Tax reform and tax on inheritances and donations – 03/05/2024 – What tax is this

Tax reform and tax on inheritances and donations – 03/05/2024 – What tax is this

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The consumption tax reform approved by Constitutional Amendment no. 132/2023 brought important changes to the Inheritance and Donation Tax (ITCMD). The progressive rate of its rate was imposed due to the value of the transfer and its requirement was established when the donor has a domicile or residence abroad, and in cases where the author of the inheritance had assets, was resident or domiciled or had his inventory processed abroad.

Taxpayers will have time to anticipate changes and adjust succession planning, but they must also consider the effects that said planning may have on other taxes, such as Income Tax (IR) on capital gains and Real Estate Transfer Tax (ITBI).

What has changed?

The possibility of progressively requiring ITCMD is nothing new. Resolution no. 9/1992 of the Federal Senate set at 8% the maximum rate that states could demand for this tax and stipulated that its requirement it could be progressive.

There was doubt as to whether the Senate had exceeded its competence by admitting the progressiveness of the tax, but this matter was pacified in February 2013 by the STF (Supreme Federal Court), which declared constitutional the law of the state of Rio Grande do Sul that required the ITCMD of such mode.

The novelty of the reform is the fact that EC 132 states that the ITCMD “will be progressive depending on the value of the share, legacy or donation”. The Amendment is mandatory.

States like São Paulo, which require the ITCMD at a single rate of 4%, will have to pass new laws stipulating the progressiveness of the tax, presumably having to implement the maximum rate of 8%.

At the same time, Bill Resolution 57/2019 is being processed in the Senate, which aims to double the maximum ITCMD rate from 8% to 16%, which will substantially burden succession by donation or cause of death.

With regard to the ITCMD requirement when the donor is domiciled or resides abroad, and in cases where the author of the inheritance had assets, was resident or domiciled or had his inventory processed abroad, since 1988 the Federal Constitution (CF) provided for the incidence of the tax in such cases, but required the enactment of a complementary law to regulate the collection of the tax, in order to avoid conflicts of tax jurisdiction.

However, this complementary law was never published. Faced with such inertia, some states enacted laws requiring the tax, which were declared unconstitutional by the STF given the absence of federal regulation. Since then, the tax is no longer required in these situations.

Instead of publishing the proposed complementary law, provisional authorization was included in the text of EC 132 to require the ITCMD on the aforementioned hypotheses. It was anticipated that while the complementary law is not enacted:

  1. regarding real estate and respective rights, in any case the ITCMD will be due to the state of the property’s situation, and is therefore not due if the property is abroad;
  2. in the case of a donation, where the donor resides or resides abroad, the ITCMD will be due to the State where the donee is domiciled, or, if the donee is domiciled or resides abroad, it will be due to the State in which the property is located; It is
  3. In the case of inheritance, if the asset received is abroad, the ITCMD will be due to the State where the deceased was domiciled, or, if he was domiciled or resident abroad, to the State where the successor or legatee is domiciled.

This provisional authorization creates the risk of double taxation, as a foreign state and a Brazilian state could charge tax on the transmission of the same assets and rights received through donation or inheritance. This is not a hypothetical problem, but one that has long been identified and is being analyzed by the European Commission.

PEC 45 also provides that, in any case involving movable assets, titles and credits transmitted by inheritance, the ITCMD becomes payable to the state where the deceased was domiciled, and no longer to the State where their inventory or listing was processed.

What to do?

In any of the situations above, the states must enact new ordinary laws regulating the matter. Even states that have already instituted the incidence of ITCMD on cases linked to abroad must issue new rules, under the terms set out in EC 132, as the STF does not allow the subsequent constitutionalization of a law.

To the extent that such legal changes would institute or increase the ITCMD tax burden, and given the principle of non-surprise and the applicable rules of precedence, they would only become effective in the year following the publication of the respective ordinary laws, and from which also respected the minimum period of ninety days from the publication of the law.

This window still gives taxpayers time to adjust their estate planning and implement changes before the new rules become effective.

Considering the expectation of a substantial increase in ITCMD taxation, one strategy would be to advance the inheritance to heirs through a living donation, which would be subject to the current tax burden. If the transaction takes place before the new laws become effective, the ITCMD would be due in accordance with the rules currently in force, which could represent relevant tax savings.

The donation of assets and rights to heirs with reservation of usufruct in favor of the donor is also a common alternative in succession planning and can also provide extra savings. Alone or in conjunction with other existing legal mechanisms, the donation with usufruct reservation allows the rationalization of the succession and the distribution of assets to the heirs without removing the fruits and control of their assets from the author of the inheritance.

States like São Paulo, for example, require only 2/3 of the ITCMD that would be due in a full donation when donating bare property with reservation of usufruct. The remaining 1/3 is charged upon termination of the usufruct and consolidation of the full property in the bare owner (eg due to the death of the donor), using the rate and calculation basis provided for in the legislation in force on the date of the donation.*

There is also a basis for challenging in court the charging of 1/3 of the tax upon termination of usufruct and the jurisprudence is consolidated in this sense, with the argument that upon termination of usufruct there is no new transfer of property or right (new triggering event), but just the consolidation of full ownership in the bare owner.

Another possibility is the use of private pension plans, more specifically the Vida Gerador de Benefícios Livres (VGBL) and possibly the Plano Gerador de Benefícios Livres (PGBL). The STF will also analyze, in the general repercussion system (Theme nº 1,214), whether or not the ITCMD affects the transmission of resources invested in VGBL and PGBL plans. The jurisprudence of other courts is mostly in favor of non-incidence on the VGBL plan, when considering the life insurance nature of the instrument.

The art. 794 of the Civil Code provides that in life or personal accident insurance in the event of death, the stipulated capital is not considered inheritance for all legal purposes. In 2021, the 2nd Panel of the STJ decided in this regard and it is likely that the STF will follow the same position.

However, one cannot lose sight of the fact that ITCMD is not the only tax that affects estate and succession planning. Taxes such as IR and ITBI can be (and generally are) relevant components of the equation.

As seen, the consumption tax reform also brought important changes in relation to the ITCMD. Taxpayers will have time to adjust their estate and succession planning, but they must be careful to adopt measures that not only promote ITCMD savings, but also take into account other relevant taxes in this context, such as IR and ITBI, as well as situations particular and special features of each family.

*Only the value of the calculation base should be updated according to the UFESP variation until the date of payment.

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