NOTE: Compliance with registration requirements may lead Internal Revenue Service (IRS) to identify final beneficiaries residing in the Country.
The IRS has attempted to hold national financial institutions accountable for the identification of all final beneficiaries of foreign investments in the financial and capital markets in Brazil, and has threatened to collect withholding income tax (“IRRF”) at the punitive rate of 35% (applicable to payments made by legal entities to unidentified beneficiaries) on income and gains derived from these investments, if there is any doubt about the existence of a final resident investor in Brazil. The objective is to disqualify the tax benefits given to foreigners in such investments.
The existence of a resident in Brazil as the final beneficiary of a foreign fund investing in the country is admitted by the legislation in force.
The entity with the exclusive participation of natural person and legal person resident and domiciled abroad is only one of the classes of foreign investors admitted by the regulations, alongside categories such as “other funds or collective investment entities”, “entities formed in the form of trusts or other fiduciary vehicles”, “incorporated companies with bearer securities” and other legal entities incorporated abroad “not included in the previous categories “.
Therefore, an entity abroad controlled by Brazilian residents should not be disregarded as a non-resident investor, provided that certain requirements are met. The foreign legal entity must be regularly declared to the Brazilian authorities, have its own legal personality and have a diversified portfolio of assets in different countries, in addition to own accounting books and prepare financial statements through an accountant qualified in the country of its constitution.
The tax legislation also does not prohibit the participation of residents in Brazil in investments made by funds and foreign companies in the Brazilian financial and capital markets under the regime of Resolution No. 4,373 / 14, of the National Monetary Council (“CMN”).
Legislation that grants tax benefits to such investments only requires the direct
investor to be nonresident and not located in a tax haven.
In order for the IRS to question such a structured transaction and to impose differentiated taxation on residents in Brazil, the entities domiciled abroad should be devoid of real existence and its structure should generate reduction or absence of taxation in comparison to investments made in the Brazilian market directly by residents in Brazil.