Brazilian residents invest all over the world and they use wealth planning and protection structures motivated for several reasons, among which: managing investments and corporate structures, facilitating the transition in corporate chains in the event of succession, ensuring the future of heirs, optimizing tax costs, protecting heirs with disabilities.
In raising said structures, individuals resident in Brazil may adopt several alternatives, both domestic and international, such as the use of a trust structure, widely adopted in certain jurisdictions. In fact, international structures including foreign trusts are commonly adopted by Brazilian resident individuals seeking sophisticated wealth planning arrangements, especially for succession purposes, even though the trust per se is not regulated under Brazilian law.
In a simplified and summarized explanation, the trust may be defined as an arrangement in which an individual, the settlor, agrees to transfer its assets so they are held and managed by another person, the trustee, for a defined period and under agreed circumstances, in favor of a beneficiary, which may be the settlor or someone else, as an heir. The name “trust” is linked to the fiduciary nature of the arrangement, as well as the trust relationship between the settlor of the trust and the trustee. This institute was originated in common law jurisdictions.
The trust, therefore, may be used as a succession planning tool, as well as to allow a professional management of the assets and their protection. It may or may not be revocable and has no legal personality, having a contractual nature.
When used as a succession planning tool, the trust is intended to allow the immediate transfer of the assets held by the trustee to the beneficiary as of the decease of the settlor or the event defined in the trust deed, reducing legal / bureaucratic costs, as well as allowing a fast transfer of the assets, which could be time consuming and expensive in case of a formal probation procedure. Using such trust structure, the transfer of the assets will be automatic, and no probation shall be necessary.
Bearing that in mind, it is worth emphasizing that the trust, originated from common law jurisdictions, is not regulated under the laws of Brazil, a civil law jurisdiction, being difficult to fall into Brazilian civil contracts’ categories. There are bills of law currently under discussion to discipline trusts in Brazil, none of them yet approved, since its nature is very different from the contracts ruled by civil law. Additionally, there are not enough judicial cases in Brazil analyzing trust structures since they are not recognized by our jurisdiction.
The consequence is that, upon the settlor’s decease, the Brazilian resident will have to comply with certain obligations in Brazil, including informing the tax authorities about the ownership of the assets transferred / inherited abroad, paying the correspondent taxes in Brazil, as well as informing the assets at his / her respective annual income tax report. Furthermore, taking into consideration the lack of legislation and the absence of consistent precedent cases involving trust structures in Brazil, one of the main issues with the use of such structure lays on tax matters, because there is a discussion around the nature of the transfer of assets from a trust structure to a beneficiary resident in Brazil. It means that, in view of the fact that the settlor transfers the ownership of his / her assets to a trust, and that the beneficiary(ies) will immediate receive the assets directly from the trust after the decease of the settlor, without a probation, it is not yet defined by Brazilian tax authorities, if such a transfer would be accepted as a succession event under Brazilian law (such as the probation procedure itself or a last will, also subject to a probation), but rather a different kind of wealth transfer.
This implies relevant consequences not only from a civil, but also tax law perspective. This is because heritages are usually only subject to the State tax on donations and heritages (so called ‘ITCMD’ or ‘ITCD’ depending on the relevant State), with rates between 2% and 8% depending on the amounts involved and the State of residence of the parties.
In this regard, it is worth mentioning that ITCMD levy on foreign triggering events was subject to intense debate during the last decades, being very recently (March/2021) suspended by the Federal Supreme Court (‘STF’ – see Extraordinary Appeal No. 851,108 – leading case), which ruled that only a complementary law (currently inexistent) could discipline this matter. Albeit for now such tax is not levied, a bill of law (also recent, from March/2021) is currently being analyzed by the Brazilian Congress to regulate the matter and to allow Brazilian States to collect ITCMD over assets abroad.
This means that succession events in Brazil involving assets abroad are currently not subject to the ITCMD, implying no taxes may be imposed in Brazil on such transfers, for now.
Nevertheless, since the trust is not deemed as a succession instrument in Brazil, but rather a contractual structure, which is not subject to a probation procedure, the transfer of the assets to the beneficiary may not be recognized by tax authorities in Brazil as an inheritance, but rather a mere increase in the beneficiary’s wealth, which could be subjected to individuals’ income tax (‘IRPF’), at progressive rate that goes up to 27.5% for annual income higher than BRL 55,9 thousand (ca. USD 8k/year). Therefore, showing clearly that the taxation is way higher when income tax is applicable than when inheritance tax applies.
Another point of attention regarding the trust arrangement and the absence of a similar institute in Brazil is related to the earnings arising from investments made via the trust and the assets held. Accordingly, Brazilian tax authorities have already ruled that any income arising from a trust shall be considered as earnings subject to income taxation – same IRPF of up to 27.5%, regardless of such amounts being or not effectively transferred to Brazil, being triggered by the disposition of such values to the beneficiary. This understanding has been recently exposed in the COSIT Binding Ruling No. 41/2020.
As it can be seen, notwithstanding being a commonly adopted wealth planning option in several jurisdictions, the trust may give rise to inefficiencies from a Brazilian tax perspective in the current legal framework, as it does not fall into Brazilian civil law categories and may be inaccurately interpreted by tax authorities, which could demand high taxes on the transfer of the assets to the beneficiary or income arising from said assets.
In conclusion, using trusts as wealth planning instruments for Brazilian residents may allow individuals to benefit from management and governance purposes, but should be carefully evaluated on a case-by-case basis and following up legal / case law development on the matter, so as to avoid unnecessary or exaggerated tax costs.