Is investing abroad more expensive than investment in Brazil? Lawyers respond – 5/2/2023 – What tax is this

The provisional measure published on Sunday (30) that corrects the Income Tax table and changes the taxation of investments abroad should raise the taxation of most of these financial investments.

This does not mean, however, a reversal in the movement towards diversification of investments abroad by individuals, which has gained strength in recent years.

Ana Carolina Monguilod, professor at Insper and director of ABDF (Brazilian Association of Financial Law), says that the MP resumes previous attempts to create this taxation, but it does so in a more comprehensive way and with tougher rules.

“The focus of previous attempts was offshore. Now, these investments by individuals, which have become increasingly common, have also been affected”, says Monguilod, who is also a partner at the i2a office.

According to the MP, income earned from 2024 on financial investments abroad by individuals residing in the country will be taxed with a new table.

For annual earnings of up to R$6,000, the rate is zero. From R$ 6,000 to R$ 50,000, the charge goes to 15%. From R$ 50,000 onwards, the percentage rises to 22.5%. Taxation occurs upon redemption, amortization, disposal, maturity or liquidation of the investment. Currently, the rate is 15% for gains of up to R$5 million and progressively rises to 22.5% for amounts above R$30 million.

“The rate of 22.5% is high, and the ranges of this table that is being proposed are very compressed. With that, you reach that percentage very quickly”, says the lawyer.

Hermano Barbosa, a partner at the BMA office in the areas of Tax Law and Estate and Succession Planning, says that the new rules create a discrepancy between the tax treatment of an application made in Brazil or abroad.

According to the lawyer, most investments abroad will be taxed at 22.5%, because the exemption range is very low for this type of investment. In Brazil, taxation is normally 15%.

“We have seen in Brazil in recent years a movement towards the internationalization of the profile of investments made by the average Brazilian investor. This is a path of no return, which is not done for tax reasons, but for protection, diversification, access to other markets.”

For him, it is still not clear in which cases it will be better to migrate from an investment model made through individuals to an investment through companies abroad, something that also depends on the final version of the text that will now be discussed in Congress.

The individual will only be taxed upon redemption, but will not be able to offset gains and losses between different investments. Through companies, taxation will be on the annual calculation of profit, even if not distributed, but it is possible to offset gains and losses.

Roberto Justo, a partner at Choaib, Paiva e Justo Advogados, says that many investments in Brazil now enjoy more advantageous tax treatment compared to those made abroad. Some even with full tax exemption. And that many investors pay 15% tax on investments in other countries.

“Those who invest abroad invest more in the sense of having assets that are a little more protected from the Brazil effect. They want to have a stronger currency”, says Justo, who does not see a disadvantage that would make these investments unfeasible.

He claims that maintaining investments via offshore companies may also be worthwhile, for example, as a mechanism for succession. US inheritance tax is 40% for non-residents, with an exemption limit of $60,000. Whoever acquires assets through these companies is not subject to this taxation.

Another highlight of the MP is the possibility of updating the values ​​of goods and rights abroad by paying 10% on this valuation later this year. The three tax specialists believe that the percentage is high and should be reduced by the Legislature.

They recall that the Income Tax reform approved in 2021 by the House, and which was subsequently stopped in the Senate, provided for a 6% charge. The taxation of undistributed profits of companies is another point that should generate controversy in Congress, according to the three specialists, with the possibility of raising questions in the Judiciary as well.

Last Sunday (30), the government published a MP dealing with these two issues, anticipating part of the Income Tax reform promised for the second half of the year and which should also deal with issues such as the end of exemption for profits and dividends.

The Ministry of Finance targets more than R$ 1 trillion (US$ 200 billion) in assets of individuals abroad.

The measures have the potential to raise BRL 3.25 billion for this year, BRL 3.59 billion for 2024 and BRL 6.75 billion for 2025. They serve as compensation for raising the Income Tax exemption range to BRL 2,640. With the update of the values ​​of the monthly IR table, the portfolio estimates a reduction in revenues of R$ 3.2 billion in 2023, R$ 5.88 billion next year and R$ 6.27 billion in 2025.

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