Introduction to the Brazilian Private Wealth Environment
According to recent official surveys, most businesses in Brazil are family owned, with as many as 90% family owned or controlled. Family businesses represent around 65% of the Brazilian Gross Domestic Product (GDP) and serve as employers of approximately 75% of the workforce in Brazil.
Although family businesses are considered as the backbone of the Brazilian economy, surveys also indicate that around 70% of such businesses fail before they are passed to the second generation of the family, with only approximately 5% surviving to be passed to the third generation.
The importance of family businesses in Brazil has led to a surge of interest in private wealth law from a number of law firms. Most of the leading law firms have now entered the field, although in many cases there are no partners working exclusively for family offices and private clients, with corporate tax lawyers acting for family offices and private clients alongside their existing corporate clients. However, some of the leading law firms are already following the trend in the UK, the United States and other jurisdictions of having dedicated professionals working exclusively in the private wealth field.
Financial institutions in Brazil have followed a similar path and all of the major firms have dedicated professionals focusing on private clients. Several foreign financial institutions have also recently established their presence in Brazil, in the majority of cases by acquiring existing Brazilian multi-family offices, with some of the Swiss banks playing an important role in that regard over the past years.
It is important to make reference to the voluntary disclosure programme implemented by the Brazilian Government in 2016, through which Brazilian resident taxpayers finally had the chance to regularise offshore unreported assets. Apart from generating a lot of work for legal firms (analysis of cases and adhesion to the VDP itself), the programme has allowed Brazilian resident taxpayers to finally use these proceeds and assets in their day to day activities. In addition, by having such assets legally reported, the families can now implement more sophisticated succession and tax planning structures both in Brazil and abroad.
Aligned with this there is a trend for families to structure their affairs through single family offices with many families using these to separate the family’s wider interests from their operating business. Consequently, families require more specialist advice from lawyers and tax advisors to help them optimise their structures for tax, succession and legal purposes.
Owing to the above factors, the Brazilian private wealth legal environment is at its most vibrant and dynamic.
Relevant Trends in the Private Wealth Market
Tax treatment applicable to trust distributions made to beneficiaries
Although trusts are not recognised by Brazilian legislation, they are largely used by Brazilian families for succession planning purposes. In this context, there is a lot of uncertainty regarding the tax treatment applicable to transactions involving Brazilian resident individuals and foreign trusts.
In that regard, on 31 March 2020, Federal tax authorities issued the first private ruling dealing with the tax treatment applicable to distributions made by foreign trusts to Brazilian resident beneficiaries. In summary, the taxpayer asked whether the distributions of a foreign trust to Brazilian resident beneficiaries should be subject to the imposition of individual income tax or to gift and inheritance tax.
Federal tax authorities stated that such distributions should be subject to the imposition of individual income tax at progressive rates (up to a maximum rate of 27.5%). The Federal tax authorities did not provide any answer with respect to the imposition of gift and inheritance tax, as this is State rather than Federal tax matter and therefore comes under the jurisdiction of the State tax authorities.
Whilst the ruling only binds the taxpayer that brought the case and the judgement does not provide an in-depth technical review of the matter, it definitely serves as an indication on how Federal tax authorities will most likely treat trust distributions. More importantly, it evidences that Federal tax authorities are paying attention to trust structures and their treatment under tax law.
Voluntary disclosure programme assessments
As mentioned, resident taxpayers had the chance to regularise their offshore unreported assets in 2016. Under the terms of the programme, Brazilian tax authorities have five years to audit the taxpayers that made a voluntary disclosure. With the deadline for initial disclosures approaching, the tax authorities have begun to inspect and assess taxpayers who did not fulfil all the conditions outlined in the legislation.
According to information provided by the tax authorities, 367 taxpayers were inspected during 2019. Among them, 79 taxpayers were subject to formal tax procedures and are defending themselves at the Administrative level. In the worst-case scenario, a taxpayer may be excluded from the programme with tax, penalty and interest levied, although a deduction would be allowed for tax paid at the time the original disclosure was made.
Additionally, and more importantly, exclusion from the programme would mean that criminal proceedings could be brought by the Brazilian tax authorities. Please note that although the programme expressly provided that the initiation or continuation of investigative proceedings regarding the origin of the funds could only occur if there was documental evidence in addition to the information provided in the original disclosure, we cannot guarantee that authorities will be bound by such provision in the context of inspections and assessments. Finally, it is expected that more inspections will occur during the years of 2020 and 2021.
FATCA & CRS
Tax authorities are also receiving new data under the FATCA and CRS regimes. In relation to FATCA, Brazilian tax authorities received information on approximately 60,400 bank accounts maintained by Brazilian tax residents in the United States of America. With respect to CRS, Brazilian tax authorities received information on approximately 860,000 bank accounts maintained by Brazilian tax residents in 96 jurisdictions, with most of the information received relating to the Bahamas, Cayman Islands, Switzerland and Uruguay. It is expected that such information will be used in future tax inspections.
Potential Legislative Developments Affecting High Net Worth Individuals
Some changes to Brazilian legislation related to private wealth matters have been expected for a long time. However, with the COVID-19 outbreak, it seems that several of those changes may occur much sooner than anticipated. In particular, the following subjects are currently under discussion at both the Legislative and Executive branches:
Although foreseen by the Federal Constitution since its promulgation in 1988, wealth tax has not yet been introduced in Brazil. Currently, 35 bills of law are under discussion at the National Congress (the high number of bills of law dealing with the same matter is a typical Brazilian peculiarity). The bill of law most likely to be passed provides for the annual imposition of tax over a wealth (net worth) exceeding BRL23 million (equivalent to USD4.4 million, based on the exchange rate at 30th June 2020) at progressive rates varying from 0.5% up to 1%.
The wealth tax would be due by individuals who are tax resident in Brazil and by non-Brazilian tax residents (individuals and legal entities). The tax would be calculated with respect to assets located in Brazil and to both assets located in Brazil and worldwide that are in the estate of deceased Brazilian tax residents.
Gift and Inheritance Tax
Gift and Inheritance Tax (ITCMD) is a State tax and the rates therefore vary from State to State. The maximum allowed rate corresponds to 8%, although most of the States provide for the application of lower rates. In the case of São Paulo for example, the maximum rate corresponds to 4%.
However, in most States, bills of law exist which aim to increase the applicable rates up to 8%. The taxable basis of the ITCMD is the market value of the assets being transferred (either via succession or via gift).
Since 1996, dividend distributions by Brazilian legal entities have been exempt from the imposition of the withholding income tax. However, there are currently 18 bills of law dealing with the re-introduction of taxation of dividend distributions by Brazilian legal entities. Some of the bills of law establish a withholding income tax rate of 15%, applicable to shareholders resident in Brazil, with the rate rising to 25% where distributions are made to shareholders located in low-tax jurisdictions (as defined by Brazilian law).
Imposition of income tax on earnings recognised by exclusive investment funds
These funds are widely used by ultra-high net worth individuals. The investors of such funds are only subject to the imposition of income tax at the redemption of the fund therefore no taxation occurs while the earnings are held within the fund.
There was an attempt in 2018 to tax the investors every six months at a 15% withholding income tax rate, even without redemption of the fund (as occurs with regular multi-strategy funds). Such attempt via Provisory Measure was not converted into law. A similar attempt via bill of law is expected to be approved soon.
Currently, there are nine bills of law aimed at establishing the Compulsory Loan in Brazil, which is a type of tax provided by the Federal Constitution to be launched in cases of emergency, such as the COVID-19 outbreak. Given its loan nature, this tax is supposed to be collected from tax residents (individuals and legal entities) and later reimbursed to the taxpayer considering the schedule to be provided by law.
The main bill of law establishing the Compulsory Loan provides that its calculation basis applies over net worth greater than those described for wealth tax purposes and the tax rate would be equivalent to four cents (BRL0.04) of each Real (BRL1) that exceeds this amount.
Other relevant subjects
As far as we are aware, currently there are no relevant discussions by the Government related to the following:
There are some bill of laws aiming to modify the Brazilian tax system. Some of the main objectives of the so-called “tax reform” are to:
The approval of the tax reform was expected to occur during 2020, however, it is unlikely that it will be accomplished within this year given the current crisis brought by the COVID-19 outbreak.