Offshore Tax Reform and Legal Instability in Capital Reductions – 04/07/2024 – What is this tax?

In times of financial correction, we have been following with concern the series of measures taken by the government with a focus on increasing revenues, including the financial programs launched by the Federal Revenue Service to monitor capital reductions made by individuals in the interests of companies owned abroad.

Through Law No. 14,754, of December 12, 2023, the tax reform was finally approved, which established the IRPF anti-deferral rule, regarding income obtained by individuals resident in Brazil in controlled entities and trusts abroad, which receive regulation through IN RFB No. 2180 of March 11, 2024.

Thus, from 2024 onwards, a system has been established whereby profits obtained by entities controlled abroad by individuals resident in Brazil on December 31 of each year will be taxed at a rate of 15%, through a DAA (Declaration of Annual Adjustment), delivered in May of the following year.

However, the stock of profits calculated abroad has been maintained until December 31, 2023, profits that will be taxed, as before, only at the moment of actual availability of the individual resident in Brazil, with the rate now reduced to 15%, no longer 27.5%.

The point of interest, in this case, is that due to the abolition of Art. 24 of Parliamentary Law No. 2.158-35/2001, the exemption that was based on income resulting from exchange rate changes when the investment originated from income originally acquired in foreign currency has been abolished, which in itself generates controversy about the acquired right to exemption from past stock.

On the other hand, the possibility of updating the value of goods and rights abroad was provided, after paying a reduced rate of 8%, which in this case ensures exemption from exchange rate changes in the case of possession with income originally earned in a foreign currency.

The announcement called ABEX, whose membership period ended on 31/05/2024, was then created as a “positive incentive” aimed at encouraging fundraising, including through RFB campaigns, which ended up publishing a memo removing “false news about inspections in the “State of Overseas Asset Update” 1, according to which “with membership, the taxpayer will benefit from greater legal certainty and stability.”

The problem is, on the one hand, that the aforementioned and misunderstood Cosit Consultation Resolution No. 678/17 is still in force, which, in dealing with capital reductions in offshore companies, among many irregularities, affirms that “in the return of capital in cash, there is no transfer of funds, since the returned capital has not ceased to be the property of the shareholder/shareholder/holder.”

The aforementioned SC 678 has, as is well known, been the basis for many tax assessments since its publication, taxing capital reductions at 27.5%, even if there is no gain (positive difference between the acquisition cost and the returned capital), to cover exchange rate fluctuations (regardless of whether they originate in foreign currency or not), and adopting a distorted fiscal hybridization that we have already had the opportunity to point out, in 20212.

However, Art. VII of the new law is clear in stating that “the change in the exchange rate (…) will offset the capital gain realized by the individual when selling, writing off or liquidating the investment, including through the return of capital.”

In other words, what was never in doubt has become clear: the return of capital is a form of alienation and is subject to the capital gains tax (GCAP) regime, at rates ranging from 15% to 22.5%, not the booklet regime of 27.5%.

On the other hand, recently, the Fed has intensified inspections involving capital reductions in companies abroad, and issued standard self-regulation conditions, recommending the correction of the DAA and the collection of the IRPF carnê-leão at 27.5%, including exchange rate changes. , under penalty of issuing tax assessments and fines ex officio, insisting on the same SC 678 as a basis.

Unsolicited invitation to litigation, in contravention of the above mentioned RFB Institutional Memorandum.

However, in the case of those who joined ABEX, believing in the incentives in search of “security and stability” and benefiting from the reduced rate of 8%, there is another credibility crisis that will surely lead to more lawsuits.

This is the situation that concerns taxpayers who joined the Exchange Rate and Tax Regulation Program (RERCT), issued by Law No. 13,254, of January 13, 2016 (and reopened in 2017), and whose DERCAT program was already tacitly approved by the Government during the expiration period.

This is because, according to the rules of that program, the exempt assets were considered as capital gains realized on December 31, 2014 and were taxed at 15%, by converting the values ​​expressed in foreign currency into the national currency, i.e. attributable to the taxpayer capital gains arising from income originally earned in foreign currency, for all purposes and legal effects.

Therefore, the portion of the ABEX update that indicates the exchange rate change for these shares organized in RERCT will be exempt from IRPF.

Under the terms of the “Questions and Answers” ​​available at the time of RERCT (ADI No. 5/2016), taxpayers will not be required to prove the source of resources, but simply declare (“verify”) in the appropriate field of DERCAT (see Question 40).

Not surprisingly, two years after joining the amnesty, a change was made to those “Questions and Answers” ​​through ADI No. 5 of December 4, 2018, so that the requirement to prove the documentary origin of resources at that time began the subsequent inspection by DERCAT.

This requirement caused taxpayers a great deal of discomfort and insecurity, created mistrust and led to major litigation on the issue, which continues to this day.

In the same vein, the “Questions and Answers” ​​of ABEX3 now appear, according to which “the mere fact that assets have been declared in the RERCT does not indicate that they arise in a foreign currency”, and therefore taxpayers are required to prove the source of assets before declaring in the ERCT (see Answer 22).

It is worth noting that those assets, which were previously considered to come from income earned with resources originally in foreign currency, under the legal regime established by Law No. 13/254/16, and whose origin would not need to be proven, except in the event of evidence other than DERCART itself, are now the subject of a new and expanded questioning.

In this, there is a re-release of the same discussion that took place in RERCT, through which it aims, in a tangential way, to reconsider the amnesty programme.

Ultimately, the impression left is of a parallel and silent tax reform, through sub-legal interpretations in search of greater revenues, leading to instability, especially in the democratically adopted transition rules.