The recent Answer to Consultation (SC Cosit) no. 99, of June 21 of this year, dealt with the imposition of Withholding Income Tax (IRRF) in the conversion of foreign investment in the Brazilian financial and capital markets via portfolio, pursuant to the Resolution of the National Monetary Council (CMN) no. 4,373/14 (Investment 4,373 - Portfolio) for foreign direct investment, according to Law No. 4,131/62 (Investment 4,131 - Direct).

The taxpayer consultant, as tax responsible of legal entities resident abroad that carry out Investment 4,373 - Portfolio, non-residents or domiciled in a country or dependence considered as a  country with a favorable taxation (Low Tax Jurisdiction - LTJ), wanted to know from the tax authorities:

  • if it would be correct to understand that the conversion is not a triggering event of the IRRF, due to the absence of transfer of ownership and disposal in the operation;
  • if the conversion was a taxable event, what would be the applicable tax treatment: exempt, because it is a sale carried out in the Brazilian stock exchange by Investment 4.373 - Portfolio not located in LTJ or subject to the rate of 15% of the IRRF, because it is not a sale carried out in the Brazilian stock exchange by Investment 4.373 – Portfolio not located in LTJ; and
  • if, in the event that the conversion is understood as a triggering event of the IRRF, who would be responsible for the collection.

SC Cosit concludes that the conversion is not subject to IRRF taxation on any capital gains, considering that:

  • there is a regulatory obligation to carry out simultaneous exchange operations (purchase and sale of currency) without effective transfer of resources (section 7, item IV, Resolution CMN no. 4,373/14);
  • such transaction is not on the list of exceptions for transactions that can be carried out outside the Brazilian stock exchange (section 19 of Resolution CVM No. 13/20); and
  • Section 30 of Circular Bacen No. 3,691/13 considers, for all purposes, simultaneous foreign exchange transactions as effective transactions.

According to SC Cosit, the fact that simultaneous foreign exchange transactions are considered for regulatory purposes as effective transactions, i.e., foreign exchange transactions with physical currency transfer, would be ficticiamente the settlement of the investment, agreement for the sale of foreign currency tied to a remittance of resources abroad and a foreign currency purchase agreement tied to an investment in the country.

Although not expressly stated in SC Cosit, the implicit reasoning would be that these operations, a priori, would be held on the stock exchange. Thus, it concludes by the application of Section 81, § 1, of Law No. 8,981/95, together with Section 16 of MP No. 2,189-49/01, which excludes from the imposition of IRRF capital gains earned in Investments 4,373 – Portfolio in transactions carried out on stock exchanges.

SC Cosit also makes it clear that, after registration, the new Investment 4,131 - Direct is subject to IRRF tax rules on capital gains, pursuant to Section 18 of Law No. 9,249/95, Sections 20 to 23 of the Normative Ruling of the Brazilian Revenue Service No. 1,455/14 and the other regulations in force. Currently, this means progressive rates of 15% to 22.5%, depending on the amount of the capital gain determined, except for situations in which the beneficiary of the capital gain is located in a LTJ. In the latter case, the applicable rate is 25%.

SC Cosit represents an important interpretation of tax authorities favorable to taxpayers, as it recognizes the application of the IRRF exemption regime on capital gains accumulated between the entry date of entry of Investment 4.373 - Portfolio and the date of conversion to Investment 4.131 – Direct.

The theme generated great insecurity, due to the lack of effective stock trading on the stock exchange, a factual condition of the normative hypothesis of the exemption rule. SC Cosit equates concepts of regulatory rules, concluding that there is exemption.