Offshore companies: legality, obligations and taxation

Individuals with tax residence in Brazil who opt for investments abroad through an Offshore company need to fulfill a series of obligations, including keeping the accounting updated and preparing the balance sheet.

Offshore Companies: What is it?

Offshore is usually a company located in favored taxation countries ("tax havens"), not required to hire labor or produce anything. The objective is to minimize or defer taxes payment and to keep confidential its owners identity, subject to recent international agreements signed by Brazil to exchange financial information with more than 100 countries.

Are Offshore companies legal?

Firstly, it is necessary to clarify that maintaining an Offshore company is a legal activity. Despite the numerous reports of the use of such companies as money laundering vehicles, concealment of assets or other unorthodox purposes, it is necessary to understand that these cases represent a minority before the group of people controlling an Offshore company.

Note that avoiding or reducing taxation on financial operations, for example, is only a consequence of an asset organization with objectives that go far beyond a simple decrease in income taxes, which, we agree, are not very significant when it comes to investments in abroad, but which are justified by their exchange rate protection considering the hostile environment of the Brazilian economy in the last decade.

Where are they located?

Offshore companies are typically located in favored taxation (the tax havens), but their assets (financial or not) may be in countries, such as in US and Switzerland.

What are the advantages of maintaining an Offshore company?

Due to their headquarters are domiciled in tax havens, there is no taxation on Offshore companies’ income in such countries, which makes it very attractive for a Brazilian resident to maintain investments outside Brazil through this company, since it is a non-resident taxpayer in Brazil and should not collect taxes from the Brazilian tax authorities on their income or capital gains.

Are Offshore companies withdrawals taxed in Brazil?

 

The natural person who opens an Offshore company will have his income taxed only when one withdraws resources from the company directly (eg: cash withdrawals) or indirectly (eg: company paying personal expenses). Eventually, depending on the tax haven, the tax is payable, but the tax rate is still small comparing to the Brazilian tax.

Read more about taxes and rates levying: Taxation on the withdrawal of funds by shareholders of offshore companies

What are the tax obligations that offshore companies’ shareholders are subject to in Brazil?

 

IRPF

Those who invest in offshore companies must disclose their assets from abroad in the Individual’s Income Tax Statement (IRPF), regardless of the value.

However, when the equity or the market value of the offshore company is greater than the equivalent to USD 100,000.00, the individual tax-domiciled in Brazil is also required to file the Brazilian Capitals Abroad (CBE) to the Central Bank of Brazil (Bacen), annual or quarterly, depending on the volume of assets (assets and rights).

Which financial statements and accounting controls should an offshore maintain?

Tax havens, as a rule, do not require accounting records of companies located there. However, tax residents in Brazil must maintain offshore accounting in accordance with IFRS standard, in case there is a requirement to present the Balance Sheet, whether from transaction, inspections, or even compliance issues.

In addition, the balance sheet enables a Brazilian resident shareholder to state, correctly, its position in the company's capital for IR purposes in Brazil, as well as to present to Bacen the data requested in the CBE, such as the total value of the shareholders' equity, total assets and liabilities, profit reserves, income for the year, and other required information.

We remind you that the CBE filing does not mean the requirement to collect any tax, since this is an informative statement for Central Bank statistical purposes. Nevertheless, we stress that its compliance and the provided information accuracy exempts the declarant from significant penalties that the Bacen may impose and reach BRL 250,000.00, per calendar year.

Advice on the opening and maintaining the offshore company is fundamental

The incorporation and maintenance of an offshore company may represent equity, succession and tax advantages. However, only an adequate planning is able to ensure the expected benefits from this action.

Having legal and accounting advice for opening an offshore company or preparing a balance sheet is the best way to achieve a tax burden decrease, by legal means.

Domingues e Pinho Contadores has a team specialized in accounting services and the preparation of offshore companies balance sheet and in all individuals’ tax obligations to meet the Brazilian agencies requirements.