Economic Impacts of Tax Reform on ITCMD and Its Reflections on Succession Planning

Constitutional Amendment Proposal No. 45 (“PEC 45”), commonly known as the “Tax Reform PEC,” is likely to affect the tax burden of hereditary succession in Brazil, leading to the search for alternative succession planning strategies to mitigate the effects of this potential increase in inheritance taxation.

This is because, in addition to creating a dual VAT (ICMS and ISS will be replaced by the Tax on Goods and Services “IBS”; while IPI, PIS, and COFINS will be replaced by the Contribution on Goods and Services “CBS”), the reform also proposes significant changes to other taxes such as IPTU (Urban Property Tax), IPVA (Vehicle Property Tax), and – most relevant to this discussion – the Tax on Transfer of Death and Donation (ITCMD).

Given its close relationship with wealth succession, a detailed analysis of ITCMD changes is necessary. Generally, the current ITCMD incidence on inheritances or donations is quite straightforward: for donations of movable assets, the tax jurisdiction is determined by the domicile of the donor (States or Federal District); for donations of immovable assets, the jurisdiction is where the property is located. Conversely, for death-related cases, the jurisdiction where the probate process was conducted has the authority to levy taxes on inherited movable assets, and for immovable assets, the location where they are situated.

Regarding applicable rates, some federative entities use fixed percentages (for example, the State of São Paulo applies a 4% rate), while others use progressive rates (like the State of Rio de Janeiro, with rates ranging from 4% to 8%). Thus, rates can be fixed or progressive as long as they respect the 8% ceiling established by Senate Resolution No. 09/1992.

If PEC 45 is definitively approved, certain tax impacts will become evident. Firstly, the tax reform project proposes mandatory application of progressive rates. This means that States currently charging ITCMD at a rate lower than the current ceiling (such as São Paulo) will see increases in tax burden due to the effects of progressivity.

This scenario is further exacerbated by Senate Resolution Project No. 57/2019, which aims to increase the ITCMD rate ceiling to 16% in Brazil.

In the case of donations or inheritances from non-residents, the Supreme Federal Court (STF) ruled that States cannot demand ITCMD in these cases, as there is currently no complementary law regulating the tax collection authority.

PEC 45 sought to address the STF’s barriers by establishing that in cases where the donor resides in another country, the tax may be collected by the State where the recipient resides. Additionally, if the recipient also resides abroad, ITCMD will be due to the State where the asset is located. For the deceased’s assets, even if located abroad, the tax will be due to the State where the deceased was domiciled, or if domiciled or resident abroad, the State where the heir or legatee resides.

It is also worth noting that, with PEC 45, it will no longer be possible to choose the probate location as a fiscal strategy to reduce ITCMD on movable assets, titles, and credits, as the new wording designates the State of the deceased’s or donor’s domicile as competent for tax collection.

Given these anticipated changes in PEC 45, any potential increase in tax burden due to ITCMD progressivity is already prompting taxpayers to seek legal means of succession planning. The primary method is through the creation of corporate structures in Brazil or abroad (such as holding companies, exclusive investment funds, offshore companies, trusts, etc.) to facilitate the advance of inheritance. In cases of premature legitimate transfer, the donor often seeks ways to retain political and financial control over the donated assets, such as through usufruct reservations.

Although it can be argued that these ITCMD changes will not be immediate – particularly due to the need for changes in state legislation and the application of the principle of anteriority – there is no doubt that careful attention must be paid to these potential changes.

Thus, it is advisable to undertake appropriate succession planning that can effectively protect taxpayers’ wealth interests before the effectiveness of these potential legislative changes.