The structuring of investments abroad through trusts - whether for succession, financial purposes or for definitive exit from Brazil - requires a careful assessment by Brazilian tax residents. This is because there is no express recognition of trusts in Brazilian legislation and the potential tax impacts from the perspective of Brazilian tax residents.
In summary, a trust is a contractual arrangement whereby the settlor transfers the ownership of certain assets and rights to a third party – namely as "trustee" -, who will be responsible for managing the assets and rights (transferred by the settlor) and assigning the trust´s assets to the beneficiary (or beneficiaries).
Although there is no specific legislation and consolidated case law analyzing the tax treatment of trusts from the perspective of Brazilian tax residents, the Brazilian Revenue Service (“RFB”) has already formally expressed its opinion in COSIT Consultation Procedure N. 41/2020. The RFB understood that the income received by a Brazilian tax resident (widow) as the beneficiary of a trust constituted abroad (by his deceased husband) would be subject to Individual Income Tax in Brazil (“IIT”), as ordinary income.
More recently, São Paulo´s Tax Authorities (“SEFAZ-SP”) expressed for the first time their understanding regarding the levy of Estate and Gift Tax (“ITCMD”) on the transfer of rights and assets from a settlor, a Brazilian resident, to an irrevocable trust.
On April 4, 2023, SEFAZ-SP published the Response to Tax Private Ruling N. 25,343/2022 understanding that the transfer of assets and rights by a settlor to trustee is, in essence, a donation and, therefore subject to ITCMD levy under the terms of Section 4 of State Law N. 10,705/2000 (which provides for ITCMD levy on donations by a donor resident or domiciled abroad).
SEFAZ-SP supported their understanding on the argument that the intention of the settlor when transferring the assets and/or rights to the trust is not to protect such assets or make a financial invest, but to transmit these assets to the beneficiary (or beneficiaries) by an “act of liberality”.
In addition, SEFAZ-SP upheld that the rule of Section 4 of State Law N. 10,705/2000 would be applicable in the concrete case even though the Federal Supreme Court (STF) had adopted a different position on the Extraordinary Appeal N. 851,108 and, more recently, on the Direct Unconstitutionality Action by Omission N. 67 (judged in June 2022 - “ADO 67”). On ADO 67, STF stipulated a deadline of 12 months for the Congress to publish a complementary law with general rules defining the incidence of ITCMD on donations and inheritances instituted abroad in light of the provisions of Section 155, item III, paragraphs "a" and "b" of the Brazilian Federal Constitution (CF/88).
From a practical point of view, the adoption of the understanding of SEFAZ-SP would result in the anticipation of taxation for the moment of constitution of a trust with the transfer of assets and/or rights from a settlor to trustee and their attribution to the beneficiary. However, there are cases where the attribution of assets and rights of the trust to the beneficiary may be subject to conditions or counterparts, or the amount that will be attributed to the beneficiary is not yet defined.
Therefore, in doing so, SEFAZ-SP has not considered in their analysis the characteristics, purpose and essential elements of a trust. In the case of revocable trusts, for example, in which the settlor may retain the right to dispose the trust and recover all the assets and rights transferred to it, it would not make sense to tax the transfer of assets that, from a legal standpoint, were not definitively assigned to the trust.
This reasoning applies to contractual arrangements in which a condition is imposed for the release of assets and rights to beneficiaries, such as the death of the settlor, which may postpone the moment of collection of ITCMD.
Currently, there are two bills pending in the National Congress. Bill N. 4,758/20, which aims to introduce and regulate the fiduciary contract, and Complementary Law Project N. 145/22 (Bill N. 145/22), which aims to regulate the tax treatment of trusts from the perspective of income tax, ITCMD and ITBI in Brazil.
If Bill N. 145/22 is converted into law with the current wording, taxpayers may have legal grounds for not adopting the understanding of SEFAZ-SP, since the Bill expressly establishes that the simple transfer of assets and rights from a settlor to trustee for the formation of the trust´s assets will not be a triggering event for ITCMD.
In addition, according to the Bill, only when the beneficiary acquires the unconditional and immediate right over the trust's assets – not subject to term or condition to access any portion of assets under the trust – will a donation be configured.
More recently, the Federal Government published Provisional Measure 1,171/23 (PM 1,171/23), which deals with the taxation of IIT on income and gains obtained by Brazilian tax residents in financial investments, controlled entities (including investment funds and foundations) and trusts abroad (click here see the analysis of PM 1,171/23).
From the perspective of PM 1,171/23, trusts incorporated abroad will be considered transparent for tax purposes, despite their characteristics, such as revocability or irrevocability.
Under the terms of the provisional measure, the assets and rights transferred to the trust must remain within the patrimonial sphere of the settlor (a Brazilian tax resident) for the purpose of the Individual Income Tax Statement (“DIRPF”). As a consequence, the income earned by the trust's portfolio is attributed to the settlor and must be declared (and the income tax collected) in the respective DIRPF.
It is worth mentioning that Section 7, item I, of PM 1,171/23 establishes that the assets and rights transferred to the trust remain under the settlor´s ownership after the creation of the trust. The beneficiary becomes the owner at the moment the trust distributes to the beneficiary or when the settlor dies, whichever occurs first.
Therefore, it seems to us that the intention of PM 1,171/23 is to establish the taxation of any income from the trust at the level of its settlor, without, however, adequately addressing the nature of the trustee´s and beneficiary´s mandatory right based on the possible characteristics of this type of contractual arrangement – such as revocability or irrevocability.
Despite the controversies on the subject, the introduction of rules applicable to trusts is on the radar of the Federal Government and the Legislative Branch. The processing of bills and PM 1,171/23 may result in major advances in the definition of the tax aspects involved in the institution of said contractual arrangement for structuring investments abroad and succession planning.