New law authorizing the step up of real estate properties and establishing a new Special Tax Regularization Regime (RERCT)

27/09/2024

In summary

On September 16, 2024, Law No. 14,973/2024 was published, which (i) allows individuals and companies to update the value of real estate properties to market value, as well as (ii) establishes the Special Tax Regularization Regime (“RERCT-Geral” or “amnesty”) for the declaration of undeclared assets or assets declared with omissions/incorrect information by individuals and companies, held in Brazil or abroad.

More details

Updating the value of real estate properties

Among other relevant changes, Law No. 14,973/2024 authorizes taxpayers, individuals or companies, to update the value of real estate properties to market value.

Individuals may choose to update the real estate property declared in their Annual Tax Return by paying a personal income tax (IRPF) at a rate of 4% (four percent) on the “deemed” capital gain.

Legal entities will also be able to update the value of real estate properties recorded as permanent assets in their balance sheet, by paying the corporate income tax (IRPJ) at the flat and permanent rate of 6% (six percent) and the social contribution on net profits (CSLL) at the rate of 4% (four percent) on the “deemed” capital gain.

The law authorizes to updated to market value for real estate properties: (i) located in Brazil, (ii) located abroad, including those that have already been updated option granted in the beginning of this year through “Abex” tax return, (iii) that are part of the assets of a controlled entity abroad, whose owner has opted for the tax transparency regime, and (iv) that are part of the assets of a trust abroad, whose owner is obliged to report the assets and rights of the trust in their DAA.

The Law also establishes a specific calculation for the capital gain arising from the sale or depreciation of such real estate property with updated values before 15 (fifteen) years have elapsed since the update date, in accordance with the formula set forth in Article 8:

Capital gain = value of the sale – [cost of the property before the update + (cost difference taxed as an update x percentage proportional to the time elapsed between the update date and the sale date, according to the table listed in the sole paragraph of article 8).

In short, the longer the period between the updating of asset value and its sale, the lower the taxable gain.

On September 20, 2024, the Brazilian Internal Revenue Service (“IRS”) published the RFB Normative Ruling No. 2,22 to regulate the form and the deadline to update the value of real estate properties. This option will be formalized by submitting a specific tax return called “Declaração de Opção pela Atualização de Bens Imóveis – Dabim” through the online Brazilian IRS (e-CAC).

The tax must be paid within 90 (ninety) days from the date of publication of this Law, i.e., until December 16, 2024.

General RERCT

Law No. 14,973/2024 also establishes the Special Tax Regularization Regime (“RERCT-Geral” or “amnesty”).

Through this program, individuals or legal entities residing or domiciled in Brazil will be able to regularize resources, assets or rights of lawful origin, which have not yet been declared or that have been declared with omissions or inaccuracies, taking into account the market value of the assets.

The regime applies to assets held in Brazil or abroad, or repatriated by residents or domiciled in the country, until December 31, 2023.

In order to join in the RERCT-Geral, it will be necessary to:

(i) Submit a tax return, indicating all the resources, assets and rights held by the individual or legal entity on December 31, 2023 to be regularized, with the real value of the assets (“DERCAT”); and

(ii) Pay income tax on the capital gain, at the rate of 15% (fifteen percent), with a penalty of 100% of the tax due.

The deadline is 90 (ninety) days from the date of publication of the law and therefore ends on December 15, 2024.After joining, individuals must include the regularized items in their annual income tax return (DIRPF) and any Brazilian Central Bank statement of declaration of assets and liabilities abroad (the so called “CBE”) for the calendar year 2024 and onwards. In turn, the legal entity will have to include the regularized items in its corporate accounting and in any Brazilian Central Bank statement of declaration of assets and capital abroad (CBE), also for the year 2024 and onwards.

In a nutshell, the tax benefits of joining is to pay 15% tax on the value of the goods declared plus 100% penalty over the referred tax.

From a criminal point of view, the compliance with the RERCT-Geral, prior to a criminal conviction, will extinguish, in relation to the regularized assets, the punishability of the crimes committed up to the date of compliance (such as various forms of crimes against the tax regime, evasion of social security contributions, forgery of documents, ideological falsehood, use of false documents, currency evasion and money laundering arising from these crimes).

Taxpayers who have complied with the RERCT provided for in Law 13,254/2016 will be able to supplement the declaration previously sent, upon payment of the corresponding tax and penalty for the additional amount.

On September 19, 2024, the Brazilian Federal Revenue published the RFB Normative Ruling No. 2,221 to regulate the RERCT-Geral.

Among other points, it clarifies that beneficiaries of trusts or foundations of any type are included in the list of persons who could submit the RERCT-Geral return. Additionally, the Normative Ruling explains the procedure applicable to the declaration of assets and rights held by condominiums.

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