The deadline for holders of offshore investments to register for the option of updating the value of their assets by paying income tax at a reduced rate of 8% starts on Friday (15). The standard rate, according to the law passed by Congress in 2023, is 15%. On Wednesday (13), the Federal Revenue Service released the details of how the new tax system works via Normative Instruction 2,180.
The deadline to adhere to the 8% rate is May 31. That is also the deadline for investors to decide whether they will remain in the general regime or opt for the tax transparency regime under the new system. In general, the former is suited for more straightforward arrangements and the latter for more complex structures. In both cases, the government aims to prevent the deferral of tax payments.
“There are many advantages to signing up,” said Daniel Loria, director of the Ministry of Finance’s Special Office for Tax Reform (Sert). “In addition to legal certainty, the person will be able to use the money in any way they want because it will already be taxed; there will be no more impounding of resources, and there is peace of mind about the future because the tax will already have been paid, and they will be protected from increases.”
The accumulated profit will be taxed definitively so that future exchange rate variations will be exempt, he added. The rules also simplify succession planning, as the funds can be donated or passed on without the heir having to pay income tax again.
The regulation was discussed with members of the market to establish a palatable and balanced standard, said the director. “We want people to understand that it’s fair.” The rules unveiled on Wednesday (13) affirm that updating the value of foreign investments at an 8% rate remains optional. “We believe this rate to be quite low,” said Mr. Lória.
In this case, the funds used to pay the tax can be repatriated, provided that they are actually utilized for such purpose. Otherwise, the investor will incur a fine. It’s a possibility that wasn’t in the law but was permitted by the normative instruction. The investor can, for example, dissolve the offshore company and repatriate the funds, explained Mr. Loria.
Another aspect aimed at clarifying doubts in the market is that it allows investors to decide whether they want to update the values of each of their assets separately. The same applies to the choice between the general regime and the tax transparency regime.
For Alessandro Fonseca of the Mattos Filho law firm, the normative instruction clarifies some important aspects, such as the ability to update the acquisition cost of assets in offshore companies to December 31, 2023, by paying tax at the differentiated rate of 8%. That significantly impacts the calculation of the best options for taxpayers.
For example, suppose an asset was purchased for $100 and was worth $1,000 at the end of 2023. In that case, this becomes the new basis for calculating variations from 2024 onwards or for distributions of gains related to the past. He explains that to make a decision, the taxpayer needs to consider the average cost of acquisition, taking into account the value of various remittances made abroad over time and the exchange rate.
“At the time of distribution, you have to assess the potential capital gain from the exchange rate variation to determine if it’s worth it compared to the 8% [of income tax], paying the money upfront.” Potentially, he notes, there’s an advantage with a reduction of 7 percentage points compared to the annual rate of 15%.
Mr. Fonseca explains that many of the measures need refinement, but another significant aspect that the Revenue Service is regulating is the taxpayer’s ability to decide which tax regime they will adopt for the 2024 fiscal year, whether it be the transparent or opaque structure. With everything on the table, they can analyze the conversion criteria, the average cost valuation for different types of assets, and situations not provided for in the law.
“Although the option to update values by paying the reduced rate can be attractive on some occasions, only a detailed analysis of an individual’s assets and rights abroad, including whether they were acquired long ago, whether they have appreciated significantly, and also their future plans for these assets and rights, will determine whether the option is truly suitable,” explained Ana Lúcia Marra, a partner in the tax area of Machado Associados. “The deadline is reasonably short to conduct the necessary analysis, and taxpayers should carry out this assessment as soon as possible.”
The normative instruction introduces new features that impact investors’ future planning. It specifies, for instance, that virtual assets are subject to the new rule only if financial assets back them. For example, works of art, such as NFTs, are exempt. These are taxed according to capital gains in this context.
The taxation of insurance policies also varies. Policies that function like a checking account consolidating investments where the individual has the discretion over investment decisions will be classified as a controlled entity, and their profits will be taxed annually. Meanwhile, market policies will be treated as regular financial investments.
Furthermore, the new regulations clarify that transactions between direct and indirect subsidiaries, such as capital returns from one to the other, will not trigger a tax consequence. Taxes paid on behalf of offshore companies under the tax transparency regime can be credited in Brazil, according to the normative instruction.
The Federal Revenue Service has developed an electronic system known as Update of Assets and Rights Abroad (ABEX), akin to the Declaration of Foreign Exchange and Tax Regularization (DERCAT) introduced in 2016.
The tax authority’s estimates suggest that the revised taxation on offshore companies could boost tax revenue by R$3.59 billion this year and R$6.75 billion in 2025. These figures, however, were calculated last year when the bill was submitted to Congress. It is estimated that the total value of investments abroad surpasses R$1 trillion.
Translation: Melissa Harkin
