Progressive Income Tax Rates
Law 13,259, published in the Official Gazette on March 17th, 2016, converted into law Provisional Measure 692/2016 (“MP 692”) thereby definitively changing capital gain taxation applicable to individuals in Brazil (see Tax News sent on September 28th, 2015, on Provisional Measure 692) which should now be calculated based on progressive income tax rates.
Prior to the issuance of MP 692 and its conversion into Law 13,259, capital gain obtained by individuals should be subject to income tax at 15% rate in Brazil.
Based on the original wording of MP 692, capital gain should be taxed based on progressive income tax rates that would go from 15% up to 30% according to the size of the capital gain obtained. Law 13,259, however, changed the original wording of MP 692 and established
that capital gain should be subject to the following progressive income tax
– 15% income tax on the portion of capital gain not exceeding BRL 5
million;– 17,5% income tax on the portion of capital gain greater than BRL 5
million that does not exceed BRL 10 million;– 20% income tax on the portion
of capital gain greater than BRL 10 million that does not exceed BRL 30 million; and
– 22,5% income tax on the portion of capital gain greater than BRL 30 million.
Two important issues to be considered in relation to such changes are:
(i) Law 13,259 makes express reference to capital gain taxation applicable to
individuals, but according to Brazilian tax law the same capital gain’s rules
applicable to Brazilian individuals should apply to non-resident investors (both
foreign individuals and legal entities); and
(ii) It is foreseen, in Law 13,259, that the new progressive income tax rates should be applicable as of January/2016 onwards. However, according to the Federal Constitution, changes introduced by Provisional Measures should only be effective in the fiscal year following its conversion into law. Since MP 692 was converted into law in March/2016 (and not in 2015), there is a discussion whether the new capital gain taxation rules should apply as of January/2016 or as of January/2017 onwards.
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