Market Bites

Good afternoon everyone, and welcome to another episode of MarketBites, a space created for us to share relevant topics from the offshore fiduciary market in a simple and direct way—topics that may impact you and your offshore structures.

I’m Rodrigo Loureiro, and today we’re going to talk a little about how Brazilian families are looking at the international landscape.

What has changed, what concerns people, and what possible scenarios may lie ahead for our families.

For this conversation, we’re joined by a long-standing partner, Pedro Omo, one of the founding partners of STEM MFOL, who works directly with wealth management and planning for families both in Brazil and abroad.

Thank you, Renan, thank you Rodrigo for the invitation. For me it’s a privilege to participate in the Harneys podcast.

As Renan mentioned, we’ve been long-time partners. I worked with Harneys for many years as a peer and also alongside other service providers, and now in the role of a client or representative of clients.

So I’ve learned a lot from you and continue learning from you. It’s truly a privilege to be here today. Thank you very much for the invitation.

Thank you as well.

Pedro is a great partner of ours. He knows the entire offshore landscape extremely well and today he applies that knowledge directly to his clients who seek both Brazilian onshore and offshore planning.

So we invited Pedro here because we want to understand these recent changes in Brazilian legislation—especially tax changes—and what the main concerns of families have been.

We’d like to understand what you’ve been seeing from your clients.

Well, talking about tax reform in Brazil could easily take days—and even then it might not be enough.

But we can divide families broadly into entrepreneurial families and non-entrepreneurial families, because the changes affect both those who have operating businesses and those who have already achieved liquidity and now hold liquid investments.

There are also families who still have equity stakes in companies but mainly receive dividends.

So there are changes affecting every type of family.

Speaking first about something that affects entrepreneurial families, we have the reform of the consumption tax system.

Brazil is creating its own version of a VAT, which will replace taxes such as PIS, Cofins, ISS and several other state and municipal taxes with a single tax.

This will have a major impact on companies.

We still don’t fully know the details of that impact, especially regarding the credits that may or may not be used.

But there will certainly be an impact and possibly an increase in effective tax rates for companies, which will directly affect families that own operating businesses.

The transition will be gradual over the coming years. It will not start at 100% next year.

There will be a transition period in which the new unified tax is gradually introduced while the existing taxes it replaces are gradually reduced.

Over time we will see how industries, clients and family businesses adapt to this new reality.

There are also other changes that will affect all families, whether entrepreneurial or not.

We cannot fail to mention the minimum tax on income.

This will undoubtedly affect families that receive significant dividend income.

Not only families—also professionals and independent workers who receive part of their income through dividends from companies they own.

This is a major impact on family income.

It raises concerns about how the new tax burden will affect everyday life—how much income remains available for investment or consumption.

So the minimum taxation of dividends is definitely one of the biggest factors leading families to rethink their structures.

In many cases they are even reconsidering relocation.

It represents a major shift in mindset for a country that has had dividend taxation at zero for such a long time.

We also have changes expected in the financial market.

There has been a lot of uncertainty about tax-exempt investment products.

I won’t even dare say exactly how things stand now because by the time someone watches this, the rules may already have changed.

For now, some instruments remain tax-exempt, but we’ll see how that evolves.

There was also an attempt to increase the capital gains tax rate on financial investments in Brazil and abroad from 15% to 17.5%, possibly even 18%, although that proposal eventually expired.

So we have both actual changes and many potential changes, which create a great deal of uncertainty for families.

We also saw changes to the IOF tax.

The way it was increased made families realise that from one moment to the next a tax change could alter their decision to move money abroad.

Essentially, the executive branch has the power to increase taxes on capital leaving Brazil.

And after the recent back-and-forth between branches of government, families realised how quickly that could happen.

So beyond the actual tax changes—such as the minimum tax and the increased IOF on foreign transfers—there is a broader perception of legal uncertainty.

It’s not just about new taxes or higher rates.

It’s about a broader tax environment in which public spending increases and the burden falls on taxpayers.

Families see government spending rising but little effort to reduce costs.

And ultimately the taxpayer is the one who pays the bill.

So families are increasingly concerned about the direction of these policies.

Some are now genuinely discussing leaving the country.

Some who never considered it before are now considering it.

Some are already doing it.

We are following this situation very closely.

For us as a family office—and for fiduciaries like you—it’s important to stay close to families and give them options.

I always tell families that decisions about where to live should involve many factors beyond taxation.

Taxes are important, of course, but our role is to advise them and provide options so they can reach the most efficient outcome based on their goals.

So in summary, that’s a bit of what we’re seeing.

And just to add something here: clients and people watching might think that relocating to another country is simply a matter of finding a place with better tax rules.

But for many families it doesn’t work that way.

Some families have operating businesses in Brazil.

You cannot simply leave the country in those situations.

For a definitive tax exit, it’s not enough to establish tax residence elsewhere while still regularly coming back to manage your business.

Some families simply cannot leave.

Their businesses require them to remain involved.

And that makes tax planning much more complex.

Exactly.

And it’s important to highlight this, because some people might think:

“I’m unhappy with Brazil. Taxes are high. I’ll just move somewhere else.”

But it’s not that simple.

This doesn’t only affect very wealthy families—it can apply to families with smaller wealth as well.

For some it may work, and for others it may not.

Exactly.

There is no silver bullet.

Simply obtaining tax residency in Uruguay or Dubai does not mean you can continue living in Brazil without consequences.

Many people think that spending fewer than six months in Brazil solves the issue.

But for Brazilian tax law that is not the main factor.

The key concept is the centre of interests.

If you claim tax residency in Uruguay, Dubai, Portugal or Italy but still have your house in Brazil, your children studying here, your business here, and you are in São Paulo every week, Brazilian tax authorities may consider Brazil your true tax residence.

That’s why proper advisory support is essential.

Families need to understand whether changing tax residency is truly a viable option.

To complement the tax discussion, let’s mention two major changes that already happened recently.

They had a big impact on wealthy families but did not necessarily trigger drastic relocation decisions.

One was the implementation of “come-cotas” taxation on closed-end funds, and the other was the taxation of foreign investments under Brazil’s CFC rules.

These changes broke long-standing paradigms.

Previously, many wealthy clients used closed-end funds as a way to defer taxation. That deferral is now gone.

However, these changes were somewhat expected.

Closed-end funds were never originally intended to be used the way they were.

And in developed OECD countries, CFC rules already exist.

So we had already been preparing clients for these changes.

When the new rules arrived, many clients were not surprised.

The main issue then became how to adapt existing structures to the new law.

For example, the shift toward transparent structures and the taxation of unrealised gains.

In some cases, clients are now facing tax bills on gains that were never realised.

Exchange rates moved dramatically, and that also created unexpected situations.

So once again it is extremely important for us to work together with accountants and tax advisers so that clients fully understand the structures they are entering.

And that was also our perception.

Clients who already had offshore structures had been discussing these issues with their advisers and were relatively prepared.

But this constant environment of change has definitely shifted the mindset of Brazilian families.

In the past, internationalisation was mostly driven by investment strategy.

Families would diversify internationally once their wealth reached a certain level.

Now other factors are influencing the decision.

Absolutely.

In the past, investing abroad was mainly about returns and accessing products not available in Brazil.

It was mostly part of the portfolio allocation process.

That still matters—but it’s no longer the only reason.

Now families also want part of their wealth in strong currencies.

They want a “Plan B” if the domestic environment deteriorates.

Legal and political uncertainty plays a big role in that decision.

Today clients understand that internationalisation should be done gradually and strategically.

They no longer try to “time the exchange rate”.

Instead they define a long-term allocation target—perhaps 30%, 40%, or 60% abroad—and move funds gradually over time.

This approach creates an average exchange rate over time and avoids trying to predict the currency market.

Many clients used to try to trade currencies.

Today they see internationalisation as diversification and protection.

And beyond that, there is access to specific sectors—such as technology and artificial intelligence—which are difficult to invest in directly from Brazil.

In global markets you have a much more developed investment ecosystem.

You can access sector-specific ETFs and many other vehicles.

So access to global opportunities is also a strong driver for internationalisation.