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Capital Gains Tax: An Overview Of Recent Changes In Brazil

In the past three years, Brazil has been the center of many controversies. The Carwash Operation and the Zelotes Operation, both by the Brazilian Federal Police, the economic crisis that hit the country at the end of 2014, combined with the impeachment of President Dilma Rousseff in the second semester of 2016, created an environment of uncertainty that put foreign investments on hold.

The shadow that recently took over the country fortunately show signs of dissipation, and important infrastructure reforms (such as changes in the Social Security and Labor Legislation and the simplification of the Tax System) are expected to develop in the second semester of the current year.

During this period of crisis, both houses of Congress succeeded in passing substantial changes in the Brazilian tax rules, including those governing the capital gains tax. After some defeats, Brazilian legislators have finally approved new legislation increasing the capital gains taxation in Brazil in the exact moment when the economy is beginning to show signs of recovery.

As of January 1, 2017, the changes introduced by Law No. 13,259/2016 (“Law No. 13,259”) became permanently effective. Capital gains from the selling of assets or rights held by individuals and certain legal entities domiciled in the country are now subject to income tax at progressive rates that may vary from 15 percent up to 22.5 percent, depending on the amount of gain realized, as follows:

  • 15 percent for gains up to BRL5m (approximately USD1.7m);
  • 17.5 percent for the portion of gain exceeding BRL5m up to BRL10m;
  • 20 percent for the portion of gain exceeding BRL10m up to BRL30m; and
  • 22.5 percent for the portion of gain exceeding BRL30m.

Controversies arise over whether the new progressive tax rates will equally apply to foreign investors selling their assets in Brazil (such as equity stakes in Brazilian companies). Doubts appear because, notwithstanding the silence of Law No. 13,259 regarding non-residents, Brazilian tax rules deter- mine that foreigners ascertaining capital gains in Brazil must calculate the corresponding taxable basis and pay the tax according to the same tax rules applicable to individuals residing in Brazil. In our opinion, non-residents should also consider such progressive rates in their transactions (unless the seller is resident in a tax haven jurisdiction, in which case a higher 25 percent tax rate applies).

The capital gain subject to such new taxation continues to correspond to the positive difference between the price at divestment of the assets or rights, and the original acquisition cost of the as- sets or rights. The taxpayer or the person legally responsible for the payment of the tax in Brazil must keep proper and reliable documentation in order to evidence said acquisition cost. For the purposes of calculating the capital gain arising from the divestment of a Brazilian investment by foreign investors, the acquisition cost is generally evidenced, in practice, by means of the foreign investment registered with the Brazilian Central Bank (“BACEN”), alongside any other document showing capital increases (except certain reserves).

The new tax rules did not bring any relief to controversies created in the past by Article 26 of Law No. 10,833/2003. Pursuant to such rule, capital gains tax is levied whenever an asset located in Brazil is divested, irrespective of whether the parties involved in the transaction (acquirer and/or purchaser) are resident in Brazil. Legislators attributed the responsibility for calculating the taxable basis and collecting the corresponding tax to the acquirer (or to his legal representative when the acquirer does not reside in Brazil), thus creating several practical difficulties for this tax compliance.

Another topic that remains unclear relates to the calculation of the capital gain earned by non- residents. Disputes refer to the currency in which such calculation should be made. On one side, some defend the use of foreign currency, in which case taxpayers must calculate the positive difference between the price at divestment and the original acquisition cost first in foreign currency, and then convert it into Reais. Others defend the calculation directly in Reais. Depending on the exchange rate applicable to the case at hand, the capital gain may be significantly affected by foreign exchange variations. Such exchange effects may give rise to taxation in Brazil even when transactions are performed at book value.

Taxpayers have arguments to defend both calculations. According to a recent ruling issued by the Brazilian Federal Revenue (Article 20 of Normative Ruling Number No. 1455/2014), the capital gain calculation must be done in Reais. Such ruling, however, gives rise to more controversies as it applies solely to legal entities not residing in Brazil, and is silent on the situation for foreign individuals.

Historically, Brazilian tax rules have never made a distinction between nonresident individuals and legal entities. Notwithstanding this, our own interpretation supports those arguments that defend the captain gain calculation in foreign currency.

With the Brazilian economic recovery, deals involving the acquisition of assets and rights in Brazil gain strength and are expected to become significant again. In addition to acquisition transactions, new rules also affect multinationals holding investments in Brazil intending to carry out corporate reorganizations.

This article was written by Erika Tukiama and Rafael Sales and published in Wolters Kluwer’s Global Tax Weekly, Issue 231, April 13, 2017

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