portfolio must be allocated to "variable income" (e.g., shares, BDRs, CDA)
Funds of Funds:The "come-cotas" regime will not apply to funds that have at least 95% of their net assets invested in (i) FIP, FIA, ETF (variable income) or FIDC, which are classified as investment entities, or (ii) FII, FIAGRO, FIP-IE, FIP-PD&I.
Changes for FII and FIAGRO: Withholding tax exemption will only be granted to investors in cases where FII and FIAGRO have at least 100 quota holders (the current requirement is 50). Quota holders who jointly own 30% or more of the quotas, or economic interests in the FII and FIAGRO' quotas, will not be eligible for this exemption.

Changes to the Taxation of Investments Abroad (Offshores and Trusts)

1. Financial Applications Abroad

Uniformization of tax rates: The income tax rate (IRPF) will be set at 15% for any financial operations abroad (e.g. virtual assets, current accounts, investment fund shares, fixed and variable income securities, credit operations), without deductions or exemptions".
Offsetting losses by individuals: Individuals may offset losses on financial investments abroad (with proper documentation) with income earned through operations of the same nature, also in subsequent calendar years.
Exchange variation on the sale of foreign currency in kind: Exempt up to an annual limit of US$5,000. Above this limit, it will be subject to income tax (IRPF) at a 15% tax rate.

2. Taxation of Offshores (controlled by companies abroad)

Annual taxation of offshore profits (effective beginning 1 January, 2024): Automatic annual taxation of profits on 31 December by the IRPF, at a rate of 15%, of offshore companies that meet one of the two conditions mentioned below:

The company is domiciled in tax haven jurisdictions, or are subject to a privileged tax regime (e.g. Cayman Islands, British Virgin Islands, Panama, among others);
or
The company's "own active income" exceeds 60% of their total income. "Own active income" is income obtained directly by the controlled entity through own economic activity, excluding royalties, dividends, rents, capital gains on short-term assets, and income from financial investments.

New rule not applicable to offshore results through 2023: The new rule applies from 1 January 2024, so results calculated until 31 December 2023 remain subject to the deferral rule, and will only be taxed by the IRPF when the profit is distributed to the individual as dividends (or a "deemed distribution" occurs).
Establishment of an optional "tax transparency" regime: Individuals may choose (irrevocably) to declare the assets, rights and obligations held by them. The individual may also choose to declare the assets and rights held by the foreign subsidiary as if they were held directly by the individual.
Option to update the value of certain offshore assets to pay taxes at a lower rate: Individuals may choose to update the value of certain assets held abroad (i.e., financial investments, real estate, vehicles, aircraft, boats and shares in controlled companies) to the market value on 31 December 2023, paying 8% tax on the difference between the updated value and the acquisition cost. Income tax in this case must be paid by 31 May 2024.

3. Taxation of Trusts

Inclusion in the provisions of Provisional Measures 1.171/1.172: There have been no substantial changes to the text of the Provisional Measures previously presented by the Federal Government that were not converted into law by the National Congress.

Timing of taxation: Assets and rights will remain the property of the trust settlor until distribution of the trust to the beneficiary or death of the trust settlor, whichever occurs first. At that point, income tax will be levied on the income and capital gains relating to the assets and rights covered by the trust.

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This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.