Yesterday, October 25^th, 2023, the Brazilian Government approved the text of Legislative Bill No. 4,173 (“PL” or “Bill”). As reported in our previous newsletter, the Bill proposes changes to the tax rules for individuals holding assets abroad.

In addition to these rules, the Plenary Opinion of the Chamber of Deputies regarding the Bill incorporates into its text the changes proposed by the Provisional Measure No. 1.184/2023, which provides for the taxation of investments in investment funds in the country, with some changes.

The text was approved by 323 congressmen against 119 rejections. The Bill will be directed to the Federal Senate for appreciation. If there are any changes to the text, the Bill will be sent to the Chamber of Deputies for consideration. If the Senate approves the text without changes, it will go to the President for sanction. It is important to note that the Bill needs to be approved this year for its effects to take effect from January 1, 2024.

We highlight below the main changes indicated in the final draft of the Bill:

Taxation of foreign income of individuals domiciled in the country:

Subject	Original text of Bill No 4,173	Approved text of Bill No 4,173
General Provisions	Individual Income Tax ("IRPF")  on income from capital invested abroad from 0% to 22.5%.	End of the exemption band and progressive rates. The tax rate will be 15%.
Controlled Foreign Companies (CFCs)	The profits of subsidiaries must be calculated in the balance sheet, which must be drawn up in accordance with the accounting standards of Brazilian commercial legislation.	The profits of subsidiaries must be calculated in the balance sheet, which must be prepared in accordance with: (i) International Financial Reporting Standards (IFRS), or Brazilian commercial legislation, at the taxpayer's discretion; or (ii) Brazilian commercial legislation, if the subsidiary is located in a country or dependency with favorable taxation or is the beneficiary of a privileged tax regime.
	The individual may choose to declare the assets and rights held by the controlled entity abroad as if they were held directly by the individual.	In addition to assets and rights, the individual may also choose to declare the liabilities held by the direct or indirect controlled entity abroad as if they were held directly by the individual.
	Lack of provision.	If the controlled entity is declared as transparent, the individual must inform the underlying obligations of the controlled entity, at zero value, on the debts and encumbrances in the sheet of the Individual Income Tax Return.
Compensation of Losses	Individuals may offset losses on financial investments abroad against income earned on operations of the same nature abroad in the same calculation period.	Offsetting will be allowed with income earned from financial investments abroad in the same calculation period.
Trusts Abroad	No changes to the original text of Bill 4,173.
Updating the Value of Assets and Rights Abroad	Final rate of IRPF of 10%.	Reduction of the definitive rate to 8%.
	Lack of provision.	If the individual declares that he or she has exercised or will exercise the option to declare the assets, rights and obligations of the foreign controlled entity as if they were held directly by the individual, he or she may opt for a specific updating criterion, or the updating criterion for each underlying asset and right.

 

Taxation of income from investments in investment funds in the country:

Subject	Original text MP No 1,184	Approved text of MP No 1,184
IRRF on sale of shares	Obligation of the shareholder to provide financial resources to the investment fund administrator to pay the IRRF on the gain on the sale of shares, with the transfer being prohibited if the administrator does not have the resources to pay the tax.	Provision was removed.
Compensation of Losses	Losses on the amortization or redemption of quotas may be offset against gains on the distribution of income, amortization, redemption or sale of quotas of the same investment fund, or of another investment fund managed by the same legal entity subject to the same tax regime.	Clarification that the losses calculated may be offset against gains calculated in future incidences, in distributions, amortization or redemption. The possibility of offsetting losses against gains on the sale of quotas has been eliminated
Exceptions to the quota payment system	The Provisional Measure exempts FIPs, FIAs and ETFs from the come-cotas tax, provided that (i) they are classified as investment entities and (ii) they meet the portfolio framework requirements set out in the Provisional Measure.	FIAs are exempt from the quota-cutting regime, regardless of their classification as an investment entity.
FIDC Portfolio	Lack of provision.	The FIDC must have at least 67% credit rights in its portfolio.
Concept of stock exchange and over-the-counter markets	Lack of provision.	Stock exchanges and organized over-the-counter markets are considered to be centralized and multilateral trading systems that enable the meeting and interaction of offers to buy and sell securities that guarantees the public formation of prices, managed by an entity authorized by the CVM.
The administrator's responsibility	Lack of provision.	If the tax is not paid within the period referred to in this article due to the shareholder's failure to provide resources, the administrator must send the tax authorities information on the fund and the amount of tax due, with the shareholder remaining responsible for paying the tax.
Taxation of stock	Option for the individual to pay the IRRF on income calculated up to December 31, 2023 at a reduced rate of 10%, which will be paid in two installments: (i) in monthly installments from December 29, 2023 to March 29, 2024, for tax on income calculated up to June 30, 2023; and (ii) in cash, on the last business day of May 2024, for income calculated from July to December 31, 2023.	Reduction of the tax rate to 8% and change in the periods for calculating income: (i) the tax must be paid in monthly installments from December 29, 2023 to March 29, 2024, relating to tax on income calculated up to November 30, 2023; and (ii) in cash, on the last working day of May 2024, relating to income calculated from December 1 to December 31, 2023.
Repayment or redemption in December 2023	Lack of provision.	In the event of amortization or redemption of quotas, or spin-off of the fund, between December 1 and 29, 2023, the effect of the event must be excluded from the equity value of the quota on November 30, 2023, for the purposes of calculating the IRRF due on the stock with the benefit of the reduced rate of 8%.
Merger, demerger, incorporation or transformation	Mergers, spin-offs, incorporations or transformations of investment funds will be subject to IRRF.	IRRF will not be levied when the merger, spin-off, incorporation or transformation involves funds subject to the same tax regime, does not imply a change in the ownership of quotas, and does not imply the disposal of assets.
Investors resident or domiciled abroad	Income from investments in investment funds in Brazil earned by investors resident or domiciled abroad will be taxed at a rate of 15%.	Income from investments in investment funds in Brazil earned by investors resident or domiciled abroad will be taxed at the rate of 15% on the date of distribution of income, amortization or redemption of quotas. The regime does not apply to investors resident or domiciled in favored tax jurisdictions. Investors resident or domiciled abroad are not subject to the periodic taxation of the quota-cutting regime.
FII and Fiagro - Exemption	IRRF exemption on income distribution by FII and Fiagro conditional on funds having at least 500 shareholders.	Reduction from 500 to 100 quota holders.
FII and Fiagro - Exemption - Connected person	Lack of provision.	If related individuals hold 30% or more of the fund's shares, or whose shares entitle them to receive income in excess of 30% of the total income earned by the fund, no exemption will be granted.

 

 

 

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