Brazilian Tax Reform: Key Changes to the ITCMD Under Bill of Supplementary Law No. 108/2024

The regulatory phase of the recently approved Tax Reform began on June 5, 2024, with the presentation of the final report on Bill of Supplementary Law (PLP) No. 108/2024. In short, the bill's main objectives are to: (i) establish the Management Committee of the Tax on Goods and Services (CG-IBS); (ii) structure the administrative tax procedure for ex officio assessments of the Tax on Goods and Services (IBS); (iii) organize the distribution of IBS revenue among the federative entities; and (iv) regulate the Tax on Causa Mortis Transfers and Donations of Any Assets or Rights (ITCMD).

Among the many changes introduced by the bill, this article focuses specifically on the developments concerning the ITCMD.

First, the ITCMD may now apply to the transfer of any assets to which an economic value can be attributed, including contributions accumulated in private pension plans (particularly PGBL and VGBL plans). In these cases, the private pension entity itself becomes responsible for withholding and paying the tax. However, transfers of VGBL plans established more than five years earlier, as well as transfers of life insurance plans and similar products, will not be subject to the ITCMD.

The bill also classifies certain transactions between related parties as donations, namely:

a) a transfer classified as onerous to a person who cannot demonstrate the financial capacity to make the acquisition;

b) corporate acts that result in disproportionate benefits to a partner or shareholder, carried out gratuitously and without a demonstrable business purpose, including disproportionate dividend distributions, disproportionate spin-offs, and capital increases or reductions at differentiated prices; and

c) debt forgiveness carried out gratuitously and without a demonstrable business purpose.

Law No. 14,754/2023, which governs the taxation of assets held abroad by individuals resident in Brazil, expanded the scope of the ITCMD to also cover the transfer of assets and rights held in a trust.

In the case of a revocable trust, the transfer of trust assets to the beneficiary upon the settlor's death will be treated as a causa mortis transfer, whereas a transfer made during the settlor's lifetime will be treated as a donation. On the other hand, the transfer may be deemed to have occurred earlier than these events if the settlor irrevocably waives their rights over the assets. Irrevocable waiver is therefore classified as a form of donation, triggering the ITCMD.

As for which State has the power to collect the ITCMD on the transfer of real estate and related rights located abroad, the competent State is: (i) the State of domicile of the decedent or donor, if domiciled in Brazil; or (ii) the State of domicile of the heir or donee, if the decedent or donor is domiciled abroad.

For the ITCMD on the transfer of movable assets, including securities, credits, and other rights and intangible assets, the competent State in a causa mortis transfer, regardless of where the assets are located, will be: (i) if the decedent was domiciled in Brazil, the State where they were domiciled; and (ii) if the decedent was domiciled abroad, the State of domicile of the heir. In donations of movable assets, regardless of where the assets are located, the competent State will be: (i) if the donor is domiciled in Brazil, the donor's State of domicile; and (ii) if the donor is domiciled abroad, the donee's State of domicile.

Finally, in causa mortis transfers or donations where both the transferor and the recipient are domiciled abroad, the tax will be payable to the State in Brazil where the assets are located.

We also note that, in line with the mandate of the recently approved Tax Reform, the bill reaffirms the requirement to adopt a progressive rate system for the ITCMD. Accordingly, States that have not yet adopted progressive ITCMD rates (based on the value of the inheritance share, legacy, or donation) must amend their local legislation, subject to the maximum rate set by the Federal Senate.

It is also worth noting that the bill must first be submitted to the plenary of the Chamber of Deputies, then to the Senate and, if approved at all previous stages, finally to presidential sanction. The text may therefore undergo significant changes throughout the legislative process.

Lorusso & Partners continues to monitor all developments regarding the emerging regulation of the new tax reform and remains available to clarify any questions on the subject.