Law 14.754/2023 introduces innovations regarding the taxation of income earned by resident individuals in Brazil from financial applications, offshore entities, and trusts abroad, as well as regarding earnings from investments in funds.

The new legislation stipulates that Brazilian individuals with controlled companies abroad domiciled in tax havens or privileged tax regimes, or with their own active income less than 60%, will subject their profits to an automatic annual taxation on December 31st of each year at a fixed rate of 15%, regardless of any actual distribution.

With the new law, resident individuals in Brazil may choose to update the value of assets and rights abroad reported in their Annual Adjustment Declaration (DAA) to the market value as of December 31, 2023, and tax the difference to the acquisition cost, by the Individual Income Tax (IRPF), at a definitive rate of 8%, provided they meet certain requirements described in the act. The method for determining the market value is also detailed in the law.

Furthermore, the new legislation allows the use of losses incurred in financial applications abroad to offset gains from other applications of the same nature or against the profits of the controlled entities recognized in the same DAA, even if they are not subject to taxation under the terms of Law 14.754/2023.

This option must be exercised in the fashion and within the deadline established by the Special Secretariat of the Federal Revenue of Brazil, and the tax must be paid by 31, May 2024.

The law also defines the concepts and tax treatments of controlled entities, financial applications, and trusts. Regarding the concept of controlled entities, it is quite strict, with various clauses aimed at preventing bypassing.

On the other hand, only controlled entities that are:

• located in countries or dependencies with favored taxation or beneficiaries of a privileged regime;
• that have passive income exceeding 60% of their total income, are subject to the regime of Law 14.754/23.

It is important for Brazilian individuals with controlled companies abroad that fit the circumstances described on the new legislation to evaluate the scenario of their offshore structure with the support of specialized advisory, which can guide them on the best format to follow.