The year 2023 was marked by significant tax changes in Brazil, with the most important milestone being the approval of the Indirect Tax Reform (Constitutional Amendment No. 132). However, among other important changes that occurred in the past year, the approval of Law No. 14,754, informally called the “Offshore Law”, was noteworthy, as it addresses the taxation of foreign income earned by individuals in Brazil, and it provides differentiated tax treatment for certain controlled foreign entities by individuals. Therefore, it is important for individuals residing in Brazil who receive income from abroad and for companies based outside Brazil to consider the changes.
Law No. 14,754 was approved and published at the end of 2023. Prior to this, the Federal Government had already attempted to address the issue through Provisional Measure No. 1,171/2023, issued in April of last year. However, due to disagreements between the Government and Congress regarding how the issue was addressed in the Provisional Measure, it was not voted on, losing its effectiveness, at which point the Executive and Legislative branches reached an agreement to address the issue through a Bill. This Bill was submitted by the Government, and it dealt with the subject in an almost identical manner to the Provisional Measure, and was approved in December 2023. As a complement to some “gaps” not set addressed by the Law, the Federal Revenue Service regulated the matter through “Normative Instruction” No. 2,180, published in March 2024.
Among the main changes set forth by the new law, the following were instituted:
(i) application of a flat rate of 15% on financial investments and profits earned abroad by individuals residing in Brazil;
(ii) automatic taxation by the Controlling Party (individual residing in Brazil) of profits from certain controlled foreign entities – companies controlled, directly or indirectly, located in a country (or territory) with favored taxation (or privileged fiscal regime) or which report own active income lower than 60% of total income;
(iii) possibility (optional) to update foreign assets to market value, subject to an 8% tax on the update;
(iv) possibility (optional) to tax the income earned by the controlled foreign entities as referred to in item ii above, as if they were earned by the Controlling Party (individual residing in Brazil); and
(v) specific tax treatment for trusts, requiring that the settlor (in the first instance) declare the assets and rights subject to the trust abroad and that the income from these assets and rights be taxed by this settlor.
Based on the above, it is extremely important for taxpayers to stay up to date on changes to the legislation and seek guidance on the “Offshore Law.” Taking such step is crucial for adopting new structures in Brazil and abroad and also reviewing existing structures, so that the adverse tax impacts of previously planned actions are mitigated. It is worth noting that regarding the changes in items iii and iv above, greater agility is required, as an option must be made by the final deadline for submitting the Income Tax Return this year (05/31/2024).