Tax controversy over the usage of trusts as worldwide wealth planning instruments for Brazil residents

Brazil residents invest all over the world using wealth planning and protection structures that are motivated for several reasons: managing investments and corporate structures, facilitating the transition in business chains in the event of a succession, securing the future of heirs, optimizing tax cost protection of heirs with disabilities.

In increasing these structures, Brazil residents can choose between various national and international alternatives, such as using a trust structure that is widely used in certain jurisdictions. Indeed, international structures, including foreign trusts, are usually adopted by Brazilian residents who are looking for sophisticated wealth planning modalities, especially for succession purposes, even though the trust is not regulated under Brazilian law per se.

In a simplified and summarized explanation, the trust can be defined as an agreement in which one person, the settlor, agrees to transfer their assets in such a way that they can be accessed by another person, the trustee, for a defined period of time and under agreed circumstances , held and managed. in favor of a beneficiary, who may be the settler or another person, as inheritance. The name “trust” is related to the fiduciary nature of the agreement and the relationship of trust between the trustee of the trust and the trustee. This institute has its origins in common law case law.

The trust can therefore be used as a succession planning tool as well as for professional asset management and protection. It may or may not be revocable and has no legal personality that is contractual.

When used as a succession planning tool, the trust is designed to enable the immediate transfer of the property held by the trustee to the beneficiary from the death of the settler or the event set out in the deed, thereby reducing legal / bureaucratic costs as well as enabling a quick transfer of the property, which in the case of formal probation, can be time consuming and expensive. When using such a trust structure, the transfer of assets is automatic and no probation is required.

In light of this, it should be emphasized that the trust that stems from common law jurisdictions is not governed by the laws of Brazil, a civil law jurisdiction that is difficult to classify into the categories of Brazilian civil contracts. Bills to discipline trusts are currently being discussed in Brazil, none of which have yet been approved because they are very different from civil law contracts. Furthermore, there are not enough court cases in Brazil in which trust structures are analyzed as they are not recognized by our jurisdiction.

The consequence is that after the settler’s death, the Brazilian resident must meet certain obligations in Brazil, including informing the tax authorities about the ownership of the assets transferred / inherited abroad, paying the relevant taxes in Brazil as well as informing the Assets in its respective annual income tax report. Given the lack of legislation and the lack of uniform precedents regarding trust structures in Brazil, one of the main problems with using this structure in tax matters is as the nature of the transfer of assets from a trust structure to a Brazil-based beneficiary is being discussed. This means that the settler transfers ownership of his / her property to a trust and the beneficiary receives the property directly from the trust immediately after the settler’s death without parole.The Brazilian tax authorities have not yet determined whether such a transfer is considered a Successor event is accepted (e.g. probation itself or a last will that is also subject to probation), but a different type of asset transfer.

This implies relevant consequences not only from a civil law, but also from a tax law perspective. This is because inheritance is usually only subject to state tax on donations and inheritance (referred to as “ITCMD” or “ITCD” depending on the state), with rates ranging from 2% to 8% depending on the amounts and state of residence of the parties.

In this context, it should be mentioned that the ITCMD levy on foreign triggering events has been the subject of intense debate in recent decades and was only recently (March / 2021) suspended by the Federal Court of Justice (STF) – see extraordinary complaint No. 851,108 – leading case) , in which it was decided that only a (currently nonexistent) supplementary law can discipline this matter. Although no such tax is currently being levied, the Brazilian Congress is currently considering a bill (also from March 2021) to regulate the matter and allow Brazilian states to collect ITCMD on assets overseas.

This means that subsequent events in Brazil that affect assets overseas are not currently subject to the ITCMD, which means that Brazil is not currently allowed to levy taxes on such transfers.

However, since the trust in Brazil is not viewed as a successor instrument but as a contractual structure to which no probation procedure applies, the transfer of the assets to the beneficiary cannot be recognized as an inheritance by the tax authorities in Brazil, but only an increase in the beneficiary’s assets which could be subject to Individual Income Tax (IRPF) at a progressive rate of up to 27.5% for annual income in excess of BRL 55.9 thousand (approximately USD 8,000 / year). This clearly shows that taxation is much higher when applying income tax than when applying inheritance tax.

Another focus related to the trust arrangement and the lack of a similar institution in Brazil concerns the income from investments made through the trust and the assets held. Accordingly, the Brazilian tax authorities have already ruled that income from a trust should be considered income taxable income – the same IRPF of up to 27.5%, regardless of whether such amounts are triggered by the sale or not effectively remitted to Brazil from such assets to the beneficiary. This understanding was recently disclosed in COSIT Binding Decision No. 41/2020.

As can be seen, while the trust is a commonly used asset planning option in several countries, it can lead to inefficiencies from a Brazilian tax perspective as it does not fall into the categories of Brazilian civil law and may be inaccurate to be interpreted by the tax authorities, who could charge high taxes on the transfer of property to the beneficiary or on income from that property.

In conclusion, using trusts as wealth planning tools for Brazil residents can enable individuals to benefit from management and governance purposes. However, they should be carefully examined on a case-by-case basis and the development of legal and jurisprudence in this regard should be followed up to avoid unnecessary or excessive tax costs.