Structuring for Brazilian individuals

1. Structuring for Brazilian individuals Ana Claudia Akie Utumi autumi@tozzinifreire.com.br October, 2013

2. Ana Claudia Akie Utumiautumi@tozzinifreire.com.br • Professional experience: Head of Tax Area at TozziniFreire Advogados, with over 18 years of experience in Tax Practice, including Tax Consulting Area of a former “Big Six” auditing firm, and another large Brazilian firm. Member of the Permanent Scientific Committee of the International Fiscal Association (“IFA”). Member of the Practice Council of the NYU International Tax Program. • Education: Doctor of Laws degree in Economic Financial Law from the Law School of Universidade de São Paulo (USP) in 2006. LL.M. in Tax Law from the Law School of São Paulo Catholic University (PUC-SP) in 2001. MBA in Finance and Capital Markets from IBMEC Business School in 1996. Graduation: Law (USP Law School, 1994) and Business Administration (Getulio Vargas Foundation, 1992) • Other Professional Activities: Member: IFA and Director of Brazilian IFA Branch (Brazilian Association of Financial Law - ABDF); Brazilian Institute of Tax Law (IBDT); Brazilian Association of Tax Law (ABRADT); Brazilian Institute of Tax Researches (IPT); Brazilian Institute of Tax Studies (IBET); International Center of Tax Studies (CIEST); Brazilian Institute of Financial Professionals Certification (IBCPF) and IBCPF Certification Committee (2003-2004). Contributor to BNA Transfer Pricing Forum and BNA Global Tax Guide. • Academic Activities: Visiting professor in different post-graduation courses of the most reputable business schools in Brazil, including Law School of Fundação Getúlio Vargas (FGV/RJ – 2002/2005); USP School of Economy and Administration (USP/FIPECAFI); International Business MBA Program at Fundação Instituto de Pesquisas Econômicas, in association with USP (USP/FIPE); Corporate Management MBA Program at Fundação Instituto de Administração, in association with USP (USP/FIA); among other important post-graduation courses in Brazil • Publications and speeches: Author of several articles related to Tax Area, and lecturer in various seminars and conferences, local and international, including 2007 IFA Congress in Kyoto (Seminar B: International Tax Issues on Emission Allowances), 2009 ABA Section of Taxation May Meeting, and 2009 IFA Congress in Vancouver (Plenary Session II: Foreign Exchange Issues). • Awards and Recognitions: Included by Latin Lawyer Magazine, in August/September 2002 edition, among “40 under 40 – Brazil’s Raising Stars” (40 leading Brazilian lawyers under 40 years old); in August/September 2003 edition among “Latin America’s Top Tax Lawyers” (Fiscal Responsibility – Latin America’s top tax lawyers); in June 2006 edition among the 40 of the Latin America's women lawyers who have excelled in their chosen area of practice (“The Glass Ceiling”). Frequently ranked among the most recognized tax lawyers in Brazil, by different companies and publications.

3. Concept of Brazilian resident individuals • Citizens living in the country • Foreign individuals that: • holds permanent visa or temporary labor visa, since the date 1st day of presence • Stays in Brazilian territory for 183 days or more within 12 months, holding any other type of visa

4. Investments abroad • Remittances to/from Brazil by individuals in connection with investments outside Brazil • Subject to Tax on Foreign Exchange Transactions (“IOF/FX”) • Rate: 0.38% • May be changed at any time by the President

5. Taxation on Foreign Sourced Income • Individuals • Taxation on worldwide basis • Taxation occurs when the income or gains are available to the Brazilian resident • Regardless the actual transfer of the funds into Brazil

6. Taxation on Foreign Sourced Income • General rule • Foreign sourced income is subject to taxation by Individual Income Tax (“IRPF”)

7. Taxation on Foreign Sourced Income • General rule • Any income generated by labor or capital, or combination of both • Includes foreign sourced income, deriving from capital located abroad, or activities developed therein

8. Taxation on Foreign Sourced Gains • Gains obtained abroad are subject to income tax at 15% • Includes • foreign exchange variation in case of investments performed with funds originated in Brazil • Income obtained in redemption or liquidation of financial investments abroad • No deduction of losses

9. Taxation on Foreign Sourced Gains • Concept of capital gains • Gains obtained in any transaction that implies in transfer or assignment of assets or rights from one person to another • Sale and purchase of assets • Swap / Exchange of assets/rights • Assignment of rights • Etc.

10. Taxation on Foreign Sourced Gains • Concept of financial investments (“aplicação financeira”) • Investments that may only be performed by means of financial institutions • Fixed yield investments • Variable yield investments – spot or futures market transactions • Transactions with gold as financial asset, including REPOs • Investment funds

11. Taxation of Foreign Sourced Income • Differences between taxation of equity investments and taxation of financial investments • Equity investments • Remittance of the funds - IOF/FX at 0.38% • Repatriation of the amount invested • IOF/FX at 0.38% • No income tax, except in relation to foreign exchange variation (functional currency depends on the origin of the proceeds - originally in Reais or in foreign currency) • Profits distribution - General income for Individual Income Tax (IRPF), maximum rate of 27.5% • Sale of shares - capital gains - income tax at 15%

12. Taxation on Foreign Sourced Income • Includes distribution of profits by controlled companies located outside Brazil IRPF Direct or indirect distribution of profits/dividends OFFSHORE COMPANY ASSETS

13. Taxation of Foreign Sourced Income • No CFC rules for individuals - taxation upon "availability" • Cash basis taxation - not necessary to bring the money back to Brazil • With an offshore company • Portfolio effect – possible to offset losses and gains within the offshore company, before making any distributions

14. Taxation of Foreign Sourced Income • Differences between taxation of equity investments and taxation of financial investments • Financial investments • Income available upon redemption, liquidation, assignment or sale – as capital gains - income tax at 15% • Coupon (income made available during the life of the investment, without requiring the redemption or liquidation): not included by the law in the capital gains - theoretically general income • However, the tax authorities has already issued a ruling including all financial income outside Brazil in the taxation of capital gains - if tax authorities change their position in the future, they can charge the principal of the tax, but no interest, nor penalty

15. Use of investment funds to invest offshore • To be treated as a financial investment – and subject to income tax at 15% • Investment fund cannot be a company • If it is a company • Taxation as equity investment • To maintain the taxation at 15% - sale of shares instead of distribution of profits

16. Use of investment funds to invest offshore • Characteristics of Brazilian investment fund • No legal personality • Nature of "condominium" - joint ownership • Mandatory management and custodian – financial institution • Regulated by the Brazilian SEC and by the Brazilian Central Bank

17. Use of investment funds to invest offshore • Advantages • Portfolio effect • matching of losses and profits • deferral of taxation to the moment that there is a redemption of quotas, and not upon each change of financial investment • Keep the taxation as capital gains • 15%, regardless of the timing of investment

18. Ancillary obligations when investing abroad • 1. Include the assets (quotas of funds, shares of offshore companies, financial investments, etc.) directly belonging to the Brazilian resident individual in the annual statement of assets, which is part of the annual income tax return • All the assets above USD 2,000 must be declared • Lack of declaration is tax evasion – deemed as a unjustified income and subject to 27.5% + 150% penalty + interest • 2. Declare the investment abroad to Brazilian Central Bank (except if the investment is less than USD 100,000)

19. Ancillary obligations when investing abroad • 3. Calculate the income tax (IRPF or on capital gains) whenever there is a taxable event • Direct or indirect distribution of profits • Realization of gains • Liquidation/redemption of financial transactions • 4. Pay the corresponding tax until the last business day of the following month • 5. Include the relevant income or gains and the corresponding tax paid in the annual income tax return

20. Fiduciary Structures • Use of fiduciary structures is NOT a tax planning for Brazilian families • There is no concept of fiduciary ownership in the Brazilian law • Except for credit transactions, in which the creditor retains the ownership until the debtor finishes paying, but in this case the asset stays in the full possession and responsibility of the debtor

21. Fiduciary Structures • Transfer of assets from a Brazilian individual to a trust or foundation • Deemed donation • Subject to State Gift Tax (4% or 8%, depending on the State) • Risk of withholding income tax • Brazilian tax authorities understand that donations are only exempt when performed between two individuals • Exclusion of transferred assets from the annual statement of assets

22. Fiduciary Structures • Distribution of income or principal from a trust/foundation to a Brazilian resident individual • Taxation under general rule – ordinary foreign sourced income

23. Structuring Fiduciary InvestmentAvoiding adverse tax implications • Capital contribution • with assets OFFSHORE COMPANY 1 Trustee 2.Capital contribution with assets (3) Corporate settlor and transfer assets to trust OFFSHORE COMPANY2 Trust ASSETS

24. Life insurance • Buying insurance policy outside Brazil • Forbidden for Brazilian residents • Unless it is evidenced that the desired coverage is not available in the Brazilian market, and an authorization is obtained with the Brazilian Insurance Regulator (SUSEP) • Brazilian resident may be insured or beneficiary of an insurance policy

25. Life insurance • Indemnification paid due to the death of the insured person • Exempt from income tax in Brazil • However, it has to be an insurance policy that could be accepted as so by the Brazilian insurance regulation • Insurance in Brazil is NOT an investment mechanism • It should be evidenced (a) who bought the insurance policy, and with what funds; (b) that the insurance company took significant risks in the insurance agreement; and (c) that the price of the insurance policy is at arms’ length conditions in comparison with Brazilian market prices