Taxation of Foreign Investments: Perspectives and Challenges for Brazilians and Foreigners/Expats

The taxation of foreign investments in Brazil has a history marked by complexities and significant changes. The recent enactment of Law Nº 14,754/2023 represents a major milestone, offering greater clarity and uniformity for individuals and companies with foreign investments, while also presenting challenges for Brazilian taxpayers and foreign residents in Brazil.

Legislative Evolution: A Long Journey

The attempt to tax controlled companies owned by individuals is not new. During Dilma Rousseff's government, Provisional Measure Nº. 627/2013 addressed the issue but did not advance, resulting only in the taxation of companies controlled by legal entities, as established by Law Nº 12,973/2014 (Brazil, 2014). Later, the 2021 tax reform (Bill No. 2,337/2021) attempted again to regulate this matter, also without success.

Finally, during Luiz Inácio Lula da Silva's government, Provisional Measure Nº 1,171/2023 introduced a temporary taxation model but lost efficacy for failing to be converted into law. The issue was revisited and consolidated with the approval of Bill No. 4,173/2023, culminating in Law Nº 14,754/2023, which took effect on January 1, 2024 (Brazil, 2023).

Before Law Nº 14.754/2023: A Fragmented Scenario

Until 2023, the taxation of foreign income was complex, with different rules applying to dividends, interest, and capital gains. This fragmented scenario required multiple calculations, currency conversions, and the completion of various forms, such as GCAP for capital gains and "Carnê-Leão" for dividends, with progressive tax rates of up to 27.5% (Brazil, 1999).

Moreover, currency conversion followed a convoluted process: values were first converted to U.S. dollars and then to Brazilian reais based on exchange rates from the Central Bank of Brazil (Brazil, 1999).

Law Nº 14.754/2023 and the Changes Introduced

The new law significantly simplifies the tax system for foreign investments that meet the requirements of the legislation. It eliminates the complexity of currency conversion and unifies the taxation of financial income and capital gains at a flat rate of 15%. Dividends from controlled foreign companies and profits from equity investments are also covered under the new rules (Brazil, 2023).

Another positive innovation is the possibility of offsetting losses in financial investments, provided in Articles 3 and 9 of Law Nº 14,754/2023. This allows taxpayers to balance losses and gains, reducing their tax burden (Brazil, 2023).

Implications for Foreigners and Expats in Brazil with Foreign Companies

Foreigners and expatriates residing fiscally in Brazil must comply not only with domestic rules but also with international tax treaties. These agreements can take precedence over Brazilian laws in certain situations, highlighting the need for specialized legal guidance (Brazil, 2023).

Additionally, those participating in controlled foreign entities should understand the following distinctions:

Taxation of the sale of equity interests follows one policy
Taxation of profits and dividends from equity interests follows another.

Despite both deriving from a controlled foreign entity, tax treatment can vary depending on the nature of the income. For example, the sale of equity interests may be taxed under the old regime as capital gains (progressive rates from 15% to 22.5%, assessed monthly upon receipt). Meanwhile, profits and dividends from the same equity interest will be taxed under the new law at a flat rate of 15%, by the end of the calendar year.

Starting January 1, 2024, taxpayers must report to Brazil’s Federal Revenue in 2025:

Dividends as receivable credits in reais, indicating the year of origin.
Annual currency variations from the date of registration to the date of payment (exempt).
Upon liquidation, termination, or dissolution of the foreign entity, subtract the amount of dividends payable from the sale value starting January 1, 2024. This must be included in the entity’s balance sheet.

Failure to comply with the third item may lead to an inflated capital gain and, consequently, undue income tax payment. I plan to write a specific article on this topic. However, this change underscores the need for tax and accounting adjustments by taxpayers while creating opportunities for more efficient and secure tax planning.

Challenges and Opportunities

Although Law Nº 14,754/2023 simplifies many aspects, income not covered by the new rules remains subject to the old regime. Exclusions include:

Rental income from movable and immovable properties.
Compensation (only traditional life insurance)—consult a lawyer for Private Placement Life Insurance (PPLI), Private Equity, Universal Life Insurance (ULI), or similar cases.
Phantom share, stocks, and equity plans.
Assignment of life insurance policies.
Salaries.
Stock options (consult a lawyer; may be taxed upon sale).
Income from services provided by individuals as independent contractors for foreign entities.
Know-how contracts.
Pensions and retirements paid by foreign governmental entities.
Performance-based bonuses and gratuities paid by foreign employers.
Copyright royalties from abroad.
Currency variation of non-interest-bearing accounts in financial institutions supervised by the monetary authority of the country where they are located.
Capital gains are not classified as financial investments.
Sale of up to USD 5,000 in foreign currency within a calendar year.

The law also opens opportunities for investors with large volumes of foreign capital, particularly by allowing tax credits for taxes paid in other countries, as outlined in Article 4 of the new law (Brazil, 2023).

Conclusion

Law Nº 14.754/2023 marks a significant advancement in the taxation of foreign investments but requires increased attention from taxpayers. Attention! Not taxed does not mean that you should not declare the asset! Therefore, proper legal and accounting support is essential to avoid errors and optimize tax compliance. Its implementation, beginning with the 2025 income tax declaration for the 2024 fiscal year, will usher in a new chapter in Brazil's pursuit of greater tax uniformity and fairness.

References

BRASIL. Law nº 12.973, of May 13, 2014. Amends federal tax legislation. Available at: https://www.planalto.gov.br/ccivil_03/_ato2011-2014/2014/lei/l12973.htm. Accessed on: January 8, 2025.BRASIL. Law nº 14.754, of December 15, 2023. Provides for the taxation of foreign investments for individuals. Available at: https://www.planalto.gov.br/ccivil_03/_ato2023-2026/2023/lei/L14754.htm. Accessed on: January 8, 2025.
BRASIL. Provisional Measure nº 1.171, of April 30, 2023. Amends federal tax legislation. Available at: https://www.planalto.gov.br/ccivil_03/_ato2023-2026/2023/mpv/mpv1171.htm. Accessed on: January 8, 2025.
BRASIL. Law nº 9.250, of December 26, 1995. Amends income tax legislation for individuals. Available at: https://www.planalto.gov.br/ccivil_03/leis/l9250.htm. Accessed on: January 8, 2025.
SILVA, David Roberto Soares da. Taxation of financial applications, offshore companies, and trusts abroad. 1st ed. São Paulo: Editora Tributária, 2023.