Welcome to Part 2. Here are some more practical and actionable tips for expats and long-term foreign residents in Brazil. Much of the content is also useful for Brazilian nationals and Mercosul residents.
Disclaimer: We are providing guidance and personal opinions which should not be interpreted as specific investment advice!
6. Tax return (IRPF)
7. Central bank declaration (DCBE)
8. Fund platforms
9. International asset consolidation
10. Insurance review
6. Prepare your tax return in advance! Imposto de Renda de Pessoa Física (IRPF)
This year’s tax return (IRPF) is due by 28 April 2020 and applies to activity in calendar year 2019. The IRPF process opens on 2 March and we advise our clients to organise themselves sooner and submit their returns before the end of March to avoid last minute panic! The following individuals are required to file:
- Residents of Brazil with taxable income above R$28.123 in 2019
- Residents of Brazil with exempt income, non-taxable income or income taxed-at-source above R$40.000 in 2019
- Anyone who realised a capital gain and/or has traded shares on the stock market (Bovespa).
- Owners of assets above R$300.000
You have the option to choose between a simple or complete declaration. A complete declaration allows you to partially offset your taxable income with expenses such as medical costs, private school fees and private pension contributions (previdência privada).
The tax return has two sections; income and assets. The income section should be completed with taxable income (inc. salary, rent..) and non-taxable income (inc. company dividends..). The asset section is simply a list of all your properties, bank accounts, investments and other assets.
Expats, resident in Brazil, with overseas investments are also required to declare the following:
- Gains from the disposal of shares, funds and other financial assets – subject to capital gains tax at 15%.
- Dividends, coupons and rental income – subject to income tax at 27.5%.
The above taxes are payable by the end of the following month after the event e.g. tax on a realised gain or dividend received on 15 Feb is payable by 31 March. Brazil has double taxation prevention treaties and special tax agreements with several countries.
Here’s the link to the Receita Federal download for completing the IRPF. Note – it will be updated from 2 March for the 2020 filing process:
If you are filing in Brazil for the first time, we recommend you hire an accountant to ensure it is as accurate as possible. Going forward, you may wish to either DIY your tax returns or continue with professional support. You could negotiate preferential fees if you package several items together, for example, a business owner who uses the same accountant for company and personal filings or an individual who expects a certain number of chargeable events from investments.
If you have undeclared assets overseas, we recommend taking advice from your accountant or lawyer. Brazil joined the Common Reporting Standard (CRS) in 2018 and is part of an international tax information sharing agreement. If certain assets were owned prior to becoming a tax resident in Brazil, you may qualifiy for a rectification filing (retificadora) to bring your declaration up to date. Many expats around the world are stressing about CRS and allowing their potential non-compliance problem to fester. If in doubt, take advice and obtain some peace of mind. More on Brazil and CRS in this comprehensive article.
7. Remember to file your Central Bank declaration – if applicable. Declaração de Capitais Brasileiros no Exterior (DCBE).
This catches out many expatriates and foreign residents in Brazil. The Banco Central DCBE is mandatory for individuals and companies which are resident or headquartered in Brazil and should not be confused with the asset statement within the IRPF personal tax return (Declaração de bens e direitos).
The DCBE is a separate declaration of overseas capital for individuals who own assets above USD 100K in value (or currency equivalent). These include financial instruments, cash in foreign currencies, real estate, shares etc. The DCBE data is used to measure the degree of ‘internationalization’ of the Brazilian economy.
The DCBE is based on assets (over USD 100K) at 31 December 2019 and the declaration period runs from 15 February to 5 April 2020. Fines for non-declaration range from R$2,500 to R$250,000. As per our advice re. IRPF, we recommend that you prepare your DCBE sooner rather than later and ask for professional guidance if necessary. More information here at the Banco Central website.
8. Consider using Fund Platforms.
Remember my favourite word from Part 1? Desbancarização!
This refers to the movement of capital and services away from traditional banks to alternative service providers. Desbancarização is being driven by the expansion in the financial sector in Brazil and greater consumer awareness about different asset classes to substitute traditional low-risk investments such as poupança (savings accounts), tesouro nacional (treasury) and CDBs (deposit certificates). In recent years, given the decline in interest rates, from 14% (2016) to 4.5% (Feb 2020), the trend has accelerated, forcing many people to consider other asset classes, such as equities and multi-asset funds. These funds are more accessible at lower entry levels, outside the traditional banking network.
A fund platform is another name for an investment account which is designed for holding funds, shares, bonds and many other financial instruments on a long-term basis. A platform can also be used for more frequent trading. The term, ‘open architecture‘, means that a wide range of assets across different financial institutions can be bought and sold in a cost-effective manner due to discounted fees, lower entry levels and no additional compliance requirements after opening the platform itself.
If you have money sitting in cash or CDBs for example, you would be better off talking to a qualified professional, such as a Planejador CFP or Agente Autonomo, about a bespoke portfolio based on your personal objectives, e.g. your attitude to risk and retirement goals. In comparison, your bank manager will be working towards a sales target with a limited range of in-house funds, with a high management fee – see item 4 in Part 1.
Remember, from Part 1, the important of small savings to earn high compound returns in the long-term? If you can save 0.5% p.a. on fund management fees and obtain, say 1.5% p.a. additional return (for the same risk category), this 2% p.a. increase in net return would compound to 21.9% over 10 years and 48.6% over 20 years. Still want to talk to your bank manager about your retirement planning?
Retail banks are good for holding current accounts and for providing loans. For everything else, look outside. Not just in Brazil… in Colombia, US, UK, France… everywhere!
9. Consolidate your international assets
We have advised many expats who have spent their careers in several locations, working for multinationals, often in energy and mining. Consider the case of a busy executive who has worked in 4 countries with insufficient time and headspace to organise their scattered pension funds and bank accounts. In many cases, they may have worked with an advisor (or a product salesman) who moved to another location or merely abdicated the client relationship.
Over time, these multiple holdings become tricky to administer and are left by the wayside to stagnate. Only later in life when the money is needed, does the busy executive attempt to make contact with the original broker or the institution itself, which may now have been taken over with a different contact number/website, and it turns into an admin nightmare which drags on for months or years with a growing opportunity cost. To prevent this from happening, we encourage clients to consolidate their residual holdings within an international portfolio structure, ideally in a tax-neutral jurisdiction.
Needless to say, this should be declared in their country of residence – in Brazil, it should be listed in the IRPF asset statement and the DCBE (if over USD 100K). Certain offshore portfolios allow for the deferral of gains and income taxes in most Mercosul and EU countries but need to fulfil several (simple) criteria to qualify.
Key benefits of consolidation:
- One login and easier to view all holdings in one place.
- Deferral of capital gains and income tax.
- Access to modern and competitively-priced investment solution with wide fund range.
- Lower nominal fees and percentage-based pricing based on portfolio size.
- Clear investment strategy with minimal overlap of funds and sub-holdings.
- For larger amounts (>USD 500K), possible to appoint a discretionary fund manager (DFM).
- Can be structured and modified for succession/inheritance tax planning.
Watch our video on ‘distressed’ clients who we have helped with consolidation and recovery from underperforming and mis-sold investments.
10. Review your insurance requirements
We often find that expats could improve the way they organise and purchase international protection, especially as providers’ prices can change significantly over the course of a year or two.
The most practical starting point is in the client fact-find in which all risks should be reviewed and prioritised collectively; protection for family in event of death, critical illness, disability, medical and travel. Many companies pay for their employees’ international cover but there are often some shortfalls and unprotected exposures.
International health insurance plans offer different categories of cover, the more expensive ones covering more categories. Many expats choose the most expensive option based on their perception of risk. Depending on how much you are travelling and whether the US is a regular destination, it is worth reviewing whether you require both, a health plan in Brazil and/or international medical insurance.
It is important to understand whether your international travel insurance continues to be valid if you become a resident of another country. Taking the UK as an example, travel insurance purchased in the UK only applies to short trips rather than long-term residency overseas. The consequences could be undesirable if you use a UK address on the application when you are actually living in Brazil for more than 6 months p.a.. We encourage regular travellers to opt for multi-trip policies instead of paying for individual trips.
If there is just one thing you take away from this article, please do not purchase universal life insurance! This is an American-style hybrid product for which you pay a regular premium in return for a fixed level of life insurance and an investment component. The pricing is opaque and it’s an obsolete 1980s product which even Crockett and Tubbs wouldn’t buy! Yet many trusting individuals are still falling for the hard-sell approach of ‘fly by night’ salesmen on hefty commissions. Let’s bring white linen suits back in fashion and kick out universal life policies!
Do yourself a favour by separating these two components and buying them individually i.e. a term life insurance plan based on how much your family would require in the event of your death and an investment plan based on how much income you need at retirement. These need to be calculated as accurately as possible to avoid over-paying or under-protecting yourself and your family.
I hope these 2020 articles were useful as they are based on our personal experiences, working with international clients across Latam over the past decade. As always, if you have any feedback, please leave a comment or write to us via our contact page.
Wishing you a happy and prosperous 2020!
Boa sorte! Buena suerte! Good luck!
2020 Copacabana cover photo (from Posto 3) – Ipanema Wealth
2020 PC screen – from rawpixel ID-1044971
Tax / Audit – from rawpixel. ID-900109
$ sign and markets – from rawpixel. ID-829653
London skyline (from The Shard) – Ipanema Wealth
Insurance policy – from rawpixel-ID-836821
Medic / stethoscope – from rawpixel. ID-380201
2020 gold – from rawpixel. ID-1234476