5 Advantages of a Holding Company in Brazil for investors

With the growing real estate market in Brazil, many investors are seeking specialization in the field to generate both active income through buying and selling properties at higher prices and passive income through rental returns from acquired properties.

However, many investors still carry out these operations as individuals, which creates a less favorable scenario due to greater disorganization and, most importantly, higher tax incidence. Let’s see how to overcome this scenario.

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Author: Leonardo Almeida Lacerda de Melo

Income in Brazil

With the increase of their wealth through investment returns, many real estate investors expand their portfolios and assets by acquiring more properties to maximize income in Brazil. This situation creates an actual investment portfolio focused on the real estate sector.

However, a significant portion of these investors continues to conduct operations in their own names as individuals, making them subject to higher taxes, primarily the Individual Income Tax (Imposto de Renda de Pessoa Física or IRPF).

In light of this scenario, a legal entity model was created solely for managing these assets, providing greater security, organization, and, most importantly, lower tax incidence on operations and income.

This model is known as a Holding Company.

Characteristics and Advantages of a Holding Company

The idea of a Holding Company is to formalize the administration of all assets owned by an individual.

In practice, this occurs when a specific investor consolidates various assets (real estate or movable property) in their name until a certain point where the taxation on these assets becomes excessive in absolute value, and their management requires more refined attention.

In this scenario, the creation of a company is projected to manage and protect these assets.

Naturally, a Holding Company has several tax benefits compared to an individual, as the tax authorities consider it to be focused on managing high-value assets and generating any income from those.

In terms of structure, a holding company can incorporate all the elements of a market-oriented company, such as a board of directors, accounting, etc. Let’s examine these advantages in more detail.

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Tax Reduction 

As mentioned earlier, rental income from properties owned by individuals is subject to the individual’s income tax table, which can reach a rate of 27.5% according to the updates in MP 1,171/2023.

In the case of a Holding Company opting for the Presumed Profit Brazilian tax regime, it will pay a rate of 15%, where amounts above R$20,000.00 (4.000,00 USD) may be subject to an additional 10% tax (IN RFB 1700/2017, article 29). This clearly represents a lower tax burden.

Regarding the purchase and sale of properties, the scenario deserves analysis depending on the nature of the transaction.

If conducted by an individual, the tax rate is higher at 15%, but it applies only to capital gains. In contrast, the sale through a holding company, despite having a lower tax rate of 6.73%, applies to the total value of the property sold.

In addition to the mentioned issues, foreign investors have a significant advantage in succession (which will be addressed later).

In addition to the mentioned issues, foreign investors have a considerable advantage in succession due to the reduced value applicable to ITCMD (Inheritance and Gift Tax), with a maximum tax rate of 8%, compared to other countries where it can reach up to 50% (this matter will be specified further ahead).

Asset Protection 

The transfer of the investor’s business assets provides greater protection to them, as the separation of personal and commercial assets provides a certain level of immunity against legal actions against the holding company.

In other words, if the holding company is legally liable for a specific debt, the investor’s personal assets will have greater protection against potential legal actions.

Succession Planning

By establishing a holding company and transferring the investor’s assets to it, these assets are properly evaluated and divided into shares, allowing for better succession planning.

Moreover, succession can be carried out during the investor’s lifetime by granting shares in the form of usufruct to the successors, which would already be subject to Inheritance and Gift Tax (Imposto de Transmissão Causa Mortis e Doação or ITCMD). This approach avoids additional costs and the probate process after the investor’s passing.

Efficient Asset Management 

As demonstrated, a holding company, in terms of structure, resembles a conventional company. Therefore, the assets aggregated to it, divided into designated shares with established values, will be centrally managed under a single administration.

This enables greater transparency in their movement, value, and financial returns, facilitating any administrative planning.

Possibility of Investment Acquisition

Being a legal entity, a holding company is viewed differently by the market. This allows it to be eligible to receive investments, whether from the domestic market or foreign investments.

Given the current real estate scenario, successful investors can generate significant returns through various investment opportunities, whether through loans in exchange for interest or through equity participation.

This can attract the interest of both domestic and foreign investors who seek to enter the Brazilian real estate market without having to personally establish a company for this purpose, significantly reducing bureaucracy and the requirements necessary to start reaping the benefits of the market (more information on the procedure for opening a company for non-residents in our article).

What is the Necessary Investment to Start a Holding Company in Brazil?

First, it is worth mentioning that there is no minimum required amount by law to open a holding company in Brazil. The only consideration is the cost-benefit analysis.

Regarding the holding company, the major cost for its establishment lies in the capitalization, as there will be an Incidence of ITBI (Real Estate Transfer Tax) upon transferring the properties from the investor’s name to the newly formed holding company. This taxation can range from 2% to 5% of the property value.

In addition to the ITBI cost, which is the main expense related to the establishment of a real estate holding company, there will be fees for opening the legal entity (generally quite low), as well as the ongoing maintenance of the company and the fees for a lawyer and an accountant. In general, an estimated amount of around R$5,000 (1,000.00 USD) can be considered.

Therefore, the investor should consider the costs involved and calculate the time needed, especially to recoup the ITBI payment, in addition to taking into account the holding company’s maintenance costs.

What is the Tax Cost on the Succession of a Holding Company in Brazil with Foreign Shareholders?

This is an interesting scenario in Brazil at the present moment. The ITCMD only has established tax rates for succession among residents in Brazil regarding assets located in Brazil (which can reach 8%).

In the case of succession of assets controlled by offshore companies, there is no specific Law governing the ITCMD tax rate.

Therefore, up to this point, there is no ITCMD tax on the succession of a foreign shareholder in a real estate holding company in Brazil that manages their shares through a company situated in their own country. In this case, the succession will take place in the administrator’s country, which, up to now, excludes the incidence of ITCMD in Brazil.

The current scenario demonstrates a favorable aspect for foreign investors seeking secure means to invest in the Brazilian real estate sector, as there is no taxation related to their succession if they choose to carry it out in their country of origin or any country that has an offshore entity responsible for the holding company derived from Brazil. In other words, the investor can choose the tax regime that is most advantageous for them.

The Advantages of Specialized Advisory Services

The establishment of a real estate holding company to manage significant assets in Brazil, while considerably advantageous, requires prior structural, legal, and tax planning.

This is necessary to develop the best strategy for reducing taxes, structuring the holding company, and estate planning.

Regarding foreigners seeking to enter the market by opening a holding company in Brazil, in addition to the aforementioned factors, they need to go through administrative procedures to obtain authorization to conduct business activities in Brazil.

These procedures may involve obtaining an individual taxpayer identification number (CPF), document regularization, and appointing a resident representative in the national territory.

For these reasons, it is in the interest of both resident and foreign investors to seek specialized assistance, such as the professionals at Koetz Advocacia, for their estate planning and structuring of the holding company responsible for managing their assets.