The taxation of individuals residing in Brazil with investments abroad has undergone significant changes with the enactment of Law No. 14,754/2023.
The main change was the provision that profits earned by controlled foreign entities (offshores) must be taxed annually in Brazil, on December 31 of each year. This means that regardless of whether the profits have actually been distributed, they will be subject to income tax.
This amendment raises discussions regarding the legality of such taxation, considering that income tax liability arises upon the acquisition of the economic or legal availability of income or any kind of proceeds, as provided in the governing legislation. Recall that economic availability occurs when there is an actual inflow of assets into the taxpayer’s estate, such as salaries or the sale of shares at a profit; and legal availability occurs when the taxpayer acquires the right to receive income, even if it has not yet been credited, such as declared dividends.
We therefore highlight three key points of attention on this subject:
1. Illegality as stipulated by Law 14,754/23: An anticipated taxation is imposed without the existence of available income, contravening the incidence hypothesis of the income tax provided for in the complementary law, which is hierarchically superior;
2. Risk of double taxation: The assessed and taxed profit may be taxed once again when distributed, should there be no compensation mechanisms in place; and
3. Legal uncertainty and litigation: The issue is already being brought before the courts, with favorable decisions for taxpayers recognizing that there is no income tax triggering event without actual economic or legal availability of income.
Recently, the judiciary ruled against the taxation of earned profits on the grounds of the illegality stipulated in Law No. 14,754/23. Moreover, judicial decisions from higher courts reinforce the understanding that the triggering event for income tax depends on the acquisition or availability of income, requiring the actual or potential availability of profit in order for it to be taxed.
Apart from the discussions about legality, the practical effects of this change can be significant. The automatic taxation of undistributed profits directly impacts the cash flow of taxpayers, who may be required to pay income tax on amounts they have not actually received, reducing their liquidity and capacity for reinvestment. This scenario is likely to create distortions in financial and corporate planning and may discourage investments in legitimate international structures. Added to this are the risks of complex tax disputes, additional litigation costs, and the potential loss of competitiveness for Brazilian companies and investors compared to their peers in countries not subject to such advanced taxation.
For these reasons, anticipating analysis and planning is essential to safeguard taxpayer rights, reduce the risk of tax assessments, and ensure the long-term financial health of the business.
