Provisional measure deals with the income tax of individuals resident in Brazil derived from financial investments, controlled entities and trusts abroad

Authors: Succession Planning Team

The Brazilian Executive Power published on April 30, 2023, Provisional Measure No. 1,171 (MP 1,171), which deals with the taxation of income earned by resident individuals derived from financial investments, controlled entities (including investment funds and foundations) and trusts abroad.

Rules are valid for events from 2024 onwards

The new rules will be valid for triggering events from 2024 onwards. Individuals must include in their annual returns (DAA), separate from the domestic income, the income arising from investments abroad. This income will be subject to the imposition of the individuals’ income tax (IRPF) according to the following rates (no deduction from the calculation basis is allowed):

0% on the annual portion of earnings that does not exceed BRL 6,000.00;

15% on the annual portion of income that exceeds BRL 6,000.00 and does not exceed BRL 50,000.00;

5% on the annual portion of income that exceeds BRL 50,000.00.

Although the income from the three investment categories mentioned above is subject to the same rates, MP 1,171 included specific rules and concepts for each of them that influence the amount that will be subject to taxation and when this happens. Below is a brief explanation of each of these rules.

Taxation of financial investments abroad

Income from financial investments must be taxed in the DAA of the period in which it is effectively received by the individual, i.e., upon redemption, amortization, disposal, maturity or liquidation of financial investments.

Financial investments held abroad by resident individuals are already subject to tax in Brazil every month whenever there is a liquidity event. For the provisions of MP 1,171, a financial investment includes not only typical financial applications but also insurance policies and retirement funds. This is an issue that may be controversial.

The new rules include income from variation in the foreign exchange (FX) rate within the financial investment concept. Also, MP 1,171 repealed the exemption applicable to FX gains, assessed in Brazilian currency, whenever the asset was acquired with funds originally in foreign currency.

The rules for taxation of capital gains assessed upon the sale of assets currently in force remain in effect. However, the new rules of MP 1,171 apply to gains arising from disposals of financial investments, such as shares listed on the US stock exchanges.

Taxation of controlled entities (the Personal Investment Companies – PICs)

As of January 1, 2024, profits earned by entities abroad (including investment funds and foundations) controlled by individuals residing in the country must be taxed on December 31 each year.

MP 1,171 considers as controlled entities the companies and other entities, such as investment funds and foundations, in which the individual:

Holds preponderance in corporate resolutions or has the power to elect or remove the majority of the entity’s directors; or

Holds more than 50% of the entity’s share capital, or of the rights to receive its profits or to receive the entity’s assets in the event of its liquidation.

The individual’s participation in the entity’s capital abroad will be considered in an isolated manner or together with related persons who hold more than 10% of the voting capital.

Automatic taxation at the end of each year affects entities abroad that:

are incorporated in a country considered a tax haven jurisdiction or that benefits from a privileged tax regime; or

have active income below 80% of total income, understood as the sum of all income, including non-operating income.

Active income corresponds to the income arising directly from the development of the entity’s own economic activity, excluding revenues arising from:




equity interests;


capital gains, except on the sale of equity interests or permanent assets acquired more than two years ago;

financial investments; and

financial intermediation.

Profits subject to taxation under MP 1,171 must be included in the DAA corresponding to the year in which they are recognized in the financial statement of the foreign entity, regardless of any decision about their distribution, in proportion to the individual’s participation in the entity’s share capital.

Profits thus taxed may be added to the acquisition cost of the investment abroad and, when distributed to the controlling individual, will reduce said cost without being taxed again.

The portion of the foreign entity’s profits corresponding to profits and dividends of any investees located in Brazil may be deducted from the profit that must be taxed in Brazil. Also, the tax paid abroad on profits included in the DAA may be offset against the tax levied in Brazil on such profits in proportion to the individual’s interest in the entity’s capital stock abroad and up to the limit of the IRPF due in Brazil.

Profits accrued up to December 31, 2023, by any entity abroad and those accrued from 2024 onwards by entities that do not fit in the above situations remain subject to taxation only when effectively made available to individuals in Brazil under the rates explained above (0% to 22.5%).

This means there is no automatic taxation of profits accumulated before 2024. On the other hand, only losses generated as of 2024 may be offset against the profits subject to automatic taxation from 2024 onwards. Hence, losses recognized in 2023 or before may not be offset against the profits taxed under MP 1,171 as of 2024.

Taxation of trusts set up abroad

Trusts set up abroad are now considered transparent for tax purposes in Brazil, regardless of their features (e.g., revocable or irrevocable). Therefore, the assets and rights transferred to the trust are deemed as still within the patrimonial sphere of the settlor residing in Brazil. The income earned by the trust’s portfolio is attributed to the settlor and must be taxed in the DAA of the latter under the rules described in the previous paragraphs.

Assets and rights object of trust are deemed as transferred to the beneficiary at the time of distribution by the trust to the beneficiary or death of the settlor, whichever happens first.

MP 1,171 considers that distributions made by the trust to the beneficiary as of January 1, 2024, will have the legal nature of a free transfer (donation or causa mortis transmission).

MP 1,171 also brings transition rules for the case of trusts previously informed in the declaration of assets and rights of the individual. In this sense, for example, a provision determines that the underlying assets and rights replace the trust in the individual’s DAA.

Update of the value of assets held abroad

MP 1,171 grants the option to update the acquisition cost of assets and rights held abroad to the market value on December 31, 2022. This option, however, implies anticipation, as early as 2023, of the effects of the MP. In this sense, the IRPF levied on the gain from this update will be calculated at the definitive rate of 10% and paid until November 30, 2023.

Please note that the “update” subject to taxation includes any appreciation of the asset’s value due to the depreciation of the BRL against the foreign currency.

Specifically in the case of controlled entities and trusts abroad, there is the option of an additional update, which will take into account the market value of the asset on December 31, 2023, with payment of the applicable tax until May 31, 2024, at the same final rate of 10%.

Other comments

Previous attempts of automatic taxation of profits earned abroad. This is not the first attempt by the Federal Government to enact automatic taxation of profits earned by entities abroad held by individuals resident in Brazil. The most recent attempt occurred in 2021, when the Executive Power sent Bill of Law No. 2,337/2021, whose Section 6 set forth a taxation rule similar to the one brought by MP 1,171.

The House of Representatives rejected Section 6. Bill of Law No. 2,337 is still pending analysis by Congress. Previously, Provisional Measure No. 627/2013 had brought a similar rule, but the House of Representatives also rejected it, not including it in the conversion bill that gave rise to Law No. 12,973/2014.

PICs. Despite the end of the possibility of deferring the taxation of profits earned by PICs, these entities continue to present relevant advantages, such as a broad offset of profits and losses of different natures, ease of control (only one addition to the DAA per year), succession planning (mitigates the possibility of causa mortis taxation abroad), etc.

MP 1,171 and countries with which Brazil has an income tax treaty. MP 1,171 must be interpreted together with the international tax treaties Brazil is signatory to. Thus, concerning a controlled entity resident in a country with which Brazil has a treaty, it is understood that profits should only be taxed when distributed.

Bills of law for the regulation of trusts. Currently, two bills of law that deal with the regulation of trusts in Brazil are waiting analysis by the National Congress—Bills of Law No. 145/2022 and No. 4,758/20. The projects have different scopes—only the first deals with tax aspects of trusts.

The legislative process of MP 1,177. MP 1,171 must be analyzed and approved by Congress (House of Representatives and the Federal Senate) within 120 days of its publication to be converted into law. If this does not happen, the provisions of MP 1,171 will have no effect.

Other changes. MP 1,171 also repealed the IRPF exemption on capital gains earned in relation to goods acquired when the taxpayer resided abroad. Finally, MP 1,171 raises the IRPF exemption bracket to BRL 2,112.00 (approx. USD 420).