On April 30^th, 2023 the Provisional Measure N. 1,117/23 (“MP 1171/23”) was issued, and besides the modification of the amounts of the monthly table of the Income Tax of Individuals (“IRPF”) mentioned in section 1^st of the Law n. 11,482/2007, and of the amounts of deduction provided by section 4^th of Law n. 9,250/1995, the MP 1171/23 also promoted important modifications in the federal tax legislation regarding the taxation of investments held outside Brazil by individuals that reside in Brazil, as follows:

• New general rule of taxation for income originated from capital invested abroad, by means of a specific table with progressive rates varying from 0% to 22.5%;
• Ruling of the taxation of financial investment abroad;
• Creation of an anti-deferral rule for revenue obtained by individuals through entities controlled abroad;
• New rules for the taxation of revenue obtained by means of trusts; and
• Option for the taxpayers to update the amount of their assets and rights abroad based on the market value on December 31st, 2022, with the taxation of the difference between the updated amount of such assets and rights and their respective acquisition costs (capital gain) by the fixed rate of 10%, as far as the tax is paid within the year 2023.

In general, the MP 1171/23 determines that as from January 1st, 2024, the Annual Income Tax Return (“DAA”) of the individual that resides in Brazil shall compute, separately from other income and capital gains, the income originated from capital invested abroad, as well as the income related to assets and rights that are the object of a trust, shall be taxed based on the following rates:

• 0% on the amount of the annual income that does not exceed R$ 6,000.00;
• 15% on the amount of the annual income that exceeds R$ 6,000.00 but does not surpass R$ 50,000.00; and
• 22,5% on the amount of the annual income that exceeds R$ 50,000.00.

The taxation as described above will be applicable in the following cases:

1) Taxation of financial investments abroad

The income originated from financial investments shall continue to be subject to the Individual Taxpayer Income Tax in the ascertainment period in which they have been effectively received by the individual, i.e., in the redemption, amortization, alienation, divestment, maturity or liquidation of the financial investments.

However, the taxation will not have any deduction in its calculation basis, and the specific progressive rates mentioned above (0% to 22.5%) shall apply in the ascertainment of the tax due in Brazil.

According to section 3 of the MP 1171/23, some examples of financial investments would be bank deposits, certificates of bank deposits, financial instruments, insurance policies, certificates of investment, capital redemption operations, credit card deposits, retirement or pension funds, fixed and variable income securities, derivative contracts, among others.

Quotas of investment funds and equity share shall only be treated as financial investment in case it is not possible to characterize them as entities controlled abroad (as per item 2 below).

Another important modification is the revocation of section 24, par. 5 of the Provisory Act n. 2,158-35/01. In view of that, it is now taxable the exchange variation expressed in the capital gain originated from the alienation of assets, rights or financial investments originally made in foreign currency.

2) Taxation of controlled entities abroad

As to the entities headquartered abroad, controlled by individuals that reside in Brazil, whether such entities are incorporated or not, including investment funds and foundations, the MP 1171/23 provides that:

• The profits ascertained until December 31st, 2023 shall continue to be submitted to taxation whenever they are effectively available for the individual that reside in Brazil;

• The profits ascertained as from January 1st, 2024 shall be taxed on December 31st of each year, regardless of its effective distribution.

The taxation shall occur proportionally to the equity held by the individual in the corporate capital, or equivalent, of the controlled entity located abroad in which the following requirements are met:

i. Corporate control:

The individual holds, directly or indirectly, individually or jointly with other parties, including by means of voting agreements, the rights that ensure his/her preponderance in the corporate deliberations or the power to elect or dismiss the majority of the company’s officers; or

ii. Economic control:

The individual holds, directly or indirectly, individually or jointly with other related parties, more than 50% of participation in the corporate capital, or its equivalent, or more than 50% of the rights to receive dividends or to receive the company’s assets in case of liquidation.

iii. Location of the controlled entity:

The controlled entity is located in a country or dependency with favorable tax treatment or submitted to a privileged tax regime; or

iv. Predominantly passive income

The controlled entity ascertains its own active income at a rate of less than 80% of its total income, in the case where own active income is considered to be “the income obtained directly by the incorporated entity by means of the exploitation of its own economic activity, excluded the revenue originated from royalties, interests, dividends, equity interests, leases, financial investments, financial intermediation and capital gain, except in the alienation of equity interest or permanent assets acquired more than two years before.

The anti-avoidance rule, however, shall not apply to profits ascertained as from January 1st, 2024 by the foreign entities controlled by individuals that reside in Brazil that do not meet the requirements of items iii and iv above, and shall continue to be submitted to the Brazilian taxation only in the moment of their effective to the individuals that reside in the country.

3) Taxation of income originated from assets and rights that are the object of a trust abroad

According to MP 1171/23, the income and capital gain obtained as from January 1st, 2024 shall be: (i) considered received by the “holder” of such assets and rights in the respective date; and (ii) submitted to the individual income tax (IRPF) according to the rules applicable to the “holder”.

In order to define who would be the “holder” of such assets and rights object of a trust, the MP 1171/23 established the following in regard of the moment of the tranfer for the purpose of IRPF incidence in Brasil: (i) the assests and rights remain held by the settlor after the creation of the trust; e (ii) the assets and rights are only transferred to the beneficiary in the moment of (a) the distribution by the trust to the beneficiary, or (b) the death of the settlor, whichever comes first.

Therefore, under the terms of MP 1171/23, as from January 1st, 2024, the distribution by the trust to the beneficiary will have the legal nature of a free of charge transfer by the settlor to the beneficiary, thus characterizing a donation, if occurred while the settlor is alive, or a causa mortis transmission in case it derives from the death of the settlor.

The MP 1171/23 also provides that as from January 1st, 2024, the assets and rights object of a trust, regardless of their acquisition date, shall be declared directly by the “holder” in the DAA (IRPF), by the acquisition cost in relation to the base date of December 31st, 2023.

Please see below a summarization of the situations described above for illustrative purposes:

Finally, the MP 1171/23 also created the option for the individual that reside in Brazil to update the amount of his/her assets and rights abroad by market value on December 31st, 2022, taxing the difference between the updated amount of such assets and their respective acquisition cost (capital gain) by the fixed rate of 10%, as far as the tax is paid until November 30th, 2023.

It is not possible to update jewels, precious stones or metals, works of art, antiques of historical or archeological value, pets or sports animals, and genetic material for animal reproduction, subject to registration in general, even though they are under fiduciary alienation.

Especially in the case of controlled entities located abroad, subject or not to the automatic taxation regime (item 2 above), the individual that have opted for the update up to December 31st, 2022, may opt, separately, for the update of the market value for the period that goes from January 1st, 2023 to December 31st, 2023, also with the payment of the IRPF in the fixed rate of 10%.

In order to enable a better understanding of the investors, follows below a comparative table between the current legislation and the modifications brought by MP 1171/23.

The members of Araújo e Policastro Tax Team are at your disposal to provide further orientation and to clarify possible doubts in relation to the modifications established by MP 1171/23 in the tax legislation.