Provisional Measure No. 1,171/2023: Innovations to the tax regime for assets abroad held by individuals residing in Brazil

On April 30, 2023, the Brazilian Federal Government published Provisional Measure (“MP”) No. 1.173/2023 providing for a new tax regime for income received abroad. Among other aspects, the new rule aims to institute the automatic taxation of income tax on income earned by individuals with residence 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 Tax Return 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$ 50,000.0022,50%

Offshore entities: Members of offshores will be highly impacted by the new rule. The main impact is the end of deferral, a tax instrument widely used by people who invest in offshore entities. The members of these offshore companies were only taxed when the resources of these companies were distributed. With the new MP, the profits and capital gain obtained abroad will be taxed regardless of distribution and in proportion to the interest held by the members in the offshores capital stock or equivalent.

Trusts: Foreign trusts will also be impacted by the rule. Assets and rights under foreign trusts will be considered as remaining under the settlor’s ownership even after the creation of the trust for purposes of taxation. Thus, the income and capital gains relating to the assets and rights held by the trust will be taxed as if they were under the settlor’s titularity.

The MP does not have automatic application and needs to be approved by the Brazilian National Congress and converted into law within 60 days (extended for another 60 days) to take effect as of January 2024. If approved, it is expected that the text will undergo changes.

For more information about the MP No. 1,171/2023, please check our website: https://drummondadvisors.com/en/2023/05/03/main-practical-aspects-of-provisional-measure-no-1171-2023/

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