On October 25, 2023, in an Extraordinary Deliberative Session of the Plenary of the Chamber of Deputies, the Final Draft of Bill 4,173/23 (“PL”) was approved, which provides for the taxation of income earned by Brazilian individuals tax residents on financial investments, controlled entities and Trusts abroad, as well as the automatic taxation of closed-end funds (included in the Preliminary Plenary Opinion of 10/03/2023). Voting closed with a score of 323 votes in favor and 119 against.
Now, the Bill of Law goes to the Federal Senate for review and approval.
In more detail
Among the main changes in relation to the original wording of the Bill were included:
- Application of the fixed rate of 15% on earnings earned abroad, with no deduction on the calculation basis. The original wording provided for progressive tax rates of up to 22.5% for earnings above BRL 50,000.00;
- Provision that the profits of the controlled entities, according to the definition of in the Bill of Law, will be calculated in accordance with the International Financial Reporting Standards (IFRS), or the Brazilian commercial law, at the discretion of the taxpayer or the Brazilian commercial law for entities located in a low tax jurisdiction or under a privileged tax regime;
- With respect to taxpayers who opt for the tax transparency treatment of the foreign entity: in addition to the obligation to replace the reporting of the interest in the entity with the underlying assets and rights, and to allocate the acquisition cost to each of these assets and rights, he/she must inform the underlying obligations in the debts and actual encumbrances form, at zero value;
- Update of tax basis of the assets and rights abroad: there is the option to update the value of assets and rights abroad reported in the income tax return to the market value on December 31, 2023 at the definitive tax rate of 8%;
- Possibility of offsetting losses made on financial investments with income earned on financial investments abroad. The previous wording provided for the possibility of offsetting with “earned in operations of the same nature”.
The subject presented in Provisional Measure 1,184/2023 was inserted in the Bill of Law, with some changes, of which we highlight:
- Taxation of accumulated earnings ( not taxed yet – the so-called “inventory of earnings”) at a rate of 15%: possibility of payment in cash on May 31, 2024 (withholding by the fund administrator) or payment in up to 24 monthly and successive installments, as of May 31, 2024;
- Alternatively, for individuals domiciled in Brazil the applicable tax rate was reduced from 15% to 8% for accumulated earnings calculated until December 31, 2023 in investment funds that were not subject to periodic taxation in the months of May and November of each year and that will be subject to periodic taxation as of 2024, provided that they are paid in two stages:
(i) the first on earnings calculated until November 30, 2023, which may be paid in 4 equal monthly and successive installments, due on December 29, 2023, January 31, 2024, February 29, 2024 and March 29, 2024 and
(ii) the second, on earnings calculated from December 1, 2023 to December 31, 2023, which must be paid in cash, within the same due date as the IRRF due in periodic taxation.
- Inclusion of Receivables Investment Funds (FIDC) in the group of investment funds that will be exempt from the general taxation regime, along with Private Equity Investment Funds (FIPs), Market Index Investment Funds (ETFs) and Equity Investment Funds (AIFs), when they are classified as investment entities and comply with the specific requirements (provision included in the Opinion presented by the Project Rapporteur);
- For Real Estate Investment Funds (FII) and Investment Funds in Agroindustrial Production Chains (Fiagro), the tax exemption will only be valid for those with at least 100 quota holders plus some additional requirements.