In an important decision, judge recognizes the possibility of reducing taxation on offshore profits
Originally published on the 22nd day of June, 2026
In May 2026, the 17th Federal Civil Court (17a Vara Cível Federal) of São Paulo granted a preliminary decision in response to a preventive writ of mandamus (Mandado de Segurança) filed to challenge the levy of Income Tax, at a rate of 15%, on profits generated by an offshore company during the 2025 fiscal year. In the decision, the judge recognized that the arguments presented by the plaintiffs indeed support a reduction of the taxable base in that specific case, partially suspending the enforceability of the tax until the writ of mandamus is finally adjudicated.
In short, the plaintiffs argued that the income tax would not be due to the extent that, due to exchange rate fluctuation, there was a loss in the value of the foreign investment position (in reais), despite the accounting profit recorded by the offshore company during 2025.
In any case, the plaintiff did not intend to challenge the legitimacy of the regime for taxing profits annually generated by controlled entities abroad, established under Law No. 14,754/2023. Rather, this was a discussion concerning the ability-to-pay principle, which appeared to be absent in this specific case.
In this context, an important precedent is the ruling of the 4th Panel of the Federal Regional Court of the 3rd Region (TRF-3), which established the following: the exchange rate variation of the investment's value should not be included in the tax base for income-related taxes, since it exceeds the concept of profit set forth in Article 43 of the National Tax Code (CTN). Accordingly, exchange rate gains that do not produce an actual increase in net worth should not be considered taxable income. This understanding by the TRF-3 echoes General Repercussion Theme 962 of the Brazilian Supreme Court (STF), according to which the materiality of the tax is tied to the existence of an increase in net worth.
The controversy highlights that the mechanics of Law No. 14,754/2023 disregard the ability-to-pay principle by imposing automatic taxation on the annual profit recorded by the offshore company, regardless of whether the controlling individual actually experienced an increase in net worth. There are cases in which, due to exchange rate variation recorded during a given period, the fact that an offshore company generated a profit does not necessarily mean that: (i) the controlling individual obtained an increase in net worth as a result, nor (ii) that the value of the foreign investment position, in reais, increased. In such situations, when the absence of an actual increase in net worth is demonstrated, the tax authorities' insistence on collecting the 15% income tax constitutes a merely revenue-driven and coercive measure.
We understand that the same reasoning could be applied to challenge the taxation of unrealized gains, which end up being included in the profit reported in the offshore company's financial statements. Similarly, it can be argued that such amounts do not represent economically available income and, therefore, should not be subject to taxation. Once again, we face a situation in which accounting profit may not necessarily reflect an actual increase in net worth.
We are waiting to see if similar decisions will multiply over the coming months. Lorusso & Partners continues to monitor all developments on this topic and remains available to clarify any relevant questions, as well as to develop customized tax, wealth, and succession planning strategies.
