LAW 14.754/2023 – Taxation of Foreign Investments and Funds in Brazil

The President of Brazil signed on December 12, 2023,  Law No. 14.754/2023, which regulates, among other things, the taxation of the income earned by Brazilian taxpayers in foreign financial investments, foreign-controlled entities, and trusts, as well as the taxation of investment funds in Brazil. The Law will become effective on January 1, 2024.

Below, we highlighted the main points related to the taxation of foreign investments.

Foreign Financial Investments and Income Held in the Name of an Individual
Income from foreign financial investments in an individual's name will be subject to a 15% flat tax rate.

Controlled Entities
Starting on January 1st, 2024, profits earned by foreign-controlled entities will be subject to a 15% tax rate, regardless of distribution.

Balance Sheet of Controlled Entities
The balance sheet of the controlled entity must be prepared according either  (i) the International Financial Reporting Standards (IFRS), or the applicable Brazilian commercial law, at the taxpayer’s discretion;  or (ii) the Brazilian commercial law if the controlled entity is located in a country or dependency with preferential tax treatment.

Fiscal Transparency of Controlled Entities
The bill provides the possibility for the taxpayer to opt for a flow-through regime. In this case, the taxpayer is required to report each asset (assets, rights, debts, and encumbrances) held by the controlled entity on the individual’s income tax return. Debts and encumbrances must be reported with a value of zero in the Annual Adjustment Report.

Trusts
The assets of the trust and its income will be taxed according to the rules for financial investments or controlled entities.

The settlor of the trust must report the trust in his/her Annual Adjustment Report by the acquisition cost.

The assets and rights of the trust will be transferred to the beneficiaries upon their effective availability or the settlor’s death, whichever occurs first. If the trust is irrevocable, the transfer will occur when the trust becomes irrevocable. 

Update of the Value of the Foreign Assets

The taxpayer may choose to update the value of foreign assets and rights reported in the Annual Adjustment Report to their market value as of December 31, 2023, taxing the gain at an 8% tax rate. The tax must be paid on or before May 31, 2024.

This option applies to financial investments, real estate in general or assets representing them, vehicles, aircraft, boats, and other movable assets subject to recording, even if the asset is encumbered by any means, such as, but not limited to, mortgages, liens, etc., and the interests in foreign controlled entities.

On the other hand, it does not apply to items such as foreign currency in cash, jewelry precious stones and metals, works of art, historical antiques, pets, or sports equipment, nor to assets purchased in 2023. 

We will publish soon comments on the parts of the law that affect your investments in the USA.