Declaration of Trust in the British Virgin Islands (BVI)

Structuring Strategies in Light of Brazilian Law No. 14,754/2023

For Brazilian clients who hold assets through companies in the British Virgin Islands (BVI), the BVI Declaration of Trust has become an essential planning instrument following the enactment of Law No. 14,754/2023. When properly structured, a Declaration of Trust can address three interrelated challenges: the taxation of Controlled Foreign Corporations (CFC), the incidence of ITCMD (Tax on Transmission Causa Mortis and Donations) in Brazil, and the new transparency and opacity classifications applicable to trusts. The common thread across these three fronts is the effective relinquishment of control by the settlor, accompanied by independent administration by the trustee.

I. What Is a BVI Declaration of Trust

A Declaration of Trust is a written instrument by which the person holding legal title to certain assets declares that such assets are henceforth held in trust, for the benefit of specific beneficiaries or for specified purposes. Unlike a Settlement of Trust, which involves the transfer of assets to a separate trustee and requires both parties' signatures, a Declaration of Trust requires only the trustee/declarant's signature, since there is no transfer of legal title. The Trustee (Amendment) Act 2021 expressly recognizes the declarant as "settlor" within the reserved powers framework, permitting the declarant to reserve certain powers without compromising the validity of the trust.

II. BVI: A Jurisdiction Considered Among the Most Comprehensive, Sophisticated, and Attractive Compared to Its Main Competitors — Bahamas, Bermuda, Jersey, and Cayman

The 2021 legislative amendment was enacted in response to trust legislation in competing jurisdictions and has made the BVI, on a sustainable basis, one of the most comprehensive jurisdictions for reserved powers trusts. The expanded firewall provisions (protecting against claims at the beneficiary level, step-relationships, and surrogacy arrangements) are especially relevant for Latin American family structures, as Latin American client families frequently present planning considerations involving blended families and forced heirship regimes under civil law. Additionally, the court variation power provides significant flexibility for future restructurings, allowing variations without beneficiary consent, even when the terms of the order may adversely affect any person or purpose.

It is important to note that the regime expressly provides that a person who, through a declaration of trust, declares that assets held by them in a beneficial capacity will henceforth be held by them under the terms of the declared trust, shall be covered by the corresponding legal protections. This explicit statutory inclusion eliminates any ambiguity regarding the application of reserved powers protections to structures established through a declaration of trust.

III. Mitigating Controlled Foreign Corporation (CFC) Taxation

The enactment of Law No. 14,754/2023 is particularly significant for Brazilian clients. Under this law, income earned by a controlled foreign entity is now taxed annually at the level of the Brazilian resident controller, at a flat rate of 15%, on an accrual or mark-to-market basis, eliminating the previously available benefit of indefinite deferral. The CFC rules apply when a Brazilian tax resident holds, directly or indirectly, more than 50% of the share capital or voting rights of a foreign entity, or exercises preponderant influence over its decisions. It is in this context that the Declaration of Trust structure presents a genuinely relevant structural argument that is often overlooked.

First, Law No. 14,754/2023 defines the "settlor" as the individual who, through the trust deed, transfers ownership of assets and rights to the trust. The law provides that the settlor is the one who, through the trust deed, transfers the ownership of assets and rights to the trust. However, a Declaration of Trust does not involve any transfer. The declarant already holds legal title and merely declares that assets in their possession are henceforth held under fiduciary obligations, and may therefore act as both settlor and trustee. Furthermore, in certain Brazilian family structures where the shares of a BVI operating company have already been transferred to an independent trustee, the declarant is an independent, non-Brazilian party (e.g., a BVI-licensed trust company or other independent trustee), and no transfer is made by a Brazilian resident individual.

The Brazilian family members provided the economic consideration at an earlier time (through a sale, capital contribution, or other arm's length transaction with the entity or with the future trustee), but the Declaration of Trust itself is a unilateral act carried out by the non-Brazilian trustee, where applicable. The Brazilian family members are beneficiaries, not "settlors"; therefore, the transparency rule that by default attributes assets to the settlor does not reach them through the trust structure.

Even if Brazilian authorities were to attribute the trust's assets to the beneficiaries, such attribution would be limited to the reporting obligation, i.e., identifying who must declare the underlying assets in their Annual Adjustment Return (DAA). However, characterization as a CFC under Articles 5 through 8 of Law No. 14,754/2023 requires a separate showing: that the Brazilian resident, directly or indirectly, alone or together with related parties, holds rights that ensure preponderance in entity deliberations or the power to elect or remove the majority of its managers, or holds more than 50% of the share capital or equivalent rights.

Being the recipient of asset attribution for reporting purposes is not the same as holding "rights that ensure preponderance in corporate deliberations." A discretionary beneficiary of a BVI trust holds no voting right in the underlying company, no power to appoint or remove managers, no contractual right to distributions — only an expectation that the trustee will exercise its discretion in their favor.

The attribution of a reporting obligation does not create corporate governance rights that did not previously exist. Any family influence may occur exclusively through non-binding mechanisms, such as a letter of wishes.

The role of the trust protector in the BVI offers an additional solution to mitigate the concern of many Brazilian clients regarding potential loss of control. In essence, the trust protector role constitutes a complementary mechanism that allows the client to maintain a degree of oversight and protection over the trust structure, without exercising the type of affirmative control that could trigger CFC characterization or classification of the trust as transparent under Law No. 14,754/2023. Brazilian law does not define "preponderant influence" with absolute precision, which creates room for appropriate contractual structuring. Generally, the following trust protector powers are considered defensible as fiduciary safeguards, rather than control instruments: (1) the power to remove and replace trustees; (2) veto power over distributions to specific individuals; (3) consent rights for amendments to the applicable law or situs of the trust; (4) veto power over the inclusion of new beneficiaries outside a previously defined class. Other powers that may fall within this category include: (a) the power to approve or veto investment decisions involving a significant percentage of trust assets; (b) consent rights for distributions above a predetermined threshold; or (c) the power to direct the trustee to amend administrative (but not dispositive) trust provisions.

Given the current uncertainty in Brazilian law on this matter, it is recommended that the trust instrument include a duress clause (or firewall clause), providing that any trust protector power that is deemed, by a judicial or tax authority, to constitute control will be automatically suspended or extinguished, without prejudice to the validity of the remaining provisions of the structure.

Should Brazilian legislation become more restrictive in the future, the trust protector role could be shared between the client and an independent co-protector (e.g., a family friend, accountant, or unrelated attorney residing outside Brazil), with joint action required to exercise the assigned powers, which would further reinforce the perception of effective independence in the event of oversight or scrutiny.

IV. ITCMD Planning — Donation and Succession

Brazilian states impose ITCMD on transfers by donation or inheritance, with rates currently ranging from 4% to 8%, and reform proposals that could significantly increase these rates. By formalizing the Declaration of Trust as an inter vivos transfer during the settlor's lifetime, the structure may allow the transmission to occur at known and manageable rates, while also establishing the situs of the trust assets in the BVI. A relevant structural decision involves the timing at which beneficial rights vest. Fixed interests vesting upon creation may characterize a complete and perfected donation subject to ITCMD at current rates. On the other hand, discretionary distribution powers defer the transmission, but future distributions will be subject to income tax at the 15% rate under Law No. 14,754/2023. Advisors should model and compare the cost of an immediate ITCMD event against ongoing taxation on distributed income, in order to identify the most efficient alternative given each client's specific circumstances, domicile state, and the prevailing legislative environment. The time for ITCMD planning in Brazil is now, as recent constitutional and legislative changes have expanded and clarified states' taxing authority, while implementing regulations, administrative guidance, and enforcement practices are still consolidating — creating a limited window for lawful and efficient structuring.

V. Lei Complementar No. 227/2026 — Federal Framework for ITCMD on Foreign Assets and Trusts

A critical legislative development directly affecting the planning considerations discussed in this article is the enactment of Complementary Law No. 227/2026 (“LC 227/26”), which establishes the long-awaited federal framework authorizing Brazilian states to levy ITCMD on assets located abroad, including offshore companies and trust structures with Brazilian settlors, heirs, or beneficiaries. Prior to LC 227/26, the Brazilian Supreme Federal Court (STF) had consistently held that states lacked authority to impose ITCMD on foreign assets without a federal complementary law filling that regulatory gap. LC 227/26 fills that gap.

Under its provisions, Brazilian states are now authorized to tax the inheritance and donation of foreign assets, including real estate, financial accounts, equity interests in offshore entities such as BVI and Cayman structures, and foreign partnership or corporate arrangements involving Brazilian residents. For trust structures specifically, LC 227/26 introduces federal-level guidelines for ITCMD incidence, with the precise triggering event, whether upon contribution of assets to the trust (if characterized as a donation) or upon distribution to beneficiaries (if treated as an inheritance or donation), depending on the trust’s classification (revocable vs. irrevocable; discretionary vs. fixed-interest) and applicable state-level regulation.

The law establishes jurisdictional criteria to determine which Brazilian state has taxing authority, generally based on: (1) domicile of the deceased; (2) domicile of the donor; (3) domicile of the heir or beneficiary.

Importantly, the Brazilian constitutional principle of anterioridade anual (annual non-retroactivity) provides that a new tax law may only produce effects in the fiscal year following its publication. Taxes must also observe a minimum 90-day period before enforcement (Anterioridade Nonagesimal). Because LC 227/26 was published in 2026, enforcement of ITCMD on foreign assets and trust structures under this law should not become effective until January 1, 2027, subject to each state enacting its own implementing legislation. Consequently, states cannot validly levy ITCMD on foreign assets in 2026 based solely on this new law. Until December 31, 2026, states remain constitutionally barred from taxing foreign assets unless previously supported by valid legislation (which, under STF precedent, was generally ineffective). Estate and donation planning executed in 2026 may fall outside the new framework, depending on structure and timing.

However, beginning January 1, 2027, States will be legally authorized to enforce ITCMD on foreign assets and trusts. State-level legislation may further regulate procedures, rates, and reporting obligations. Furthermore, enforcement activity is expected to increase.

In view of the impending changes, clients with offshore holding companies, trust structures, foreign real estate holdings, anticipated inheritance planning involving foreign assets, and cross-border estates where heirs reside in Brazil should undertake a proactive review now.

Particular attention should be given to domicile of the settlor and beneficiaries, the timing of any taxable events, and the characterization of trust interests under applicable state law. The interaction between LC 227/26, Law No. 14,754/2023, and the BVI trust structure analyzed throughout this article underscores the importance of coordinated, cross-border planning before the 2027 effective date arrives.

VI. Conclusion

LC 227/26 materially alters the taxation landscape for cross-border estate and donation planning involving Brazilian residents. Although the law cannot be enforced before the next fiscal year due to the principle of annual anteriority, its impact beginning in 2027 will be significant. Clients should undertake a proactive review now to evaluate exposure and restructuring options. 

We are actively assisting our clients in evaluating their offshore holdings and determining their ITCMD exposure on a state-by-state basis. After a thorough review of each client’s structure, timing considerations, and ensuring that we understand his or her unique goals and situations, we work closely with them to design and implement a restructuring plan that is tailored to the client’s unique situation and is in alignment with his or her objectives.

Please contact us to take advantage of this time window and discuss your potential restructuring options.