Brazilian Personal Taxation in Brief
Under the Brazilian personal tax system, residents are taxed on their worldwide income, which includes interests and dividends from foreign sources.
An individual is considered Brazilian resident for tax purposes if he remains in the country for 183 days, consecutive or not, during the course of a calendar year. Those entering Brazil with a permanent visa are also deemed to be permanent residents for tax purposes as of the date of their arrival.
The personal income tax rate is progressive, up to a rate of 27.5% for annual income exceeding BRL 42,984 (around USD 25,500). Capital gains are subject to a flat tax rate of 15%.
Brazilian tax law applies a number of anti avoidance provisions, including transfer pricing, thin capitalisation and general anti-avoidance rules, which entails Brazilian tax authorities, under the “substance over form” test, to disregard acts performed with the purpose of dissimulating the occurrence of the taxable event of the tax.
Controlled Foreign Corporation (CFC) rules have also been introduced in Brazil under Art. 74 of the Provisional Measure 2158-35/2001, however the definition, as set forth under Law 6.4040, only applies to Corporations and not to individual investors, who may achieve tax deferrals.
In addition to the legal obligation to file annual income tax returns, Brazilian individuals must file an annual return (Declaracao Eletronica dos Capitais Brasileiros no Exterior, or CBE) with Brazil’s Central Bank declaring all foreign assets held on December 31st of the preceding year. Despite this filing obligation, there is currently no wealth tax in place in Brazil and thus no tax is assessed and levied on the gross or net assets of a fiscal resident.
The Benefits of BVI Funds
In April 2007, the BVI Financial Services Commission (FSC) was welcomed as an ordinary member of the International Organization of Securities Commissions (IOSCO), which regulates more than 90% of the world’s securities markets in over 100 jurisdictions, including Brazil. This was widely seen as recognition of the BVI’s robust international cooperation framework and its long-standing commitment to comply fully with the standards and requirements as outlined by the IOSCO’s Multilateral Memorandum of Understanding concerning Consultation and Cooperation and the Exchange of Information (IOSCO MMoU).
On 23 April 2010, the government of the BVI enacted the Securities and Investment Business Act (“SIBA” or the “Act”), which codifies some of the practices already undertaken by Funds domiciled in the BVI, and introduces laws to regulate investment business, public issues of securities and market abuse. With the new SIBA, the BVI established a new regulatory framework in full compliance with international standards, thus reaffirming its position as one of the most effectively regulated offshore jurisdictions in the world.
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When properly structured, BVI Mutual Funds can offer considerable tax planning advantages for Brazilian investors, by generating capital gains rather than ordinary income, when the maximum tax rate for capital gains is 15 percent against 27.5 percent for ordinary income.
Additionally, as CFC rules do not apply to individual investors, the use of mutual funds can provide for tax deferral, where income or gains are only taxed once a distribution is received by the investor.
Mutual funds also can offer various other advantages, including but not limited to:
- Family Offices – Mutual Funds can be structured in such a way that individual family members have their own share class or segregated portfolio with separate investment managers and custodians. They are therefore an interesting option to consider for wealthy families;
- Professional Management – While investors might not always have the time or the expertise to manage their own portfolios, Mutual Funds are managed and supervised by investment professionals and subject to an independent external audit;
- Diversification – Investing in Mutual Funds allows investors to spread their investment across a range of diversified securities, thus reducing risk;
- Access – Mutual Funds may have access to investment opportunities which individuals do not have;
- Liquidity – Mutual funds shares may be redeemed with relative ease.
In addition, funds can present substantial succession planning advantages, as upon death of the investor, his shares in the mutual fund will be transferred to his legal heirs, who will then have independent choice to redeem or maintain the investment in the fund. This is a considerable advantage compared to, e.g. offshore corporations, where in a similar situation, strategic decisions on distributions are subject to a consensus between legal heirs.
Palladium Trust Services Limited provides a range of services in jurisdictions across the globe including: corporate services, trust and fiduciary, fund and legal services in the BVI and Anguilla.
Palladium Trust Services Limited
23 Berkeley Square, London, W1J 6HE
Contact: Stephen Abletshauser
T: +44 20 3170 7169
F: +44 20 3178 2848
Note from Palladium: This article is not intended to be a substitute for legal advice. Further, it deals in broad terms only and it is intended to merely provide a brief overview and give general information.