Taxation of exclusive and offshore funds accelerates decisions to leave the country By Estadão Conteúdo

2023-12-04 12:00:17

© Reuters. Taxation of exclusive and offshore funds accelerates P exit decisions

The taxation of exclusive and offshore funds, used as investment vehicles for large fortunes, accelerated decisions to leave Brazil among some of the wealthiest families. The idea of ​​changing tax domicile to non-resident was one of the first reactions noticed by managers of large fortunes, especially among families in which issues such as succession in companies or the structure of children or heirs have already been resolved.

“We noticed this right away,” said partner and legal and compliance director at G5 Partners, Roberto Freitas. The house has R$30 billion in fortunes under management. He noted, however, that the majority of clients who proposed accelerating the process of changing their tax domicile already had this intention before the bill was released, due to family reasons, life projects and disagreement with government policies. .

The bill to tax offshore funds and exclusive funds was approved on Wednesday, 29, by the Senate and now goes to presidential approval. The proposal establishes a rate of 15% for funds abroad. Exclusive short-term funds will have a tax rate of 20% and long-term funds will have a tax rate of 15%. Furthermore, taxpayers who decide to pay tax in advance on the balance of exclusive funds for this year will pay a lower rate of 8%.

Tax consultant and partner at Shield International, Patrícia Quintas, explains that taxpayers who leave Brazil definitively and duly formalized before the Federal Revenue Service, from the date of physical departure from the country, become non-Brazilian tax residents. As a result, income obtained abroad will no longer be taxed and declared in Brazil. Income from Brazilian sources will be subject to special taxation as non-tax residents.

One of the benefits, according to her, would be on rental income in Brazil, on which a rate of 15% is levied, directly at source, against a progressive rate of zero to 27.5% for residents. But the expert notes that changing tax residence is always accompanied by good planning in the process. “It is necessary to study the advantages and disadvantages, be they economic, tax, inheritance or even the search for new opportunities”, she says. The consultant’s client portfolio includes a large majority of families with an average net worth of US$50 million.

Freitas, from G5, says there is no “silver bullet” to offset this new expense. “There are alternatives for mitigating the effects of taxation, which include restructuring and slicing investments for funds that continue without the come-quotas (as the tax on funds is known)”, he states.

He recalls that exclusive funds were structured in a format that gave families flexibility in investments, allowing the direct purchase of any financial asset, securities or shares in other funds.

However, adds Freitas, there are options that wealth managers are already studying with their clients, ranging from pension funds, Investment Funds in Agroindustrial Chains (Fiagros), real estate investment funds, investment funds in credit rights to funds of actions. There is also an expectation among capital market agents that exempt products such as Real Estate Receivables Certificates (CRIs) and Agribusiness Receivables Certificates (CRAs), as well as infrastructure debentures, will come into the sights of these investors.

Freitas also said that most of G5’s clients intend to pay tax in advance on the stock of their investments in exclusive funds.

Out there

In the case of offshore funds belonging to individuals, there is no incentive to pay the stock in advance. Freitas states that the conversations take place with clients who have their investments abroad through controlled entities, popularly known as “offshores”. These are companies set up by the super rich in tax havens to manage their investments abroad.

The new rule gives offshore vehicles the opportunity to be treated as “transparent” entities, being taxed under the same rule as individuals who invest directly abroad. In other words, income tax is charged, if any. But if the entity chooses to continue in its current “opaque” status, taxation will be carried out in accordance with Brazilian accounting rules for company balance sheets.

“When taxing the balance sheet, the entity is subject to being taxed on annual or periodic investments that are, as a rule, updated and may not have generated profit”, explains the executive.