The Brazilian Supreme Court (STF) has recently issued decisions that prevented the levy of Income Tax on capital gains resulting from the appreciation of assets transferred by inheritance or donation, which had already been subject to ITCMD. The decisions were issued by the 1st Panel, in the judgment of Appeal in Extraordinary Appeal (ARE) No. 1,387,761 and by the 2nd Panel in Extraordinary Appeal (RE) No. 943,075.

In the transfer of property due to death or donation, the Tax on Transfer by Death or Donation (ITCMD) is levied, due to the States and the Federal District, the rates vary, but can reach the maximum rate of 8%.

Currently, in practice, in addition to the ITCMD, if a given asset has increased in value, considering the original value stated in the deceased's Income Tax return and the value attributed to the asset after death (“market value”), it would be up to the heirs to indicate the lower or higher value of the asset at the time of transfer of ownership – as provided for in art. 32 of Law No. 9532/97. Thus, if the higher value is chosen (“market value”), the positive difference between the values will also be taxed by Income Tax, with a rate between 15% and 22%.

The 1st Panel, in the judgment of ARE No. 1,387,761, decided by majority to eliminate the incidence of Income Tax on the appreciation of the property transferred by donation. According to the vote of the rapporteur, Min. Luís Roberto Barroso, the incidence of IR would result in double taxation, since two taxes would be levied on the transfer of the valued asset if the higher value were reported, an understanding followed by Ministers Dias Toffoli, Luiz Fux and Alexandre de Moraes. Minister Carmen Lúcia, the only one who disagreed with the rapporteur's position, argued that Income Tax would be levied on the taxpayer's capital gain, not on the donation, and that there would be no question of double taxation.

In turn, in the judgment of RE No. 943,075, carried out by the 2nd Panel, but without addressing the merits, the incidence of IR on the appreciation of property was also ruled out, but this time on the transfer due to the death of the owner. In this judgment, the rapporteur Minister Nunes Marques understood that the discussion present in the Extraordinary Appeal was not of a constitutional nature, and that it was not within the jurisdiction of the STF to judge such a case, upholding a decision favorable to the heirs. The decision was unanimous.

Despite the favorable scenarios, due to these new precedents, taxpayers must be cautious in transactions involving the incidence of IR on capital gains resulting from the appreciation of assets transferred, whether by inheritance or donation, already burdened by ITCMD, since the understanding on the matter in the higher courts (STF and STJ) is not yet standardized.