The high tax burden on consumption and business activities in Brazil is widely known and criticized for inhibiting business development and economic growth. Brazil markedly contrasts with other emerging economies, where lower tax burdens prevail. It also contrasts with countries where higher taxation is justified by concrete welfare services provided by the States to their citizens, certainly not a Brazilian reality.
But while taxation in Brazil harshly impacts on productive activities and the Brazilian middle class, paradoxically it can be quite attractive for high net worth individuals and non-productive activities in certain aspects.
Firstly, taxation on inheritance transfers in Brazil is quite low as compared to other countries and may lead non-residents bequeathing considerable assets to family members to consider transferring their tax residence to Brazil.
The only tax levied in Brazil on inheritance or gifts transfer between living persons is the ITCMD (Imposto sobre Transmissão Causa Mortis e Doação de Quaisquer Bens ou Direitos) tax. ITCMD rates may vary according to the laws of the State where the taxable event takes place, up to a maximum of 8%. Typically, ITCMD rates are lower than 8%. For example, a 4% rate presently applies in the State of São Paulo. Exemptions and tax reductions also apply in specific situations. The ITCMD calculation basis is normally the fair market value of the transferred assets on the date of the decedent’s death or on the date of execution of the gift instrument.
Income taxation of Brazilian resident individuals is also relatively low, usually from 0% to the maximum of 27.5% on regular income, and at 15% on capital gains, earned from Brazilian or foreign sources.
No income tax is levied on inheritance or donation transfers should the transfer value be the same as the value at which the asset was reported on the transferor’s last tax returns and remain reported at this same value on the transferee’s tax returns. Transferor and transferee may choose to evaluate/transfer the assets at fair market value, in which case the positive difference between the market value and the value indicated on the transferor’s last tax returns is treated as a capital gain subject to 15% income tax.
Another important tax benefit is granted to individuals who become Brazilian non-residents and later reacquire Brazilian residency status. Said individuals are granted income tax exemption for any capital gains earned by them on the sale, liquidation or redemption of assets located abroad or representative of rights abroad, as well as of financial investments, acquired at any title while they were Brazilian non-residents.
Lastly, as opposed to what takes place in many other countries, Brazilian resident individuals who own equity interest in overseas foreign corporate entities, funds or trusts are generally not taxed on the income or wealth appreciation earned via their overseas foreign entities, funds or trusts until such time as the income or wealth appreciation is effectively distributed to them by said foreign entities.
These and other particularities of Brazilian taxation – in addition to Brazil’s reliable financial and capital market regulation – make it an attractive country for high net worth individuals desirous of bequeathing considerable assets via Brazilian tax residence, and/or who own a significant amount of assets overseas qualifying for the above tax benefits.