As widely reported in the media, Provisional Measure (MP) No. 1,171/2023 was published on April 30, 2023, which imposes relevant changes in the taxation of individuals residing in the country with investments abroad.
The MP needs to be approved by Congress within 60 days, extendable for another 60 days. If approved in its original wording, individuals who hold investments abroad will be taxed more rigorously.
Here we list some of the main changes introduced by the Provisional Measure:
Overseas controlled entities. The most relevant change is, without a doubt, the end of the deferral of income tax for companies domiciled abroad and controlled by individuals residing in Brazil. Under the new rule, profits calculated from January 1, 2024 will be taxed on December 31 of each year, following the progressive rates of zero, 15% and 22.5%. The “inventory” (profits calculated up to December 31, 2023) will be preserved (that is, it will only be taxed at the time of its effective availability).
Financial assets abroad. In order to simplify the taxation of financial investments abroad, the MP determines that income will be taxed annually, upon submission of the Annual Adjustment Declaration, following the progressive rates of zero, 15% and 22.5%.
Reassessment of assets and rights abroad. The Provisional Measure also allows tax resident individuals in Brazil to update the value of assets and rights abroad to the market value of December 31, 2022, applying a 10% income tax rate. The tax must be paid by November 30, 2023. If the MP is approved, the practical aspects of this rule will still need to be regulated by the Federal Revenue Service.
Overseas trusts. Until today, there was no clear definition on the taxation of assets and rights attributed to trusts. In an attempt to regulate this institute, the MP establishes that, as of January 1, 2024, the founder of the trust must pay income tax on income and capital gains related to assets held by the trust (as if the transfer of ownership of the assets and rights of the settlor to the trust is disregarded). In a second moment, when the assets and rights of the trust are transferred to the beneficiaries, such transfer will be treated as a donation or transmission causa mortis.
Exchange variation. End of income tax exemption on exchange variation of investments abroad acquired with earnings originally earned in foreign currency.
In order for the above rules to come into force as of January 1, 2024, the National Congress needs to consider and approve the conversion of the MP into law by September 10, 2023, subject to the deadlines for analysis by the Joint Commission and by the two houses of the National Congress.
