On April 30, 2023, Provisional Measure (“MP”) No. 1,171/2023 was published, which brought relevant changes to the legislation on income tax, especially on the taxation of income earned by individuals resident in the country in financial investments abroad, companies controlled abroad held by individuals and, in an unprecedented manner, the taxation of structures involving “trusts” abroad. The MP also changed the values of the monthly table of personal income tax (“IRPF”).

One of the main objectives of the new rules for taxation of assets abroad is to offset part of the amounts that the Government will no longer collect for public coffers, due to the increase in the IRPF exemption bracket.

In general, MP No. 1,171/2023 provides that individuals residing in the country, as of 01/01/2024, must tax income from capital invested abroad in the following ways, separately from other income and capital gains: (i) financial applications, (ii) profits and dividends of controlled entities (“subsidiaries”) and (iii) assets and rights subject to trust.

These incomes will be subject to IRPF in the annual adjustment declaration, following the progression of the following rates: (i) 0% on the annual portion of income that does not exceed R$6,000.00, (ii) 15% on the annual portion of income that exceeds R$ 6,000.00 and does not exceed R$ 50,000.00 and (iii) 22.5% on the annual portion of income that exceeds R$ 50,000.00.

• Financial applications

Article 3 of the Provisional Measure provides examples of what would be considered financial investments, including financial instruments, bank deposits, credit card deposits, deposit certificates, investment certificates, investment fund shares, insurance policies, retirement funds, fixed income and variable income securities, among others. In addition, it provides examples of income situations and hypotheses, including exchange rate variations of foreign currency against the national currency.

Income from financial investments abroad will be subject to IRPF, following progressive rates from 0% to 22.5%, as explained above. Regarding the temporal aspect, the incidence will only occur in the respective assessment period in which the income is received by the individual (i.e., upon redemption, sale, amortization, maturity or liquidation of the financial investments).

We emphasize that investment fund shares and corporate interests will only be classified and treated as financial investments if they do not meet the requirements for their characterization as controlled entities abroad.

• Companies controlled abroad – “Anti-deferral” rule of income tax for individuals

Commonly, companies (“entities”) controlled abroad are forms of diversification, reduction of the tax burden, deferral of IRPF and asset protection used by individuals for investments in assets (physical or financial) abroad.

The Federal Government, through the aforementioned Provisional Measure, also promoted changes in taxation in entities controlled abroad, that is, those entities, with legal personality or not, in which the individual holds, directly or indirectly, individually or jointly, rights that allow electing or dismissing administrators, or that ensure predominance in the share quotas, or that owns more than 50% of the share capital or in the rights to participate in profits or receive their assets in the event of their liquidation.

In general terms, the legislation currently in force allows income from entities controlled abroad obtained by individuals (resident in Brazil) to be taxed only at the time of their effective availability. In other words, for example, taxation only occurs in the case of the sale of shares in the legal entity abroad, which was calculated through the IRPF levied on capital gains.

However, the MP determines that such income must be automatically taxed, annually, in the individual's annual adjustment declaration, which has been called the “anti-deferral rule”.

Therefore, if the Provisional Measure is converted into Law, starting on 01/01/2024, income must be recognized as earned every year (“on December 31 of each year”), observing progressive rates of up to 22.5%.

In general, there are requirements to be met to be subject to the rules of the MP, such as: the subsidiaries must be located in a country or dependency with favorable taxation, be beneficiaries of a privileged tax regime, or even have their own active income of less than 80% of income (that is, attention must be paid to income in passive income greater than 20%). Otherwise, the rules of effective provision for individuals will follow.

Finally, in short, the income of companies controlled abroad must be determined individually, considering the annual balance sheet of the subsidiary as a basis, and the losses of the subsidiary may be deducted, as well as the profits and dividends of Brazilian invested companies held by the subsidiary abroad.

Furthermore, it is interesting to note that individuals will be able to deduct income tax paid abroad by the subsidiary and its investees up to the limit of the tax due in Brazil.

• Trusts

Until then, as the trust is not an institution recognized by the Brazilian legal system, there was no regulation on the subject. The MP introduced important provisions and intended to regulate the institution specifically, for IRPF purposes in Brazil.

Thus, in short, as for trusts, the assets and rights that are the object of the trust abroad remain under the ownership of the founder after the establishment of the trust and are considered as having been received by the owner of the assets and rights, as of 01/01/2024. In the event of the death of the founder or at the time of distribution, the assets are considered as if they belonged to the beneficiary, and in both cases, IRPF is levied on such assets, depending on the type of asset.

• Updating the value of assets or rights abroad

Furthermore, the Provisional Measure also allows individuals to update the value of assets they own abroad, such as financial investments, real estate or assets that guarantee rights over them, vehicles, aircraft, vessels, and interests in controlled entities to the market value on December 31, 2022 and tax the difference to the acquisition cost, through IRPF, at the rate of 10%.

In the case of entities controlled abroad, if the individual has opted for the update until 12/31/2022, the update may also be carried out separately, for the period from 01/01/2023 to 12/31/2023, so that the tax collection occurs until 05/31/2024, which will also be the difference between the amounts at the rate of 10%.

• Changes to rules for calculating capital gains in international situations – Revocations

Finally, it is worth mentioning that the Provisional Measure also revoked art. 24 of MP 2158-35/2001 and provisions of art. 4 of Law No. 9,250/1995, which provided for the exemption of income tax on capital gains from exchange rate variations on the sale of assets abroad acquired in foreign currency. With the MP, any capital gain will be calculated and taxed on the difference in reais between the acquisition cost and the sale value (taxation of exchange rate variations in any case).

Furthermore, the exemption relating to gains obtained from the sale or liquidation of assets located abroad or representing rights abroad, including financial investments, which were acquired by the taxpayer, in any capacity, as a non-resident in Brazil, was revoked.

• Conclusions

Although Provisional Measure No. 1,171/2023 is effective immediately, most of its provisions give rise to the collection of income tax, therefore, any collection may only be required from the next fiscal year, that is, from 01/01/2024.

Furthermore, the MP has a validity period of 60 days, renewable once for the same period, and must be converted into law within this period. Otherwise, it will lose its effectiveness. In turn, the conversion bill itself may undergo changes. Within this scenario, our team will monitor the evolution of the aforementioned MP, for the purpose of converting it into law, as well as its possible developments.