Recent Private Ruling 41/2020 of the Brazilian IRS

The Brazilian IRS recently took position on the tax treatment of trust distributions to Brazilian resident beneficiaries (Receita Federal, Coordenação-Geral de Tributação, Solução de Consulta N. 41 – Cosit, 31st March 2020).

Recently, on March 31st, 2020, the Brazilian IRS has published a so-called Private Ruling which provides for the tax treatment of distributions made by foreign trusts to Brazilian resident beneficiaries. The Ruling is relevant in case of succession in Brazil, as it analyses the taxation of said distributions. It is binding to the Brazilian tax authorities.
 

In a nutshell, a Brazilian resident beneficiary of a trust based in the Bahamas approached the Brazilian IRS and asked for guidance with respect to the tax treatment of the distributions she had received so far from the trust, this in her quality as a beneficiary but also as an heir. The trust had been settled years ago by her husband who had meanwhile died. The question was raised whether the distributions should be subject to Individual Income Tax (“Imposto sobre a Renda”) or Estate Tax (“Imposto sobre Transmissâo Causa Mortis e Doaçâo de Quaisquer Bens ou Direitos”) in Brazil.

The Brazilian IRS stated the following:

• The Estate tax is levied by the Brazilian States, wherefore the IRS declared that it does not have the power to decide whether or not an estate tax is due in this case.
   
• The Brazilian IRS adopted the concept of article 2 of the Hague Convention to which, however, Brazil is not a signatory. It did adopt the concept that the trust is a legal relationship created inter vivos or after death, in which the grantor places his assets under the control of a trustee for the benefit of a specific beneficiary or purpose. In this context, the IRS clarified the concepts of settlor, trustee, beneficiary and trust deed.
   
• The constellation described by the consultant fits within the rule of art. 8, Law 7.713 / 88 so that the distributions made by the trust should be characterized as a taxable event subject to a monthly payment (so called "carnê-leão") under the ordinary Individual Income Tax rate (up to 27.5%).

Outcome

The ruling has a certain importance since it deals with the tax treatment of distributions from trusts domiciled abroad, even though trusts are not formally recognised by Brazilian law. However, unfortunately, the Ruling failed to analyse the possible application of the exemption of Individual Income Tax on the amounts received as inheritance, i.e. on the assets originally contributed to the trust. It does not differentiate distributions made out of the principal amount of the trust or its profits or income. Addressing these issues would have given much more importance to the Ruling.

In the writing of the Receita Federal you can read more:  Coordenação-Geral de Tributação  (Portuguese).

For further questions or if you would like to know more about this topic, I am at your disposal at any time.