Brazil – Changes to Individual Taxation, Reporting of Foreign Income and Assets

Main Aspects of MP No. 1,171/2023 

As from May 2023, the individual income tax will be calculated according to the following monthly table:

Source: KPMG in Brazil

* Taxpayers will apply the maximum rate in their tax bracket to total income, then deduct the respective deductible amount. This aids in the progressivity of the tax system.

Moreover, as an alternative to the currently allowed monthly income tax deductions, a simple monthly discount corresponding to 25 percent of the maximum exempt amount of the progressive tax table may be used if it is more beneficial to the taxpayer.  

Financial Investments Abroad

As from January 1, 2024, there will be a separate tax calculation and reporting obligation for tax residents in Brazil receiving the following earnings from capital invested abroad:

—   financial investments;

—   profit and dividends from subsidiaries;

—   assets and rights held by a trust.

Such calculation will take on board the tax rates and thresholds noted below, with no deductions allowed:

Source: KPMG in Brazil

The earnings mentioned by the MP will be included in the Income Tax Return and subjected to income taxation when they are effectively received by the individual, upon redemption, amortization, sale, maturity, or settlement of financial investments.

Capital Gain Taxation

The MP revokes the exemption previously applied to capital gains (profit) on the sale of assets held abroad by tax residents in Brazil, when the asset had been acquired during their period of non-tax residence.

Foreign Assets and Rights Value Update 

Tax residents in Brazil can now choose to update the value of rights and assets held abroad that are disclosed on their individual income tax return as per their respective market value as of December 31, 2022.  As such, the difference from the market value to the acquisition cost of the asset will be taxed at a 10-percent tax rate.

The option must be exercised as per the rules and deadline to be set forth by the Brazilian tax authorities, and it has already been announced that the updates can be applied collectively or separately for each asset or right abroad, with the applicable tax payable by November 30, 2023.

Assets and rights ALLOWED to have their value updated are the following:

• financial investments;
• properties in general, or assets that represent rights to real estate;
• vehicles, aircraft, vessels, and other movable property subject to registration in general, even if in fiduciary sale; and
• ownership of subsidiary entities.

Assets and rights that CANNOT have their value updated are the following:

• assets and rights that have not been reported in the 2023-2022 Brazil Income Tax Return (filed by May 31, 2023);
• assets and rights that have been disposed of, written off, or settled on a date prior to when the option addressed by this MP is formalized; and
• jewel, stones, and precious metals, pieces of art, antiques of historical or archeological value, domestic or sport animals, and animal-based reproduction genetic material subject to registration in general, even if these are subject to conditional sale.

KPMG Insights

The Provisional Measure enacted by Brazil’s new government contains a number of changes that, simply put, alter the tax treatment of individual income, whether that income comes from employment or financial investments overseas.  The trust regime has undergone some important reforms.  And the valuation of foreign assets for Brazilian tax residents – and, hence, their taxation – will change, as well.

For new assignees inbound to Brazil, pre-departure and/or on-arrival conversations with those who will be subject to Brazilian tax law should include mention of applicable tax rates, thresholds and brackets, exemptions, valuation rules for overseas assets they hold, reporting requirements, and the impact on the assignee.

Employers and employees concerned about the effect of the above-noted changes and how to budget for and otherwise plan the employee’s assignment, should contact their qualified tax professional or a member of the Global Mobility Services team with KPMG in Brazil (see the Contacts section).

Contacts