The Brazilian Tax System
Brazil operates a residence based tax system, so regardless of your citizenship or domicile, you will be subject to income taxes if you are resident in Brazil.
In examining how a Bahamas SMART fund structure can help a Brazilian resident defer the frequency of tax, we will focus on income tax and capital gains tax.
Income tax rates for individuals in Brazil range from 0% to 27.5%, whilst the tax rate on capital gains is 15%.
Typically a capital gain, for Brazilian tax purposes, is the increase in value of an asset, but can also include a reduction of a company’s paid-up capital and redemption of an interest in an investment fund.
How will a fund help?
Basically, by investing in a fund, an individual or family can consolidate their wealth into a single entity.
For tax purposes, the income and gains made by the fund are not treated as accruing to the individual. Income tax and capital gains tax will only be taxed if he or she receives a dividend from the fund, or makes a capital gain on a redemption of their interest, although it may be possible to alleviate the level of taxes with the appropriate planning.
Although there are similarities in the tax treatment in the way an offshore company is taxed, a fund can offer a way of reducing the amount of tax that is paid on profit distributions. The key is to ensure that the fund is structured properly, and we will work closely with the your’s tax advisers to create the most tax efficient structure.
What is a SMART fund, and what advantages does it offer?
The Bahamas SMART Fund – the Special Mandate Alternative Regulatory Test Fund – is a fund established and licensed under the Bahamas’ Investment Funds Act 2003. The regulatory approach to supervision of SMART funds is risk-based, and was specifically designed to offer private investors a much more flexible and lower cost of a licensed fund product.
There are seven alternative “models” of the SMART fund that investors can choose, but for a private individual or family, the most common model is the Model 004 SMART fund. The features Model 004 SMART fund are:
- No offering memorandum is required – a term sheet is optional, but not mandatory (but recommended).
- No more than five individual investors.
- Operates as a private investment company.
- Subject to an annual certification to the Securities Commission or Unrestricted Fund Administrator.
- Investors can waive requirement for an annual audit.
- Can have an ISIN Number and Bloomberg Ticker.
In essence, the aim of the SMART fund regime is to offer the benefits of a licensed fund in a well regulated environment, but with a fraction of the regulatory restrictions that are necessary for traditional funds.
Ownership of the Fund
Whilst the client or members of the family can invest directly into a SMART fund, there are a number of reasons to consider using alternative ownership structures:
- The limit of 5 investors into a Model 004 fund may not suit the family circumstances.
- Complexities and possible tax consequences involved in transferring units to other family members.
- Probate and succession issues on death of the investor and possible tax consequences.
- Brazil’s forced heirship rules will dictate to whom, and in what proportions, the client’s interest in the fund will pass on death.
Our Recommendation
We would recommend that a discretionary, irrevocable trust is used as the vehicle to invest into the fund. This avoids the issues noted above, and in our understanding, does not lead to any additional tax issues.
Beneficiaries will be taxed on what they receive from the trust. Your tax advisers will be able to discuss the merits and tax implications and work with your advisor to provide the most appropriate structure.