Brazil: Private Client (2nd edition)

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Brazil.

This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-client-2nd-edition/

  1. Which factors bring an individual within the scope of tax on income and capital gains?

    An individual resident in Brazil is subject to tax on his worldwide income. On the other hand, a non-resident person is taxed by income tax in Brazil only on income earned or by capital gains derived from the selling of Brazilian assets, even if the transaction occurs between two non-residents.

    According to the Brazilian legislation, the concept of resident for tax purposes is defined as the natural person:

    I - who resides in Brazil on a permanent basis;

    II - who leaves the country to render services as employee of local authorities or agencies of the Brazilian Government located abroad;

    III - who enters in Brazil:

    a) with a permanent visa, on the date of arrival;

    b) with temporary visa:

    1. to work with an employment relationship;

    2. on the date you complete 184 days, consecutive or not, of permanence in Brazil, within a period up to 365 days;

    3. on the date of obtaining a permanent visa or employment relationship, if it occurs before completing 184 days, consecutive or not, of permanence in Brazil, within a period of up to 365 days;

    IV - a Brazilian citizen who acquired the status of non-resident in Brazil and returns to the country with intention to remain on the date of arrival;

    V - who is absent from Brazil on a temporary basis or withdraws permanently from the national territory without communicating to the Revenue Authority, during the first twelve consecutive months of absence.

    There is also a special regime for individuals resident in Brazil who intend to transfer their residence to a low tax jurisdiction or a country with preferred tax regime. In these cases, the transfer of residence only occurs if the individual satisfies one of the two conditions: (i) if the individuals remains at least 184 days, consecutive or not, within a period of up to 365 days there or his family lives there and most of his wealth is located in the jurisdiction indicated; or (ii) his worldwide income is taxed in that jurisdiction and income tax and capital gains tax are effective paid in that jurisdiction.

  2. What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?

    Income tax is levied on the income of taxpayers resident in Brazil. It has progressive rates according to the amount of income earned by taxpayers, so that those of lower income are not reached by taxation or by a lower tax rate.

    Annual income tax basis (R$)

    Tax rate (%)

    Portion to be deducted from Personal Income Tax  (R$)

    Up to R$22.847,76

    -

    -

    From  R$22.847,77 to R$33.919,80

    7,50%

     R$                          1.713,58

    From R$33.919,81 to R$45.012,60

    15,00%

     R$                          4.257,57

    From R$45.012,61 to R$55.976,16

    22,50%

     R$                          7.633,51

    Above R$55.976,16

    27,50%

     R$                        10.432,32

    Income tax is withheld when paid to individual by legal entities or is due up to the last business day of the following month when the income is paid by another individual.

    For non-residents the tax rate is flat at 15% for non low tax jurisdictions and at 25% for low tax jurisdictions and is due at the date the funds are paid. Please consider low tax jurisdictions countries that do not tax income or tax it at a rate lower than twenty percent (20%), or whose domestic legislation does not allow access to information related to the ownership or ownership of legal entities. Normative Instruction no. 1.037/2010 brings the list of jurisdictions considered in Brazil as ‘low tax’.

    Capital gains tax is levied on gains (i.e. positive difference between selling price and cost of acquisition) earned by residents and non-residents (if assets located in Brazil are the object of the transaction), in the following operations:

    I - alienation, in any way, of goods or rights or assignment or promise of assignment of rights to its acquisition, such as those made by purchase and sale, exchange, award, payment in kind, own promise, promise to buy and sell, assignment of rights or promise of assignment of rights and related contracts;

    II - transfer to heirs and legatees in succession, to grantees in donation, including in advancement of the forced estate, or assignment to ex-spouse or ex-cohabitant, in the dissolution of the conjugal society or stable union of goods and rights for a value greater than that declared in the Tax Return of the deceased, the donor, the former spouse or former cohabitant who transferred them.

    For the sale of assets and rights of any kind made from January 1, 2017, the capital gain perceived by the individual will be subject to the following tax rates:

    I - 15% on the portion of the gains not exceeding R$ 5,000,000.00;

    II - 17.5% on the portion of the gains that exceeds R$ 5,000,000.00 and does not exceed
    R$ 10,000,000.00;

    III - 20% on the portion of the gains that exceeds R$ 10,000,000.00 and does not exceed
    R$ 30,000,000.00; and

    IV - 22.5% on the portion of the gains that exceed R$ 30,000,000.00.

    In case of sale in parts of the same good or right, as from the second operation, provided that it is carried out until the end of the calendar year following the first operation, the calculation must add to the gains earned in previous transactions, for the purpose of determining the appropriate tax rate and total tax due.

    For non-residents in Brazil and residents on low tax jurisdictions, the withholding tax rate on capital gain is flat at 25%.

    In all the cases, income tax on capital gain is due up the last business day of the following month of payment and is proportional to each instalment in cases of a deferred payment.

    The fiscal year in Brazil begins on January 1st and ends on December 31st. Individuals resident in the country must file their tax return annually, until April 30th of the following calendar year. Therefore, income and capital gains earned during 2018 will be declared in the Tax Return of 2019.

  3. Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?

    In accordance with the Brazilian Income tax regulation (article 744), the income, capital gains and other payments, credited, delivered or paid, by source located in Brazil, to a non-resident (individual or legal entity), shall be subject to the withholding tax at the rate of 15%, when they do not have specific taxation foreseen in the Regulation Chapter.

    Nevertheless, no withholding tax is imposed on dividends distribution for a non-resident since 1996 (Law nº 9.249/95).

    Capital gains will be subject to WHT at a minimum rate of 15% up to 22,5% depending on the value of the gain in each transaction. Notice that taxation applies when the asset/share/property sold is located in Brazil even if the acquirer is a non-resident or is domiciled abroad (Law No. 10.833, of 2003, article 26).

    A 25% tax rate shall apply when the beneficiary is a resident in low tax jurisdictions.

    In all cases, the source of payments, individual or legal entity, resident or domiciled in the Country, or an agent through a proxy (when the acquirer, in a capital gain situation, is also a non-resident), is responsible for withholding and collecting income tax due by non-resident individuals or legal entity.

  4. Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?

    Brazil does not impose a wealth tax.

    Despite its original provision in the 1988 Brazilian Constitution (article 153, VII), the wealth tax has never been enacted in Brazil.

  5. Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?

    ITCMD is a state tax levied on the transfer of ownership of goods and rights upon gift or inheritance (for example, shares, securities, assets, money and real estate), which shall be collect considering the reference value of goods and rights which is determined by the State revenue authority (v.g. real state value, equity value of shares) or the effective value of the transaction if this is higher than the reference value.. ITCMD is usually paid by the recipient of the gift or inheritance (grantee or heir) and its tax rates vary according to the state legislation where the taxable event takes place, up to a maximum of 8% (for example, a 4% rate applies in the state of São Paulo).

    It is essential to consider in which State the donor and deceased involved with the donation or inheritance are domiciled. The tax must be calculated and declared by the taxpayer themselves, who are obliged to anticipate the payment without prior supervision by the administrative authority.

    It is also important to mention that if (a.) the donor is a non-resident in Brazil; or (b.) the goods inherited are located outside Brazil, even if the deceased is a resident in Brazil, it is possible to file a judicial proceeding to avoid the taxation. According to the Federal Constitution, a Federal Complementary Law should regulate the state's jurisdiction to levy ITCMD if the donor is a non-resident person, the inherited assets are located abroad or the deceased is a non-resident person. However, this law has not yet been enacted. Therefore, the matter is currently regulated according to local state law, which has caused controversy. Brazil's Federal Supreme Court has yet to decide on the constitutionality of such taxation (by each state's local law) considering the absence of the Federal Complementary Law.

  6. Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?

    ITCMD tax exemptions vary according to the state legislation where the taxable event takes place. For instance, São Paulo provides an exemption of up to BRL60,000 donations for each consecutive 12-month period. Besides that, if a person is married on total communion of goods, the spouse has the right of 50% of the total assets held by the couple (including inheritance, donations and income from professional activity), if one of them dies, without the levy of ITCMD since the remaining person already owns that amount. On the other hand, if a person is married on partial communion of goods, the spouse has the right of 50% of the assets earned during the reunion of the couple. Inheritance earned by each one of them, does not communicated to the other. Partial communion of goods is the default regime in force, which means that if a couple (effective married or just living together) prefers another regime, they have to sign premarital agreement or define it at the moment of marriage.

  7. Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?

    Donations to charity are also subject to ITCMD taxes although the entity is recognized as of public interest and is recognized as tax exempt. Donations only brings income tax incentive when the contributions are made directly to funds controlled by the Municipal, State and National Child and Adolescent Rights Councils, which must be proven by certificates issued by these Councils.

  8. How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?

    ITBI is a municipal tax due on charged transfers [acquisitions/disposals] of real estate and real estate rights and is generally paid by the buyer or receiver of the real estate or real estate right. The amount of the tax varies from city to city and is calculated based on the reference value of the goods in question, (if this value is higher than the effective value of the transaction; on the other hand if transaction’s value is higher than reference value, the tax basis will be the former one), which is determined by the municipality. The applicable rate can vary from 2% to 6%. In the city of São Paulo the tax rate is 3%.

    ITBI is not levied if both: (a.) the real estate is transferred to a company as a capital contribution or spin-off transaction and (b.) the main activity of the acquiring company does not involve real estate transactions. If the real estate property is transferred back to the previous owner (before the capital increase) ITBI will also not be levied.

    IPTU is a municipal tax charged annually over urban properties and its rates are progressive and vary in each city, up to a maximum of 15% over the property's market value. If the property is located on rural areas, ITR is levied to the federal government and its rates are progressive and vary up to a maximum of 20% over the property's market value. Differing from the IPTU, the ITR rates are set by considering not only the market value of the property, but also its level of use and productivity.

    ITBI and IPTU are due even if its owner is non-resident in Brazil since they are levied based only on ownership of real state. Please note that there some legal restrictions to non-residents own rural lands in Brazil.

  9. Are taxes other than those described above imposed on individuals and, if so, how do they apply?

    Taxes on the property of vehicles (IPVA), import of duties (II, PIS/COFINS, IPI and ICMS), financial transactions (IOF), social security contributions, and on services (ISS) might also be due by individuals according to specific transactions, but normally not in a regularly basis.

  10. Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?

    There is no special tax regime applicable for those who has just acquired the condition of tax resident in Brazil. The tax legislation has only one regime for residents in the country, independently of how long they have been living here. In other words, there is no difference in the tax legislation between resident and domiciled in Brazil.

  11. What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?

    Even though Brazil taxes its residents on world-wide income, income earned abroad by individuals that are resident in Brazil is only taxed when received by them. Therefore, if individual’s assets that pay periodic income are contributed to the capital of an offshore company, this income will only be taxed in Brazil when the offshore company distributes dividends to its shareholder. In a sense, this mechanism allows the deferral of Brazilian income tax to the moment when profits of the offshore are paid to the Brazilian resident. However, when profits are distributed, taxpayer resident in Brazil has to pay income tax in Brazil at tax rate that varies from 0% to 27,5%.

    Considering the tax deferral structure described, before establishing residence in Brazil, it is recommended to an individual to establish a company in a low tax jurisdiction (“offshore”) in order to set up the control of all the assets the individual have abroad, so that Brazilian income tax will be deferral on income derived from those resources.

  12. What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?

    By law, 50% of the estate must be allocated to all Forced Heirs [children, spouse (according to the marital regime – see question 13) and parents]. This forced heirship rule also considers all donations made in life by the deceased to each of the heirs, in order to determine if this proportion was respected. If there is no will [see question 16] 100% of the estate should be divided between the Forced Heirs.

    If any of the heirs dies before the deceased leaving issue alive, such issue shall take the share of the Forced Portion which his parent would otherwise have taken and if more than one in equal shares per stirpes.

    If, at the moment of death, the deceased has not an existing Forced Heir, the estate should be divided according to the will, if the deceased has left one, and 100% of the estate is free to be distributed or should be addressed to parents and siblings, if any. In last case, if there is no relative nor a will the estate should be addressed to the Municipality where they are located.

    In sum, if the deceased left no will, the allocation of estate will be in the following order:

    • First the estate is left for the spouse and descendants;
    • If there are no descendants, the goods will remain for the spouse and the parents;
    • If there are no parents, the spouse gets 100% of the estate;
    • If there is no spouse, the brothers will inherit;
    • If there are no brothers, the nephews will inherit;
    • And if there are no nephews, the uncles of the deceased will inherit; and finally
    • If there is no relative (including collaterals), after a vacancy of five years, the assets should be transferred to the municipality.

    Only in specific circumstances the deceased can disinherit one or all of the Forced Heirs.

  13. Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?

    The default matrimonial regime is the ‘partial segregation of assets’, where all the assets onerously acquired on the constancy of the marriage should be considered common assets and each spouse has 50% ownership of it. Other possible regimes, elected at the moment of marriage, are: (a.) ‘total segregation of assets’ where the assets are always particular to each spouse; and (b.) ‘total common assets’, where the assets are always considered common to both spouses.

    All assets that the deceased has earned by heritage or donation (gift assets) will never be considered common of the couple, unless they are married on the ‘total common assets regime’, but should be considered on the calculation of the estate to be distributed.

    According to each regime and type of asset, the succession will be affected in a way that the estate reflects only the fraction of the couple assets that individually belongs to the deceased.

  14. What factors cause the succession law of the jurisdiction to apply on the death of an individual?

    According to Brazilian law, as a general rule, the succession will be governed by the laws of the deceased's last domicile.

    As an exception to the rule, the Brazilian succession law will be applied if this is more beneficial to the Brazilian spouse and children.

    Regardless of applicable law, the probate process should take place in Brazil to all Brazilian assets.

    For all assets that a Brazilian resident has abroad, the probate process should take place on that jurisdiction.

  15. How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?

    As a general rule, the Brazilian jurisdiction respect the law of the deceased's last domicile.

    However, it is important to note a single material rule of Brazilian succession law that seeks to protect Brazilian nationals in case of international succession. The rule, now with a constitutional status, states that “the succession of non-residents with assets located in Brazil will be governed by Brazilian law for the benefit of the Brazilian spouse or children, whenever the law governing the probate of the deceased is not more favourable to them" (free translation).

    In Brazil, there is also the legal determination of exclusive jurisdiction of the Brazilian jurisdiction in matters of property situated in Brazil. Thus, no foreign sentence will be recognized and executed in Brazil, if it decides on the inventory and sharing of Brazilian assets.

  16. In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?

    The importance of a Will is to determine the part and distribution of the Free Heritage [respecting the 50% Forced Heritage] to any person that the deceased may want to benefit. A Will is also important to determine each asset should be distribute to each of the heirs, otherwise, without an agreement, the assets should be distributed equal on common shares.

    The Will can be a public or o private deed. The public one must be registered within a Public Notary.

    The private one must be read aloud by the testator and signed by at least three witnesses, without any erasure and blank space.

    All Wills must be written and made by individuals with full civil capacity.

    A foreigner that only have a real state property in Brazil not necessarily need a will to regulate the probate.

  17. How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?

    The executer of the estate may be appointed by the judge [if it is a judicial probate] ou by the heirs [if it is an administrative probate].

    He will be responsible to administrate the assets, pay debts and collect earnings up to the moment the assets are distributed by a judicial order or agreement of the heirs if a judicial probate process is not mandatory.

    The executer must be supervised by the judge [if it is a judicial probate] and by the heirs.

  18. Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?

    Although there is no specific structure for regulating private family wealth, the Brazilian law provides many options to hold, administer and regulate succession. The most common structure is the limited liability company (“sociedade limitada”) in which a person or a family set up governance rules to drive family decisions related to the assets, including succession planning by way of defining the company´s shareholding composition to each family member. It is very important that succession rules are thoroughly laid out in the company´s articles of association to avoid legal disputes among family members and third-parties, including tax authorities.

    Brazilian law does not have a specific regulation for trusts and foundations for succession purpose, not even how to tax the estate held abroad and administrated by similar vehicles [see Q&A 22].

  19. How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?

    The Brazilian limited liability company (‘sociedade limitada”) is incorporated through an Articles of Association, which must be duly registered before the local Trade of Commerce. The main characteristics of this corporate structure relates to the responsibility of each shareholder which is limited to the amount of their share capital provided that the capital is fully paid-in. The “sociedade limitada” incorporation does not require a high level of formality to be executed and ordinary KYC documents from the shareholders are required by the Trade of Commerce. Moreover, there is no need to have the financial statements published in official gazettes and statutory auditing is not required as well, except if the company exceeds specifics thresholds on total assets and gross revenue.

  20. What information is required to be made available to the public regarding such structures and the ultimate beneficial ownership or control of such structures or of private assets generally?

    In relation to the assets, mainly real estate properties, the law requires the disclosure of the deeds to the Trade of Commerce in order to transfer the real estate property from individuals to the ‘sociedade limitada’. It is worth mentioning that corporate documents filled before the Trade of Commerce as well as real estate deeds registered with Notaries are public and might be analysed by third-parties.

    In relation to the disclosure of the ultimate beneficial owner, following international trends, the Brazilian Revenue Services has recently enacted a new legislation requiring the disclosure of the UBO on entities which hold interests on Brazilian assets, such as real estate, bank accounts, equity participation in corporate holdings etc. Such UBOs include individuals and certain entities that, directly or indirectly, hold, control, or ‘significantly influence’ an entity, as well as individuals and certain entities on whose behalf a transaction is undertaken.

  21. How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    The limited liability company in Brazil is subject to a wide range of indirect and direct taxes which are of great complexity. A family business will likely to be entitled to pay taxes on the income derived from its assets, such as rents, interest and capital gains on the disposal of such assets. On the other hand, profit and dividend distribution are not subject to taxation. Payments to directors will be taxed by the social security and personal income taxes.

    As mentioned, there is no specific rule in Brazil to regulate trusts, foundations and other succession vehicles. As a consequence, Brazilian residents acting as settlors, founders, trustees, directors of foreign structures, although are not subject to taxation in Brazil at a first moment, might have to fulfil filling obligation with the Brazilian Central Bank [see Q&A 23].

  22. Are foreign trusts, private foundations etc recognised?

    According to the Brazilian Civil Law, private foundation is an organization established through an endowment dedicated to a public interest cause and as such is not a succession vehicle.

    As a civil law jurisdiction, Brazilian law does not have a specific regulation for trusts. On the other hand, a Brazilian resident might set up a trust in another jurisdiction provided that the originating funds come from legal sources. Consequently, the legal effect from the foreign trust must be respected by the Brazilian authorities.

  23. How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    There are no specific rules on taxation derived from trusts’ activities as such structure is not recognized in Brazil. However, considering that the Brazilian tax system is based on the worldwide income from its residents, all Brazilian tax residents must submit trust-related income to the local tax authorities.

    Furthermore, for regulatory purpose, individuals who owns values abroad over USD100,000 has to declare it annually to the Brazilian Central Bank. In this sense, the regulation requires that beneficiaries of trust also render this information.

  24. To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?

    In general, once the shareholders have set up the ‘sociedade limitada’ and transferred out the assets to the company, such assets might benefit from a relatively protection of creditors of a shareholder individually considered. However, in order to achieve such protection, the transfer should have been done before the debt is enforceable before a Court of Law.

  25. What provision can be made to hold and manage assets for minor children and grandchildren?

    In order to manage minor assets, in the absence of the parents, it is possible for the parents to nominate a guardian by will or any other authentic document. The guardian shall manage the assets of the minor, however any act of disposal affecting the assets must be authorized by the court which will require in the process, the consent of a public prosecutor.

  26. Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?

    Individuals may by authentic document declare their will of who should be their committee in case of incapacity. However, the appointment of committee is made only by court, considering: (1) the order of preference provided for by law (i.e. if there is a husband/spouse, he/she will be the committee, in their absence, it will be their ascendant, and in their absence, it will be their descendants; and if none of them can be, the judge will choose the committee); and (2) the best interest of the individual.

  27. What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?

    Under the Brazilian Civil Code (Law no. 10.406/2002), there are two main legal forms of organizations in the charity sector: associations and foundations.

    Whereas associations can have a wide range of purposes, are subject to less regulations (no public authorities oversight), and can be incorporated by at least two members, charitable foundations must be incorporated exclusively for the development of certain public activities and assets are required for its incorporation.

    Both may benefit from tax immunity or tax exemptions depending on their purpose, activity and the fulfilment of special rules and conditions required by special laws.

    There is no provision for trusts in the Brazilian legislation.

    Law no. 13.800/2019 was recently enacted to create and regulate endowment funds in order to encourage the investment in education, science, technology, research and innovation, culture, health, environment, social assistance, sport, public safety, human rights and other public interest objectives. This a very new structure that still need to be better developed.

  28. What important legislative changes do you anticipate so far as they affect your advice to private clients?

    Since Brazilian general election in 2018, several organizations (and the Congress itself) have been working for a wide tax reform in Brazil. Nevertheless, there is not yet convergence on the reform proposals.

    On the other hand, all the candidates that were running for president defended that dividends in Brazil must be taxed (there is no taxation on dividends in Brazil whatsoever until now).

    Additionally, there has been rumours that a wealth tax might be implemented in Brazil (in light of the constitutional provision as per Q&A 4). Yet, there is no foreseeable legislative changes regarding this subject.

    The tax deferral applicable to offshore companies held by individuals resident in Brazil (see Q&A no.11) might also be eliminate by the enactment of a new CFC rules (CFC rules already in place is not applicable to individuals, only legal entities).

    In the State level, every year there are rumours concerning the elevation of the tax rate applicable on tax on Gifts and estate (ITCMD) up to 8% (please see Q&A 5).

    In almost all these scenarios, the “new taxation” would be effective only in the subsequent calendar year.