The impacts of the Provisional Measure 1,171/2023 – Taxation of earnings accrued abroad

The impacts of the Provisional Measure 1,171/2023 – Taxation of earnings accrued abroad.


This April 30, the Federal Government edited the Provisional Measure 1,171/2023, which brought many changes to the tax regime of financial investments earnings, investments in controlled companies, and trusts abroad held by individuals.

Generally, this change will have a relevant impact for Brazilians who have investments abroad, and will require the review of all corporate and financial modeling for 2024, under penalty of making such investments less attractive and/or not obtaining its advantages. Thus, this article aims to analyze the main impacts of the PM.


1. Regarding the enforceability of the PM.

Initially, it is important to notice that provisional measures are normative texts, with operation of law, edited by the Executive Branch upon relevant and urgent situations, but that shall be heard by the Brazilian Congress (Federal Senate and Chamber of Deputies), in order to be changed into ordinary laws, as provided in the article 62 of the Brazilian Federal Constitution (CF/88).

The provisional measures have a sixty-day validity, being automatically extended for more sixty days in case the subject matter is not heard in the Brazilian Congress.

The paragraph 2 of the CF/88 also provides that the provisional measures that address the surcharge or the creation of taxes shall only cause impacts in the subsequent year of their change into laws.

Thus, we shall expect in the following months the submission of the PM 1,171/2023 to the Brazilian Congress, which will be entitled to approve, modify, or reject the text proposed by the Executive Branch.


2. Regarding the taxation of individuals in Brazil related to financial investments directly abroad.


2.1. Earnings from financial investments in force up to 2023.

The article 21 of law 8,981/1995, as amended by law 13,259/2016, established the rates and limits for the taxation of the capital gain earned by individuals residing in Brazil, as transcribed below:

“Art. 21. The capital gain received by an individual arising from the disposal of goods and rights of any nature is subject to the levy of the income tax under the following rates:

I – 15% (fifteen per cent) on the portion of gain that does not exceed BRL 5,000,000.00 (five million Brazilian reais);

II – 17.5% (seventeen point five per cent) on the portion of gain that exceeds BRL 5,000,000.00 (five million Brazilian reais) and does not exceed BRL 10,000,000.00 (ten million Brazilian reais);

III – 20% (twenty per cent) on the portion of gain that exceeds BRL 10,000,000.00 (ten million Brazilian reais) and does not exceed BRL 30,000,000.00 (thirty million Brazilian reais); and

IV – 22.5% (twenty-two point five per cent) on the portion of gain that exceeds BRL 30,000,000.00 (thirty million Brazilian reais).”

We highlight that, according to article 24 of PM 2158-35/2001 (provisional measured edited prior to the enforcement of the current rules, thus, in force up to this day), for the value of gains verified in financial investments abroad, the taxation rules related to the capital gain shall be used, by applying the rates from 15% to 22.5% and respecting the limits established by law.

In this sense, the tax administration edited the Interpretative Declaratory Act 08/2003, that provides:

“Art. 1 The credit from earnings related to financial investments, including compensated deposits, made in foreign currency by an individual residing in Brazil implies the record of taxable capital gain, as long as the credited amount can be withdrawn by the beneficiary.”

Therefore, it is clear that the Brazilian legal system already considered the taxation of earnings from financial investments abroad.

2.2 Financial investments earnings starting from 2024.

As mentioned before, the current taxation of earnings from financial investments abroad shall be made under the same taxation rules for the capital gain, with progressive rates from 15% to 22.5%, with the first range being for earnings up to BRL 5,000,000.00 (five million Brazilian reais) and the second one for earnings above BRL 30,000,000.00 (thirty million Brazilian reais).

With the new PM, there will be a few differences in the rates, but the most relevant aspect are the changes in the thresholds, as follows:

  • 0% for income up to BRL 6,000.00 per year;

  • 15% for income between BRL 6,000.01 and BRL 50,000.00 per year; and

  • 22.5% for income above BRL 50,000.00.

Therefore, different from what the Executive Branch states, there were existing rules for the taxation of such earnings, being that, with the new model, the earnings that were taxed at the rate of 15% (applied for income up to BRL 5 million) may be taxed at the rate of 22.5% (that will be applied for income above BRL 50 thousand in 2024).


3. Regarding the earnings from abroad by controlled legal entities (offshore).


3.1. Taxation of profits and dividends earned by controlled companies abroad – in force up to 2023.

The law 7,713/88, combined with the law 9,250/95, establishes that the earnings received from profits and dividends of companies abroad shall be taxed for purposes of the Brazilian Income Tax.

In this sense, the tax administration edited the Normative Instruction 1,500/2014, bringing the following text:

“Art. 53. It is subject to the monthly payment of the tax the individual residing in the Country that receives:

II – earnings or any other amounts from sources abroad, such as salaried or non-salaried work, use, exploit, or occupation of real state or personal property, transferred or not to Brazil, profits and dividends;”

Thus, there is the possibility of deferring the gains earned abroad by legal entities up to the moment when such gains are effectively transferred to the investor individuals.

The applied rates are those in the income tax progressive table, that is, they may vary from 0% to 27.5%, subject to taxation as compulsory monthly collection (carnê-leão).

3.2. Taxation of profits and dividends earned by controlled companies abroad – starting from 2024.

The new PM also aims to repress the deferral of taxation of profits earned by individuals through legal entities established abroad.

According to the new rule, the taxation will be made at December 31 of each year, at the moment when the profits are calculated in the balance, regardless of any dividends resolution act, with the following rates:

  • 0% for income up to BRL 6,000.00 per year;

  • 15% for income between BRL 6,000.01 and BRL 50,000.00 per year; and

  • 22.5% for income above BRL 50,000.00.

It is important to note that not all offshores will be affected by the new rule, since only those companies located at countries with low taxation or no income taxation and legal entities without an active income above 80% of its total income are subject to the new taxation regime. Active income is understood as resulting from economic activity (purchase, sale, service providing, etc.).

The legal definition of a low tax jurisdiction or one without income taxation is provided in the articles 24 and 24-A of law 9,430/1996, and it generally comprises those countries that require the income taxation in an amount below 17%.

The Federal Revenue Service Office publishes a list of countries and tax regimes classified under such definitions in the Normative Instruction RFB 1,037/2010, updated from time to time. However, this list does not cover all countries or regimes that do not tax the profit of offshore companies in real life.

According to the presented change, we conclude that the Brazilian taxpayer shall collect the earnings of its controlled company abroad at December 31 of each year, regardless of its controlled company settling or encashing its investments, that is, it will be subject to the tax payment in Brazil without even having access to the money of the controlled company’s own earning, which will cause many future discussions around the effective contributory capacity.

It is also pointed out that, upon the requirement of the controlled companies’ profit taxation per period, before encashing their investments, we understand that a tendency to discourage the maintenance of these companies abroad will arise, since, as mentioned, in case the taxpayer make the investment directly abroad (e.g.: financial investment), the tax shall be levied only upon encashment.

Thus, the reflection and studies on the matter shall be deeper, once establishing a company abroad, in many cases, aims not only the tax rationalization, but also the corporate and family succession structuring.

Pursuant to the provisional text, migrating the company to a country that taxes the income in a rate above 17% is not enough, since the presented tax requirement affects any company that has a passive income (interest, royalties, dividends, financial investments, etc.) above 20% of the total.

Finally, in spite of the mentioned negative impacts for the taxpayers, as a positive aspect we can highlight that, generally, the taxation was made upon the application of the 27.5% rate, and with this change, the rate will be of 22.5%

3.3. Taxation of profits and dividends earned by controlled companies abroad – control of profits earned up to 31.12.2023.

The profits of legal entities located abroad calculated before the PM came into force will be taxed only in the moment of their availability. However, such taxation will be made according to the rates in force in the moment of their availability.

3.4. Taxation of profits and dividends earned by controlled companies abroad – losses offset.

According to the new rules, the losses calculated in the balance by offshores can only be offset with profits of the same controlled company, considering their calculation after the enforcement of the PM and prior to the income calculation.

The PM does not present any type of time limitation to use the losses, but it also does not present any hypothesis of update.

3.5. Taxation of profits and dividends earned by controlled companies abroad – deduction of the tax owed abroad.

Upon determination of the owed tax, the individual may deduct (in the proportion of their interest in the capital or equivalent) the income tax paid abroad by the controlled company and its invested companies levied on the income calculated in the tax base of the tax mentioned in this article, up to the limit of the tax owed in the country.

The new command does not have any other requirement for the offset, however, we understand that the subject will cause countless problems and shall be analyzed case by case, since the taxpayer shall calculate the tax owed in Brazil per period at December 31 of each year, and the tax owed abroad is generally owed at a subsequent moment.


4. Regarding the rules for trusts.


The trusts, which until then did not follow a specific approach in Brazil, started to be regulated.

Under the new rules, the settlor shall inform in their statement all destined goods and tax all earnings received by the trust, except if the beneficiary had already previously declared the trust to the Brazilian authorities.

Thus, despite of maintaining a trust, on a tax standpoint, there will be total transparency in relation to the analytical breakdown of the equity and its consequent tax requirement, in a model similar to direct investments.


5. Regarding the update rules for value of goods and rights.


Although all measures presented reflect an increase in tax collection, the mentioned PM brings an excellent hypothesis of tax rationalization.

Pursuant to the PM, an individual residing in the country may choose to update the value of goods and rights abroad declared in their Annual Adjustment Statement (DAA) to the market value at December 31, 2022, as well as to tax the difference to the acquisition cost by the IRPF at the definite rate of 10% (ten per cent).

The option applies to:

  1. financial investments;

  2. general real state properties or assets that represent rights over real state properties;

  3. vehicles, aircrafts, watercrafts, and other individual property subject to general register, even in chattel mortgage; and

  4. interests on controlled entities.

The option can be made jointly or separately for each good or right abroad, and the tax shall be paid until November 30, 2023.

The following cannot be subject to update:

  1. goods or rights that were not stated in the DAA related to the calendar-year of 2022, delivered up to May 31, 2023;

  2. goods or rights that were disposed, written-off, or settled prior to the date of formalization of the option addressed in this article; and

  3. jewelry, gemstones and precious metals, artwork, antiques of historical or archeological value, domestic or sports animals and animal reproduction genetic material, subject to general, even in chattel mortgage.

We conclude that it is an excellent hypothesis of tax burden reduction, since the taxpayers generally have many earnings abroad that were not subject to taxation due to the current deferral rules, and that, in a single opportunity, they will be able to apply, through the advance payment of the tax, the rate of 10% on earnings that are subject to the rates from 15% to 27.5% and would be taxed in the future.


6. Final notes.


Thus, we understand that we are facing many changes that directly impact making investments abroad and that shall be individually evaluated. Upon these changes, we recommend the review of the models and structures, in order to mitigate any possible impacts, considering the fortuitous loss of tax efficiency in comparison with other variables, such as foreign exchange hedge, and objectives of equity consolidation due to succession aspects.

Finally, we would link to emphasize that PP&C has a team of multidisciplinary experts in international tax matters in over 125 countries and can help you to evaluate all impacts arising from this PM, through understanding the features of your equity and identifying the best legal alternatives.


Make sure to contact our team of specialists and understand more details about this topic: ppc@ppc.com.br or +55 11 3883-1600.

Content written by Marcos Vinicius de Freitas Gutierres, Tax Director at PP&C Auditores Independentes (mvf.gutierres@ppc.com.br).

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