In the face of this, an increase in tax rates seems largely undesired and yet an unavoidable reality.
Under that scenario, new rules were enacted earlier this year concerning the income tax (IT) levied on capital gains realised by Brazilian-resident individuals upon the disposal of assets and rights that will be effective as of January 2017.
As of 2017, the flat 15% general rate currently in force will be replaced by a new progressive taxation systematic to be applicable in the context of IT levied upon capital gains, starting with the same 15% (for gains up to R$5 million or $1.42) that will be progressively increased to 17.5% (applicable to the portion of the gain between R$ 5-10 million), 20% (for the portion of the gain between R$10-20 million ($2.83-5.66 million)) and eventually to 22.5% (for the portion of the gain exceeding R$30 million.
Even though the wording of such new rules has not directly addressed the issue, it may come to indirectly impact certain capital gains realised by foreign investors, taken into account a general tax provision currently in force that assimilates the tax treatment of gains realised by foreign investor with the one applicable to Brazilian resident individuals.
It is important to note that these new provisions strictly cover the general rules regarding capital gains. Hence, other situations which are regulated by more specific rules are not impacted, including tax exemptions and specific tax regimes made available by the applicable law.
There is a wide range of specificities that must be reviewed for purposes of determining which cases may be impacted by the new rules, such as, among other considerations, the jurisdiction of the of the foreign investor, how and under which rules the investment is carried out, and the form by which the disposal transaction is carried out.
Gains arising from a sale transaction carried out by means of an order placed with the stock exchange (open market) may be tax exempt, while bilateral over-the-counter transactions may be subject to:
(a) the new progressive rates if the investment is carried out directly, or
(b) to the flat 15% rate if the investment is made through a Brazilian regulated investment fund.
If it is true that a short window is still opened allowing certain room for planning (the law will only be effective as of 2017) it is also true that Brazilian tax authorities are heavily pressured to obtain new revenues, resulting in consistently stricter scrutiny and more and more disputable tax claims. More than ever, the moment urges that taxpayers’ moves should be carefully reviewed before implementation to accurately assess the level of comfort for the alternative tax positions that may (or may not) be adopted.
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By Flávio Mifano, partner at Mattos Filho |