On August 28, Provisional Measure 1.184/2023 was issued, implementing new Income Tax rates on the earnings of exclusive funds. Now, this modality will be taxed at rates of 15% to 20%, depending on the investment period. The change comes into effect from 2024.
The main purpose of this MP is to make the tax system more equitable, specifically regarding the taxation of exclusive funds compared to traditional investment funds, and to ensure an increase in tax collection, especially to compensate for a new policy for minimum wage adjustments and the update of the Income Tax exemption threshold to R$ 2,112.
Understanding Exclusive Funds: Under current legislation, exclusive funds are taxed only at the time of redemption or distribution of earnings to the quota holders. This mechanism made exclusive funds attractive instruments for both personal wealth and succession planning for individuals and cash reserves for legal entities.
What Changes with MP No. 1,184?
Taxation Frequency: In the previous model, exclusive funds were taxed only upon quota redemption. Now, similar to conventional investment funds, exclusive funds will also be taxed every six months, precisely in May and November, by the system known as “come-cotas.”
Tax Rate: There is a definition of a basic rate of 15% for Income Tax Withheld at Source (IRRF). However, the progressivity in relation to the investment time or duration of the funds remains intact. The Ministry of Finance detailed that funds will generally be taxed at 15%. Short-term funds (180 to 360 days) will have a rate of 20%.
Taxation of Earnings Stock: Earnings generated until December 31, 2023, will be subject to an IRRF rate of 15%. The fund administrator will be responsible for withholding this tax, which can be paid upfront or in up to 24 installments, updated by the Selic rate, starting in May 2024.
Exceptions to the New Regime: The new tax structure does not apply to a series of funds, including FII (Real Estate Investment Fund), Fiagro (Agro-Industrial Investment Fund), funds investing in public securities aimed at residents abroad, among others listed.
Important: The IRRF applied will be definitive for physical persons residing in Brazil and legal entities that opt for the Simples Nacional tax regime. On the other hand, for legal entities taxed based on real, presumed, or arbitrated profit, the amount will function as an anticipation of the Corporate Income Tax (IRPJ).