As of today (March 1, 2021), Brazilian resident individuals have to report their taxes to the Federal Revenue Department by filing their annual tax returns. The deadline for the filing is April 30, 2021, and it applies to expatriates residing in Brazil in 2020.
Expatriates coming to work in Brazil must take some precautions when preparing their first Brazilian annual income tax return. Some mistakes and errors made in the first tax return may cause unnecessary and undesirable effects in the future.
In a recent article, I explained the conditions that make a foreign individual become a Brazilian resident for tax purposes (Acquiring Brazilian Residency for Tax Purposes). This article talks about some mistakes expatriates commit when filing their first Brazilian tax return.
The most common error made by expatriates or their tax preparers is to omit assets they own outside Brazil.
Individuals who become a Brazilian resident for tax purposes are subject to the same tax rules applicable to other residents when they acquire local residency.
In the first income tax return, the expatriate can take all tax deductions available to Brazilian residents if they have been incurred after acquiring Brazilian residency. That includes deductions of medical expenses, education expenses (up to a specific limit), child support, among others. In most cases, such deductions are not limited to those paid within Brazil; some deductions also include payments made outside Brazil if incurred after the taxpayer has acquired Brazilian residency.
Besides information regarding the individual’s income and expenses, the annual income tax return requires the taxpayer to list and describe all assets and liabilities held within Brazil and abroad, and those of the tax dependents, in the last two preceding years. Assets must be listed and described in the so-called asset statement section (declaração de bens e direitos) of the annual tax return. Debts, including those related to assets listed on the asset statement, must be reported in the debts and encumbrances section (dívidas e ônus).
For instance, in the annual tax return due by April 30, 2021, the taxpayer must list and describe her assets and liabilities and their corresponding values on December 31 of 2020 and 2019.
Expatriates are usually reluctant to describe the assets they own outside Brazil, fearing they will have to pay local taxes in addition to those they pay in their home country. That may be true for income earned outside Brazil and capital gains from the disposition of foreign assets. But, legally speaking, the Brazilian annual tax return must contemplate all of the taxpayer’s assets held outside Brazil.
Omitting assets held abroad may become a problem to the expatriates, particularly if they eventually decide to sell the foreign property and bring the proceeds into Brazil (to buy property, for instance).
Remitting the proceeds from undeclared foreign assets into Brazil may be a problem for more than one reason. First, the commercial bank in charge of converting the proceeds into Brazilian currency will most probably require a statement on foreign funds’ origin to comply with money laundering regulations. Lack of such a statement causes difficulties to bring the money into Brazil. The foreign asset’s listing in the annual tax return is the appropriate statement.
Second, assuming one finds a bank to convert the proceeds from the sale of undeclared foreign assets, the taxpayer will probably have to pay taxes on such an amount. The applicable tax will not be the capital gains tax (15%) as the asset had not been included in the tax return. Instead, the taxpayer must pay tax according to the personal income tax brackets in place (up to 27.5%), as the proceeds will be ordinary income.
At last, expatriates must bear in mind that the world has changed in the past few years. Now, countries around the world annually exchange taxpayers’ bank and financial information among themselves in a systematic and automatic way, which means that an unreported bank account or investment in their home country may end up reported to Brazil’s tax administration. No matter the legal origin of such an account or investment, failure to duly report it to Brazil’s Revenue Department is a tax offense that may result in the assessment of taxes and fines.
To avoid unnecessary hassles, expatriates must seek advice from professionals that clearly understand the specificities of local reporting of their clients’ foreign assets and income.
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