For many years, law No. 9,532/1997 has provided that, in the transfer of assets and rights by way of inheritance, legacy, or donation as an advance on the compulsory share, the taxpayer may elect either to value such assets and rights at fair market value or to adopt the value stated in the decedent’s or donor’s tax return (historical cost).
When the historical cost method is chosen, no increase in net worth is deemed to have occurred, and therefore no income tax is levied — unlike the situation in which the taxpayer opts for the transfer at fair market value, in which case income tax is due.
Notwithstanding this long-standing legal provision, in 2024, to the surprise of taxpayers, the Brazilian Federal Revenue Service (Receita Federal do Brasil – RFB) issued Private Letter Ruling (Solução de Consulta) No. 21/2024, asserting that such provision would not apply to donations or transfers of investment fund units, and determining that fund administrators must withhold withholding income tax (IRRF) at the time of the donation or succession.
According to the RFB, the intent of the law would merely be to defer taxation so as to avoid requiring heirs or donees to dispose of their assets at the time of succession or donation to pay the tax. Such deferral, however, would allegedly not be “necessary” in the case of transfers of units in fixed-income or equity investment funds, which would purportedly have sufficient liquidity and resources to bear the tax burden.
This taxation, however, may be challenged in court, as the tax authorities’ position contradicts the express statutory language based solely on an interpretative assessment of what the RFB considers to be the purpose of the rule. There are recent court decisions favorable to taxpayers that reaffirm the explicit legal provision that income tax is only levied when the transfer is carried out at fair market value, and that the RFB has no authority to restrict the application of the statutory text.
This understanding is also supported by precedents of the Superior Court of Justice (STJ) on the matter, even prior to the issuance of Private Letter Ruling No. 21/2024.
The discussion is particularly relevant for families holding interests in exclusive funds, Private Equity Funds (FIPs), Credit Rights Investment Funds (FIDCs), or other closed-end funds, and who are currently undergoing estate and succession planning.
Accordingly, it is advisable to consider filing a lawsuit either to prevent taxation if the transfer of the fund units has not yet occurred, or to recover any tax unduly paid within the last five years.
