By Adriana Lemos and Flavia Sobral
The federal court of Sao Paulo, with a judgment rendered on December 18, 2020, decided that the beneficiaries must pay Income Tax (“IRPF”) on income originating from Trust abroad.
A Trust is a legal concept widely used in an international context as a contractual instrument that allows the organization of succession plans, formalized through the “Trust Deed”, in which its founder (“Settlor”) transfers total or partial ownership of its assets and rights to a third party (“Trustee”) so that they can manage it in a relationship of trust, for the benefit of third parties (“Beneficiaries”).
Although not yet regulated by Brazilian law, either from the point of view of its reception in the eyes of civil law or its impact on taxes, its benefits can be enjoyed in the country with no restrictions.
However, due to the absence of a legal foundation, questions arise on the part of investors, beneficiaries, and even the tax administration itself with regards to the form of taxation of assets and goods received by Brazilian tax residents from Trusts.
The heart of the matter revolves around the incidence of the Tax on Transmission Cause Mortis and Donation (“ITCMD”) if it is considered as a receipt arising from a donation/succession, or on the IRPF, in the event that the tax authorities consider such payments as income-generating facts.
Origin of the Judgement
The origin of the judgment is an injunction that is pending at the 11th Federal Civil Court of São Paulo (Injunction No. 5017217-81.2020.4.03.6100), whose plaintiff, a beneficiary of a Trust in New Zealand, sought to obtain recognition exemption from the IRPF provided for in the 6th, XVI, of Law no. 7,713 of 1988, which establishes the Income Tax exemption on amounts received by donation.
As a justification, the plaintiff conveyed that he received donations from the Trust, which were declared to the Receita Federal do Brasil (“RFB”) and taxed by the ITCMD. He also conveyed that the amounts managed by the Trustee, also a Brazilian tax resident, were declared and subject to taxation by the IRPF.
In the sentence published in January 2021, Federal Judge Regilena Emy Fukui Bolognesi understood that despite the existence of a legal provision regarding the income tax exemption on assets acquired by donation or inheritance, the Trust institute is not typically provided for in Brazil, and it is not possible to state that the amounts received are classified as a donation. Additionally, she stressed that:
“In addition, under the terms of the Green Garden trust’s Termination and Appointment of Fiduciary Administrators and Guarantee, the earnings are referred to as payments, and although they are subject to the fund administrator’s discretion, they are not made as a matter of liberality, pursuant to article 538 of the Civil Code.”
According to the Magistrate, the triggering event for the IRPF is the receipt of income from abroad, whose hypothetical incidence is provided for in the legislation. Therefore, it denied the certainty and dismissed the request made.

The Federal Revenue’s position on the taxation of amounts received by Trusts
The Federal Revenue of Brazil (RFB), through the COSIT Consultation Solution nº 41, of March 31TH, 2020 (SC 41/2020), expressed a favorable incidence of the IRPF on amounts received by a tax resident in Brazil from Trust abroad.
In this specific case, the consultation was carried out by a beneficiary of a Trust located in the Bahamas, constituted by her husband. Due to the latter’s death, the beneficiary started to receive amounts from the Trust, as beneficiary/inheritor. The question raised by the Consultant before Federal Revenue was whether proceeds from the Trust are taxable by the IRPF or the ITCMD.
The Federal Revenue Service concluded that the amounts received from the Trust are subject to the IRPF, since it is income earned from a foreign source, which implies an equity increase. In the view of the Revenue, the amounts received from the Trust should be taxed monthly by means of monthly payments (with a progressive rate of up to 27.5%) and included in the annual adjustment statement as taxable income received from abroad.
However, it was declared that the part of the consultation that questions the incidence of the ITCMD is ineffective, as it is not a tax on competence.
It should be noted that the consultation solutions issued by COSIT have a binding effect within the scope of the RFB as of the date of its publication, and may mean that the agency will apply the same understanding to taxpayers in the same factual situation.
Financial Considerations
The Trust is an institute with extensive contractual flexibility and has proved to be an essential element for the protection of assets and efficient succession planning, in the legal, economic, and tax spheres.
However, specifically in the tax sphere, the lack of regulation of this contractual instrument in the Brazilian legal system has caused legal uncertainty for the beneficiaries with regard to the legal nature of the proceeds and the tax consequences.
Despite the recent judgments handed down by the Federal Justice of the State of São Paulo and by the Federal Revenue of Brazil signal the understanding by the incidence of the IRPF, the issue is still embryonic in Brazil and needs to be analyzed individually considering the specific characteristics of each Trust contract, in order to characterize the legal nature of the amounts received from the perspective of Brazilian legislation – donation/inheritance x ordinary income.
It should be noted that the Federal Supreme Court recently ruled that the ITCMD charge on inheritances and donations from abroad was unconstitutional (Extraordinary Appeal No. 851108). Thus, if the amounts received by beneficiaries of Trusts abroad are recognized under the legal an nature of donation/inheritance, there will not be an application of the incidence of ITCMD, at least until the enactment of a Complementary Law that authorizes state taxation.
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