TAX & CUSTOMS
CLIENT ALERT
MAY/2016
LAW NO. 13,259/16 AND INTERPRETATIVE DECLARATORY ACT NO. 03/16 –
INCOME TAX RATES ON CAPITAL GAINS REALIZED BY INDIVIDUALS AND FOREIGN
INVESTORS
PRACTICE AREA
Tax & Customs
COORDINATION
As previously informed, Provisional Measure no. 692 (“MP 692”), published on 22
September, 2015, amended Section 21 of Law no. 8,981/95 to introduce progressive
income tax rates on capital gains realized by individuals and non-residents as follows:
Marcelo Reinecken
§ 15% of the amount of capital gains not exceeding R$ 1 million;
§ 20% of the amount of capital gains exceeding R$ 1 million up to R$ 5 million;
§ 25% of the amount of capital gains exceeding R$ 5 million up to R$ 20 million; and
§ 30% of the amount of capital gains that exceed R$ 20 million.
So far, regardless of the amount involved the applicable rate was 15% (25% in case of
non-residents domiciled in low tax jurisdictions).
In addition, MP 692 provided that if the same asset or right was sold in installments, the
capital gain realized as from the second installment should be added to the capital gain
realized in the original transaction.
Despite the fact MP 692 did not make any directly reference to capital gains realized by
non-residents, once section 18 of Law no. 9,249/95 provides that the capital gain realized
by non-residents shall be calculated in accordance with the same rules applicable to
Brazilian residents, it was possible to conclude that the new rules applied to them as well.
MP 692 would enter into force as of January 1st, 2016, if converted into law until
December 31, 2015.
For further information,
please send a message to
[email protected]
This document was prepared
exclusively for informational
purposes and does not constitute
legal advice or an invitation to an
attorney-client relationship. If you
have any questions, our lawyers are
available for clarification.
It is forbidden to distribute,
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document, in full or in part, without
the prior consent of Veirano
Advogados.
However, MP 692 was only converted into law on 17 March, 2016. Law no. 13,259/16
basically maintained the relevant changes introduced by MP 692, but with a few
important modifications.
In accordance with Section 1 of Law no. 13,259/16, capital gains levied on the sale or
disposition of assets and rights will be subject to the income tax as follows:
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§ 15% of the amount of capital gains not exceeding R$ 5 million;
§ 17.5% of the amount of capital gains exceeding R$ 5 million up to R$ 10 million;
§ 20% of the amount of capital gains exceeding R$ 10 million up to R$ 30 million; and
§ 22.5% of the amount of capital gains that exceed R$ 30 million.
Moreover, Law no. 13,259/16 changed paragraph 3 of MP 692 in order to clarify that in case of sale or disposition of
assets and rights in installments, the capital gain realized as from the second installment must only be added to the
original capital gain only if carried out until the last day of the year following the year in which the first transaction took
place.
In addition, it is also worth mentioning that paragraphs 1 and 2 of Section 5, which provided that the progressive income
tax rates should only be adopted to the sale or disposal of assets and rights realized as of January 1st, 2016, onwards, were
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vetoed under the argument that it was not compatible with Section 62, paragraph 2, of the Federal Constitution.
Note, however, that regardless of that fact that MP 692 was only converted into law in 2016, Section 5 of Law no.
13,259/16 provides that the new rules will enter into force as of January 1st, 2016.
Notwithstanding, this misconception did not pass unnoticed.
On 29 April, 2016, by means of Interpretative Declaratory Act no. 03/16, the Brazilian Federal Revenue Services formally
expressed their opinion in the sense that Section 1 of Law no. 13.259/16 will enter into force as of January 1st, 2017.
In other words, capital gains levied on the sale or disposal of assets and rights realized until the end of 2016 will remain
subject to a 15% income tax rate (25% in case of foreign investors domiciled in low tax jurisdictions).
In spite of that, we reinforce that some controversy may arise in relation to:
§ transactions concluded until the end of 2016 with payments of the purchase price deferred to 2017 onwards;
§ deferred payments deposited in escrow accounts; and
§ payments that are subject to a future condition, such as earn-outs linked to the increase of the company’s gross
revenues.
In our view – and paragraphs 1 and 2 of Section 5, which were vetoed by the Brazilian President, confirm this
understanding –, the new rules should only apply to transactions carried out as of January 1st, 2017, especially when it
comes to deferred payments.
However, there are arguments which may lead to the conclusion that the purchase price paid or released in subsequent
years would be subject to the new tax rates.
As for payments subject to a future condition, it would be harder to support this understanding, since in this case the
payment could be seen as a new taxable event, detached from the original transaction.
Finally, we highlight that the progressive income tax rates introduced by Law no. 13,259/16 applies only to general rules
concerning capital gains. As a result, all situations regulated by specific tax rules (e.g., investments in Private Equity Funds,
investments in the financial and capital markets, net gains on transactions carried out by individuals in the stock exchange
and capital gains realized by non-residents located in low tax jurisdictions) remain unchanged.
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Section 62, paragraph 2, of the Federal Constitution provides that Provisional Measures that implicates in the increase of the income tax shall
only enter into force in the following fiscal year if converted into law until the last day of the year in which it was issued.
We are at your disposal if you have any questions or need additional information.
Ian Muniz
[email protected]
Bruno Habib N. Barbosa
[email protected]
veirano.com.br
Rio de Janeiro
São Paulo
Porto Alegre
Brasília