To repatriate or not to repatriate?

Taxation on the repatriation of Brazilians foreign investment

The current devaluation of the Real against the Dollar and the need for liquidity is making some Brazilian investors choose to repatriate part of their money invested abroad.

Repatriation can be done through the liquidation of any investment in fixed income, for example, or through the return of the capital invested in businesses or companies abroad. Specifically on the repatriation through capital reduction of a foreign company, the incidence or not of income tax depends on a couple of variables.

First: what is the origin of the capital being repatriated? Capital constituted with income originally earned in foreign currency (in principle) has no tax impact. The capital constituted with income earned in Reais and converted into foreign currency has a tax impact and may result in the incidence of income tax on the exchange rate variation (i.e., appreciation or not of the foreign currency against the Real over the years). Many taxpayers indicate the capital reduction in their Annual Adjustment Statements to the Brazil’s Federal Revenue, but do not pay attention to this issue regarding the origin of the investment and the possible impact of taxation on exchange rate variation.

The capital constituted with income earned, partly in national currency and partly in foreign currency, must observe a proportion between the different currencies, in such a way that one part will be subject to income tax (gain on exchange variation), and the other part will not.

The same reasoning applies to investments abroad held by individuals. The payment of interest, dividends or capital gain will be subject to taxation according to the legal nature of the financial investment, where the origin of the income must also be observed.

So far, there is no doubt.

The capital reduction becomes nebulous when we are dealing with taxpayers who regularized their foreign investments in the Fiscal Amnesty Program (RERCT) granted by the Federal Revenue in 2016. Are these resources considered to have been originally earned in foreign currency or national currency? What is the correct treatment?

It is fairly known that when it comes to the Brazil’s Federal Revenue, not everything is black and white. There are those who argue that the income will always be in Real, and there are those who argue that we are facing foreign currency resources, on the grounds that, at the time they were recognized (regularized under the RERCT), there was no longer any evidence of its marking in Real.

Second: what if the repatriated amount exceeds the amount initially invested? Another discussion that has already been the subject of considerable questioning and that we should be aware of is the return of capital in cash to individuals residing in Brazil. This issue was addressed by the Federal Revenue (Cosit Consultation Solution No. 678/2017), when it was understood that the return of capital, whose participation has been regularized in the RERCT, is subject to taxation in the form of mandatory monthly payment (known as carnê-leão). In other words, the reduction would be considered as taxable income and not as a capital gain (in what and if it exceeds the cost of contributed capital).

The purpose of this article is to alert taxpayers who are taking advantage of the Dollar’s rise to face difficult times like this, to do so in an attentive and appropriate way to avoid future questionings.

By Marcela Leal Sammarone, associate at Candido Martins Advogados.