Brazil will change tax on foreign income

The Chamber of Deputies approved the Law Project (Bill) 4.73/2023 which changes the taxation of investments abroad by individuals, as well as the taxation of investment funds in Brazil. The Bill must still be analyzed by the Senate.

The legal change is relevant given the current scenario in which investments by Brazilians abroad have become more common, not to mention the increase in foreigners residing in Brazil. Therefore, this law affects a large part of the Brazilian population and practically all foreigners residing in Brazil, since the law provides for “taxation of income earned by individuals residing in the country in financial investments, controlled entities and trusts abroad.”

With this, the Brazilian government expects to raise R$7 billion, as early as 2024.

The object of the law for taxation is set out in its art. 3rd, §1st, items I and II, the following:

I - financial investments abroad: any financial operations outside the country”, which includes deposits or bank accounts, crypto assets, digital wallets, investment funds investments, retirement or pension funds, corporate interests, among others;

II - income from financial investments abroad: including exchange rate variation of foreign currency or cryptocurrency, income on deposits or accounts abroad, interest, commissions, premium, discount, profit sharing, dividends and gains from investments and gains from capital market negotiations, among others.

What the current taxation regime is like:

• rate from 15% to 22.5% on capital gains;

• up to 27.5% on income and dividends;

We have to consider that, under the current regime, losses cannot be compensated with future gains, even if of the same nature. And investments by individuals abroad must observe the “cash regime” to calculate taxes monthly (the well-known carnê-leão), regardless of the return on investments from abroad to Brazil.

What will change with the new law, in 2024:

• income and capital gain: single rate of 15%, without exemption range;

• compensation of losses with gains from financial investments abroad: the innovation makes it possible to offset losses with gains in income from financial investments abroad (which is currently only it is possible within a controlled entity), including of different natures, with the possibility of the individual still offsetting losses with gains of the legal entity in the same calculation period or in subsequent years (as long as they are reported in the income statement); however, it will not be possible to offset profits of the individual with losses of the entity controlled abroad;

• annual assessment: under the current regime, the individual must be assessed monthly by the carnê-leão; With the new law, the calculation becomes annual in the Annual Adjustment Declaration (DAA);

• exemption from income tax on exchange rate variations:

  • in non-interest-bearing accounts abroad: the exemption applies to non-interest-bearing accounts, including credit or debit card accounts abroad;

  • in the sale of foreign currency in cash up to US$ 5,000.00: the exemption occurs when selling foreign currency in cash up to US$ 5,000.00 in the year.

Possibility of updating the value of goods and rights abroad:

The individual, residing in Brazil, has the option of updating the value of assets and rights abroad informed in the Annual Adjustment Declaration (DAA) , as long as these have been declared by 12/31/2022, and thus subject the difference to the acquisition cost to taxation at the definitive rate of 10% (there may be a reduction in this rate to 8%). Assets and rights acquired throughout 2023 cannot benefit from this benefit.

The updated value of the Annual Adjustment Declaration (DAA) must be at market value on 12/31/2023, and payment must occur by 05/31/2024.

The update is not restricted to assets held by controlled entities, therefore, it is applicable to all assets abroad, such as vehicles, real estate, among others. Items that are difficult to price, such as jewelry and works of art, are excluded from the benefit.

The new law also brings regulations for controlled entities and trusts abroad, in addition to exclusive funds in Brazil (closed-end funds).

In this change that is coming in 2024, it is important to review the asset organization of individuals who hold investments abroad to comply with the new tax rules and avoid penalties and excessive taxation.