The original version of this article is written in Portuguese and is also available on this blog. We highly recommend reading the original, if possible.
In Brazil, pension or retirement income received by a resident in the country is taxed according to the progressive income tax table. However, once the beneficiary decides to reside abroad, this income would be taxed at a fixed rate of 25%, as provided for in Article 7 of Law No. 9779/1999.
As of the decision on September 21, 2024, by the Federal Supreme Court (STF), the taxation scenario for retirement income received by a non-resident beneficiary has changed.
The STF declared the 25% income tax on pension and retirement income paid, credited, delivered, employed, or remitted to residents or domiciliaries abroad to be unconstitutional.
This decision brought important changes for retirees living outside Brazil, providing financial relief for many and clarifying a point that had been a source of controversy for years.
Discussion Context
Based on Article 7 of Law No. 9779/1999, as updated by Law No. 13.315/2016, Brazilian legislation determines that "income from work, whether or not linked to employment, retirement income, pensions, and service fees, paid, credited, delivered, employed, or remitted to residents or domiciliaries abroad, are subject to a 25% income tax withholding."
This provision has caused considerable dissatisfaction, especially among non-residents. This is because income received by residents in Brazil is currently subject to a progressive tax table, where the tax rate varies according to income. In contrast, non-residents face a fixed 25% tax rate regardless of the amount of income. This has led to an interpretation of unequal treatment for those who chose to live abroad but continue to receive pensions or other income paid by the Brazilian system.
The STF Decision
The Supreme Federal Court (STF), in ruling on case ARE No. 1327491 (Topic 1174), considered this practice unconstitutional. The case concerned an individual residing in Portugal who contested the 25% tax on their minimum-wage pension. The defense argued that this tax was unconstitutional, as it violated the constitutional principles of equality, the progressiveness of income tax, the guarantee against confiscation, and proportionality.
The case's rapporteur, Justice Dias Toffoli, ruled in favor of declaring the law unconstitutional, arguing that it violated constitutional principles such as equality, which guarantees equal treatment to all taxpayers, as well as protections for the elderly, as provided for in Article 230 of the Federal Constitution.
The tax authority (Fazenda) argued that, due to the lack of visibility into the taxpayer's other sources of income, owing to their non-resident status, the individual must adhere to the provisions of the law.
Thus, the court unanimously denied the tax authority's appeal and set the following precedent:
"It is unconstitutional to subject retirement and pension income paid, credited, delivered, employed, or remitted to residents or domiciliaries abroad to a 25% income tax withholding, as established by Article 7 of Law No. 9.779/1999, as amended by Law No. 13.315/2016, following the opinion of the rapporteur."
Justice Flávio Dino concurred with the rapporteur, with the following caveats:
Taxation of those residing abroad may differ, provided a new law is enacted that observes progressivity; and
Until such a law is enacted, the progressive tax table in force for retirees and pensioners residing in Brazil must be applied.
Conclusion
The STF's decision is a major victory for retirees living abroad, who will now receive similar tax treatment to residents in Brazil, paying only a rate proportional to the income they receive.
Additionally, the decision could pave the way for retirees abroad to seek refunds for taxes paid unduly over the past five years, provided they can prove they were taxed at 25% during that period.
However, this raises some further questions. While defending the principles of equality, income tax progressivity, protection against confiscation, and proportionality between residents and non-residents is undoubtedly important, should this treatment be extended to other matters, such as capital gains, which currently imposes a fixed 15% rate on non-residents?
Perhaps in the future, we will see these issues debated in Brazil's higher courts, especially since the second half of 2024 has brought significant changes to the tax landscape.
In light of this scenario, the Mosaico Tax team will continue to monitor major updates on the topic and assist clients with appropriate tax planning.
If you have already paid the 25% tax on retirement income or have other questions about how to file your income tax return or final exit declaration, schedule a consultation with one of our specialists.
It is worth noting that the information presented in this article is purely informative and analytical and does not constitute technical or professional advice. This company is not responsible for any decisions made based on the content provided.
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