In September 2015, the Brazilian federal government proposed a new rule increasing the income tax rates applicable to capital gains payable by certain taxpayers from a transfer or sale of assets or rights, as reported in our Alerts of October 2015 and December 2015. The rule has been approved by the Brazilian Congress and the Brazilian President and became law on March 16, 2016 ("Law n. 13,259").
Prior to the approval of Law n. 13,259, capital gains were taxed at a rate of 15 percent for Brazilian individuals and foreign legal entities that are not subject to a specific tax regime.
The capital gains tax rates as finally approved under Law n. 13,259 are as follows:
- 15 percent on capital gains up to R$5 million.
- 17.5 percent on capital gains exceeding R$5 million and up to R$10 million.
- 20 percent on capital gains exceeding R$10 million and up to R$30 million.
- 22.5 percent on capital gains exceeding R$30 million.
Law n. 13,259 expressly applies only to individuals residing in Brazil and to Brazilian legal entities not taxed based on actual profits (which is mandatory for most companies whose total revenues, in the previous calendar year, exceeded R$78 million per year), presumed profits (generally applicable to companies whose revenues fall short of the threshold for the actual profits regime but are not eligible for the simplified tax regime applicable to small businesses), or assessed profits. However, Brazilian law provides that a foreign legal entity is subject to the same capital gains tax rates as an individual Brazilian resident, unless a specific rule otherwise applies to such foreign entity.
As a result, absent further clarification, Brazilian tax authorities will apply these new increased capital gains rates to a non-Brazilian legal entity selling Brazilian assets or transferring Brazilian rights, unless the non-Brazilian legal entity can qualify for a specific tax regime in Brazil (for example, the favorable tax treatment accorded to an investor in a Fundo de Investimento em Participações, a Brazilian private equity fund commonly known as a "FIP")
It should be noted that, as reported in our Alert of January 2016, the increased tax rates will not come into effect until January 2017. Pursuant to Brazilian law, any law creating new taxes or increasing tax rates is effective only as of the beginning of the calendar year following its approval by the Brazilian Congress.