Tax Guide for US Expats Living and Working in Brazil
Who Is Liable For Income Taxes In Brazil
Residents are taxed on worldwide income. Non-residents are taxed on Brazilian-source income only.
Determination of residence for tax purposes depends on which visa an individual uses to enter the country. Foreign nationals holding either temporary type “V” visas based on a labor contract with a Brazilian company or permanent visas are taxed as residents from the time they enter Brazil. Other foreign nationals are taxed as nonresidents if they satisfy the following conditions:
- They hold other types of temporary visas.
- They are not involved in a local labor relationship.
- They do not stay in Brazil for more than 183 days during any 12-month period.
A foreign national who remains in Brazil for longer than 183 days is subject to tax on his or her worldwide income at the progressive rates applicable to residents.
Before their definitive departure from Brazil, tax residents should obtain tax clearance to resolve their final liability for Brazilian income tax. Otherwise, these individuals may be considered resident for tax purposes, subject to Brazilian income tax on worldwide income during the 12-month period subsequent to departure. From the time the expatriate requests a tax clearance or obtains a permanent visa for another country, the expatriate is taxed as a nonresident on Brazilian-source income only.
Income subject to tax. The various types of income subject to tax are described below. For a table outlining the taxability of income items.
Employment income. Taxable employment income generally includes wages, salaries, and any other type of remuneration and benefits received by an employee from an employer. The treatment of employer-provided allowances varies, as described below.
Schooling allowances for an individual’s family members are considered indirect salary and are taxed accordingly. For tax purposes, no distinction is made between amounts paid directly by the company or reimbursed by the company to an employee. Moving allowances are generally not taxable if paid in a lump sum by the employer.
Under Brazilian law, individuals are taxed on a cash basis. Payments from foreign sources, including bonuses or premiums related to services rendered, that are made before or after an assignment in Brazil are generally not taxable if received during a period when the individual is not resident for tax purposes. Therefore, these payments should be scheduled so that they are received when the individual is not yet resident for tax purposes or after tax clearance is requested prior to repatriation.
Reimbursements received by employees from employers for income tax liability are recognized as income on a cash basis. If employers make the income tax payments directly, the amounts paid are taxable to the employees.
Other allowances received by expatriates for work performed, including foreign service premiums and allowances for home leave, costs of living and housing, are subject to regular taxation.
Employees are not taxed on obligatory monthly deposits equivalent to 8% of gross salaries that are paid by employers to the Severance Pay Indemnity Fund (FGTS), which is administered by the government. The amounts deposited, plus interest, may be withdrawn tax-free by the employees under certain conditions, including retirement or dismissal without just cause.
In addition, an employee who is dismissed arbitrarily or without just cause is entitled to a tax-free indemnification from the employer equal to 40% of the employer’s deposits in the employee’s FGTS fund.
Self-employment income. Self-employed resident individuals are subject to tax on income from a trade, business or profession.
Investment income. Interest income received by resident individuals from sources abroad is generally included in taxable income and is taxed at the rates. Local financial income and gains from fixed or variable interest financial investments are taxed exclusively at source. The rates vary from 15% to 22.5%, depending on the investment term. In general, financial institutions withhold the tax due and the earnings are credited net.
Net rental income and royalty income from Brazilian and foreign sources are generally included in taxable income and are taxed at the rates.
Brazilian dividends paid to nonresidents are exempt from withholding tax. Other payments to nonresidents from Brazilian sources are subject to a 25% final withholding tax, unless a lower treaty rate applies.
Taxation of employer-provided stock options. Employer-provided stock options are not subject to tax at the time of grant. The taxation of equity plans represents a gray area in Brazil. In general, stock options are taxable at the time of exercise. The difference between the market price and the strike price is considered a fringe benefit and is taxable as employment income at a maximum rate of 27.5%. For purposes of capital gains tax, when the employee sells the shares the cost basis is the market value of the shares at the time of exercise (the spread between the strike price and the market value has already been taxed as employment income). Any gain is taxed as a capital gain at a flat rate of 15%. Sales of assets located abroad by a resident of less than R$35,000 (approximately US$21,875) in any one month are exempt from capital gains tax.
Capital gains. Gains realized on the sale of capital assets are subject to tax at a flat rate of 15%, regardless of whether the underlying assets are used in a trade or business. Capital gains on one transaction each month are exempt from tax if the sale price is less than R$35,000. Capital gains are defined as the difference between the sale price of an asset and its acquisition price.
Capital gains derived from the sale of shares listed on Brazilian stock exchanges are exempt from tax if the sale price is less than R$20,000 (approximately US$12,500). If the sale price exceeds R$20,000, the entire gain is taxed at a rate of 15%.
Capital gains derived from the sale of real estate are subject to income tax at a rate of 15% on the difference between the sale price and the acquisition price. For real estate acquired before 1 January 1989, the calculated gain is reduced based on the length of ownership; no tax is due if the real estate is held for 20 years or longer.
A special exemption is granted to individuals selling their only residence if they have owned it for at least five years and if the sale price does not exceed R$440,000 (approximately S$275,000). In addition, gains derived from sales of residential real properties are exempt from tax if the seller uses the proceeds from the sale to buy other residential real properties in Brazil within 180 days from the first contract execution date.
Deductions. The following are the only deductible expenses permitted when calculating monthly income tax liability:
- Social security taxes paid to Brazilian federal, state or municipal entities
- Amounts paid as alimony and pensions in accordance with a Brazilian court decree
- R$157.47 per month for each dependent, with no limitation on the number of dependents
- Brazilian Pension Funds contributions, up to 12% of gross taxable income
On the annual federal income tax return, the taxpayer may elect the standard deduction, which is 20% of taxable income up to a maximum deduction of R$13,916.36 or may deduct the following amounts:
- Brazilian Pension Funds contributions, up to 12% of gross taxable income
- Amounts paid as alimony and pensions in accordance with a court decree
- R$1,889.64 for each dependent, with no limitation on the number of dependents
- Social security taxes paid to Brazilian federal, state or municipal entities
- Payments made by the taxpayer or a dependent for educational expenses, up to an annual limit of R$2,958.23 for each individual
- Payments made during the calendar year to doctors, dentists, psychologists, physiotherapists, phono-audiologists, occupational therapists and hospitals, as well as expenses for laboratory tests and X-rays, with no limit
- Payments for medical treatment plans managed by Brazilian companies or by companies authorized to carry out activities in Brazil, as well as payments made to entities to ensure the right to either medical attention or reimbursement for medical, dental and hospital expenses
- Contributions to cultural and audiovisual activities, sports and the Children’s Fund, up to 6% of income tax due
- Payments for the social security system on behalf of a maid who works in the taxpayer’s house (limited to one employee per taxpayer and to an amount, which is currently R$810.60; this is the 2010 amount; the government has not yet fixed the 2011 amount) Ordinarily, a dependent’s medical expenses are deductible on the annual federal return. Expenses that are covered by insurance or reimbursed to the taxpayer are not deductible.
Relief for losses. If a self-employed person’s business activity shows a loss in one month, the loss may be carried forward to a later month in the same fiscal year (but not into a new year) if the proper supporting documentation is provided.
B. Estate and gift tax
The Senate has established a maximum estate and gift tax rate of 8%. States may levy estate and gift tax on transfers of real estate by donation and inheritance at any rate, up to 8%. A rate of 4% generally applies in Rio de Janeiro and São Paulo. Resident foreigners and nonresidents are subject to this tax on assets located in Brazil only.
For transfers of property through succession, inheritance or donation, the assets may be valued at either market value or the value stated in the declaration of assets of the deceased or donor. For transfers carried out at market value, the excess of market value over the value stated in the declaration of assets is subject to income tax at a rate of 15%.
C. Social security
Contributions. All individuals earning remuneration from a Brazilian source are subject to local social security tax, which is withheld by the payer. Contributions are levied on employees at rates ranging from 8% to 11%, depending on the level of remuneration, with a maximum required monthly contribution of R$405.86 (approximately US$253.66). Employers’ contributions are calculated at approximately 26.8% to 28.8% of monthly payroll, without limit.
Self-employed individuals’ contributions are calculated at a rate of 20% of base salary. The base salary is fixed by the government, and its value depends on when the self-employed individual joined the social security system. The maximum monthly contribution for a self-employed person is R$737.93 (approximately US$461.20).
Totalization agreements. Brazil has entered into social security totalization treaties with Argentina, Cape Verde, Chile, Greece, Italy, Luxembourg, Paraguay, Portugal, Spain and Uruguay.
To learn more about the history, culture, economy and other information about Brazil
We have been preparing US income tax returns for US Citizens and permanent residents living in Brazil for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Brazil and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Brazil tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Brazil Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Brazil, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Brazil.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email