The Brazilian government is planning to tax the superwealthy
Gilberto Ayres Moreira / Tax Law
08 de agosto de 2023
Por Diogo Rodriguez publicado no The Brazilian Report
Brazilian Finance Minister Fernando Haddad on July 19 said the government has a plan to tax so-called “exclusive funds,” that is, investment funds for the super-wealthy. Their name comes from the fact that these funds often have a single investor and are offered only to those who have more than BRL 10 million (USD 2.1 million) in assets.
Mr. Haddad has pledged to send a bill on this to Congress along with the 2024 budget. He hopes the move will generate more than BRL 10 billion in new tax revenue.
According to its own new fiscal framework proposal, which still needs congressional approval, the government must zero the public deficit by the end of next year. As Mr. Haddad has promised not to raise taxes, the only solution is to boost revenue.
This bill, Mr. Haddad explained, is part of the second stage of a tax reform supported by the government, the first stage of which was approved by the House (but is still pending in the Senate).
How taxing exclusive funds might work
Because the super wealthy have large amounts to invest, they have the luxury of getting an exclusive manager who decides where their money goes. The so-called “exclusive funds” are commonly used for estate planning as well, so these individuals can pass on their wealth to future generations.
André de Vita, an asset management and investment funds expert, explains that these exclusive funds have three main advantages. First, they offer access to products that are not available in regular funds. Second, they fall under advantageous tax rules, which makes them very lucrative. Last but not least, one can reallocate assets and thus avoid paying any taxes.
In total, Brazilian exclusive funds have BRL 756 billion in investments, according to consulting company TradeMap. This amount is divided among 3,500 funds and 2,800 shareholders.
Currently, the shareholders only pay income taxes every time they make a withdrawal. But the government wants to change that, using a mode of taxation called “equity eater” — which is already the norm for open investment funds. This system anticipates income tax payments, with the taxman knocking on funds’ doors twice a year — which eats up their equity, hence the name.
It is still not clear if the government will actually submit this proposal or put forward an alternative form of taxation — President Lula has a penchant for leaking policy projects to test public reaction to them, so until a policy is formally announced, it is hard to anticipate exactly what it will be like.
If confirmed, this tax plan will execute an idea that was vented by the two previous administrations — which tried and failed to tax exclusive funds. Paulo Guedes, the economy minister under former President Jair Bolsonaro, proposed a 6 percent rate on exclusive funds, but the project never took off.
Scaring away the wealthy?
Experts, however, fear the move may have the opposite effect than intended. Taxing the exclusive funds may lead to investors fleeing Brazil, they say.
For Gilberto Ayres Moreira, a member of the Brazilian Financial Law Association, these super-wealthy investors will seek countries that have lower taxes for these kinds of investments. He believes the government should have tried negotiating with financial markets before bluntly making its announcement. “Just announcing that they will create this tax with no explanation doesn’t seem reasonable,” he says.
According to Rogerio Fedele, a lawyer who handles wealth planning, one of the problems lies in the lack of liquidity of the assets that compose the funds.
According to Mr. Fedele, taxing the exclusive funds once or twice a year will require fund managers to completely rearrange their strategies. Today, he says, investors concentrate their money in longterm investments. To comply with the government’s proposal, managers will have to offer more liquid assets to pay taxes.
Such a requirement might make these funds no longer worthwhile for the investors, who spend BRL 50,000 to 70,000 monthly to maintain them. So they might go looking for profit elsewhere.
Mr. de Vita believes that the main issue lies in how the government plans to charge these funds if the bill gets approved. If the idea is to retroactively tax these funds, then he agrees that Brazil will see these rich investors flee. But, if the bill only taxes gains made after the approval of the legislation, then he believes the exclusive funds will adapt to new liquidity requirements and avoid major losses.
Still, Mr. Ayres Moreira argues that now is not the right time for this specific discussion, with the government needing to pass major pieces of legislation in Congress — such as the new fiscal framework and the first part of the tax reform.
If the administration tries to bite off more than it can chew, he says, it might end up with nothing.
House Speaker Arthur Lira agrees with that assessment. He wants to wait until the tax reform is approved to even start discussing changing the taxation on the exclusive funds. In his opinion, it is “a considerable political risk” to open too many discussion fronts at once — and doing so could jeopardize the approval of the tax reform in Congress.
In April, President Lula signed a decree taxing capital income from offshore financial investments owned by citizens who reside in Brazil. These include investments made through offshore companies, trust funds, and other formally constituted entities located in tax havens.