1. Legal Framework
1.1. How are income and wealth taxed in your country?
Brazilian nationals and foreigners who qualify as residents in Brazil for tax purposes will be taxed by the Brazilian individual income tax on a worldwide basis. The applicable rates and payment mechanics will vary depending on the type of income these individuals receive.
Earnings received from Brazilian legal entities
Income tax on earnings received from Brazilian legal entities, including salaries and bonuses, must be withheld and paid by the Brazilian entities on a monthly basis.
Earnings received from other sources
Unlike the income tax on earnings received from Brazilian entities, the tax on earnings received from other individuals or from foreign sources must be calculated and paid directly by the individuals who receive such earnings. The payment must be made on a monthly basis up to the last business day of the month immediately subsequent to that in which the earnings were received. This payment mechanics is commonly referred to as “carnê leão”.
Rental income and dividends related to investments abroad must also be included in the “carnê leão”, regardless if such earnings are remitted or otherwise transferred to Brazil.
The income mentioned above will be included in the Annual Income Tax Return and the tax withheld or paid will be considered as a credit.
Tax on capital gains must be calculated and paid by the individual up to the last business day of the month immediately subsequent to that in which the gains were obtained. Capital gains are informed in the Annual Income Tax Return but the tax paid will not be considered as a credit.
Interest Income from Investments Abroad Interest income from investments abroad are taxed as capital gains.
Wealth is presently not taxed in Brazil.
1.2. What is the range of the applicable tax rates for individuals on income and wealth?
Earnings received from Brazilian legal entities
Salaries and bonuses are taxed at progressive rates varying from 0% to 27.5%, the latter being presently applicable to earnings equal to or exceeding BRL 4,664.68 (approximately EUR 730 – September 2020) per month. The income tax payable will be withheld and paid by the Brazilian entities on a monthly basis. Certain deductions for social security charges and dependents are allowed in the calculation of the withholding tax.
Earnings received from other sources
Earnings received from other individuals or from foreign sources are taxed at the same progressive rates applicable to earnings received from Brazilian entities (0% to 27.5%). Certain deductions for social security charges and dependents will also be allowed in the calculation of the tax (but only in case these deductions have not been used in the calculation of the income tax on earnings received from Brazilian entities).
Capital gains from the sale of assets, regardless of whether such assets are in Brazil or abroad, are taxed at progressive rates varying from 15% to 22.5%. The taxable gain will be equal to the positive difference between (a) the price or amount obtained with the sale or disposition of the asset and (b) the respective acquisition cost (amount effectively paid). If the asset is abroad, such difference must be calculated (i) in USD if the asset was acquired with resources originally received in foreign currency or (ii) in Reais if the asset was acquired with resources originally received in national currency.
Some exemptions and reductions may apply, such as (i) the exemption on gains when the amount of the assets of the same type sold during the month is equal to or lower than BRL 35,000 (approximately EUR 5,470) or (ii) the exemption on gains from the sale of properties or disposition of investments maintained outside Brazil and that have been acquired or made in foreign currency prior to the time of characterization of “residency” for Brazilian tax purposes, among others.
Interest Income from Investments Abroad Interest income from investments abroad are taxed at progressive rates varying from 15% to 22.5%.
Tax Treaties / Offsetting of Taxes Paid Abroad
Earnings and gains received from countries with which Brazil has entered into double taxation treaties are also subject to the applicable provisions of such treaties.
These provisions may afford a preferential tax treatment or other tax benefits for eligible individual taxpayers. When double taxation treaties are not applicable, Brazilian income tax laws generally authorize that the tax paid abroad with respect to income taxable in Brazil be credited against the Brazilian income tax, provided that the offsetting of tax is allowed to Brazilian tax residents by the relevant foreign country and that the offsetting does not exceed the tax due on income received from Brazilian sources. Thus, it is necessary to verify if the other country also allows the offsetting of tax and, in this case, it is necessary to obtain a copy of the legislation that allows such offsetting.
1.3. How are profit and net equity taxed in your country?
Profits accrued by Brazilian legal entities are subject to Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL). These federal taxes may be calculated according to two main systems (other systems exist).
Some kinds of businesses must enroll with the Actual Profit system, which is also mandatory for companies with annual gross exceeding BRL 78 million (approximately EUR 12 million).
Under the Actual Profit system, IRPJ and CSLL are levied on accounting profits adjusted with the additions and exclusions set forth by tax law.
Under the Deemed Profit system, IRPJ and CSLL are calculated on the sum of (i) the application of certain percentages of the legal entity’s gross revenue, which vary according to the legal entity’s activities (generally 8% for IRPJ and 12% for CSLL); and (ii) other revenues which are fully added to the taxable bases of these taxes.
Revenues accrued by Brazilian companies are also subject to the levy of Social Contributions on Revenues (PIS/COFINS), according to two different regimes (which, in principle, follow the taxpayer’s choice for the Actual or Deemed Profit systems). Under the non-cumulative regime (applicable, in general, to legal entities subject to the Actual Profit system), PIS/COFINS are levied at a combined rate of 9.25% on the total revenues accrued. The legal entity is entitled to certain tax credits.
Under the cumulative regime, PIS/COFINS are levied at a combined rate of 3.65% on the gross revenues accrued. No tax credits are available.
Brazilian law also provides for a “Special Tax Regime for Small Businesses (SIMPLES)”, applicable to companies with annual gross revenues up to BRL 4,800,000 (approximately EUR 750,000). Not applicable to certain companies or activities (e.g. corporations, companies with foreign shareholders and companies engaged in consulting services). Companies enrolled in SIMPLES may calculate and pay the IRPJ, CSLL, PIS, COFINS, Social Security Contribution Paid by Employer (CPP) and, depending on the nature of the activities performed, the State VAT (ICMS), Excise Tax (IPI) and the Municipal Service Tax (ISS) by means of a single monthly payment. The rates vary in accordance to the companies’ revenues. Companies are not entitled to book tax credits. Companies with foreign quotaholders, or affiliates of foreign companies cannot benefit from SIMPLES.
Brazil does not levy any taxes on net equity.
1.4. What is the range of the applicable tax rates for legal entities on profit and capital?
IRPJ is levied at a general rate of 15%, plus a surcharge of 10% on taxable income exceeding BRL 240,000 (approximately EUR 37,000). CSLL is levied at a general rate of 9%.
1.5. What kind of valuation is generally accepted in respect of certain assets (such as art) by the tax authorities?
Assets, including artwork, must be included in the Annual Individual Income Tax Return to be filed with the Brazilian Revenue Service at cost of acquisition (amounts effectively paid by the individual).
Moreover, individual taxpayers who own assets (including artwork) outside Brazil are required to file with the Central Bank of Brazil a Statement of Brazilian Capitals abroad known as DCBE if these assets have an aggregate value equal to or greater than USD 1,000,000. The DCBE must be filed by April 5th (or the previous business day if a non-business day) of each following year. Assets must be included in the DCBE by their market value.
2. Taxation of Art
Is there an obligation of declaring | disclosing private artworks to the tax or other authorities (list of inventories or alike)?
As mentioned in the question 1.5 above, private artworks must be included in the Annual Individual Income Tax Return to be filed with the Brazilian Revenue Service. They will be valued at their cost of acquisition (amounts effectively paid by the individual).
Moreover, individual taxpayers who own artworks outside Brazil are required to file with the Central Bank of Brazil a Statement of Brazilian Capitals abroad known as DCBE if these assets have an aggregate value equal to or greater than USD 1,000,000. The DCBE must be filed by April 5th (or the following business day if a non-business day) of each following year. In case of artworks, (i) the price recently paid by the individual may be considered or (ii) an appraisal may be issued by an expert on the matter.
2.1.1. Income taxes
Is income generated from the sale of artworks taxed in your country? If yes, please indicate how (i.e. capital gains tax | income from self-employment).
Tax on capital gains obtained on the sale of assets (including artworks) must be calculated and paid by the individual up to the last business day of the month immediately subsequent to that in which the payment was received (cash basis).
Regardless of whether such assets are in Brazil or abroad, the gain will be taxed at progressive rates varying from 15% to 22.5%. The taxable gain will be equal to the positive difference between (a) the amount obtained with the sale or disposition of the asset and (b) the respective acquisition cost (amount effectively paid). If the assets is abroad, such difference must be calculated (i) in USD if the asset was acquired with resources originally received in foreign currency or (ii) in Reais if the asset was acquired with resources originally received in national currency.
Gains from the sale of assets, including artworks, maintained outside Brazil and that have been acquired in foreign currency prior to the time of characterization of “residency” for Brazilian tax purposes will be exempt.
2.1.2. Wealth taxes
Does your country envisage any specific categories of classification of artworks (e.g. tax-exempt personal belongings/household)?
Brazilian tax law does not provide for any categories of artworks. As mentioned below, individuals must declare in their Annual Income Tax Return all assets with acquisition cost higher than BRL 5,000 (approximately EUR 780), regardless of whether the works of art are household goods. The capital gain accrued by individuals arising from the sale of assets (including artwork), which sale price is equal or lower than BRL 35,000 (approximately EUR 5,470), is exempt from income tax in Brazil.
Is there an obligation to declare works of art in the tax return? Please indicate how this is done or if there is any other obligation of declaration.
In Brazil, individuals must declare in their Annual Income Tax Return all assets (including artwork) with acquisition cost higher than BRL 5,000 (approximately EUR 780). Individuals must file the Income Tax Return until the last business day of April of the following year.
Please, see the answer in 2.1 above.
How are works of art valued for tax purposes in your country? Are there any common and accepted valuation methods, i.e. at cost, insured value, market price?
As detailed above, Brazilian tax law only provides for the valuation of works of art at acquisition cost for individual income tax purposes.
2.1.3. Inheritance | gift taxes
In case of an inheritance or gift will there be any tax levied?
Inheritance and gifts are subject to the levy of Tax on Donation and Inheritance (“ITCMD”). As ITCMD is a state tax, the applicable rate (up to 8%) for movable assets (e.g., works of art) may vary according to the State in which the inventory is processed, in the case of inheritance, and the State in which the donor is domiciled, in case of gifts. The taxable basis generally corresponds to the market value of the assets. In the State of São Paulo, the applicable rate in is 4%.
3. Taxation of legal entities (as owner of the artworks)
3.1. Corporate income taxes
How are profits deriving from the sale of artworks taxed?
The taxation of profits arising from the sale of artworks may vary according to the system of taxation chosen by the legal entity and to whether this activity is the main activity of the legal entity.
Under the Actual Profit system, in principle, the capital gain (positive difference between the sale price and the acquisition cost) arising from the sale of artworks is subject to Corporate Income tax (IRPJ) and Social Contribution on Net Profit (CSLL) at the combined rate of 34%. If the works of art are not registered as an investment, Social Contributions on Revenues (PIS/COFINS) would be levied at a combined rate of 9.25% (non cumulative regime) on the revenues accrued from the sale.
Under the Deemed Profit system, Brazilian legal entities, having the buying and selling of artwork as their main activity, must calculate the taxable bases of IRPJ and CSLL (levied at the combined rate of 34%) based on 8%/12%, respectively, of the revenues accrued with the sale, regardless of the acquisition cost. In this case, PIS/COFINS are levied on the revenues from the sale of artworks at a combined rate of 3.65% (cumulative regime).
For legal entities subject to the Deemed Profit system and whose main activity does not include the buying and selling of works of art, the capital gain arising from the sale is subject to IRPJ and CSLL at the combined rate of 34%. PIS/COFINS are not levied on the revenues arising from this sale.
Are there any general advantages of a legal entity as owner of artworks instead of a private ownership?
From a Brazilian tax perspective, it could be more beneficial for an individual to hold artworks through a legal entity. Legal entities subject to the Deemed Profit system of taxation/cumulative regime and whose main activity is the buying and selling of artworks are subject to IRPJ, CSLL and PIS/COFINS at an effective rate of 6.73% on the revenues accrued from the sales.
Meanwhile, as detailed above, any capital gain (positive difference between the sale price and the acquisition cost) accrued by the individual is subject to income tax at progressive rates ranging from 15% to 22.5%.
4. VAT | Customs
When selling or dealing with works of art within your country what VAT implications have to be considered?
Transactions with works of art may benefit from a tax exemption of the State VAT (ICMS) when sold directly by the author/artist. When a company buys an artwork directly from its author/artist and resells it, it can (except for the State of Rio Grande do Sul) benefit from a deemed credit of 50% of the ICMS (even considering the exemption in its acquisition). As the National Fiscal Policy Council authorizes all Brazilian states to grant the exemption, a case-by-case analysis is necessary to check the applicability of the exemption and of the deemed credit in each State. In this scenario, some alternatives to rationalize the tax burden, such as consignment sales, can be analyzed.
The ICMS exemption and credit may also be applied to the import of artworks donated by the author/artist himself or when the artwork is acquired with funds from the Ministry of Culture.
The ICMS rate varies in each state, and is generally 18%. Interstate transactions are generally subject to rates of 7% or 12%.
Currently, the Excise Tax (IPI) is not levied on domestic transactions with works of art (including photographs, paintings, drawings, statues, sculptures etc.).
The preparation of works of art upon request of clients and the services from auction houses are taxed by the municipal Service Tax (ISS), whose rate varies from 2% to 5%.
When works of art cross the border of your country what needs to be considered regarding VAT | customs?
Export revenues are not taxed PIS and COFINS, and ICMS. Specific rules apply to exports in consignment and temporary exports (for fairs and expositions, e.g.).
The imports are taxed. Import Duty varies from 0% to 16% (4% for paintings, drawings and sculptures). Imports of artworks produced abroad by authors/artists resident or domiciled in Brazil, per-formed by the authors/artists themselves, are exempt from the Import Duty. Special regimes for temporary imports may apply.
Donations of some products of the Chapter 97 of the Harmonized System (i.e. paintings, drawings, statues), destined to public museums or entities declared of public utility are exempt from Import Duty.
The ICMS is due on imports and different rates apply (generally is 18%). A 4% rate usually applies to interstate transactions with imported products.
PIS-Import and COFINS-Import are levied at a 11.75% rate. Donations of some products of the Chapter 97 of the Harmonized System (i.e. paintings, drawings, statues), destined for public museums or entities declared of public utility are exempt.
The Excise Tax (IPI) is not levied on imports of works of art.
5. Voluntarily disclosure program
What is the procedure in a voluntary disclosure of previously not properly declared art works and what are the expected consequences?
Brazilian individuals may amend the Annual Income Tax Return to include previously undeclared art-work at any time within 5 years of the filing. If the amended information does not give rise to any income tax due, no fines are levied. In case the original funds for the acquisition of the artwork had not being previously declared to the tax authorities, the income tax will be due and penalty and interest shall be charged.
Brazilian legal entities are required to disclose their accounting and tax information in accordance with the Brazilian Federal Revenue Service’s standards and systems. If a legal entity fails to disclose information on artwork, it may be subject to fines imposed by tax authorities.
Legal entities and individuals may only amend the returns without any fines, as long as they are not undergoing a tax inspection. If the amendment gives rise to any tax due, legal entities and individuals may benefit from a voluntary disclosure procedure, under which late payment fines might not be due.
Does your country have a non-punishable voluntary disclosure programme?
In 2016, Brazil allowed the temporary repatriation of non-declared capital from abroad (which was reopened in 2017). This programme did not allow the disclosure of works of art held abroad.
6. Special provisions re taxation of arts
In Brazil, there are no trusts or foundations specifically for holding works of art.
Writers: Rosiene Nunes and Stephanie Makin from Machado Associados
Original file: WTSGlobal_TaxationOfArtworks-Guide.