On 29 August 2017, Normative Instruction #1,732 was published in the Official Gazette ("IN #1,732"), introducing changes to Normative Instruction #1,455/2014. IN #1,732 clarifies that non-resident investors' capital gains should be subject to withholding income tax based on progressive rates from 15% to 22.5%.
Historically, non-resident investors were generally subject to a capital gains withholding tax of 15% (or 25% when remitted to a tax haven jurisdiction).
On 17 March 2016, Law 13,259/2016 introduced changes to the capital gains tax applicable to Brazilian resident individuals. This change had the effect of calculating capital gains tax based on the progressive income tax rates from 15% to 22.5% (dependent on the quantum of the capital gain).
At the time, there was uncertainty around whether or not the new progressive income tax rates applied to non-resident investors. The uncertainty existed because Law 13,259 made express reference to the capital gains tax applicable to Brazilian resident individuals but did not mention capital gains tax in respect of non-residents. However, according to Brazilian tax legislation, the capital gains tax applicable to Brazilian resident individuals should also apply to non-resident investors (please see our Tax News sent on 24 March 2016).
IN #1,732 clarifies this position by clearly stating that non-resident investors' capital gains on the disposal of permanent assets in Brazil should be subject to the progressive income tax rates in Brazil, as set out below:
Until 31 December 2016, the applicable rate was 15%. Accordingly, the rates set out above should apply from 1 January 2017. Capital gains obtained by non-resident investors residing in tax haven jurisdictions remain taxable at 25%.
Further, we note that where an asset is disposed of "in stages", the rules will treat all different pieces of the disposal "in stages" as if they were a single transaction, in case the subsequent "stages" occur until the end of the calendar-year subsequent to the first disposal transaction (i.e., the first "stage"). This rule aims to prevent utilization of the lower income tax rates by artificially splitting the disposal of a single asset in different "stages".
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