Trusts and Their Impacts in Brazil
By Fernando Retzler Martins, WFaria Advogados
Trusts are a useful and powerful planning instrument worldwide and are also used by Brazilian tax residents for estate, succession and tax planning. However, their recognition and disclosure in Brazil is a complex topic, subject to conflicting interpretations and many grey areas due to the lack of clear and specific regulations.
Essentially, once a Settlor transfers its assets to a Trustee, the prevailing understanding is that such assets shall be removed from their Income Tax Return (declaration of goods and rights).
From the perspective of the Beneficiaries, however, the topic is more controversial. Brazilian tax legislation does not clearly establish a rule for the declaration of the Trust by its Beneficiaries (except for the recent Tax Amnesty programme, which will be analysed later in this article). Provided the Trust is discretionary, many practitioners maintain that Beneficiaries need only declare the distributions effectively received by them. Other practitioners, in a more conservative approach, maintain that as soon as a Beneficiary starts receiving payments or distributions from the Trust, such a Trust must be fully declared by them (proportional to their participation as Beneficiaries); the main problem with this approach is that the Beneficiary must pay taxes on the full value of the Trust they are declaring. Many other practitioners adopt a third possible solution, whereby Beneficiaries may disclose the Trust at a symbolic value in Brazil.
As for the Brazilian Central Bank, the guidelines for filing the Declaration of Brazilian Capital Abroad (CBE) are relatively clearer, despite being highly questionable in our view. According to these rules, Trust agreements involving the custody and administration of assets abroad, with Brazilian individuals or legal entities as Beneficiaries, must be declared in the CBE as ‘other assets’. Such declaration must always be filed by the Beneficiary or by the Trustee on behalf and in the name of the Beneficiary, who must be registered in the Central Bank electronic system.
Taxation of Trust arrangements is also a controversial topic in Brazil. The prevailing understanding is that the transfer of the assets and rights by the Settlor to the Trust shall be viewed as a donation and, as a result, shall be subject to our Gift and Estate Tax (ITCMD), at a rate that varies from 2% to 8% depending on the state where the assets are located and/or where the Settlor is domiciled.
When Beneficiaries receive assets, rights, payments or any distributions from the Trust, they will also be subject to taxes in Brazil. The definition of the applicable tax is again a controversial topic; while many practitioners maintain that such transfers should be viewed as income and, therefore, subject to Federal Income Tax (IRPF) at a maximum 27.5% rate, many others maintain that these transfers from the Trust to the Beneficiaries are donations, subject to ITCMD at a rate that varies from 2% to 8%.
An important Repatriation Programme (Special Tax and Currency Exchange Regularisation Regime – RERCT) was introduced in Brazil in 2016 through Law N. 13,254/16. The Programme was available until 31 October 2016, while a second phase has recently become available in 2017, allowing taxpayers to join it until 31 July 2017. RERCT allows eligible persons to normalize the disclosure of assets remitted or maintained abroad in violation of Brazilian currency exchange and tax regulations, even if already repatriated, after the payment of a 30% tax on their market value (this rate was increased to 35.25% in the second phase).
Specifically regarding Trusts, RERCT’s regulations determined that such instruments must be disclosed by Beneficiaries in Brazil, even if such Beneficiaries are also the Trust’s Settlors. The Repatriation Programme regulation was the first instrument where the Brazilian Tax Authorities officially introduced the necessity of disclosing Trust arrangements where Beneficiaries are tax resident in Brazil. Unfortunately, such rules do not clearly foresee specific circumstances such as the difference between discretionary/deterministic Trusts, revocable/irrevocable Trusts, or cases where Beneficiaries are not even aware of the existence of a Trust and their corresponding rights.
In principle, if a Trust is not disclosed by its Beneficiaries that are tax resident in Brazil, and not disclosed under the Repatriation Programme (RERCT), such Beneficiaries are subject to the risk of being assessed by the Brazilian Tax Authorities and by the Brazilian Central Bank, as well as the risk of potential criminal exposure.
From the perspective of the Brazilian Tax Authorities, Beneficiaries who do not declare a Trust would in principle be subject to Income Tax on the assets they receive or any other distributions/payments made, at a 27.5% rate, increased by penalties (75% in case of a tax assessment, 20% in case of a future voluntary disclosure) and interest (SELIC rate, approximately 14% per annum). As for the assets and rights that are still entitled to the Trust, even though there are no clear rules or guidelines provided by the Tax Authorities, there is also the risk of them challenging the Beneficiaries to pay these same taxes and penalties on those amounts.
From a Brazilian Central Bank perspective, if Beneficiaries do not declare a Trust, they could be subject to penalties of up to BRL 250,000 (approximately USD 75,000) per year (generally applicable to the previous five years).
Finally, from a criminal perspective, several different crimes may be identified, depending on the case, from tax evasion and maintenance of undeclared funds abroad to money laundering. Sentences vary considerably and should be discussed with a criminal lawyer. The statute of limitations varies from 12 to 16 years, depending on the crime.
Fernando Retzler MartinsWFaria Advogados, Sao Paulo, Brazil
T: +55 11 3018 7878
Fernando Retzler Martins is a Tax Partner at WFaria Advogados, a full service law firm in Sao Paulo, Brazil, and provides tax advisory on direct and indirect taxes. Fernando is a certified tax lawyer and certified public accountant in Brazil, a former Partner with Big Four audit firms and a former head of a Brazilian Tax Desk in Germany. Fernando is a Trust and Estate Practitioner (TEP), member of the Brazilian Institute of Tax Law, German-Brazil Lawyers Association and the Tax Commission of the Brazilian Bar Association. He is an international conferencist and has several articles published.
Published: July 2017 l Photo: gustavofrazao - Fotolia.com