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Carf sustains tax-deficiency notice for income tax on profits of Trusts abroad

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The Administrative Tax Appeals Board (“Carf”), in a trial held on 11/09/21, kept most of a collection of Income Tax (“IR”) on profits from trusts of former congressman Eduardo Cunha, for R$ 3.76 million.

In the decision at issue, Carf suppressed the tax assessment regarding capital gains in the disposal of assets and rights the taxable events that occurred in the calendar year of 2010 due to statute of limitation. However, the duty to pay IR on capital gains obtained in the disposal of assets and rights in the years 2011, 2012, and 2013, was maintained.

Trust is a legal figure commonly used in the international scenario as a contractual instrument that allows for the organization of an estate planning, formalized by a “Trust Deed”, in which the Settlor revocably or irrevocably transfers the ownership of their assets and rights to a third party (“Trustee”), for the latter to manage it in a relationship of trust for the benefit of third parties (“Beneficiaries”).

Although there is no basis in the Brazilian legal system regarding the tax effects resulting from the receipt of assets and amounts from trusts abroad, such fact has been deemed irrelevant by the reporting judge on the case, since it was determined in the court records that the trusts were used for the sole purpose of promoting the protection of the respondent’s estate.

In this case, the foreign trusts kept checking accounts in banks abroad, and the holder-beneficiary of such accounts was the respondent himself, which, according to the tax authority, shows that such institutes were used as means to conceal the actual holder of the checking accounts abroad and wrongfully avoid IR in Brazil.

For the reporting judge, according to the documentation provided, it was evident that the respondent accumulated the roles of the settlor, administrator, and beneficiary of the trusts, and not only the role of the mere beneficiary that did not keep legally or economically entitlement for the dividends, income and capital gains obtained through the trusts, as the former congressman claimed.

The concealment of the income received by the individual resulted in an uncovered equity increase, giving rise to the taxation of the amounts corresponding to such increase.

Therefore, according to the decision, the respondent would be required to include the accounts held abroad in his Individual Income Tax return and pay taxes on the concealed income on his Adjusted Annual Income Tax Return, as well as the mandatory monthly payments of amounts received from sources abroad through the “monthly tax payment on extra personal income”, known as “carnê-leão” in Brazil..

CARF – Case 10166.730726/2016-15 – Appellate Decision no. 2401-010.022

Written by Flávia Sobral, Senior Tax Consultant at Drummond Advisors