The Complementary Law Project (PLP) 108/2024, whose base text was approved last Tuesday (08/13) by the House of Representatives (Camara dos Deputados), regulates the Tax Reform under development in Brazil and brings profound transformations to the regime of the Gift and Estate Tax (ITCMD). With changes set to take effect in 2025, the project seeks to unify state tax legislation, implement progressive tax rates, expand the tax base, and redefine territorial competence for tax collection. Additionally, the PLP addresses fundamental aspects of estate and succession planning, directly affecting entrepreneurs and investors.
The ITCMD, whose authority for institution and regulation is attributed to the states and the Federal District by the Federal Constitution (Art. 155, I and §1), taxes the transmission of goods and rights with economic value resulting from inheritances or donations. Currently, the maximum ITCMD rate is capped at 8%, according to Senate Resolution No. 09/1992.
The project aims to standardize ITCMD legislation among the states, promoting greater clarity and predictability for both taxpayers and state tax administrations. Today, the rules vary significantly between states, allowing, in some cases, the strategic choice of the most advantageous state for estate and succession planning. With the proposed regulation, it is expected that there will be a harmonization of rules, establishing a more consistent tax environment, less subject to distortions.
One of the most significant innovations of PLP 108/2024 is the mandatory progressive rates for ITCMD, a model already applied in some states, such as Rio de Janeiro and Santa Catarina. Progressivity, now constitutionally mandated, will be implemented to reflect taxpayers' contributive capacity, aligning the ITCMD with the principle of tax justice.
This new progressive regime requires state legislatures to establish tax brackets that increase according to the value of the transferred estate. Thus, for example, higher-value inheritances will be taxed at higher rates, while lower-value estates will be subject to lighter taxation.
Although the progressive rates are implemented with the intention of making taxation fairer, aiming for fiscal equity, the practical application of this measure may lead to a general increase in the tax burden. This increase may be more significant in states facing greater financial difficulties. In these states, the need for revenue may lead to the adoption of higher progressive rates for less substantial estates, which, in turn, may increase the tax burden on taxpayers.
Another consequence that may arise from ITCMD progressivity is the potential increase in the maximum rate set by the Senate. The 8% rate has been in effect for over thirty years and may be considered low compared to the rates applied in other countries. In the United States, for example, this tax, only at the federal level, is levied at progressive rates of up to 40%, but with a significant exemption threshold of up to $13.61 million per person (for the 2024 tax year). Meanwhile, in Switzerland, most cantons, unlike other European countries, do not tax the transfer of assets to first-degree heirs. These international differences highlight the diversity of approaches to inheritance and donation taxation, underscoring the need for careful planning to minimize fiscal impacts.
Currently, Senate Resolution Proposal No. 57/2019, which proposes raising the ITCMD rate to 16%, is under consideration. Furthermore, in 2015, the National Finance Policy Council (Confaz) had already submitted Official Letter No. 11/2015 to the Senate, suggesting a rate of 20%. With the introduction of mandatory ITCMD progressivity by tax reform, it is plausible that these initiatives will receive greater attention and potential support, considering the current context of changes in tax legislation.
The project also provides for the incidence of ITCMD on certain private pension plans, namely the Free Benefit Generator Plan (PGBL) and the Life Benefit Generator Plan (VGBL). In the case of the PGBL, the ITCMD will fully apply to the amount transferred, given the pension nature of the plan. In the case of the VGBL, the tax incidence will only apply if the application is less than five years old. This rule aims to prevent the VGBL from being used as a succession planning mechanism to avoid taxation, ensuring that the transfer of accumulated values in such plans is adequately taxed according to the new guidelines established by the reform.
PLP 108/2024 also provides for the expansion of the ITCMD tax base, with a special focus on transfers involving quotas or equity interests. The new valuation methodology requires that the market value of the transferred assets or rights be considered, adjusted according to state legislation.
This adjustment to the tax base will significantly impact companies of all sizes, which will need to re-evaluate their assets to meet the new tax requirements. The transition from book value to market value in determining the ITCMD tax base could result in a higher tax burden. Therefore, family businesses and holding companies will need to review their succession plans and consider hiring specialists in asset valuation and tax consultants to ensure compliance with the new rules.
The project also introduces the possibility of ITCMD incidence on the disproportionate distribution of dividends, especially in cases where such distribution arises from a corporate act carried out by liberality, without a negotiable justification capable of verification. In these circumstances, the disproportionate distribution may be considered a disguised donation, which would justify the application of ITCMD. This measure aims to prevent corporate manipulation as a means of tax avoidance, ensuring that the transfer of wealth between partners or shareholders is properly taxed, according to the principle of contributive capacity.
Additionally, the project regulates the taxation of Trusts and similar structures, innovating by determining that the assets and rights in a Trust will be considered as belonging to the grantor until his/her death. The transfer of assets to beneficiaries will be treated as a causa mortis transfer, subject to ITCMD taxation. If the distribution occurs during the grantor's lifetime, it will be considered a donation, also subject to taxation.
Another innovation of PLP 108/2024 is the change in territorial jurisdiction for ITCMD collection. Under the new rules, the tax will be due to the state of the deceased's domicile, rather than the state where the probate or estate proceedings take place. This change standardizes tax jurisdiction and eliminates the possibility of choosing the most advantageous state for tax payment, directly affecting estate planning.
The tax reform addresses a controversy related to ITCMD that has been much debated in the jurisprudence of Brazilian courts, namely the possibility of taxing assets located abroad.
Article 155, §1º, item III of the Constitution currently provides that ITCMD incidence in cases where "the donor has domicile or residence abroad" or "the deceased owned assets, was resident or domiciled, or had their estate processed abroad" depends on regulation by a complementary law. To date, Congress has not enacted this law, leading some states to establish this incidence in their local legislation. However, the Federal Supreme Court has definitively addressed this issue in the judgment of Theme No. 825 of general repercussion, declaring the unconstitutionality of these state laws.
With the tax reform, and until the aforementioned complementary law is enacted, ITCMD will apply in the following scenarios: 1) when the real estate or respective rights are located in the territory of the Federative Entity; 2) when the donee is domiciled in the Federative Entity, in cases where the donor is a resident abroad, or when the assets are located abroad and both parties reside outside the country; and 3) when the deceased was domiciled in the Federative Entity, or, in the case of domicile abroad, when the heir or legatee is domiciled within national territory.
PLP 108/2024 represents a significant step towards a more just and efficient tax system, but it also introduces new challenges for estate and succession planning. The changes proposed by this bill, which will come into effect in 2025, provide a crucial transition period for companies and individuals to adjust their tax and succession planning.
During this period, it is essential that taxpayers and investors closely monitor the progress of PLP 108/2024 in the National Congress and seek specialized advice to fully understand the impact of the proposed changes. Well-structured planning, carried out in advance, will be crucial to mitigate the tax effects of these changes and ensure efficient management of investments and estates. In this context, it is imperative to re-evaluate assets, restructure family holdings, and update legal documents, always with the support of tax consultants and specialized lawyers, to ensure compliance with the new rules and minimize fiscal impacts.
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