Investing across borders: how the new tax rules impact taxpayers holding assets abroad

 

Investors should plan ahead for new tax scenario

 

By Rosana Villardi

 

Tax residents in Brazil with investments in foreign assets must be mindful and take strategic action in the face of the recent changes in tax regulations brought about by Law No. 14,754/2023, in force since January 2024.

These amendments significantly affect income taxation, requiring careful analysis and sound decisions in investment structuring. In this evolving tax landscape, specialized consultancy becomes indispensable, providing pathways to tax efficiency and ensuring compliance with the new legal requirements, all tailored to individual financial goals.

 

• Further reading: Law amends tax rules on investments abroad and exclusive funds in Brazil

 

Below are the main aspects of the new legislation:

 

Income tax on personal income

Previously subject to mandatory monthly income tax payment ("carnê-leão"), earnings derived from capital investments abroad, in the form of financial investments and profits and dividends from offshore entities, are now subject to the Individual Income Tax and must be reported using the Annual Tax Return (DAA).

Taxpayers must itemize this foreign-sourced income in their DAAs, which is taxed at a fixed 15% rate, with no deductions from the taxable amount allowed.

 

Capital gains on foreign assets

Capital gains arising from the sale, write-off or liquidation of non-financial assets and rights held overseas continue to be taxed at progressive rates of 15%, 17.5%, 20%, and 22.5%.

 

Exchange rate fluctuation on overseas deposits and cash holdings

The legislation addresses the tax implications of converting foreign currencies to the national currency. 

Notably, the exchange rate fluctuations on non-interest-bearing funds held in foreign checking accounts or transacted using international debit/credit cards managed by accredited financial institutions, are exempt from Individual Income Tax (IRPF). This means that any gains resulting from changes in the value of the dollar will not be taxed.

Conversely, for cash holdings, the exchange rate gains are tax-exempt only up to a conversion limit of USD 5,000. Any profit exceeding this threshold is fully subject to IRPF. 

 

Controlled foreign companies - offshores

An anti-deferral rule has been implemented for taxing controlled foreign companies. As of 2024, the profits of these entities are now subject to a fixed rate of 15%, even if they are not distributed.

For earnings retained up to December 31, 2023, taxes are now levied upon distribution, on a cash basis. 

Taxpayers also have the choice to irrevocably declare the assets of a controlled entity as personal assets. This approach subjects these assets to taxation only when income is effectively received or gains are realized.

 

Foreign trusts

The recent legislation has extended its reach to include foreign trusts, which were previously not recognized within the Brazilian legal framework.

The Estate and Gift Tax (ITCMD) will be levied on the transfer of assets from trusts, either due to the distribution of profits to its beneficiaries or the death of the settlor. Additionally, a 15% annual tax rate will be applied to the income generated by these trusts, regardless of whether the funds remain overseas.

Income and capital gains will be subject to income tax (IR) at the time of their realization. Moreover, any changes in the ownership of trust assets will be treated as either a donation or inheritance, and thus will be subject to the ITCMD.

 

Valuation adjustment for foreign assets and rights

Another noteworthy aspect of the law is the provision for Brazilian residents to adjust the foreign assets and rights reported in their Annual Income Tax Returns (DAA) to their market value as of December 31, 2023. The resulting difference from the original acquisition cost will be subject to IRPF at a final rate of 8%. In this case, the corresponding tax must be paid by May 31, 2024.

 

Tailored Tax Support

The recent shifts in tax regulations necessitate a strategic response from investors, underscoring the importance of obtaining professional guidance to navigate these changes effectively and safeguard their financial interests. 

Domingues e Pinho Contadores boasts a team of experts adept at providing specialized tax consulting services for investors. Our support guarantees compliance with the latest legislative requirements. For tailored tax advice, please reach out to us: dpc@dpc.com.br.