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Brazilian Fixed Maturity Mutual Funds and Succession Planning

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By issuing the Private Letter Ruling No. 98 of June 21st, 2021 (“PLR 98/21”), the Brazilian Revenue Service brought some good news for taxpayers regarding donations of shares in fixed maturity mutual funds treated as inheritance advancement, as well as transfer of such shares by death. Apparently, PLR 98/21 analysis initially would be limited to donations treated as inheritance advancement, extending the PLR applicability to transfers at death is a welcome addition as it is only mentioned at the end of the ruling itself.

PLR 98/21 brought greater legal certainty by allowing shares in fixed maturity mutual funds to be donated as an inheritance advancement and to be transferred at death to the current owner’s heirs at cost basis, i.e., without imposing tax on the capital gain accrued at that point in time. Additionally, PLR 98/21 also provided that if the taxpayer elects the transfer to be made at fair market value, the taxpayer will be responsible for withholding the tax, not the fund manager or the intermediary institution.

PLR 98/21 concluded that there is no early redemption when donations of these shares are made as inheritance advancement, and emphasized that fixed maturity mutual funds do not allow redemptions of shares before the maturity date set in the fund documents. In this regard, PLR 98/21 references art.4 of CVM (Brazilian Securities and Exchange) Instruction 555, issued on December 17, 2014. Thus, PLR 98/21 clearly distances itself  from the PLR (COSIT) n. 383 of December 26, 2014. The latter analyzed the transfer at death of shares in a fixed-income open-end mutual fund which is a separate and distinct type of investment.

While addressing donations as inheritance advancement involving shares in fixed maturity mutual funds is made at market value, PLR 98/21 quoted the rule in art. 23, of Law 9,532, of December 10, 1997, which sets out that the donated asset can be transferred at fair market value or at the cost value included in the taxpayer’s individual tax return. More specifically, when the donation as inheritance advancement is made at fair market value, the donor will be the payor of the 15 percent income tax rate on the gain and such payment is due by the last business day of the subsequent month.

If the donation as inheritance advancement is at cost basis, no income tax will be due. I.e., gains will only be calculated at maturity, when an actual redemption is supposed to take place. In this case, the donor will be the taxpayer of the income tax on the gains. It follows that the recipient will have to inform the fund administrator that a donation as inheritance advancement was made, so that the administrator can take care of the paperwork.

In any case, whether at fair market value or at cost basis, the recipient will report the shares of the fixed maturity mutual fund in his annual income tax return and will include the amount based on which the transfer was made.

Finally, it is also worth noting that PLR 98/21 was correct to dismiss the general rule that required the tax on gains to be withheld by the fund manager or by the intermediary institution. I.e., PLR 98/21 recognized the applicability of the specific rules of art.16, II, of IN RFB no. 1.585 of 2015 and of art. 23, §2, II, of Law 9,532/97 which set out that in cases of donation as inheritance advancement, the donor is required to withhold the income tax when there is a gain.

PLR 98/21 reinforces that its ruling, as well as the aforementioned art. 23 of Law 9532/97, are also applicable to fixed maturity mutual fund shares that are transferred at death.

Written by Roberto P. Vasconcellos, senior tax consultant at Drummond Advisors