Author name: lycia

The Tax Reform approved by Constitutional Amendment No. 132/2023 (EC 132/23) has not only affected consumption taxation, but it has also introduced significant changes to the Inheritance and Donation Tax (ITCMD), which directly impact estate and succession planning. The regulations regarding these changes to the ITCMD are outlined in Complementary Bill No. 108/2024 (PLP 108/2024, Book II, Articles 163 et seq.), which has been approved by the Chamber of Deputies and is currently being processed by the Federal Senate. The text of PLP 108/2024 aims to standardize and harmonize ITCMD regulations, as they vary significantly across different States and the Federal District, which have the authority to enact and enforce the tax. While the impact of the reform will depend on individual circumstances, we highlight below seven key changes introduced by the bill: 1. Taxable Event (Article 164) The ITCMD is levied on the donation of assets, rights, and values between living persons, and on transfers upon death (inheritance or bequest). PLP 108/2024 equates the transfer between related persons declared as onerous to a donation if there is no proof of financial capacity to acquire the asset or right; the same occurs in the forgiveness of debt by liberality and without verifiable business justification. Related parties include: (i) spouses, partners, or relatives up to the third degree, and (ii) legal entities in which such individuals hold executive or ownership positions. 2. Tax Immunity for Non-Profit Institutions (Articles 165–168) PLP 108/2024 regulates ITCMD immunity for donations received or made by non-profit entities with public or social purposes, as provided for in EC 132/2023. Each State and the Federal District will define the process for recognition of tax immunity. However, in any case, institutions must prove that the donations are linked to their institutional purposes and comply with the general requirements for enjoying tax immunities set out in the National Tax Code (Article 14). Among the requirements are the non-distribution of any portion of assets or income and the complete application of resources to the maintenance of institutional objectives. 3. Timing of Taxable Event: Impacts on Trusts (Articles 169–172) The definition of trust for ITCMD purposes is the same as for income tax. The applicable rules extend to both foreign contracts and domestic trust agreements that share similar characteristics. The assets and rights within a trust abroad remain the property of the settlor until they are distributed to the beneficiary or the settlor dies, whichever occurs first. ITCMD will be triggered at either event. If the settlor irrevocably waives rights to the assets, tax may apply earlier. 4. Tax Base: Market Value of the Asset (Articles 173–177) The ITCMD calculation basis will now be the market value of the asset transferred, which can significantly increase the tax due when compared to the calculation based on the reference venal value or the IPTU. For transfer of publicly traded shares, the calculation basis will correspond to the closing price on the day before valuation. For others private company interests, including those that have not been actively traded for more than 90 days, PLP 168/2024 stipulates that the ITCMD will be calculated using a suitable methodology appropriate to the quotas and shares, and will correspond at least to the net worth adjusted by the valuation of assets and liabilities at market value, plus the market value of goodwill. This calculation methodology – which no longer considers the equity value, but the market value of the assets – meets a request from state tax authorities. Its provision in the law could substantially impact the amount of tax due for companies with undervalued assets in their accounting, such as real estate holdings. The reference to the use of a ‘technically suitable and adequate methodology’ also creates some uncertainty, as it broadens the valuation tools to lead to the so-called ‘fair value’ of shares and quotas, which can be achieved using different techniques, such as discounted cash flow or market multiples. While these valuation methods are common in corporate transactions, they may take into account numerous variables, including risk factors, costs and expenses, intangible assets, and patents for new technologies, which tax authorities have not historically utilized. On a positive note, this legislation allows for the deduction of the deceased’s debts from the ITCMD base, provided that their origin, authenticity, and pre-existence are adequately proven. 5. Progressive Tax Rates: Higher Taxation on Large Estates (Art. 178) PLP 108/2024 introduces progressive ITCMD rates based on the value of the asset or right transferred. While progressive taxation is already adopted by some States, even based on criteria other than the value of the asset or right, the change may represent a significant shift for States that currently apply a flat rate, such as São Paulo, Minas Gerais, and Paraná. The so-called ‘large estates’, as defined in state or district legislation, will be taxed at the maximum rate, currently set at 8%. Although there is an old legislative proposal to raise the maximum ITCMD rate to 16% (Senate Resolution Bill No. 57/2019), it is still under consideration. 6. Liable Parties. Joint and Several Liability (Articles 179–181) In addition to identifying the heirs and donees as ITCMD taxpayers in the case of causa mortis transfers and donations, respectively, PLP 108/2024 specifies the third parties who may be held jointly and severally liable for paying the tax. These parties include the donor, the estate, notaries, financial institutions, and any other individual or entity responsible for the administration, custody, and registration of movable or immovable property, along with the associated rights of the transfer. Additionally, the transferee and any individual or legal entity that contributes to the concealment or disguise of the causa mortis transfer or donation are also liable. 7. Tax Authority Jurisdiction for Domestic and International Transfers (Arts. 182–184) PLP 108/2024 thus regulates the competence to institute and collect ITCMD: a.1. in Brazil → State/DF where the property, or most of it, is located; a.2. abroad: b.1. For inheritance: b.2. For donation: b.3. All parties domiciled abroad → State/DF where the