International Tax Newsletter - Dezembro 2023

New taxation for investment funds and offshores is sanctioned

On December 12th, the President of the Republic, Luiz Inácio Lula da Silva, sanctioned Law 14,754, of 2023, which, among other changes, promotes changes to the Income Tax (IR) levied on investment funds and taxation of income from abroad through offshore companies and establishes a taxation regime for trust assets abroad via fiscal transparency. The text, published in the Official Gazette of the Union (DOU) on December 13th, establishes that the law will come into force from January 1st, 2024, with exceptions for certain rules, especially those related to the regime transition.

Currently, a 15% income tax rate is levied on capital gains from resources invested in offshore companies. However, taxation only occurs on resources that return to Brazil. In other words, once outside the country, this income could never actually be taxed, as long as it never returned to the country.

The new law establishes a 15% annual rate on income from 2024, even if the assets remain abroad. Collection will occur in advance, with the same rules as for exclusive funds.

In relation to exclusive funds, generally adopted by individuals considered “super rich”, participants in exclusive funds will be subject to taxation of 15% on income in long-term funds or 20% in the case of short-term funds (lasting up to one year) for Income Tax purposes. Longer investment periods will be associated with lower tax rates, as provided for in the Income Tax regressive table.

Starting next year, the amounts will be collected every six months through the "come-cotas" system. In this modality, the Federal Revenue Service withholds the income tax due, taxing a portion of quotas every six months. It is important to note that the quota allowance exclusively impacts profits, not affecting the capital invested.

Investors who choose to start paying the allowance this year will be able to pay 8% on all income obtained until 2023 in installments, with the first installment starting in December; or 15% in 24 months, with the first installment in May 2024.

Brazil’s National Congress Approves Proposed Tax Reform on Consumption

On December 15^th, 2023, in a vote held in the House of Representatives, the National Congress definitively approved Constitutional Amendment Proposal (“PEC”) No. 45/2019, which proposes a broad reform in taxation on consumption in Brazil.

In a plenary session on November 08^th, 2023, the Federal Senate approved its version of the text of PEC No. 45, introducing certain changes to the original text, as explained in our Client Alert of November 10^th, 2023. In turn, when reviewing again the tax reform PEC, the House of Representatives made several adjustments to the changes proposed by the Senate, some of those which we highlight below:

• Removal of the 100% reduction in the rate on the acquisition of medicines and medical devices by non-profit social assistance entities;
• Exclusion of specific regimes for specific sectors;
• Maintenance of the Tax on Industrialized Goods (IPI) as a competitive advantage mechanism for the Manaus Free Trade Zone, to the detriment of charging the Contribution for Intervention in the Economic Domain (CIDE);
• Exclusion of the provision that brought a list of sectors prevented from taking advantage of the Manaus Free Zone incentives (e.g. weapons and ammunition, tobacco, alcoholic beverages);
• Exclusion of the provisions that dealt with the need for a hearing and approval by the Federal Senate for the president of the IBS Management Committee;
• Exclusion of the provision that dealt with the competence of external control of the Management Committee of legislative assemblies and chambers, with the assistance of the audit courts;
• Exclusion of the award mechanism for federative entities with greater collection efficiency, linked to the transition factor;
• Changes to the provisions that dealt with publicity and study in the publication of infra-legal tax rules and the need to demonstrate the economic-financial impact on bills that require or increase taxes.

We would just like to reinforce that this reform will exclude several indirect taxes in favor of a dual VAT, which will then enter a transition period from 2026 to 2033. The text is now expected to move for enactment in 2023, while discussions should intensify during 2024 with the need to issue Complementary Laws.

Brazil E-Visa is now available for citizens of Canada, U.S and Australia

Starting from January 10th, 2024, citizens traveling with passports from Australia, Canada and the United States visiting Brazil for tourism or business, will be subject to visa requirements in order to enter in Brazilian territory.

It is not necessary to attend an Embassy or Consulate in person to apply for this visa. This process is fully electronic. After requesting the E-Visa through the Electronic Visa system, the applicant will receive it in a few days on their e-mail.

Therefore, the nationals of these countries will need to present their passports and a printed copy of their E-visas to enter in Brazil.

It is important to emphasize that the E-visa will allow multiple entries in the country and will have the same validity period as traditional visas: 10 years for U.S citizens and 5 years for Canadian and Australian citizens.

Federal Senate approves taxation proposal for online betting and prizes

On December 12th, the Federal Senate plenary approved a tax proposal for online sports betting companies and their prize winners. According to the Ministry of Finance, the initiative could generate an initial revenue of BRL 2 billion by the year 2024. However, it is important to understand what this implies for regular users of these platforms.

The project underwent modifications in the Senate and now returns to the Chamber of Deputies for a new vote, before proceeding to presidential approval.

If approved in its current form by the senators, platform users will only be taxed in cases of victory, being exempt in case of losing bets.

The text establishes a tax of 12% on the revenue of online betting platforms and 15% on prizes allocated to individuals. This means that bettors who are unsuccessful in their bets will not have tax obligations. However, the winners must allocate 15% of the prize to the government, according to the proposal.

The project determines that taxation on betting prizes greater than BRL 2,112, exempting lower amounts. Income tax will only be levied on the difference between the cash prize and the first bracket of the monthly Personal Income Tax (IRPF) table up to BRL 2,112, according to the limit established for 2023.

Copom reduces basic interest to 11.75% per year

On December 13th, the Monetary Policy Committee (Copom) of the Central Bank (BC) met to define the economy's basic interest rate, Selic. Unanimously, the entity reduced the rate by 0.5 percentage points, establishing it at 11.75% per year.

According to the Copom, new cuts of 0.5 percentage points will continue to be promoted in the next meetings, however, it did not detail when it will stop reducing the Selic, as this will depend on inflationary behavior in the first half of 2024.

“If the expected scenario is confirmed, the committee members unanimously foresee a reduction of the same magnitude in the next meetings and assess that this is the appropriate pace to maintain the contractionary monetary policy necessary for the disinflationary process. The committee emphasizes that the total magnitude of the easing cycle over time will depend on the evolution of inflationary dynamics,” the Copom highlighted in a statement.

It is worth remembering that the defined rate is at its lowest level since May 2022. From March 2021 to August 2022, the Committee raised the basic rate 12 consecutive times.

Before the start of the high cycle, the Selic had been reduced to 2% per year, the lowest level in history that began in 1986. However, the economic contracting generated by the Covid-19 pandemic meant that the Central Bank (BC) lower the rate in order to stimulate production and consumption.