The recent change of income tax taxation for non-resident investors in Brazil

On September 27, 2022, new provisional regulations were published (PM, or interim measure in Portuguese) 1.137 /2022 by the Brazilian Executive, establishing new beneficial rules for the taxation of income tax for non-resident investors in Brazil.

The regulations are in force but will take effect from the first of January next year. According to the explanatory statement of the regulations, the changes are aimed at attracting new investments from abroad in the national productive sector and, consequently, reducing the effects of the economic crisis in Brazil since 2014,  which has worsened with the coronavirus pandemic.

The Brazilian legislation, until the publication of this measure, regulated those foreign investors, with the exception of those who have tax domicile in countries considered tax havens; they were exempt or subject to a zero rate of income tax in the following fields:

  • In public securities, directly or through funds exclusively for foreigners;

  • As a general rule, in securities or transferable securities issued by non-financial companies and in investment funds in credit rights;
  • As a general rule, in investment funds in shares;
  • In funds that apply their resources in assets with income tax exemption, whose holders are exclusively foreign investors.

*General rule is because you must observe specific criteria of the legislation.

With the publication of PM 1.137 / 2022, the benefit with the zero aliquot for financial sectors has been widened and the imposed restrictions have been reduced (percentage of participation, for example) to make it easier for foreign investors not resident in Brazil to access the zero aliquot of other financial fields. Thus, this new PM has added the following financial fields to the list:

  • Investment fund in shares in infrastructure and investment fund in shares in intensive economic production in research, development and innovation;
  • Financial letters, which are fixed income securities issued by financial institutions;
  • Securities or transferable securities subject to public distribution of issue by legal entities under private law, with the exception of financial institutions;
  • Investment funds in credit rights;
  • Investment funds in shares and investment funds in emerging companies.

However, with the change of PM 1.137 / 2022, the legislation no longer refers to the term tax havens and yes, in a more restrictive way, that the benefits do not apply to taxpayers with a tax domicile in a jurisdiction with favored taxation and beneficiary of a privileged tax regime. This restriction of the tax domicile is not considered when it comes to Sovereign Funds, which are investments constituted abroad with assets partly formed by sovereign savings resources of the country of origin. In addition, the benefits also do not apply to transactions between related persons, in accordance with the transfer pricing legislation.

It is important to clarify that this interim measure in Brazil, it is a normative act that has provisional validity for up to 120 days, in accordance with the Federal Constitution of 1988, and that to be valid for an indefinite period, the National Congress (Brazilian legislative Chamber) must approve it. PM 1.137 /2022 is still in force and currently under analysis by the Congress.

The estimated fiscal loss with the extension of the benefit is around 4.3 billion reais over three years, but the Brazilian government expects to reach new foreign investments and not change the conditions of investments already established in other Brazilian securities and funds exempt for people domiciled abroad.

Conclusion: The recent change in Brazilian legislation expanded the list of zero aliquot scenarios for financial applications of non-resident taxpayers in Brazil, with the aim of attracting new investments from abroad, especially for fixed income, private funds and similar.


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