Tax & Wealth Planning for Family-Owned Businesses – October 2018

Tax and Wealth Planning for Family-Owned Businesses

Fernando Azevedo Pimenta, partner at Prandini, De Luca & Pimenta Advogados Associados

An increasing subject among Brazilian families, estate planning, together with adequate wealth and tax structures, seeks – if not perpetuate – at least preserve the creation and accumulation of wealth for the future generations.

Not too long ago, and we dare say, still these days, there has been a strong resistance from the Brazilian society to discuss estate planning, since we are dealing, in an ultimate analysis, with death. Such resistance stems from a heritage from the Latin people who, unlike the anglo-saxons, at least in Brazil, are still learning to walk in regard to concepts and legal structures that are universally well grounded in the North American and English laws, and others.

Notwithstanding, we have been experiencing a substantial evolution on “Estate Planning” in the last twenty years, either in regard to the Brazilian society or in regard to the legislation, which has been improving with the creation of new and more sophisticated legal devices to fulfill the most varied yearnings of the estate holders.

Wealth planning consists of a more cost saving, efficient and less belligerent way to dispose of assets while still alive, avoiding likely conflicts between heirs, and, most importantly, providing them with immediate access to the assets of the person, which is a considerable advantage when it comes to Brazil, where the succession procedure, as a rule, may take several years, if not decades, when the successors are not in accord with each other.

Something we could realize after having structured almost a hundred plans is that each established structure always present its nuances, details and specificities, wherefore there is no form, formula or recipe to follow, which makes wealth planning always unique.

After this brief introduction about the topic, we shall effectively deal now with the process of creation of wealth planning, whose first step seems to us to be fundamental, which is the answers to the following questions to be addressed to the estate holder: (i) what are his/her goals? (ii) what is the composition of his/her assets? (iii) what is his/her family structure? (iv) if the owner is married or lives common-law, what is his/her marital regime? (v) the plan will be made only by the owner or (if married or living common-law) will it be made by both partners? (vi) how old is the estate holder and how is the estate holder’s health? Of course, such questions will naturally bring new questions, whose final purpose is to define the estate holder’s wish in details, the composition of his or her assets, and the interpersonal relationship between the owner, his/her heirs and their successors.

Another aspect worth highlighting is that estate planning, most of the times, is dynamical, i.e., there is no beginning, middle and end, wherefore the plan needs to be changed and amended – throughout the years to adjust it to the owner’s reality, his/her assets and successors.


In Brazil, unlike other countries, most of the applicable legislation is at the federal level, and it is valid across every part of the federation. In estate planning, it is natural that several aspects will also be subject to state and municipal levels, but the federal laws are applicable in the whole country and govern key aspects about civil law, corporate law, tax and succession.

In this regard, in addition to the Federal Constitution of 1988, the legal advisor will undoubtedly at least consider the application of the Brazilian Civil Code (Law no. 10,406/2002), which provides general rules for succession, inheritance, marriage, marital regime, and other topics inseparably related to estate planning.

The applicable legislation covers a very broad scope. For instance, where one’s wealth is comprised of real estate, the real estate is subject to local municipal tax laws. This can create widely diversified results, considering there are approximately 5,570 different municipalities in Brazil.

Finally, still concerning the applicable legislation, we cannot forget the State laws, which are also within the tax scope, since every transfer of property while still alive or after death is subject to ITCMD (tax on mortis causa succession or donation) or ITCD in some Brazilian states. Therefore, we must consider twenty-seven different rules, each one applicable to one of the twenty-six states, plus the Federal District.


As mentioned in the beginning of this article, there are numerous advantages related to estate planning, including: (i) conflict reduction, (ii) significant cost savings, (iii) immediate access to the estate owner’s assets, (iv) rational distribution, and preservation of the estate, (v) continuity of the family business activities, and others.

The reduction of conflict is evident, for, when the estate owner puts the wealth planning into place, he is distributing his assets in a more favorable manner and suitable to the successors’ profiles, while, on the other hand, the absence of rules may cause situations of animosity. For instance, creating a joint ownership over certain assets, consisting of several successors with different profiles would very likely face difficult obstacles to agree with each other regarding which assets should be divided and how the allocation should be made.

As to the economic-financial aspect (which can vary according to the chosen structure), it is important to highlight that the estate plan, as a rule, accelerates or even reaches all stages of succession following the estate holder’s demise.

In summary, proper estate planning can provide substantial cost savings from the court fees or public registry fees arising from the succession procedure; these fees can easily amount fifteen percent (15%) of the total assets of the deceased, not including other legal fees, taxes, court expenses, and others.

Despite the recent creation of out-of-court probate via public registries, the succession procedure in Brazil can be slow and bureaucratic, which often prevents the successor from broad and easy access to the assets of the deceased for a long period of time. In many situations, this delay causes the deterioration and value reduction of such assets. With the establishment of the estate plan, however, the successors’ access to the assets can be virtually automatic and the estate is better protected and preserved.

Another very positive aspect of estate planning is the fact that the estate owner can allocate his wealth reasonably and coherently. For example, it is very common that one or more successors would not possess sufficient management skills to conduct the family business. In this case, if possible, nothing seems more reasonable and logical than allocate other assets to these particular heirs which are not directly related to the family business, thus avoiding the risk of conflicts and value destruction of the family business.

Currently, more than seventy percent of the business corporations are held by family businesses. Only thirty percent of those reach the second generation, and only five percent reach the third generation of the founders. In this contest, the adoption of an estate plan becomes essential for the preservation and continuity of the family business.


Although it is not the subject matter of this article, it is important to emphasize that estate planning by Brazilian families is not restricted to structures established on the national soil, We can and must consider that a certain portion of the wealth shall be allocated to other countries, for the sole purpose of reducing risk, by means of the creation of trusts and family foundations, which are consolidated in many countries, but some of them are not even provided for in the Brazilian law.

That said, we shall expound the main legal devices provided under the Brazilian legislation for the outlining of an estate plan, being important to ponder that, more complex the family and wealth structure, in addition to the interpersonal relationships, more the need for planning with combined devices or not.

3.1- Wills.

One of the simplest devices of estate planning is the will, a strictly personal act set forth in article 1,857 of the Brazilian Civil Code. Subject to legal limitations, such as the minimal reserve of fifty percent of the assets to the forced heirs (descendants, ancestors and spouse), it is possible to establish a series of rules and criteria for setting the distribution of the estate among the heirs of the testator, such as: determining incomes and supports, excluding collaterals, restricting the disposal of assets by the heirs, by using no-commingling, inalienability and impossibility to levy execution clauses set forth in articles 1,848 and 1,911 (et. al), of the Brazilian Civil Code.

While a will is one of the most devices used for estate planning, a will by itself does not seem to be the most adequate method, as it does not prevent the successor from submitting it to probate. On that matter, the only advantage we can see between the will and the interstate succession (general rule set forth in the Civil Code) is the allocation of assets among the successors, in order to reduce conflicts.

Another disadvantage of the will is the fact that the probate proceedings required to go through the courts, which makes the whole process longer and costly for the successors.

As discussed, it is a tool with advantages and disadvantages to be considered by the estate owner within the particularities of his estate planning.

3.2- Donation with or without usufruct limitations.

Another widely-used device in the Brazilian Law is the donation, which enables the conveyance of assets while still alive. Donations are regulated by article 538 (et. al) of the Brazilian Civil Code, and they are efficient instrument of estate planning. A donation can be made through public or private instrument (article 541 of the Brazilian Civil Code), except in specific cases where the law defines the public deed as mandatory for the validity and effectiveness of the act.

The Brazilian Legislation admits the establishment of conditions precedent for the perfection of the donation, as per article 553 of the Brazilian Civil Code, which gives more acuity to the concept in the scope of estate planning. The imposition of such conditions, provided that they are not prohibited by law, can be freely considered by the donator, for example, with the provision of a period of unavailability of access to the asset, the use of the asset for a certain purpose, or even the fulfillment of certain conditions (or goals) by the donee for him to get a free access to the asset (e.g. graduation from college). The range of alternatives is broad, wherefore a donation is a simple and efficient estate-planning device for the donor while still alive. Reminding that, once the donation is accepted, the donee must comply with the obligations set forth therein as a condition for the conveyance of the ownership of the donated item.

From another perspective, the donation can be divided into two types, that is, without usufruct limitations, whereby the donator can convey the whole ownership of his asset to the donee, or with limitation to certain rights by the donator. Usually, in the latter case, there are limitations to the usufruct of the assets, which means that, during a certain period of time or even until the death of the donator, the donator will hold the possession, use, management and will derive the fruits from the donated thing, as per Article 1,390 and following of the Brazilian Civil Code, which is deemed as property right and strictly personal. A simple example for the understanding of the practical application of the concept is the donation of real estate from de donor parents to children, while the rent payments are still being made to the donor parents. The donor parents retain the necessary to the determine the use and destination of the real estate as they wish, but the donor parents themselves cannot sell or transfer the real state without prior and written consent of the done children (naked owners).

The donation consists of a simple and efficient instrument for the conveyance of assets while the donor is still alive, with the advantage of waving the succession proceedings, should the donated assets comprise the entire estate of the estate holder. It is worth noting that case, the donor must at least be entitled to a minimum income for his or her subsistence, as per article 548 of the Brazilian Civil Code.

Another relevant aspect of this concept is the economy created by the anticipation of the collection of taxes levied on the conveyance of the assets (ITCMD), whose maximum tax rate can reach 8% (Senate Resolution no. 09/03), which is a very low percentage in comparison to other countries. In this sense, we wish to highlight that for decades Brazil has been trying to increase the tax burden on donations and inheritance, with projects pending before the Congress that varies from a tax burden increase to 20% (Notice CONSEFAZ no. 11/2015) or even more expressive 45% on the total value of the donated or inherited property, which will likely occur in a not-so-distant future.

3.3– Legal Entities.

On this topic, it is important to highlight that the Brazilian legislation offers a variety of corporate structures that can serve the most diverse purposes in the scope of estate planning.

3.3.1. – Corporate Structures

The most common corporate structure in Brazil is the limited liability company, set forth in Articles 1,057 to 1,087 of the Brazilian Civil Code. Approximately ninety percent of the Brazilian companies are incorporated as limited liability partnerships.

The limited liability companies – or just Ltda. – can be incorporated as a simple general partnership or as a company, being the latter more usual between the two structures. The Ltda. shall be incorporated with at least two shareholders (individuals or legal entities), through an articles of organization document registered before either (a) the relevant State Registry of Commerce, if incorporated as a company, or (b) the Civil Registry of Legal Entities, if established as a simple general partnership. Brazilian legislation does not have a minimal capital for the incorporation of the Ltda. Such partnerships are very versatile and can encompass all kind of business activities, either in the service industry or the commerce and industrial areas, except for activities that have to be mandatorily performed by means of a corporation (i.e. banks, securities dealers – DTVM, insurance companies, and others).

The basic requirements and obligations for the incorporation of a limited liability company are: (i) trade name, (ii) capital stock in the currency of the country, with the number of shares of each shareholder, form and term for the payment of the capital, (iii) complete address of the headquarters, and any branch, (iv) description of the purpose, / the activities that the company will perform, (v) expiration date, (vi) date of closing of the fiscal year, when not the same as the calendar year, (vii) appointment of the individual officers, who must reside and have domicile in Brazil, as well as their powers and attributions, (viii) shares of each shareholder in the profit and losses of the company and (ix) venue or arbitration clause.

As a rule, the responsibility of the shareholders is limited to the amount of their shares, but every shareholder assumes joint liability for the entire capital stock, according to article 1,052 of the Brazilian Civil Code. Even though this rule restricts the responsibility of the shareholders, there are in fact exceptions which allow for the disregard of the corporate veil, such as labor and social security debts.

In summary, the limited liability company is a very common corporate structure with fewer maintenance burdens, resulting in a vehicle that is both interesting and widely used for estate planning. On the other hand, the limited liability companies have disadvantages such as stricter rules, higher risks posed to the shareholders’ personal assets, as the full control of the limited liability company requires an interest of at least seventy-five percent of the capital stock; while on the other hand, in the corporation, the control of the company can be obtained with only twenty-five plus one share of the capital stock of the company, if it is comprised of common and preferred shares in the same proportion.

Another unfavorable aspect of the limited liability company lies on the fact that its regulation has been undergoing significant modifications in the recent past, with the enactment of the Brazilian Civil Code. These modifications remodeled a fair part of the provisions about this corporate structure and have been in force for only fifteen years, while the corporations are regulated by Law no. 6,404/1976 (or Corporation Act), even if still generally mentioned in the body of the Brazilian Civil Code (Articles 1,088 and 1,089). As such, the Corporate Act (which was enacted more than forty years ago) provides more legal certainty on the most diverse matters as a result of the legal scholarship and most importantly, case law consolidated by the courts.

Another important aspect to consider: despite the Brazilian Civil Code setting forth the possibility of secondary application of the Corporation Act, the jurists, judges, and lawyers are far from reaching a consensus as to the effective adoption of certain concepts of the Corporation Act regarding limited liability companies. This includes for instance the possibility to use shares with and without voting rights in the limited liability companies.

Corporations, on the other hand, are incorporated either as closely-held corporations (where the shares cannot be publicly traded) or publicly-held corporations whose shareholding structure is comprised of at least two shareholders, except for the wholly-owned subsidiary. The instrument that establishes the general rules of the corporation is the articles of incorporation (“estatuto social”). The corporation will always function as a business, regardless of its corporate purpose. It is a stock company, which has rules that protect the investment of each shareholder and not its personal interest. The incorporation of publicly held corporations must have the prior approval of the Securities and Exchange Commission (“CVM”), as per Article 82 of the Corporation Act, and many other specific requirements.

In addition, to establishing a wide range of alternatives, the Corporation Act provides a wide and complete regulation of the rights and obligations of shareholders and persons related to the corporation. This results in a very flexible corporate structure that enables the use of many mechanisms to better advance the precise application of corporate governance rules, which are often essential to the maintenance and continuity of the family business in the scope of estate planning. It is also worth highlighting that the responsibility of the shareholders is limited to their vested interest, notwithstanding the exceptions – fewer than those applicable to limited liability companies – that eliminate such limitations in closely-held corporations. Even so, we understand the corporation gives the appearance of a better instrument for the protection of the shareholders’ assets than the protection provided by the limited liability companies.

The corporation is not without its disadvantages, as it requires a higher maintenance cost than limited liability companies due to the publication obligation in newspapers and official gazettes, as well as expenses incurred by the shareholders’ professionals and advisors. As a result of the increase of complex regulations, these complexities require more legal and accounting advice, which also means more time and greater incurred costs.

There are many corporate structures under Brazilian law, as there are many differences between limited liability companies and corporations. However, the purpose of this Article is simply to outline and briefly address the available instruments, in order to provide the reader with a global view of Brazilian corporate law by discussing the two corporate structures most commonly used in Brazil.

Finally, it is worth mentioning the Limited Liability Sole Proprietorship (“EIRELI”), created and regulated by the Law no. 12,441/2011, which added Article 44 and 980-A, as well as modified the Article 1,033, sole paragraph of the Brazilian Civil Code.

The EIRELI is a “sole proprietorship” (i.e., comprised of a single individual), created with the main purpose of eliminating the need of a second partner, as this was often a problem to the incorporation of a partnership. It is the only corporate structure that requires a minimum capital of one hundred minimum wages (i.e., approximately $30,000 USD). Each individual can hold only one EIRELI. After many juristic and court precedent discussions, it was defined that an EIRELI cannot only be held by individuals, but also by legal entities. This is indeed a progressive step, considering that it enables the adoption of this corporate structure in more complex wealth structures. Even so, we understand that such a corporate structure can be advantageous for the establishment of an estate plan for less complex estates and family structures, which are often lacking the basic aspects typically found in more sophisticated structures.

3.3.2 – Nature of the Company

After this brief exposition on Brazilian corporate structures, we shall discuss the legal nature of the companies, which is an essential element for estate planning, especially in the scope of tax law.

The companies, either limited liability companies, corporations, or other kinds, can be incorporated with many purposes, among which it is worth highlighting the Property Holding Companies, pure and mixed, and the real estate partnerships.

The main purpose of holding companies is to hold various assets and rights such as interests in other companies, immovable and movable assets, tangible and intangible assets (brands, patents, etc.), credit rights, financial investments and the like.

The pure holding company has the sole purpose of holding assets and rights of the partners or shareholders without engaging in any operational activity. In estate planning, holding companies are created to centralize the management of assets comprising the estate and establish uniform rules for their use. Another purpose is to keep the shareholders separated from the company itself, or from the active operations of its controlling company, thereby functioning as a shield or wall to avoid the direct management by their partners or shareholders in the conduction of operational business of the family or family groups.

There are still cases where more than one branch or group of families collectively hold the operational company; this makes the incorporation of a property holding company very important in order to segregate the general rules of the operational business from certain family members/branches.

As for tax considerations, the taxation on holding companies is not always the most favorable when comparing the rules applicable to individual taxpayers. For instance with financial investment, where the tax incidence is higher, one must consider the imposition of contribution on net profits (CSLL), not applicable to individual tax payers, and federal VAT tax (PIS/COFINS) in certain cases, equally non-applicable to individuals. In any case, estate planning has an overall wider scope than mere taxes, however, we certainly must keep tax consequences in mind.

A mixed holding company is a related form of a holding company. Not only does it share the purpose and typical activities of a pure holding company, but it also encompasses operational activities beyond merely focusing on the interest in other companies and asset holding. Because of the wide variety of tax portions applicable to numerous business activities in the country, the mixed holding company can be an efficient device for the completion of a tax plan, which can provide a significant cost saving in regard to estate planning and continuity of the family corporate business.

Both the pure and the mixed forms of holding companies are very useful vehicles in anticipation of the estate plan, the establishment of prior rules and, in particular, the continuity of the corporate business with the maintenance of the culture and philosophy established by the previous generations.

On the other hand, while a real estate partnership can be used for the same purposes as the holding company, its main purpose is to specialize the family corporate business in real estate activities, i.e., buying and selling of own property, real estate leasing, renting, and in particular to make a significant tax economy for estate planning structures, in which the estate is comprised of immovable assets for commercial use.

3.4 Other Estate Planning Vehicles

Apart from the traditional vehicles of estate planning in Brazil, it has been become more and more common to use other legal structures which deserve at least a brief reflection in this article. Among them, we highlight: (i) Closed-end Investment Funds and (ii) Private Pension Plans.

 3.4.1 Closed-end Investment Funds

The closed-end investment funds can consist of a sole shareholder (also known as “exclusive funds”), or several shareholders (“restricted funds”), provided there is a common interest among them. The benefit of closed-end funds is the delegation / outsourcing of management of assets which are carried out by specialists in the financial industry, and/or portfolio managers duly registered before the CVM (the Brazilian SEC). These investment schemes can be created in the most varied types, with the purpose to invest in private equity (FIP – Private Equity Funds), credit rights (FIDC – Receivables Funds) and the like.

Because of the costs involved in the creation of such vehicles and administration, the use of closed-end structures, whether exclusive or restricted, is recommended for estate planning involving funds of at least $3,000,000 USD, so it can withstand the costs of the closed-end fund maintenance.

It is a very interesting device for estate planning, since one can establish the precise rights and obligations of the shareholders. However, one must bear in mind that, in addition to the high costs, the investment itself will be allocated over a long term (10, 20, or 30 years), and it is not possible to redeem one’s shares except in limited circumstances of selling to other shareholders in the securities exchange or secondary market. The investment funds are required to have a fixed term and shall terminate after such period.

From a tax standpoint, the closed-end funds have already been extremely helpful since they delay payment of Income Tax until the moment of the amortization or liquidation of the fund; while asset negotiation (shares, securities, etc.) is allowed throughout its existence in an exempted form, unlike other investments and banking products which must be taxed every six months (mandatory withholding of income tax on investments system).

However, if the Government Bill no. 10.638/2018 is approved in the Brazilian Congress, the tax benefit granted to the closed-end funds of the Income Tax deferring will be revoked, thereby subjecting such funds to a mandatory system of income tax withholding. Then the closed-end funds will be taxed under the mandatory income tax withholding mechanism beginning in the year after the said Bill is approved. Regardless, from a tax economy standpoint, the change in these criteria seriously undermines the previous exemption which had formerly applied to such investment funds in the past. In this sense, this new scenario must be analyzed in order to assess the pros and cons of the adoption of pension private funds in estate planning.

3.4.2 Private Pension Plan

Private pension plans are regulated by the insurance market legislation. The funds of the estate owner can be transferred to such schemes, where he/she will appoint the heirs/successors as beneficiaries. The holder is thereby able to waive the succession procedure, for the release of the resources to the beneficiaries occurs automatically after the death of the private pension plan holder. There are two categories of private pension plans, the cash value life insurance (VGBL) and the pension plan (PGBL), which differ from each other in regard to the tax benefits. The main benefits of these private pension plans in estate planning consist of generated cost savings, since these structures make the probate procedure unnecessary and the tax incidence is more favorable. In addition, it can reduce conflicts among the successors, as each and everyone will receive the exact portion of their shares, according to what the estate holder/investor has determined.

It is worth noting the estate holder may determine whether the beneficiary will receive all the funds at once, or on a monthly basis in the form of temporary income.

Last, but not least, we shall mention that there is no incidence of ITCMD (tax on causa mortis transmission and donation of any property or right) on the amount of the private pension plans, despite certain States having indicated their intention to levy taxes on such plans. In this sense, we mention that the Brazilian courts have been ruling in favor of the taxpayers, concluding that those revenues are not inserted in the concept of inheritance.

Fernando Azevedo Pimenta, sócio de Prandini, De Luca & Pimenta Advogados Associados