Brazil – Investments Abroad & Taxation

The article below has been written by Edmo Colnaghi Neves, PhD, from our Brazilian member firm Murray Advogados

The recent legislation made important changes to the taxation of investments abroad, with the publication of the law in December 2023, which are still being assimilated by taxpayers.

Among the various aspects legislated is the status of the Trust. Institute better known abroad than in Brazil, where there are few regulations on the subject, but which allows for patrimonial and family planning.
In this institute we have the figure of the “settlor”, the “trustee” and the “beneficiaries”, the first being the one who has an asset that transfers it to the second, with a transfer of ownership, and who has the obligation to manage these assets and allocate its fruits to third parties, the “beneficiaries”, chosen and indicated by the “settlor”. This is usually detailed in a contract called “Trust deed”.
Thus, when establishing the Trust, the “settlor” or settlor, ceases to be the owner of the assets, in the case of an irrevocable Trust.

Among other topics, Brazilian legislation published at the end of the year literally stated:

“Art. 10. For the purposes of this Law, assets and rights subject to trust abroad will be considered as follows:
I – will remain under the ownership of the settlor after the establishment of the trust; It is
II – will become the property of the beneficiary at the time of distribution by the trust to the beneficiary or the death of the settlor, whichever occurs first.” (Law 14754/23)

In other words, the assets that the settlor (settlor) had transferred to the trustee (trust administrator, in free translation) must still be considered as property of the settlor for the purposes of income tax legislation and thus be reported in the respective declaration or as property of the beneficiary in the event of distribution to the beneficiary or death of the settlor.

In other words, the law revoked the irrevocable: the transfer of assets from the settlor to the Trust. According to the law, the assets belong to the settlor or the beneficiary, there is no third alternative.

Brazilian Law, in this case, the Civil Code, requires a capable agent, a lawful object and a form prescribed or not defended by law, to consider a valid transaction.

On the other hand, article 110 of the National Tax Code, an ordinary law with the “status” of complementary law, in view of the phenomenon of reception, determines that tax law cannot alter the concepts of private law.

Having concluded the valid transaction, we are faced with a perfect legal act and the law will not harm the perfect legal act, which is established in section XXXVI of article 5 of the Federal Constitution.
The protection of perfect legal acts is one of the pillars of legal security that the Brazilian State must provide. Without legal certainty there is no reason for the rule of law to exist. There is a flagrant violation of the Brazilian Constitution in this provision.
It is true that the right to property, on the one hand, and the social function of property, on the other hand, must be reconciled within the condominium of fundamental rights provided for in the Greater Law, but current fundraising objectives cannot violate the right to property , the perfect legal act and the security of social relations. The aforementioned provisions, therefore, must be considered invalid as they are unconstitutional.

Brazilian Law allows control of the constitutionality of norms through concentrated or diffuse means. In the first case, it is direct, through direct actions of unconstitutionality, proposed by those whom the Federal Constitution authorizes, but also through diffuse means, through legal action by citizens and legal entities that have their rights violated or threatened by unconstitutional rules.