On May 6, the Brazilian Federal Revenue Service (RFB) published COSIT Ruling No. 75/25, which addresses the tax treatment of trusts incorporated abroad by a foreign legal entity. This topic is particularly relevant because, although trusts are widely used as succession planning instruments abroad, there is no specific regulation for them within the Brazilian legal system. Law 14,754/23, effective as of January 1, 2024, introduced rules for the taxation of trusts, but several uncertainties remain regarding their application in complex scenarios.

Summary of the trust structure

The trust analyzed in the COSIT Ruling was established under the laws of the State of Delaware, United States, by a foreign legal entity that contributed resources derived from economic rights granted by another foreign legal entity, which is an indirect shareholder of a Brazilian company. The trust was created to potentially benefit the descendants of one of the shareholders of the Brazilian company. It is irrevocable, has a duration of 150 years, and is discretionary in nature.

The discretionary nature of the trust is a central aspect: there are no defined beneficiaries, as the acquisition of rights over the trust’s assets depends on the fulfillment of conditions precedent established in the trust instrument. The trustee has broad authority to determine the allocation of the assets and may even refuse requests for distributions. The shareholder of the Brazilian company is not, and cannot be, a beneficiary of the trust, nor does he participate in the management of the trust assets.

Additionally, it was reported that there has been no distribution of resources to beneficiaries, and if the suspensive conditions are not met, the resources will not be made available to the descendants.

Given this scenario, the consultation raised the question of whether, considering the irrevocable and discretionary nature of the trust, the absence of defined beneficiaries, and the existence of suspensive conditions, there would be an obligation for the shareholder of the Brazilian company or the potential beneficiaries of the trust to report the underlying assets in the Individual Income Tax Return (DIRPF) and to tax their income under the Individual Income Tax (IRPF), pursuant to articles 10 to 12 of Law 14,754/23.

RFB’s interpretation

The RFB’s position is that the mere expectation of a beneficiary’s right in relation to the trust’s assets is sufficient to characterize them as beneficiaries for the purposes of reporting and taxation of the underlying income. This interpretation is based on several points:

• Law 14,754/23 is premised on the assumption that the settlor of the trust is always an individual. Therefore, it is necessary to investigate the chain of ownership of the assets and rights contributed to the trust, in order to identify the individual who ultimately owns the assets used to constitute the trust, even if these assets are formally held by legal entities.
• According to Law 14,754/23, the establishment of an irrevocable trust implies the transfer of ownership of the trust’s assets to the beneficiaries from the moment of its creation, regardless of any future event, for the purposes of asset reporting and taxation of the underlying income.
• The status of beneficiary does not depend on the existence of an acquired right to the trust’s assets. Thus, the mere expectation of a right to the assets of an irrevocable trust, even if subject to conditions precedent, is sufficient to characterize an individual as a beneficiary.

As a result, the RFB adopts a restrictive interpretation that the trust’s assets will always have a defined owner, regardless of the conditions or variations in its structure:

• In the case of a revocable trust, the settlor remains the owner until distribution or death.
• In the case of an irrevocable trust, ownership is attributed to the beneficiaries from the moment of incorporation.

This approach applies both for reporting purposes and for the taxation of income generated by the trust’s assets.

The wording of COSIT Ruling No. 75/25 also indicates a tendency by the RFB to adopt a more restrictive interpretation regarding the figure of the settlor, emphasizing that the law presumes the settlor of the trust is necessarily an individual and that the chain of assets must be analyzed to identify the individual who ultimately holds the assets assigned to the trust.

Another aspect addressed in the ruling concerns the role of the trustee, whose responsibilities under Law 14,754/23 remain unclear, especially in cases involving irrevocable trusts where the identity of the beneficiary is uncertain.

In summary, this controversy emerged after the publication of the law and the fact that trust administrators are considered ultimate beneficial owners for the purposes of registration with the National Registry of Legal Entities (CNPJ), pursuant to Normative Instruction RFB 2,119/22. In the consultation solution, the RFB appears to recognize that, even in cases of uncertainty, the trustee would never be considered liable for tax reporting or compliance with tax obligations in Brazil.

Initial impressions

Some conclusions of COSIT Ruling No. 75/25 merit significant criticism:

• Definition of Settlor: The requirement that the settlor must always be an individual disregards the patrimonial autonomy of legal entities. This restrictive interpretation contradicts fundamental principles of tax law, although it was anticipated given the wording of Law 14,754/23, which defines the settlor as “an individual who, through the deed of the trust, allocates assets and rights owned by him to form the trust.”

Article 109 of the National Tax Code (CTN) provides for the subsidiary application of private law concepts to qualify taxable events, unless otherwise provided by law.

Given that Brazilian law does not regulate this type of succession instrument and that the law of the trust’s jurisdiction governs the legal relationships between the parties, disregarding a structure in which the settlor is, in fact, a legal entity creates a legal fiction that shifts the tax obligation to an individual tax resident in Brazil, through an “investigation of the patrimonial chain” of the assets and rights contributed to the trust.

This approach may legitimize the requirement to present documents and sensitive information about foreign investments, including by individuals who often do not have access to such documentation, as is the case with discretionary beneficiaries.

• Concept of beneficiary and taxation: The characterization of beneficiary status for the purposes of reporting and taxation of income from the trust’s assets based on a mere “expectation of right” contradicts the constitutional concept of income and the requirement of “acquisition of economic or legal availability” as provided in article 43 of the CTN.

When the expectation of income is subject to a condition precedent, as is common in most discretionary trusts, the legal situation is not definitively constituted. The right to receive the trust’s assets depends on a future and uncertain event, which prevents the occurrence of the taxable event for income tax purposes.

The mere expectation does not grant the beneficiary the power to dispose of the trust’s assets, an essential requirement for the characterization of taxable income. This anticipated taxation, in addition to being potentially confiscatory, also violates the principle of legality in tax matters, as provided in article 150, I, of the Federal Constitution, which requires that taxes be established by law.

COSIT Ruling No. 75/25 brings important considerations regarding the taxation of foreign trusts, but also raises issues that warrant deeper critical analysis, particularly from the perspective of the concept of income and the principle of legality in tax matters. It is essential that taxpayers remain informed about ongoing discussions on this topic and take steps to protect their interests.

Machado Meyer's Tax and Estate and Succession Planning team is available to answer any questions on the subject.