Overview of US & Brazil Double Tax Treaty

Overview of US & Brazil Double Tax Treaty

Overview of US & Brazil Double Tax Treaty

US Taxation of Brazil Income, Pension & Investments:& IRS Offshore Reporting: The United States has entered into several tax treaties with different countries across the globe — unfortunately, Brazil is not one of them. While there are many US taxpayers who are originally from Brazil and/or still maintain offshore accounts, assets & investments and/or generate income from Brazil — since there is no tax treaty between United States and Brazil, it can make it unnecessarily difficult when it comes to analyzing how various income generated from Brazil is taxed in the United States. When there is a tax treaty in place it helps to limit and minimize the taxation of certain income between the respective countries. Some treaties to reduce the tax rates, eliminate tax on certain types of income such as Business Income, Capital Gains and Real Estate — and/or restrict how pension income can be taxed. When there is no tax treaty in place the US government generally relies on basic US tax law principles in valuating how foreign income should be taxed.

How is Income from Brazil Taxed?

Since there is no Tax Treaty between United States and Brazil, the default position is that a taxpayer who is a US person such as a US Citizen, Legal Permanent Resident, or Foreign National who meets Substantial Presence Test is taxed on their worldwide. With Brazil, this would also include income that is being generated in Brazil, and may be tax free under the tax rules of Brazil.

Pension Retirement and Pension

If the US person is earning income that is pension related from Brazil, there are a few different categories to consider when deciding whether or not any income is taxable. 

Let’s go through the basics:

Brazil Pension Contributions

Even when there is a tax treaty place between United States and the second country, the general rule is that when a foreign employer makes pretax contributions into the US persons’ foreign pension plan – those contributions are taxable — and do not receive tax deferred status. This is true, even if the equivalent to a 401(k) and possibly tax deferred in the foreign country – those benefits are usually not applicable on the US tax return.

One example is the UK, in which certain contributions made from a foreign employer on behalf of US person into a UK pension may receive US tax deferred treatment as well, similar 401K.

Growth within a Brazil Pension

If income is being accumulated or accrued in a foreign pension account in Brazil, then chances are that income can be taxable in the United States. It really is an unfair position, because that income is probably growing tax-free and may be subject to limited-tax at the time of distribution.*

A distinction should be made as to whether there is income actually accumulating in the pension fund, or whether just a value of the assets have increased.

Distributions from the Brazil Pension

If a US person is receiving distributions from a Brazil pension plan, then chances are that income is going to be taxable absent some specific exception, ruling or other regulation or Revenue Procedure.

Offshore Reporting (FBAR & FATCA)

When a US person has various Accounts, Assets or Investments in Brazil common in they have reported to the United States each year on various different forms depending on the value of and category of the assets/accounts.

Here are some common forms which may need to be filed:

5 International Tax Forms You May Have Missed

The following is a summary of five (5) common international tax forms.

FBAR (FinCEN 114)

The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.

The threshold requirements are relatively simple. On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?

If it does, then you most likely have to file the form. The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.

Form 8938

This form is used to report “Specified Foreign Financial Assets.”

There are four main thresholds for individuals is as follows:.

  • Single or Filing Separate (in the U.S.): $50,000/$75,000
  • Married with a Joint Returns (In the U.S): $100,000/$150,000
  • Single or Filing Separate (Outside the U.S.): $200,000/$300,000
  • Married with a Joint Returns (Outside the U.S.): $400,000/$600,000

Form 3520

Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:

  • Gift from a Foreign Person: More than $100,000.
  • Gift from a Foreign Business: More than $16,076.
  • Foreign Trust: Various threshold requirements involving foreign Trusts

Form 5471

Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:

  • Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
  • Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
  • Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
  • Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
  • Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).

Form 8621

Form 8621 requires a complex analysis, beyond the scope of this article. It is required by any person with a PFIC (Passive Foreign Investment Company).

The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.

*There are some exceptions, exclusions, and limitations to filing.

Receiving a Gift or Inheritance From Brazil

If you are a U.S. Person and receive a gift from a Foreign Person, Foreign Business or Foreign Trust, you may have to file a Form 3520. The failure to file these forms may lead to IRS Fines and Penalties (see below).

Which Banks in Brazil Report U.S. Account Holders?

As of now, there are nearly 2000 Foreign Financial Institutions, within Brazil that report US account holder information to the IRS. The list can be found here: Brazil FFI List:.

What is important to note, is that the list is not limited to just bank accounts. Rather, when it comes to FATCA or FBAR Reporting, it may involve a much more broad spectrum of assets and accounts, including:

  • Bank Accounts
  • Investment Accounts
  • Retirement Accounts
  • Direct Stock Ownership
  • ETF and Mutual Fund Accounts
  • Pension Accounts
  • Life Insurance or Life Assurance Policies

Totalization Agreement

The purpose of a Totalization Agreement is to help individuals avoid double taxation on Social Security (aka U.S. individuals living abroad and who might be subject to both US and foreign Social Security tax [especially self-employed individuals] from having to pay Social Security taxes to both countries).

As provided by the IRS:

      • “The United States has entered into agreements, called Totalization Agreements, with several nations for the purpose of avoiding double taxation of income with respect to social security taxes. These agreements must be taken into account when determining whether any alien is subject to the U.S. Social Security/Medicare tax, or whether any U.S. citizen or resident alien is subject to the social security taxes of a foreign country”

The United States has  entered into 26 Totalization Agreements, including Brazil (as of 2018).

What Should You Do if You Missed Income from Brazil?

In conclusion, everyone makes mistakes. If at some point you discover that you should have been reporting your foreign income, accounts, assets or investments, the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure programs.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

Contact our firm today for assistance.