Taxation on the withdrawal of funds by shareholders of offshore companies

The maintenance of offshore companies as a vehicle to invest abroad grows every year in Brazil. Brazilian taxpayers (individuals) realized that investment as a direct holder of assets represents a high cost in taxes. In addition, considering the flexibility of the standards of the countries where these companies are headquartered, maintaining an offshore should serve as a form of succession planning and patrimonial protection.

Brazilian taxpayers still need to be adjusted to the fact that the funds contributed to an offshore company become the property of the company and the investor will have to fulfill some obligations before taking advantage of the invested capital.

The inflow of resources into an offshore company can be accomplished by paying capital or by granting a shareholder loan to the company. The fruition of resources will occur, particularly, through profits sharing (directly or indirectly), capital decrease, or reimbursement of the granted loan.

Profit Sharing

The profits sharing of a Brazilian company to its partners until the present moment are exempt from taxation to the income beneficiaries. However, such exemption does not cover the profits sharing of a company overseas, much less those in countries with favored taxation, which is more common when we talk about offshore companies.

Therefore, profits sharing, even indirectly (e.g. the offshore company paying the credit card owned by the shareholder) is a taxable event in Brazil. In the case of individuals, taxation takes place through the Compulsory Monthly Collection (Carnê-Leão).

The Carnê-Leão is an anticipation of the annual tax due by the taxpayer and must be monthly calculated based on the progressive income tax table in each calendar year. The tax must be paid by the last business day of the month following receiving the income and is mandatory.

Capital Decrease

When the retirement of funds occurs through capital decrease, there will be taxation when the origin of resources used to invest in the offshore company is income earned in Brazilian Reais. Generally, a capital decrease is a non-taxable event.

However, when the resource is income earned in Brazilian Reais, it is settled that the shareholder will be subject to pay tax on Capital Gain made in function of the exchange variation occurred between the average rate of contributions and the conversion rate of the amounts expressed in foreign currency to Brazilian Reais at the capital decrease. The calculation is in Brazilian Reais and the capital gain is taxed based on the progressive table of capital gains taxes fluctuating from 15% to 22.5%. It is noteworthy that the tax is levied on the exchange rate variation and not on the redemption amount.

The capital gain tax, in the same way as the Carnê-Leão, must be paid by the last business day of the month following the capital gain realization.

Repayment of granted loan

When the withdrawal of funds is due to the loan repayment, as above, there may be taxation on the exchange variation, as in the way mentioned in the capital decrease operations.

Records to support operations are required

It is important to stress that capital decrease operations require a corporate act prior to the retirement of funds in which the offshore company's directors decide to decrease the capital, as lending operations require contractual and foreign exchange register (when there is a remittance of funds from Brazil abroad) so that the loan can be repaid in whole or in part to the shareholder as well as to justify the nature of the exchange operation to be registered with the Central Bank of Brazil when there is repatriation of the money.

Monthly Accounting and Annual Financial Statement

It is clear that shareholders residing in Brazil must be rigorous on control over the operations of an offshore company, both for the financial issue and for compliance with tax obligations.

They should monthly perform such control in order to avoid any payment of any taxes (usually due up to the last business day of the month following the receipt of income or the realization of capital gains) after the maturity.

The monthly control optimizes and facilitates the preparation of an annual financial statement that, although not mandatory, is an essential document so that the shareholder can provide all the information required for Individual’s Income Tax and for Statement of Brazilian Capital Abroad purposes, as already highlighted in previous articles, available at the following links:

Offshore companies: legality, obligations and taxation

Offshore companies: monthly accounting follow-up avoids fines and penalties