MP 1.171, RFB nº 2119 and the slow march towards regulated Trusts in Brazil

The issue of trusts in Brazil has been widely debated for the better part of the last decade. As a civil law jurisdiction, Brazil has historically shied away from the trust structure as a legislative reality. Of course, this has far from deterred prominent Brazilians from using the structure actively in their international planning. The privacy and asset protection offered by the structure has been attractive to high-net-worth individuals looking to secure part of their international wealth from economic and political risk. The issue of the use of trusts entered the social political consciousness in 2016 when high profile politicians were discovered to have used the structure in their planning. With the general tax amnesty of the same year, it become apparent that some kind of position from the Brazilian fiscal authorities would be necessary. It was during that time that the authorities, in an informal answer and question discussion, made the first foray into trusts. Namely they made simple statement detailing that assets in a revocable trust would be declared by grantors while those in an irrevocable trust would be declared by beneficiaries of the trust. Since that time, we had a lot of speculation, but general silence on formal legislation concerning these structures.

While the expectation was a formal legislative act concerning these instruments, and in fact several versions of proposed legislative acts were published, nothing became formal. This is until the past couple of months, when on two occasions, the fiscal authorities decided to take matters into their own hands and bypassed general congressional deliberation. They have, through these two acts, created the groundwork on what is shaping to be position of the regulation of trusts by Brazil.

International law is a difficult concept for most countries because it involves translating international reality into a national framework. While treaties do much to push this regard, they have for the most part been limited to specific facts and circumstances. Countries tend to fear forgoing, even nominally, any part of their sovereignty. Most international law than is regional reaction to what their citizens are doing abroad. It was this that was behind recent legislative efforts affecting trusts in many South American countries. Citizens of those countries were not only sending their money abroad but were doing so by using several kinds of entities which did not similarly or equivalently exist in the national law. These structures were sometimes chosen because of their exotic legal framework, which granted the additional air of defensibility for their users. The efforts to create a national framework for these structures are highly valuable though. It allows countries to better understand the behaviors of their citizens and allows citizens better clarity on how to comply with the law.

As hinted at above, Brazil has not been completely devoid of mention of trusts in its past. In 2016 and in 2021 the structure was recognized, but in both cases in semi formal pronouncements, and not in a true regulatory fashion. These positions either did not do much to clarify what people using these structures should exactly do, or were almost nonsensical in their understanding of the operations of the structures.

This brings us to more recent regulatory shifts in Brazil. The “Instrução Normativa RFB nº 2119, de 06 de dezembro de 2022”, further modified in March of 2023, took the first coherent step in recognizing the existence of the trust structures. In Article 53, Section 5, it seeks to define which parties to a trust should be identified when the structure directly or indirectly enters the Brazilian market to invest. This regulation seeks to identify inbound investors and what would be either a substantial interest in economic rights or decision-making authority.

Even more recently and more surprisingly the issue of outbound taxation was taken on by MP1.171. The regulation sought mostly to create a series of new CFC rules for Brazilian owned offshore structures, and to create a passive income non deferral regime. It also took some strides to identify when trust parties need to report their structures. Notably, it requires that trust grantors need to declare all trust assets as if held directly by themselves, and trust beneficiaries should only declare the assets after the grantors passing. It stated that trust income distributions would be taxed at the 22.5% tax rate, which many have begun to question, as they also state that the payment is characterized as donations usually subject to much lower tax rates. Most importantly. MP1.171 defined grantors subject to reporting as natural persons, making it understood that trusts granted by corporate grantors would not be under the scope of the regulation.

It remains to be seen how these moves will play out. Like any large democracy Brazil suffers from division between its branches and it is no surprise that these regulations were acts of executive agencies and not legislative efforts. The thing that is most clear is that the issue of trusts is no longer being ignored by South America’s largest economy, and clarification and further regulation will likely follow suit in the next few months. This isn’t a bad thing. The regulation of these structures does not do anything to limit the benefits they historically offered, and only offers us clarity in how to plan and retain both national and international assets. A well-regulated corporate framework is better than an unregulated corporate framework, and an unregulated corporate framework is better than a badly regulated one. Different than what it has done in the past, Brazil has taken steps to join the international space. If the future regulations play out well, we could see positive benefits for both inbound and outbound structures.

Though still early in the stages of development, I would ideally like to see a formal legislation creating trusts in Brazil which follows the international standards found in most of the developed world. Namely these structures should allow families to plan wealth succession and safeguard assets. Ideally formal and robust legislation concerning trust structures would attract inbound investment as well as set the ground for clear and concise international reporting. This dream is still far from reality, and as of today, regulatory baby steps are the most we can hope for.