Brazil: Joint Committee approves Report on Provisional Measure 1.172/23 including taxation of foreign investments of Brazilian individuals


In brief

On August 8, 2023, the Report of the Provisional Measure No 1.172 of 2023 (“MP”), that provides new rules for the minimum wage in Brazil, was presented and approved by the Join Committee in charge of this MP at the Brazilian Congress.

The Report incorporated the main changes on the taxation rules for individuals investing abroad, previously provided in Provisional Measure 1.171/23, which regulates the taxation of earnings by Brazilian individuals in financial investments, controlled entities and trusts abroad.

MP 1.172/23 will proceed to the Chamber of Deputies and to Federal Senate for analysis and it must be approved by August 28, 2023. The deadline for MP 1.171/23 to be converted into law is August 27, 2023.

We highlight below the main changes in relation to the original text of MP 1.171/23, among the proposed changes, which may impact individuals who are tax residents in Brazil investing abroad, if approved.

Financial Investments abroad

The report presented in MP 1.172/23 brought the following changes regarding financial investments:

  • Inclusion of the foreign exchange exemption on non-interest-bearing checking account deposits and non-interest-bearing debit and credit card deposits;
  • Inclusion of cryptoassets as a financial asset;
  • Inclusion of digital portfolios in the definition of financial assets;
  • Inclusion of the possibility of using the foreign tax credit paid abroad on taxable income from financial investments;
  • With regard to insurance policies, the new draft has further detailed the asset to clarify that these are “insurance policies whose principal and yield are redeemable by the insured or his beneficiaries”
  • Inclusion of a new rule for the taxation of foreign currency in cash, previously taxed as capital gain. Now, the exchange variation of foreign currency in cash will not be subject to taxation up to the limit of USD 5,000.00, exceeding this limit will be subject to a rate of up to 22,5%.

Controlled Foreign Entities

In the original text of MP 1.171/23, it provides the automatic annual taxation of profits earned by foreign controlled entities owned by individuals (anti-deferral rule). That is, as of January 1, 2024, the profits calculated based on the annual balance sheet of the controlled entity will be taxed on December 31 of each year, under progressive rates of up to 22,5%.

The original MP 1.171/23 also defines as “controlled entity” the company and other entities (whether personified or not) that the individual holds directly or indirectly, (i) alone or jointly with other parties, the majority in the corporate resolution or the power to elect or dismiss the majority of its managers or (ii) alone or jointly with related parties, more than 50% of the share capital, or equivalent, or in the rights to receive its profits or receive its assets in the event of its liquidation.

The changes proposed in MP 1.172/23 regarding controlled entities can be summarized as follows:

  • Inclusion of investment funds and other entities with classes of quotas and shares with segregated assets in the concept of foreign controlled entity;
  • Reduction of the minimum active income threshold for classification of a foreign subsidiary, from 80% to 60%;
  • Exclusion of the following items from the definition of passive income:

(i) interest, financial investments and financial intermediations from financial institutions authorized to                      operate abroad;
(ii) dividends and equity interests of operating companies with own active income exceeding 60% of
total income; and
(iii) the rentals of companies whose main activity is the commercial activity of real estate development
or construction abroad.

  • Explanation that the calculation of the profit of the controlled entity abroad will follow the accounting principles of Brazilian commercial legislation, for each direct and indirect subsidiary and indicating the year of origin of the profits;
  • Exclusion, from the tax basis, of the profits of indirect subsidiaries located in Brazil, including any income earned in Brazil, provided that they are taxed at a rate equivalent to the maximum of the new rule (22,5%);
  • Possibility of using credit for income tax paid abroad on the profit earned by the subsidiary;
  • Clarifies the rules for calculating the capital gain on the return of capital to Brazil: the exchange rate variation of the initial investment in the entity abroad will compose the taxable capital gain at the time of sale, write-off or liquidation of the investment, including through return of capital (as in the event of capital reduction, redemption of shares and dissolution).


In regards to trusts, the Report presented in MP 1.172/23 brought the following changes:

  • Irrevocable trusts: MP 1.171/23 did not differentiate between revocable and irrevocable trusts, and provided that the ownership of the assets would remain with the (i) settlor after the establishment of the trust or (ii) beneficiary, at the time of distribution by the trust to the beneficiary or the death of the settlor. The “new MP” (1.172/23) clarifies that when the settlor of the trust irrevocably relinquishes his or her property in favor of the beneficiary, it may be recognized that the transfer occurred prior to the gift or death of the settlor;
  • Tax liability of the trustee: inserted provision that the trustee must make available to the settlor or beneficiaries, as applicable, the financial resources and information necessary to enable the payment of income tax and the fulfillment of other tax obligations in Brazil; and
  • Application to similar contract: contracts governed by foreign law with similar characteristics to trust (e.g; foundations) will also be subject to the rules applicable to trusts.
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