Brazil: Provisional Measure N. 1,171/23

Changes on the taxation of financial investments, controlled companies and trusts owned by Brazilian tax residents (individuals)

In brief

On 30 April 2023, Provisional Measure 1.171/23 (“MP” or “MP 1.171/23”) was published, bringing some changes on the taxation of Brazilian tax residents (Individuals), especially regarding: (i) the taxation of financial investments abroad, and (ii) the creation of “anti-deferral” rules for foreign controlled entities owned by Brazilian individuals. In addition, for the first time, this MP deals with the taxation of foreign trusts. MP 1.171/23 also changed the bracket amounts of the ordinary income tax progressive rates and revoked some specific tax provisions, including specific exemptions applicable to individuals.

The new rules shall be applicable from 1 January 2024 ahead (assuming the timely conversion of the provisional measure into law, as required in Brazil).

More details

1. General rule

MP 1,171/23 establishes that individuals, residing in Brazil on 1 January2024, must tax – individual income tax (IRPF) – separately and definitively the income/earnings from capital invested abroad in the modalities of (i) financial investments, (ii) profits of foreign controlled entities (“controlled entities”) and (iii) assets and rights owned by a foreign trust.

Such income/earnings will be subject to progressive rates up to 22.5% without deductions, as per the table below:

Earnings (annually) Tax rate
Up to BRL.6.000,00 0%
From BRL.6.000,00 up to 50.000,00 15%
Above 50.000,00 22,5%


2. Financial investments

Earnings generated from financial investments abroad should follow the general rule above, with progressive rates of up to 22.5% (according to the table above) without deductions.

These earnings will have to be computed in the Annual Individual Income Tax Return (so called “DAA”) and taxed when effectively received by the individual, at the time of redemption, amortization, disposal, maturity or settlement of the corresponding financial investment.

The MP lists examples of financial investments to be subject to the new taxation rules, including shares of investment funds and insurance policies. It also lists  some earnings hypotheses, including the exchange variation of the foreign currency against the national currency. 

3. Controlled entities abroad – “anti-deferral” rule for individuals – Profits earned from 1 January 2024

MP 1,171/23 provides for automatic annual taxation of profits earned by controlled entities abroad (anti-deferral rule). That is, from 1 January 2024, the profits generated abroad, based on the controlled entity’s annual balance sheet, will be taxed on 31 December of each year at progressive rates of up to 22.5%.

MP 1,171/23 defines as a controlled entity the company and other entities (incorporated or unincorporated) where the individual, directly or indirectly, separately or through other related entities, holds: (i) the majority of the powers to manage the entity and/or to elect and remove the majority of its officers or (ii) more than 50% interest in the share capital, or equivalent, or in the rights to receive its profits or receive its assets in the event of  liquidation.

It is worth mentioning that said anti-deferral rules shall be applicable only to controlled entities (i) located in a country or dependency with favored tax regime (“low tax jurisdiction”), (ii) beneficiaries of a privileged tax regime or (iii) with active income of less than 80% total income – for instance, financial investments  is one of the examples of deemed  passive income according to the MP.

The profits will be calculated individually, based on the controlled entity’s annual balance sheet. The entity’s losses, and the profits and dividends of Brazilian subsidiaries held by the controlled entity abroad, may reduce the taxable profits.

In addition, the individual may deduct the income tax paid abroad by the controlled entity and its subsidiaries, levied on the profit computed in the tax calculation basis, up to the limit of the tax due in Brazil.

MP 1,171/23 does not provide for mandatory taxation of the of retained earnings/profits that have been generated and accumulated up to 31 December 2023.

With regard to the exchange variation of the principal amount contributed to the controlled entity, there is an express provision in the MP stated that it will be taxed upon disposal, written-off or liquidation of the foreign investment, including in the case of return of capital.

4. Option to update the value of foreign assets

MP 1,171/23 grants the choice for individuals to update the value of foreign assets informed in their DAA to the market value on 12.31.2022. The positive difference shall be taxed by the individual income tax at the definitive tax rate of 10%.

The possibility of updating the value of the assets is granted for financial investments, real estate properties, vehicles, aircraft and movable assets subject to registration, equity interest in companies and trust assets held by the individual resident in Brazil.

The tax must be paid by 30 November 2023, and the Brazilian Internal Revenue Service will regulate the form for the taxpayer to adopt this option.

Specifically for controlled entities abroad, taxpayers who elect to update their foreign assets value may also choose, separately, to update the market value of the same assets for the period from 1 January 2023 to 31 December 2023, with payment of the IRPF at the definitive rate of 10%. In this case, the tax must be paid by 31 May 2024.

5. Trusts

Trust is a common-law institute often used for succession planning purposes abroad, in which the founder (Settlor) transfers its assets to an administrator (Trustee) who is responsible for managing the assets and transferring them to the beneficiary in accordance to the rules set out in the trust deed and in the letter of wishes. Since the trust is not an institute recognized by the Brazilian legal system, there was no tax regulation on this matter before and, therefore, there were many doubts regarding the taxation of the Brazilian individuals involved in the trust.

The main provisions of MP 1.171/23 regarding trusts, in summary, provide that:

1. Assets and rights owned by a foreign trust will be considered under the ownership of the settlor after the establishment of the trust and will pass to the ownership of the beneficiary at the time of distribution by the trust to the beneficiary or of at the settlor’s passing (whichever occurs first)

2. The distribution from the trust to the beneficiary will have the legal nature of transfer free of charge by the settlor to the beneficiary, characterized as a donation (if transferred in life) or causa mortis transfer (if resulting from the settlor’s passing);

3. Regarding income and capital gains related to the assets and rights owned by the trust to be earned as from 1 January 2024, they will be:

a. deemed earned by the holder of such assets and rights on the respective date and
b. subject to IRPF in accordance with the rules applicable to the holder;

4. The trust will be considered transparent for tax purposes when it holds a controlled entity abroad, applying the taxation rules set forth in the item above (of controlled entities).

It is worth mentioning that MP 1,171/23 does not distinguish revocable and irrevocable trust, so that the analysis should be carried on a case by case basis.

6. Revocations and next legislative steps of MP 1,171/23

Finally, MP 1,171/23 revoked the possibility of excluding exchange variation for the calculation of taxable gains arising from foreign investments made with income earned originally in foreign currency. It also revoked the exemption for gains in the case of disposal of assets and financial investments acquired by an individual while a non-resident of Brazil.

Because this provisional measure amends legal provisions that increase the collection of individual income tax, it can only require the payment of the referred tax in the next fiscal year, that is, as from 1 January 2024 or after this date.

Regarding provisional measures legislative steps, they produce immediate effects as soon as published, however their term is 60 days, extendable once for an equal period, and it must be converted into law during this period.
We are monitoring the evolution of said provisional measure for the purpose of converting it into law within the current calendar year as well as its main developments.

* * * * *


Trench Rossi Watanabe and Baker McKenzie have executed a strategic cooperation agreement for consulting on foreign law.

Contact Information
Clarissa Machado
Sao Paulo, Trench Rossi Watanabe
Read my Bio
Flavia Gerola
Sao Paulo, Trench Rossi Watanabe
Read my Bio

Copyright © 2024 Baker & McKenzie. All rights reserved. Ownership: This documentation and content (Content) is a proprietary resource owned exclusively by Baker McKenzie (meaning Baker & McKenzie International and its member firms). The Content is protected under international copyright conventions. Use of this Content does not of itself create a contractual relationship, nor any attorney/client relationship, between Baker McKenzie and any person. Non-reliance and exclusion: All Content is for informational purposes only and may not reflect the most current legal and regulatory developments. All summaries of the laws, regulations and practice are subject to change. The Content is not offered as legal or professional advice for any specific matter. It is not intended to be a substitute for reference to (and compliance with) the detailed provisions of applicable laws, rules, regulations or forms. Legal advice should always be sought before taking any action or refraining from taking any action based on any Content. Baker McKenzie and the editors and the contributing authors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The Content may contain links to external websites and external websites may link to the Content. Baker McKenzie is not responsible for the content or operation of any such external sites and disclaims all liability, howsoever occurring, in respect of the content or operation of any such external websites. Attorney Advertising: This Content may qualify as “Attorney Advertising” requiring notice in some jurisdictions. To the extent that this Content may qualify as Attorney Advertising, PRIOR RESULTS DO NOT GUARANTEE A SIMILAR OUTCOME. Reproduction: Reproduction of reasonable portions of the Content is permitted provided that (i) such reproductions are made available free of charge and for non-commercial purposes, (ii) such reproductions are properly attributed to Baker McKenzie, (iii) the portion of the Content being reproduced is not altered or made available in a manner that modifies the Content or presents the Content being reproduced in a false light and (iv) notice is made to the disclaimers included on the Content. The permission to re-copy does not allow for incorporation of any substantial portion of the Content in any work or publication, whether in hard copy, electronic or any other form or for commercial purposes.