Taxation Of Capital Gains Earned By Brazilian Individuals And Non-Residents And Amendment To The Rule Of Taxation Of Profits Earned Abroad By Associated Companies- Conversion Of Provisional Measure No. 692/15 Into Law No. 13,259/16

The Brazilian Presidency sanctioned, on March 16, 2016, Law No. 13,259/16, which converted into law the rules of Provisional Measure No. 692 of September 22, 2015 ("MP 692/15").

The final wording of Law 13,259/16 provided progressive rates for the levy of Personal Income Tax on capital gains earned as a result of the disposal of assets and rights of any nature. The progressive rates are the following:

15% over gains that do not exceed R$ 5,000,000.00; 17.5% over gains that exceed R$ 5,000,000 but do not exceed R$ 10,000,000.00; 20% over gains that exceed R$ 10,000,000.00 but do not exceed R$ 30,000,00.00; and 22.5% over gains that exceed R$ 30,000,000.00 We highlight that the referred tax rates also apply for disposal of an asset or right located in Brazil performed by non-resident individuals or legal entities.

In case of a disposition in parts of the same asset or right, from the second operation on, as long as it is performed up to the end of the subsequent calendar-year to the first operation, the capital gain must be added to the gains earned in the previous transactions for purposes of calculating the Income Tax based on the progressive rates described above. In this scenario, the tax paid with respect to the previous transactions must be deducted from the amount of the final tax due.

For such purposes, Law 13,259/16 states that the shares or quotas of a same legal entity are part of the same asset or right.

It is important to note that paragraph 2 of Article 5, initially included in the Bill of Law of Conversion of MP 692/15, has been vetoed by the Presidency. Such rule provided that the new tax rates would be applicable for disposals occurred as from January 1, 2016. However, this provision has been vetoed based on Article 62, paragraph 2, of the Federal Constitution, which provides that a Provisional Measure that implies in the imposition or increase of taxes (except the so-called "regulatory" taxes) will only produce effects in the subsequent financial year if it is converted into law up to the last day of the year in which it was enacted.

Therefore, we believe there are good arguments to support that the new tax rates apply only for disposals...