Changes to the taxation of private wealth held abroad by Brazilian-resident clients

Law No. 14,754/2023 has finally been published on 13 December 2023 and will, for the most part, come into force on 1 January 2024.

Holding companies that previously offered tax deferral will no longer be able to do so. Law No. 14,754/2023 introduces a number of rules under which, from 2024, many of these entities will be considered Controlled Foreign Corporations – or CFCs –, whose accounting profit (calculated in accordance with international/Brazilian accounting rules), even if unrealised, will be annually subject to 15% tax in Brazil. However, the new rules allow CFCs to opt for a Tax Transparency Regime (“Check-The-Box”). In this scenario, tax will not be calculated on the accounting profit but the assets held through the CFC will be considered as held directly by the Brazilian individual and taxed accordingly.

Offshore financial investments such as foreign unit-linked life insurance[1] directly held by Brazilian-resident individuals (or considered as directly held as per the “Check-The-Box” Regime) will only be taxed as and when the income is realised, i.e. on actual realisation, at a rate of 15%.

Additionally, individuals are given the option of updating the value of the assets and rights currently held abroad to their market value at 31 December 2023 and taxing the difference compared with the acquisition cost at a reduced rate of 8%.

Further to these changes, many Brazilians will need to review how their offshore wealth is structured if they intend to continue deferring taxation of income.

In this new context, Luxembourg unit-linked life assurance policies will remain, if properly structured and substantiated, a robust, fully compliant and tax-efficient long term wealth planning solution providing:

• full income tax deferral on all income generated under the life insurance contract (for as long as the policyholder does not surrender the policy there is no taxable event);
• efficient and flexible succession planning capabilities;
• possibility to design the solution with an open architecture approach, the client being able to choose the bank(s) where the assets will be held in custody and the investment manager(s) which will manage the portfolio linked to the policy;
• portability of the contract in case the circumstances would change in the future and possibility to design cross-border solutions in case family members are spread across different countries;
• access to international assets and institutional investments, including private equity, hedge funds alternative investments, etc.;
• wealth protection under Luxembourg policyholder protection rules, one of the strongest asset protection regimes provided by a AAA-rated country; and
• no taxation on payments made from the life insurance policy to Brazilian-resident beneficiaries upon termination of the contract.

[1] The law refers to “insurance policies whose principal and proceeds are redeemable by the insured or their beneficiaries”.

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