Tax treatment of foreign trusts in Brazil: A commentary to Bill 145/2022 – Part 1

By David Roberto R. Soares da Silva

Without much fanfare, Brazil’s House of Representatives is reviewing a complementary law project that proposes to regulate the effectiveness of foreign trusts in Brazil and their respective tax treatment. The law project has no relation to the bill already under discussion in Congress on the possibility of creating a sort of Brazilian trust (the so-called fiduciary contract).

Complementary Law Project No. 145/2022 (PLP 145), authored by lawmaker Eduardo Cury, was submitted to the House of Representatives on November 23, 2022, and has been in the House Finance and Taxation Committee since December 2. With 18 articles, PLP 145 proposes to create an innovative and exciting tax framework that, if approved, will bring some certainty about the legal effectiveness and appropriate tax treatment in the use of foreign trusts with parties resident in Brazil.

This Part 1 reviews the definitions established in PLP 145, applicable law and jurisdiction, and the proposed tax treatment of property transfer taxes, namely the state inheritance and donations tax (ITCMD) and the municipal real estate transfer tax (ITBI).

A. Definitions

Article 2 of PLP 145 provides for definitions that will be important for the appropriate tax treatment of property transfers involving foreign trusts. These are:

• beneficiary: the effective beneficiary or potential beneficiary, as the case may be;
• effective beneficiary: the person favored by the trust and who has already unconditionally acquired, fully or partially, the right to the trust’s assets, meaning the immediate, unqualified right to access any portion of assets under the trust, either through distributions, redemption of the original capital or termination of the trust;
• potential beneficiary: the person who may be favored by the trust but who has not yet unconditionally acquired the right to the trust’s assets, meaning the immediate, unqualified right to access any portion of assets under the trust, either through distributions, redemption of the original capital or termination of the trust;
• settlor: the person who (1) creates the trust by transferring assets or rights to a trustee for the formation of the trust assets, (2) appoints the beneficiaries, or (3) establishes the purpose of the trust if so desired;
• trust: the foreign legal structure resulting from the transfer of assets or rights with economic value made by an individual or legal entity (the settlor) to a formal owner (the trustee), simultaneously with the birth of an autonomous ownership right or title of the beneficiaries of the transferred assets or rights;
• trustee, administrator, or curator: the person who receives the custody and formal ownership of assets or rights with economic value that are part of the trust and who undertakes the duties towards the trust’s beneficiaries and in relation to the trust’s assets.

At first glance, one can note that PLP 145 makes an interesting distinction between “effective beneficiary” and “potential beneficiary.” As we will see, this distinction will be necessary for tax purposes since only acquiring the status of “effective beneficiary” will trigger a tax consequence in Brazil.

B. Applicable law and jurisdiction

PLP 145 establishes that a beneficiary can be the settlor himself or a third party, or even those appointed by the trustee or by law.

Articles 3 to 5 deal with the law applicable to the trust, which will be indicated in the trust deed, “except if they violate the national sovereignty, the public order other generally accepted social values” (Article 3). This point is interesting as one may interpret it as that trusts violating Brazilian rules may not have their effectiveness or validity recognized in Brazil. For example, a possible situation could be a trust violating statutory forced heirship rules.

In the absence of an indication of the applicable law, the rules of Private International Law should govern (Article 4).

As for the jurisdiction to process actions related to the trust, the Brazilian courts will not have jurisdiction if the trust deed establishes another authority (Article 5). The exception to this rule is the processing of tax-related actions involving the trust and those related to taxes due in Brazil (Article 5, sole paragraph).

C. ITCMD (Inheritance and donations tax)

The first relevant issue is that PLP 145 considers that distributions made by a foreign trust are subject to the state ITCMD and not to income tax, although income tax applies in some situations, as we will see later.

The general rule is that the ITCMD taxable event is the acquisition, by the potential beneficiary, of an unconditional and immediate right to any portion of the trust’s assets (Article 7). In other words, the ITCMD is due when a potential beneficiary becomes an effective beneficiary.

Under the definition of Article 2 of PLP 145, this acquisition of unconditional right occurs, partially or totally, when any portion of the trust’s assets becomes available to a beneficiary without being subject to any term or condition. Let’s see some possible situations:

It is important to note that, according to PLP 145, the remittance of a distribution to Brazil is irrelevant. If a distribution becomes available to the beneficiary, they must immediately pay the ITCMD according to the rules of the state of their domicile.

The tax basis is the value of the transferred asset or right in Brazilian real (Art. 7, item I).

PLP 145 also establishes some ITCMD tax-exemption rules by excluding certain transmissions from the concept of a donation. The following situations will not be deemed to be a donation and will not be subject to ITCMD (Art. 8):

1. Transfers of assets, rights, and values from the settlor to the trustee for the formation of the trust fund;
2. Any payment of values or asset transfers from the trust to the settlor;
3. Any payment of values or asset transfers made by the trust to effective beneficiaries after they acquire such a condition (of effective beneficiaries).

The situation under item 3 makes sense because the ITCMD is due by the beneficiary at the moment they acquire the unconditional right to a distribution, even if that distribution takes place at a later moment.

D. ITBI

An interesting point relates to the transfer of real estate to the trust. PLP 145 (Art. 9) establishes that ITBI (the municipal real estate transfer tax) will not apply to transfers of real estate and related rights for the formation of the trust fund. In practice, “capitalization” of the trust with real estate will not be subject to ITCMD (Art. 8) or ITBI, providing a possible tax planning opportunity.

ITBI, however, will apply to real estate transactions in the following situations (Art. 10):

1. If the property is acquired with results obtained by the trust after a beneficiary has become an effective beneficiary and it is transferred to an effective beneficiary who is not the settlor; or
2. If the trust delivers the property to the settlor in the capacity of a beneficiary, and such property has not been previously transferred by the settlor to the trustee.

The PLP 145 also establishes that the properly legalized trust deed is sufficient to register the property transfer with the Real Estate Registrar Office without needing a public deed.

Given their extension and complexity, the PLP 145 income tax rules involving foreign trusts will be addressed in Part 2 of this article.

However, one can anticipate that PLP 145 is innovative and helps to provide more legal and tax certainty to international succession planning involving this powerful fiduciary tool.

David Roberto R. Soares da Silva is an expert in tax, estate, and succession planning, founding partner of BLS Advogados, author of Brazil Tax Guide for Foreigners (2021), and coauthor of Planejamento Patrimonial: Família, Sucessão e Impostos (2022),  Renda Variável: Tipos de investimentos, tributação e como declarar (2021), and Tributação da Economia Digital no Brasil (2020), published by Editora B18.

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