Main practical aspects of Provisional Measure No. 1,171/2023

On April 30, 2023, the Federal Government published Provisional Measure (“MP”) No. 1,173/2023 which, among other aspects, aims to institute the automatic taxation of income tax on income earned by individuals resident in Brazil from financial investments, controlled entities, and trusts abroad.

According to article 2 of the MP, this income must be reported in the Annual Adjustment Declaration and separated from other income and capital gains, observing the following progressive table:

Total IncomeRate
Up to R$ 6,000.000% 
From R$ 6,000.001 to R$ 50,000.0015%
Above R$ 50,000.0022,5% 


The income from financial investments was defined as the remunerations produced by the investments, including premiums, commissions, premiums, discounts, profit sharing, dividends, gains from secondary market negotiations (including gains from the sale of shares of non-controlled entities on foreign stock exchanges), and also gains from exchange variations.

The MP presented a list of examples of what would be the financial investments subject to the taxation imposed by the MP, highlighting bank deposits, insurance policies, fixed income securities, credit card deposits, and retirement and pension funds.

In relation to quotas of investment funds and corporate interests, these will be considered financial investments if they do not fit into the concept of foreign controlled entity, explained below.


For the purposes of the MP, foreign controlled entities are companies and other entities, personified or not, including investment funds and foundations, in which the individual holds

a.         Rights that assure him/her preponderance in the corporate resolutions or power to elect or dismiss the majority of its managers; OR

b.         More than 50% of participation in the corporate capital, or equivalent, or in the rights to receive its profits, or to receive its assets in the hypothesis of its liquidation.

The provisions of item “a” apply to the individual who holds such rights directly, alone or together with other parties, including due to the existence of agreements and votes.

In regards to item “b”, the MP states that in order to certify the participation exceeding 50%, the participation of the individual himself/herself, herein referred to as the “tested person”, must be considered, added to the participation of other individuals and legal entities considered to be linked, such as, for example, the spouse or relative by blood or affinity, up to the third degree.

We emphasize that only foreign controlled entities that are located in a country or dependency with favored taxation or are beneficiaries of a privileged tax regime and/or that compute active income lower than 80% of the total income are subject to the taxation brought by the MP. In other words, controlled entities in all jurisdictions may be subject to the provisions of the MP, provided they are within these specific parameters.

Own active income is defined as the income obtained by the legal entity by means of the exploitation of its own economic activity, excluding the revenues deriving, exclusively, from royalties, interest, dividends, equity interests, among others set forth in item I, paragraph 5, article 4 of the MP.

The taxation will occur as follows:

1.         The profits of controlled entities abroad will be calculated individually in the annual balance sheet, which must be prepared in accordance with the accounting principles.

2.         On December 31 of each year, such profits will be taxed at up to 22.5% (see progressive table above) regardless of distribution and in proportion to the interest in the capital stock or equivalent.

3.         These profits will be stated as an additional acquisition cost in the Annual Adjustment Declaration, specifically in the assets and rights tab.

4.         As of the effective distribution, the profits will reduce such additional acquisition cost, without further taxation.

With regard to the balance sheet mentioned in item 1, the MP has not clarified whether the accounting principles to be observed are those of the jurisdiction of the foreign controlled entity or the principles adopted in Brazil, the use of the latter being recommended, at least until further notice.

It is worth mentioning that some deductions from such profits are allowed, such as, for example, losses ascertained by the foreign subsidiary.

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Under the terms of the MP, assets and rights subject matter of foreign trusts will be considered as remaining under the settlor’s ownership after the creation of the trust. Ownership will pass to the beneficiary when one of the following events occurs first:

a.         The trust distributes to such beneficiary the assets and rights; or

b.         Death of the settlor. 

The income and capital gains related to the trust’s assets and rights will be taxed by the progressive table from 0% to 22.5% mentioned above, in the person of its holder.

It is worth highlighting that the MP does not address nor recognizes the existence of irrevocable trusts as such.

Specifically with respect to the trustee, the latter was considered a trustee of the trust (article 9, item III of the MP)III of the MP), even if he/she is the holder of the assets and rights transferred to the trust. The provision of transfer of ownership of trust property contemplating only the settlor and beneficiary figures.

Considering that the trust is a contractually ruled instrument, it is necessary to emphasize that the MP did not make any reference to the possible instructions to be outlined by the settlor, such as, for example, the termination of the trust upon death without the transfer of ownership to the beneficiary.

The trust holder must inform the assets and rights transferred to the trust in his/her Annual Adjustment Declaration at the acquisition cost, i.e., the trust itself should not be declared, according to article 8 of the MP.

We highlight that if the trust has a foreign subsidiary, for practical purposes, the holder will be considered the owner of such company, and the respective rules for foreign subsidiaries described in the MP will apply.

In the event of a distribution by the trust to the beneficiary during the settlor’s lifetime, the distribution will have the legal nature of a gift. In case it results from the settlor’s death, it will be considered a causa mortis transfer. Such rule will only be valid, once again, as of 2024.

Updating of the Value of Assets and Rights Abroad

Individuals will be allowed to update the value of assets and rights abroad to the market value of December 31, 2022, upon payment of income tax at the rate of 10% on any positive difference. This tax must be paid by November 30, 2023.

According to article 10, §6, the adjustment option may be exercised jointly or separately for each asset or right held abroad by individuals.

Assets not subject to updating: (i) jewelry, precious metals, works of art, antiques of historical or archaeological value, pets or sports animals and genetic material for animal reproduction, subject to registration in general, even if in fiduciary alienation; (ii) assets or rights not declared in the annual adjustment statement for calendar year 2022; and (iii) assets or rights sold, disposed of, or liquidated prior to the date of formalization of the option to update the value.

To those interested in updating the value of assets and rights abroad, it is important to note that the MP raises several points that may violate the 1988 Federal Constitution, and it is possible to anticipate changes in its wording until it becomes effective.

Finally, it is worth highlighting that the MP revokes article 24, paragraph 6, I, of MP 2158-35/2001, which provides for income tax exemption on the disposal of assets acquired abroad as a non-resident.

The MP does not have automatic application and needs to be converted into law within 60 days (extended for another 60 days) to take effect as of 01/01/2024.

Our International Tax Planning team is at your disposal for further clarifications.

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