Like most countries, Brazil taxes individuals based on their residency rather than citizenship or other criteria. Therefore, determining a person’s residence in Brazil directly impacts that person’s tax treatment and tax reporting obligations.
Nonresident individuals are subject to a flat withholding tax on Brazilian-source income, with no deductions available and no local tax reporting obligations. No foreign-source income is taxed as long as the nonresident status remains in effect.
Local laws define a resident for Brazilian tax purposes as the person who:
1. resides in Brazil permanently;
2. leaves Brazil to render service as an employee of a Brazilian governmental agency or body;
3. enters Brazil:
a. with a permanent visa, on the date of arrival;
b. with a temporary visa:
i. to work under an employment agreement regarding taxable events occurring from the date of the arrival;
ii. on the date she completes 184 days in Brazil, whether consecutive or not, within a period of 12 months;
iii. on the date she obtains a permanent visa or becomes an employee in Brazil before completing 184 days in the country, whether consecutive or not, within a period of 12 months;
4. being Brazilian and nonresident for tax purposes returns to Brazil with the purpose of becoming a permanent resident, on the date of arrival;
5. leaves Brazil on a temporary basis;
6. leaves Brazil on a permanent basis without filing the “tax exit” return within the first 12 months of absence.
Individuals becoming residents for Brazilian tax purposes are taxed at progressive rates on worldwide income. They are entitled to the same deductions and exemptions applicable to other resident individuals, which in some cases include the deduction of medical and educational expenses paid outside of Brazil. They must also report their local and foreign assets in the annual tax return’s asset statement.
Taxes paid abroad on foreign-source income may or may not be creditable against Brazil’s income tax on that same foreign-source income. The tax credit is generally available:
- if there is a tax treaty between Brazil and the country where income was earned;
- in the absence of a treaty, if there is reciprocity treatment in the foreign country accepting Brazilian income tax to be creditable by residents in that foreign country. The taxpayer must prove the reciprocity treatment in the foreign country, except for the U.S., the United Kingdom, and Germany, for which the tax administration has issued formal recognition of the tax reciprocity.
So, foreign individuals falling into one of the situations listed above in 2020 soon have to report their income and assets, in Brazil and overseas, to the Federal Revenue Department. The 2021 tax season is just around the corner. It starts on March 1, 2021, regarding calendar year 2020. So, it is time to start gathering information, bank statements, documents, etc., to prepare and timely file the 2021 annual tax return.
David Roberto R. Soares da Silva, expert in tax, estate and succession planning, founding partner of do Battella, Lasmar & Silva Advogados, and coauthor of Planejamento Patrimonial: Família, Sucessão e Impostos, and Tributação da Economia Digital no Brasil, published by Editora B18