Provisional Measure 1,171 was published on April 30th, 2023 with amongst other topics and with effect as from January 1st, 2024:
- changing the taxation of income on financial investments held abroad which shall be taxed at 22.5%;
- establishing the taxation of controlled, alone or together with relatives, foreign corporations (in tax havens or not) at the same tax rate of 22.5% if more than 20% of their annual income is composed of passive income;
- regulating the tax treatment of trusts regardless of the characteristics they may have: assets and rights of the trust shall be treated transparently as if they were directly held by the settlor, and transfers to beneficiaries shall be treated as gift/inheritance;
- revoking the exemption of capital gains for assets abroad acquired as a non-resident; and
- revoking the tax exemption on the exchange variation of assets acquired in foreign currency.
The Provisional Measure also provides for the possibility to update the value of assets held abroad (as they appear in the income tax return of taxpayers) to their current market value and to tax the difference at a special rate of 10% (to be paid in November 2023).
The proposal must now be discussed in Congress within 60 days, extendable for another 60 days.
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 contract (for as long as the policyholder does access the value under 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 where the assets will be held in custody and the investment manager 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 mechanisms provided for by a country rated Triple AAA; and
- no taxation on payments made from the life policy to Brazilian-resident beneficiaries upon termination of the contract.
As already stated above, the Provisional Measure will now be discussed in the Brazilian Congress. We will therefore need to follow up on any changes the Provisional Measure may suffer prior to its approval or even its removal as it already happened with similar proposals in 2013 or 2021.
