“Taxation of the super-rich” will yield less than the government expected

The project that increases taxation on closed-end funds in Brazil and investments abroad via “offshores” will yield less money than the government expected. In the negotiations to seek approval of the text in Congress, the Minister of Finance, Fernando Haddad, had to accept some reductions in rates.

There was an expectation that the new text would be voted on this Tuesday (17). But the acting president of the Chamber, Marcos Pereira (Republicanos-SP), decided to postpone the vote until next Tuesday (24), after the return of the president of the House, Arthur Lira (PP-AL).

The main change made by the proposal’s rapporteur, deputy Pedro Paulo (PSD-RJ), in relation to the government’s original project was the reduction in the tax rate on gains accumulated with these investments until this year.

In both closed-end and offshore funds, taxation on the stock of income was reduced from 10% to 6% by the rapporteur. This was the main impasse between congressmen and the government.

With the changes, the government tends to collect less than it would like from the new taxation. There are those who even see a risk of a drop in revenue – in this case, not because of the changes made by Congress, but rather because of the spirit of the project itself, which would have the potential to scare away investors.

The increase in taxation on these two types of investment makes up a package informally known as “taxation of the super-rich”, as it targets applications accessible to high-income people. The government’s idea is to collect more and thus try to eliminate the primary deficit in 2024, as established in the fiscal framework.

Bill (PL) 4,173/23, which deals with offshore companies, had been stuck in the Chamber since it was signed by President Luiz Inácio Lula da Silva (PT), at the end of August. At the beginning of October, Lira appointed the rapporteur to make the changes negotiated with the government.

Deputy Pedro Paulo included in the final text the content of provisional measure (MP) 1,184/23, which establishes taxation on income from closed-end funds.

The rapporteur considered including in his text new rules for the taxation of Interest on Equity (JCP), a type of remuneration that some companies distribute to shareholders. Later, however, he decided to leave the subject out of the final text.

Therefore, the JCP issue must be addressed later, in the income tax reform, as well as the taxation of profits and dividends.

Last week, when talking about the project, Pedro Paulo expressed concern about the consequences of the new taxation.

“What will the movement of assets be like, of these R$700 billion that are the stock of investments in exclusive funds? A calibration error and you can have a movement that generates revenue in the first moment, but affects the capital market a lot”, he stated. “With an excessive rate, you make exclusive funds unviable and they go to other long-term assets that have some type of tax incentive.”

Technical note from the Public Leadership Center (CLP) points to the risk of a drop in revenue – the opposite of what the government intended. According to the institution, taxation could cause richer taxpayers to leave the country.

According to an estimate by the CLP, if 3% of the richest 1% in the country made this decision, there would be a loss in revenue of R$4 billion per year. If 5% of the richest leave Brazil, the loss would reach R$6.75 billion.

Voting went back and forth and was postponed again

The vote was scheduled for the week of October 4th, but it ran into obstruction promoted by opposition parties, in protest against the alleged interference of the Federal Supreme Court (STF) in Congressional agendas.

The vote was then rescheduled for the 24th, after Arthur Lira returned to the country. In the meantime, however, Lula and the Minister of Finance, Fernando Haddad, negotiated an anticipation for this Tuesday with Marcos Pereira, acting president of the Chamber.

However, the opposition did not believe that the agenda would move forward without the presence of Arthur Lira. And, in fact, in a meeting this Tuesday, party leaders recalled the agreement to vote on the project only on the 24th. As a result, Pereira ended up giving in and rescheduling the vote.

“There can be no risk of not approving”, said the rapporteur last Friday (13) to CNN. The vote tends to be a test to measure the commitment of the allied base with the government after the entry of Centrão representatives into command of ministries.

What are offshore funds and what changes with the project

“Offshore” funds are financial investments abroad made through companies. Typically, managers live in Brazil and companies are headquartered in countries with favorable tax conditions.

Although they contain baskets of assets from various countries, such investments are different from international funds, offered by large banks or renowned investment managers, with access to more developed markets.

Today, money invested abroad is only taxed when redeemed or sent to Brazil. But many investors use alternatives to avoid taxation. One of them is to invest the profit in a company in which the investor has a shareholding in Brazil. Thus, he can redeem the money in the form of dividends, tax free.

In an attempt to avoid tax fraud, the government drew up a rule – maintained by the rapporteur in the Chamber – establishing that income abroad will be subject, from 2024, to a single table. Tax will be charged once a year on the investment profit, even if there is no redemption.

Income of up to R$6,000 will be exempt. Between R$6,000 and R$50,000, taxation will be 15%. For profits exceeding R$50,000, the maximum rate of 22.5% will be applied, the same used for short-term investments in the country.

The rapporteur, however, removed from the calculation of taxation of companies abroad the gains from exchange rate variation, which was included in the government’s original proposal.

The government had also proposed that investors update their assets and rights abroad to market values, paying 10% tax on the gains accumulated until the end of this year. This rate was reduced by the rapporteur to 6%.

With the change, revenue should be lower than expected by the government. Initially, the Treasury estimated to raise R$7.05 billion in 2024; R$6.75 billion in 2025; and R$7.13 billion in 2026.

Exclusive funds are now taxed under the “come-quotas” system

Exclusive funds are those in which there is a single shareholder, generally members of the same group or family. Managed by renowned professionals, they are different from the so-called condominium funds, available to any investor.

Like all funds, they can be made up of assets from different classes, but they belong to a single shareholder, like an investment club. Personalized and expensive, they range from R$10 million to R$20 million.

With the project, the government is targeting exclusive closed-end funds, those in which the investor cannot request redemption of the investment at any time. To recover the resources, he needs to sell the shares he owns to someone else, such as in real estate funds and ETFs.

Today, exclusive closed-end funds are only taxed on the redemption of resources, the sale of shares or amortization (when the share is used to pay off a debt or debt with the broker). The big advantage is the exemption from the so-called “quota allowance”. This benefit will end if the project is approved by Congress.

If the PL passes, closed-end funds will be taxed with the share tax, as is already the case with conventional funds. This mechanism works as an advance on Income Tax. It is automatically charged every six months, on the last business day of May and November, even if there is no withdrawal of funds.

For short-term funds, made up of assets with an average maturity of up to one year, the project provides for a 20% tax rate on income. For longer terms, with an average maturity of more than one year, the come-quota rate will be 15%.

The government’s idea is to equalize the taxes on different funds. Today, without the incidence of quota eaters, the return for those who put money into a closed-end fund can be up to 30% higher, according to experts. This is because the amount that would be taxed periodically on other investments continues to yield.

In addition to establishing the come-quotas, the government intended to charge a tax on the gains accumulated in closed-end funds until the end of 2023. The tax rate on this stock would be 10% or 15%, to be paid in installments – the government had proposed two options, with higher taxation on longer installments.

Also in this case, the rapporteur lowered the rate to 6%. And it allowed this tax to be paid in 24 monthly installments starting on May 31, 2024, which was the longest installment allowed by the government.

Taxation of exclusive funds was already on the radar in previous governments

This is not the first time that the federal government has tried to tax exclusive funds. In 2017, the then president Michel Temer (MDB) instituted, by provisional measure, the collection of income tax on such funds. But Congress resisted and the MP ended up losing its validity.

In the government of Jair Bolsonaro (PL), the proposal was included in the tax reform project that the then Economy Minister, Paulo Guedes, sent to Congress in 2021. Once again, taxation did not advance.

In the current project, presented by minister Fernando Haddad, the initial revenue projection was R$3.21 billion for 2023; R$13.28 billion for 2024; R$3.51 billion for 2025; and R$3.86 billion for 2026.

Even without the reduction in the rate on accumulated earnings, market analysts already considered the government’s revenue projections to be overestimated. They point out that the gains from retroactive taxation will occur only once, and assess that the revenue from semi-annual taxation from 2024 onwards tends to be insignificant.

Other tax changes and exceptions are still under discussion

Regarding exclusive closed-end funds, there are still some points under discussion. Parliamentarians want to guarantee exemption from the biannual quota fee in two situations: that of a non-resident investor in Brazil who invests in an investment fund in the country; and in funds that invest more than 95% of their portfolio in Real Estate Investment Funds (FII) and Agribusiness Investment Funds (Fiagro), which do not pay IR, and in Credit Rights Investment Funds (FIDC).

FIIs are made up of investments in the real estate sector, such as hospitals, shopping malls, commercial buildings, and assets. Through these roles, the investor becomes the “owner” of parts of the properties. Fiagro is aimed at investors who want to diversify their FII portfolio in the agricultural sector. And the FIDC is formed by investors who invest at least 50% of the portfolio in credits that companies have to receive, such as rents and bills.

The final text of the PL also provides for a reduction in the number of shareholders to be exempt from Income Tax on dividends distributed by FIIs, which are accessible to small investors.

Currently, the benefit is guaranteed for portfolios with more than 50 shareholders. The government’s original proposal raised the number to 500 shareholders. The objective was to prevent IR exemption for private structures aimed at a select public, and grant the benefit to larger and more popular funds. The rapporteur proposed balancing the number at 300 shareholders. He also established a deadline for funds to adapt to the new rule.