Brazil’s Tax Reform Targets Inheritance on Pensions

On July 8, Brazil’s tax reform group decided to reintroduce inheritance tax on private pensions, affecting PGBL and VGBL plans.

PGBL plans offers tax-deductible contributions, and VGBL provides tax-free growth, crucial for retirement and inheritance planning.

VGBLs held over five years are now exempt from the Inheritance and Donation Tax (ITCMD), while PGBLs will face taxation regardless of duration.

This reform aims to discourage the wealthy from using VGBL funds as a tax avoidance strategy.

The measure targets large estates at the highest ITCMD rate, with states defining and implementing ‘large estates’.

The Ministry of Finance proposed this tax initially, but it faced resistance, was withdrawn, and reinstated by regional leaders.

Tax application varies across regions; for example, some states tax both types of plans while others exempt them.

The new regulations tax only pension plans for inheritance, preserving the tax-exempt status of insurance components.

For example, if an individual’s VGBL is valued at R$1 million ($183,00), with a death benefit of R$2 million ($367,000), inheritance tax would apply only to the R$1 million ($183,000).

If approved, each state will choose whether to adopt this tax, with potential enactment by 2025. The matter is also pending review by a higher judicial authority.

Brazil’s Tax Reform Targets Inheritance on Pensions

The reform creates a management committee to integrate state and municipal VAT with federal VAT and resolve conflicts.

The legislation proposes a 25-year transition for states to adjust to a 1% tax rate for poverty reduction, addressing regional disparities.

It also mandates significant female representation in governance roles of the tax management bodies.

The reform aims to create a fairer tax system, closing loopholes for the wealthy and supporting poverty reduction.

For the full picture, see our Brazil Tax Reform: Complete Guide.