Brunno Novaes Texeira
Tomás Lima de Carvalho
The dynamic reality of business activity, allied to the need for growth and market affirmation, presupposes that business organizations, constantly, seek viable alternatives to develop their assets and make them attractive to investors, aiming for efficiency and maximization of results.
Indeed, the market is made up of business organizations that need to raise funds through the public offering of bonds and securities, and of those that have resources to offer, in search of security, profitability and liquidity. This is a set of medium and/or long-term, or even indefinite-term operations, aimed mainly at financing capital (companies) and safety and increasing equity (investors).
The main characteristic of the capital market is the capture of popular savings in a risky investment: the investor, who invests resources in the capital market, as a result of the acquisition of securities, is not guaranteed to obtain profits, but, on the contrary, in addition to the possibility of not achieving a return on the amount invested, the investor who acquires securities may still lose everything he invested.
Thus, investors must seek information and adopt strategies to better use their resources, in search of safety, efficiency and liquidity. Indeed, recognizing the importance of innovation as a way of opening horizons of possibilities, it is important to verify some dynamic aspects, related to the creation of new aspects, new strategies, mechanisms to solve or produce new paths and bring differentiated and adequate solutions. to the desires that are proposed to them.
One of these innovative strategies is the use of offshore structures as an investment vehicle, allowing access to foreign markets – and assets –, protection against “Brazil risk” and the volatility of our market, protection of capital abroad, as well as the tax and succession efficiency of investments.
However, the strategic use of offshore companies and the use of their benefits find an obstacle in the rules of law, especially in the need for legal support in incorporation, transfer of resources, tax returns and respect for international transparency rules. Thus, the lack of knowledge of its own rules and the absence of qualified consulting to investors can be seen as a major obstacle to the use of offshore as a strategic instrument for investments.
Given this situation, the scope of this article consists of a careful analysis of Offshores, especially the design of the institute, the main points of attention and its strategic advantages.
The “offshore company”, also known as IBC (International Business Company) designates the company incorporated in a jurisdiction different from that of its partners (tax residence) and/or that operates outside the territorial limits where it is located. Indeed, an offshore company does not have a specific legal form – eg. joint-stock company – and may take on the form and type of company that suits the needs of the partners, in accordance with the corporate law of the jurisdiction where it is incorporated.
Such characteristics does not necessarily indicate that they are companies constituted illicitly or for illicit purposes. Especially because, the practice of illicit acts does not depend on the constitution of a company located in a different jurisdiction endowed with tax benefits, but only that any person – natural or legal – practices acts contrary to the law.
As a matter of fact, the idea of illegality related to Offshores concerns the intention of its partners or beneficiaries – the illegality derives from the agent, and not from the institute itself -, aiming at the constitution in tax havens with the purpose of practicing fraud, money laundering, concealment of assets, obtaining income from illegal activities, tax evasion or any type of illegality.
On the other hand, any person has the right, provided that they act within the limits of the law, to conduct their activities in the way they see fit, including in order to achieve a reduction in the tax burden, diversification of markets and asset protection and safety.
And this is precisely the idea of legality attributed to Offshores: better alternatives for gain over commercial operations, efficiency in tax planning or flow of payments and receipts in foreign currency, resulting in several benefits to their partners, such as financial privacy, access to investments abroad, limited civil liability, efficient tax structure, preservation of shareholders’ equity and succession efficiency. Furthermore, the incorporation of an offshore company allows the opening of bank accounts and ownership of assets or investments abroad.
On the Brazilian legislation, it is a legal and regulated institute. The Normative Instruction of the Brazilian Federal Revenue n. 1037, of June 4, 2010, considers tax havens to be countries or facilities that do not charge tax on income or that tax it at a rate lower than 20% (twenty percent) or whose domestic legislation does not allow access to information related to the structure of legal entities or their ownership. Privileged tax regimes, on the other hand, are those that grant at least one of the advantages established by Brazilian legislation, such as taxing income at the maximum rate of 20% and granting a tax advantage to a non-resident without requiring the performance of economic activity.
It is mandatory before the Brazilian Federal Revenue, in the Individual Income Tax Return, the declaration regarding the existence of an offshore company, and any financial transferring whenever made to or from Brazil, or distribution of profits to the Brazilian shareholder. It is also imperative to declare the existence of the offshore to the Central Bank of Brazil, when the company has equity equivalent to USD$1,000,000.00 (one million dollars), pursuant to art. 2 of Resolution n. 3,854/2010 of the Central Bank of Brazil.
Therefore, offshores are a legal instrument provided that the equity invested has a legal origin and the ownership of the interest in the offshore capital and the amounts contributed therein are regularly declared to the Brazilian Federal Revenue and the Central Bank of Brazil.
Central American countries currently stand out among the main jurisdictions to have an offshore company, particularly the British Virgin Islands (BVI), Belize, St Kitts & Nevis, Bahamas, and Panama. Each of these jurisdictions has specificities that must be considered and indicated according to the needs of the interested party.
Recently, after some information leaks (eg Panama Papers and Pandora Leaks) the Limited Liability Company (LLC) business model in the United States of America (USA) emerged as an option for those seeking secrecy and greater confidentiality in investments abroad.
The US is not a signatory to any mutual information exchange treaty, that is, it has no obligation to send information to another requesting country. It is important to note, however, that each US state has its own legislation, varying the level of access to information, state-level taxation rules and costs of establishing and maintaining these LLCs. Among the best jurisdictions in the US, South Dakota, Wyoming, Delaware, and Florida currently stand out.
As mentioned, the use of an offshore company is an effective way to make investments abroad, since it has a series of advantages of different types, among which the following stand out:
The use of Offshore to make investments provides the deferral of the payment of Brazilian Income Tax on income obtained abroad. Thus, the accounting of the offshore records the income obtained regularly (accrual basis), but the tax is only due on the part of the profits that the investor will actually withdraw (Cash basis).
Tax deferral means that there will be taxation of profits from the company’s profits, but such taxation will only occur when (and if) there is distribution to the partners. If the partners decide to keep reinvesting the profits, there will be no taxation.
This does not mean tax evasion or any type of illicit conduct, but only differs the moment when the tax will be paid.
On the other hand, if the investment were made through the individual – and not through Offshore – such taxation would occur compulsorily on any profit, and the tax would be collected through “carnê-leão”.
The hypothesis of income and taxation of Brazilian partners, in Brazil, regarding Offshore operations, are:
JTWRS refers to a legal structure of condominium ownership, involving two or more parties for any type of asset (eg, company shares). Each Joint Tenancy owner has an equal right to the asset; therefore, all Joint Tenancy owners are considered as co-owners of the same asset, in a condominium
Because of the “rights of survivorship”, joint tenancy owners who survive the owner who dies are automatically considered owners of the asset.
The JTWRS, therefore, translates into the exercise of the property right by the “joint owners”, in an indivisible way, over the good considered as a whole. While living, joint owners are indivisible holders of the same property right (co-ownership). Upon the death of one, the survivor becomes the holder of that property right in isolation. Therefore, nothing remains to be transmitted, inherited or fractionated by third parties.
In the case of JTWRS instituted on offshore interests in jurisdiction of Anglo-Saxon law, the applicable law in Brazil must be the law of the offshore jurisdiction itself (art. 8, caput, LINDB). Thus, along with the discussion on possible characterization of donation, assets located abroad are not subject to the probate and succession process in Brazil, and the succession rule of the deceased’s last domicile must be respected; or, in this case, the corporate rule for the application of the JTWRS clause.
The Joint Tenancy with Rights of Survivorship it is a useful and efficient tool to avoid the beginning of succession proceedings abroad, as well as the payment of inheritance tax abroad. On the other hand, it ensures the “transmission” of the asset to the “owner in Joint Tenancy”, forgetting, although as a rule, the rules for the transmission of inheritance to heirs established by law.
In addition to the discussion on the possible characterization of donation, in cases where the owner in a Joint Tenancy has not made any financial contribution to the asset, he must not even present it in his annual declaration of assets and rights in Brazil. It is only upon the death of the co-owner that the said asset becomes part of its list of assets when the “automatic succession” arises from the JTWRS clause.
In addition to the benefits already mentioned, another factor that stands out is the non-incidence of inheritance tax in the Offshore jurisdiction based in tax havens or jurisdictions endowed with tax advantages.
In the case of an offshore company headquartered in a jurisdiction with a provision for Joint Tenancy with Rights of Survivorship, the death of one of the joint holders does not imply the occurrence of a succession event, since the surviving joint holder remains in the ownership of the asset.
Even if the investments of an Offshore company are carried out in the United States of America (where, it is known, the inheritance tax for “non-residents” is 40%, when the assets exceed USD60,000.00), still, there will be no inheritance tax, since the holder of the investment in the US is the legal entity (Offshore), and not the individual holder of Offshore shares.
In view of the constitution of an offshore company to hold the ownership of assets and manage them, to the detriment of the individual, it is inferred that in the Annual Personal Income Tax Return (IRPF), only the ownership of the interest in Offshore must be declared to the IRS.
Therefore, Offshore partners do not need to present as their own an asset or a financial investment held or carried out by the legal entity (Offshore). In effect, such assets or rights are not included in the IRPF declaration, resulting in greater privacy and secrecy about their property.
Furthermore, as the ownership of assets and rights is conferred on the legal entity, headquartered abroad; and there is no information about ownership of these assets in the IRPF of the Offshore partners; greater patrimonial protection is inferred in relation to such assets and rights.
Regarding the obligations of an offshore company, most international jurisdictions do not require income tax returns, or even accounting records of companies based there.
However, it is always recommended that tax residents in Brazil keep the offshore accounting within the IFRS standard (international accounting standard) in case there is any requirement to present the Balance Sheet, whether due to a transaction, inspections or even for compliance issues. In addition, the balance sheet enables shareholders residing in Brazil to correctly demonstrate their position in the company’s capital for IRPF purposes in Brazil, as well as submit to the Central Bank the data requested in the CBE, such as the total amount of equity, total assets and liabilities, profit reserves, income for the year, among other necessary information.
It is worth remembering that the presentation of the CBE to the Central Bank does not imply the need to pay any tax, given that it is an informative declaration for statistical purposes.
Finally, it is important to clarify that some countries (such as the BVI) require the completion and submission of an economic substance form annually. In this form, it must be informed that the company does not have active economic activity, that is, there is no direct exploitation of activity by the company (eg. property rental). Investments, bank accounts and the like are considered passive activities, not falling under the concept of economic substance. While there are still no effective measures taken, jurisdictions that require this form of economic substance aim to tax these companies in the future.