On April 4, 2023, the São Paulo State Treasury Secretariat (SEF-SP) published the Response to Tax Consultation No. 25,343/2022, addressing the taxation of irrevocable trusts established abroad with beneficiaries residing in Brazil.
In the analyzed case, the settlor (the creator of the trust) was a legal entity based abroad, while the beneficiaries were individuals residing in Brazil.
According to SEF-SP’s interpretation, the assets transferred to the trust by the settlor do not become part of the trustee’s own property but are under the trustee’s control for the benefit of the beneficiary.
As a result, if this transfer was made gratuitously, SEF-SP views the establishment of the trust as a donation from the settlor to the beneficiary, subject to the Inheritance and Donations Tax (ITCMD). This understanding aligns with the rule proposed in the Draft Complementary Law No. 145/2022, which aims to provide guidelines on the applicable law for trusts, their effectiveness, and their tax treatment in the country.
It is important to note that SEF-SP’s interpretation is that ITCMD applies even if the settlor is a non-resident, despite the Supreme Federal Court (STF) declaring the imposition of this tax unconstitutional in cases where the donation is made by a foreigner. According to SEF-SP, “despite the STF’s decision in RE No. 851.108/SP, Article 4 of Law 10.705/2000 remains valid and in force in the legal system. Nonetheless, considering the STF’s interpretation, any potential charge could be challenged through legal measures with a probable chance of success.
Furthermore, SEF-SP’s understanding differs from the interpretation by the Federal Revenue Service of Brazil (RFB) Coordination of Taxation (Cosit), as expressed in Tax Consultation No. 41/2020. At that time, the RFB expressed the view that distributions made by trusts would be taxable income for the beneficiaries.
Under SEF-SP’s interpretation, Income Tax would only be due on the portion of the distribution corresponding to income earned after the establishment of the trust, as donations received by residents in Brazil are exempt from Income Tax.
Given the absence of specific legislation, the taxation of operations involving trusts remains a controversial topic, likely to prompt further discussions and decisions in both administrative and judicial spheres.