On September 22, 2015, the Brazilian federal government proposed
a new rule—Medida Provisória n. 692/2015
("MP 692")—increasing the income tax rates
applicable to capital gains realized by certain taxpayers from a
transfer or sale of assets or rights. MP 692 will become effective
on January 1, 2016, if duly adopted as a federal law by the
Brazilian Congress.
Currently, capital gains are taxed at a rate of 15 percent for
Brazilian individuals and foreign legal entities that are not
subject to a specific tax regime. The proposed capital gains tax
rates under MP 692 are as follows:
- 15 percent on capital gains up to R$1,000,000;
- 20 percent on capital gains exceeding R$1,000,000 and up to R$5,000,000;
- 25 percent on capital gains exceeding R$5,000,000 and up to R$20,000,000; and
- 30 percent on capital gains exceeding R$20,000,000.
Based on the U.S. Dollar/Brazilian Real exchange rate on September 29, 2015 (US$1.00 = R$4.05), the approximate thresholds above in U.S. Dollars would be as follows: (a) 15 percent tax rate would apply to capital gains of up to US$246,193; (b) 20 percent tax rate would apply to capital gains of up to US$1,234,567; (c) 25 percent tax rate would apply to capital gains of up to US$4,938,271; and (d) 30 percent tax rate would apply to capital gains exceeding US$4,938,271.
MP 692 expressly applies only to individuals residing in Brazil
and to Brazilian legal entities not taxed based on actual profits
(which is mandatory for most companies whose total revenues, in the
previous calendar year, exceeded R$78 million per year), presumed
profits (generally applicable to companies whose revenues fall
short of the threshold for the actual profits regime but are not
eligible for the simplified tax regime applicable to small
businesses), or assessed profits. However, Brazilian law provides
that foreign legal entities are subject to the same capital gains
tax rates as individual Brazilian residents, unless a specific rule
otherwise applies to such foreign entity. As a result, absent
further clarification, Brazilian tax authorities may apply these
new increased capital gains rates to non-Brazilian legal entities
selling Brazilian assets or transferring Brazilian rights, which
are not otherwise subject to another specific tax regime.
At this point, it is unclear what impact, if any, MP 692 will have
on a nonresident legal entity that is subject to specific
preexisting tax rules, such as an entity domiciled in a
jurisdiction defined as a tax haven by Brazilian authorities. A
foreign legal entity resident in a tax haven jurisdiction currently
pays 25 percent income tax on capital gains in Brazil. It is also
unclear if a specific tax regime applicable to a nonresident
selling over a stock exchange, or resident in a country with an
existing tax treaty with Brazil, will be affected by MP 692.
However, it is our understanding that MP 692 should not change the
capital gains tax treatment of an investment made by a nonresident
investor in a Brazilian private equity fund (Fundo de
Investimento em Participação), which is a common
structure used by foreign private equity investors when making
investments in Brazil.
In addition to raising the capital gains tax rate, MP 692 provides
that where a single asset is sold in multiple transactions, any
capital gains realized in the first transaction are added to
capital gains realized in all subsequent related transactions for
determining the applicable tax rate for the cumulative gain (with
appropriate deductions for taxes paid in prior transactions). MP
692 further establishes that for the purpose of determining the
applicable capital gains tax rate, shares or quotas issued by a
legal entity will be considered part of a single asset or
transaction, in the event of a transfer or sale in a series of
related transactions. The proposed rule creates a mechanism that
prevents a taxpayer from circumventing the application of the new
capital gains tax rates by characterizing the transaction as a
number of separate smaller transfers or sales to take advantage of
the graduated rates.
In addition, it should be noted that MP 692 may apply to a
transaction consummated before the effective date of the increased
tax rates but where any payments are made after January 1, 2016.
Depending on the payment structure adopted by parties in a
particular transaction, the Brazilian tax authorities may determine
that a payment which was subject to a condition subsequent (such as
an earn-out payment) constitutes a new taxable event, separate from
the original transaction, if it occurs after January 1, 2016, and
is therefore subject to the new tax rates established by MP
692.
MP 692 is only one of several measures under consideration by the
Brazilian government aimed at shoring up Brazilian public finances.
Additional measures are expected to be announced in the coming
weeks.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
