The Administrative Council of Tax Appeals (CARF) has just imposed a limit on the Federal Revenue Service's attempt to automatically tax as income the amounts received by Brazilians from trusts abroad.
In a unanimous decision issued in April, the 1st Ordinary Panel of the 4th Chamber of the 2nd Section of the court canceled an assessment of R$ 25.8 million against a taxpayer who had received US$ 30 million from a trust established in the Cayman Islands.
The tax authorities treated the entire amount as income received from abroad, subject to the monthly withholding tax and the progressive income tax table for individuals, up to 27.5%. The Administrative Council of Tax Appeals (CARF) understood that the assessment was based on a mistaken premise: that all value distributed by a trust should automatically be considered income.
The decision is a game-changer for Brazilian families with assets abroad, requiring the tax authorities to separate income from capital gains and simple asset transfers, which should not be taxed.
The discussion has a direct impact on a stock of operations carried out before the entry into force of Law 14.754, the Offshore Law , which became effective for events occurring from 2024 onwards. Until then, taxpayers and the tax authorities coexisted with differing interpretations regarding the treatment of structures such as trusts, foundations, and asset-holding entities abroad.
According to Lucas Babo, a tax lawyer specializing in estate and succession planning at Cescon Barrieu, the decision puts a limit on an aggressive stance by the tax authorities.
“The tax authorities had been relying on administrative interpretations that lumped all trust distributions together,” says Babo. “This decision is important because it shows that a trust cannot automatically be treated as a source of income.”
The decision comes at a time when wealth planning firms are reporting a wave of audits concerning events from 2021 and 2022. Since the statute of limitations is five years, the tax authorities can still audit transactions related to 2023 until 2028. After that, these cases could take several more years to resolve through administrative litigation.
“Today, what’s on the table is the past. We’ve been receiving a flood of inspections from 2021 and 2022, and the infraction notices are being issued,” says Rodrigo Massud, partner at Choaib, Paiva e Justo. “This judgment is a relief for the families.”
For those who have already been charged or have chosen to pay the tax in light of a more aggressive interpretation by the tax authorities, the decision may also open the door to legal challenges and potential refund requests.
“If it is later established that there was an improper payment, the taxpayer can request a refund, provided that the five-year period following the payment is observed,” says Massud. “But this turns into a dispute over the recovery of undue payment.”
The decision also increases predictability for those who intend to use the structure in international estate planning from now on.
The tax bill
The case involves a taxpayer who had regularized her assets under the Special Regime for Exchange and Tax Regularization (RERCT), the so-called amnesty for assets held abroad. Later, she declared contributions and redemptions linked to the trust.
For the CARF (Administrative Council of Tax Appeals), this history was relevant because it showed that it was not possible to presume that the entire amount received in 2021 was new income. The tax authorities, however, classified the entire redemption as income received from a foreign source.
The court understood that the transaction lacked certainty and liquidity because it did not specify the nature of each installment. In other words, it was not enough to say that the money came from a trust. It was necessary to demonstrate what that amount represented.
“It was a very good decision because the rapporteur analyzed the issue and made the assessment that the auditor should have made,” says Alamy Candido, partner at Candido Martins Cukier.
In practice, the decision dismantles the argument that the tax authorities could treat all money distributed by a trust as income subject to the maximum tax rate of 27.5%. In this specific case, the tax assessment was canceled in full because the tax authorities did not correctly separate the funds.
This interpretation challenges understandings that the tax authorities have been using to support tax assessments. One of them is Tax Ruling Cosit No. 41 of 2020, which treated amounts received from trusts as income from a foreign source. Another point cited by tax experts is Cosit Ruling No. 1678, which reignited discussions about capital reductions in structures outside of Brazil.
According to Massud, the tax authorities began to argue that, in certain cases of cash capital repayment, the amounts should be treated as income subject to the monthly income tax withholding, and not as capital or capital gains.
“In this understanding, the returned money never ceased to belong to the partner. The tax authorities began to stretch this rope and distort historical concepts,” says Massud. “Fortunately for us, this ruling is a relief. These assessments have been very bad.”
In its decision, the CARF (Administrative Council of Tax Appeals) makes it clear that the taxations are distinct. If the distribution is income, it may be taxed as foreign income. If it results from the sale, liquidation, or redemption of an asset with appreciation, there may be a capital gain, subject to rates of 15% to 22.5%. If it is merely a return of assets already declared, without alienation or increase in net worth, the portion should not be taxed.
There is a large backlog of pre-Offshore Law litigation, with assessments now arriving regarding events prior to 2024. However, the precedent is not binding: other judges at CARF (Administrative Council of Tax Appeals) are not obligated to follow the same interpretation.
Nevertheless, this April ruling becomes an important piece of evidence for administrative defenses, ongoing audits, and potential appeals to the Superior Chamber.
“The decision is very helpful in discussions because it forces us to look at the nature of what is being distributed,” says Candido. “From a legal standpoint, another judge is not obligated to follow it. But, from the standpoint of reasonableness, it certainly helps to build arguments.”
What will happen to the new trusts?
Although the Offshore Law created a specific regime for trusts starting in 2024, lawyers see the CARF's reasoning as a point of support for future discussions.
The reason is simple: the ruling bases the taxation on the concept of income in article 43 of the National Tax Code, requiring an increase in assets and identification of the origin of the amount received.
According to Babo, the Offshore Law solved part of the problem by reducing the scope for treating all trust distributions in the same way. But it did not eliminate the uncertainty. The new point of concern, according to him, lies in recent interpretations by the tax authorities regarding the concept of a trust beneficiary.
“It’s no longer possible to lump everything together, but the tax authorities have once again created a problem by broadening the concept of trust beneficiary,” says Babo. “If the CARF [Administrative Council of Tax Appeals] says it’s necessary to distinguish between the principal and the proceeds, the tax authorities cannot go back to stretching the concept of income through another door.”
According to him, the same reasoning used by CARF to overturn the assessment can serve to challenge new interpretations by the tax authorities. The central point remains the concept of income: for taxation to occur, it is necessary to demonstrate an increase in assets and identify the origin of the value received.
“The logic used by CARF can be used to challenge new interpretations by the tax authorities,” says Babo. “The decision is very good because it anchors the discussion in the concept of income. The tax authorities have been stretching this concept to the limit in order to tax more.”
Starting in 2024, profits from controlled entities abroad will be taxed annually at a rate of 15%. Capital gains follow a progressive tax table ranging from 15% to 22.5%. Furthermore, the new rule eliminated the exemption from exchange rate fluctuations in certain situations that previously benefited funds of foreign origin.
However, for Massud, the real test of the new legislation is yet to come. The first tax returns under the new regime were submitted in 2025, and the tax authorities have five years to audit them.
"We'll find out what happens in two or three years, when these processes start to be opened. For now, the taxpayer is declaring according to our interpretation of the law," he says.
Meanwhile, the CARF decision helps reduce fears surrounding trusts as an asset planning tool. Historically associated in Brazil with opaque or undeclared structures, this legal instrument has been reevaluated following the amnesty and, more recently, the new offshore legislation.
According to Candido, trusts are no longer seen merely as a type of will abroad. In high-net-worth families, they can function as a tool to regulate the use of resources by future generations, establish conditions for access to assets, and create governance mechanisms that Brazilian law does not yet offer in the same way.
"The trust can continue to be used as an instrument of succession, but also as an instrument to better regulate the use of this patrimony by future generations," says Candido.
This use can involve, for example, rules for education, experiences abroad, the beginning of adult life, or the development of personal and professional projects. The logic is less about simply transferring assets and more about organizing how, when, and under what conditions they will be accessed.
"The trust allows this education to be implemented with legal constraints. Therefore, it becomes an important instrument in the succession process."
