CFC Rules For Brazilian Resident Individuals

On November 12, 2013, Provisional Measure n. 627 ("MP 627/2013") was published, which, among other relevant changes in Brazilian Income Tax Legislation, changed the way investments abroad are taxed when held by Brazilian-resident individuals. In accordance with such new rules, individuals shall recognize and anticipate the payment of income tax over the profits obtained abroad through controlled foreign corporations ("CFC"). Starting on January 1st, 2015, the profits deriving from a CFC will be considered as made available to Brazilian resident individuals at the closing of the CFC's taxable year and will be subject to Income Tax in Brazil if: I - the CFC is located in a tax haven or subject to a beneficial tax regime; or II - the CFC is subject to "sub-taxation" (a regime which taxes resident companies at a nominal tax rate below 20%); or III - the Brazilian resident individual does not possess the relevant incorporation documents and subsequent changes, registered in relevant public offices, which identify the other shareholders of the CFC. The lists of tax havens and beneficial tax regimes are contained in Normative Instruction n. 1,037, dated June 7, 2010 (in Portuguese). The applicable tax is the Individual Income Tax ("IRPF"), calculated on the basis of the progressive monthly rates, which must be paid up until the last day of the month following the deemed availability of the CFC's profits, and this shall be included in the taxpayer's Annual Income Tax Return. By the time the dividends deriving from the CFC are actually paid to the individual, any accrued gain deriving from the positive variation in the foreign currency's exchange rate between the amount that was subject to tax under the CFC rules and the amount effectively distributed as a dividend, if any, will be taxed as a capital gain to the Brazilian resident individual. The profits regulated by these rules will be considered as income for purposes of IRPF at the rate of the individual's ownership in the...