Paying taxes on digital nomads' copyrights: do digital nomads domiciled abroad have to pay income tax on the amounts they receive from Brazil as copyrights?
Many digital nomads domiciled abroad have various sources of income in Brazil, in addition to their salary. One of these sources of income is the amounts received as royalties, as is the case with writers, artists, producers, software developers, among others.
However, many people think that, when submitting the Final Exit Declaration, they should only declare the amounts received as royalties in the country where they are domiciled.
This thinking is partly correct and therefore deserves a more thorough analysis.
Copyright taxes: income tax is deducted directly from the source
Amounts paid as royalties to people domiciled abroad are automatically deducted from the source for payment of income tax. In the case of copyrights, the rate is fixed at 15%, whatever the amount, according to art. 37 of Normative Instruction no. 208/2002:
"Art. 37: Amounts paid, credited, delivered, employed or remitted to non-residents as royalties of any kind and remuneration for technical services and technical, administrative and similar assistance are subject to withholding tax at the rate of fifteen percent."
Brazil, like many other countries in the world, adopts the principle of territoriality for collecting tax from non-residents. In other words, if you are domiciled abroad, the Brazilian tax authorities will only be able to collect tax on income that originates in Brazil.
Copyright, unlike income from work, has a lower flat rate. The explanation is simple: most of the conventions that Brazil has signed with other countries to avoid double taxation limit the taxation of royalties at source to 15%.
However, there is an exception to this rule: if the beneficiary is domiciled in a country considered a tax haven, the rate will be 25%, as established in §3 of art. 37 of Normative Instruction no. 208/2002:
"Art. 37: Amounts paid, credited, delivered, employed or remitted to non-residents as royalties of any nature and remuneration for technical services and technical, administrative and similar assistance are subject to withholding tax at the rate of fifteen percent.
(..)
§ Paragraph 3. The income mentioned in the heading received by a resident of a country with favorable taxation is subject to withholding tax at the rate of 25%."
Discussion on the constitutionality of flat rates for non-tax residents: ARE nº 1327491
Due to the significant number of lawsuits with divergent decisions, the STF recognized the general repercussion of the issue in ARE No. 1327491, to discuss whether the 25% withholding tax rate on retirement and pension income is constitutional or not.
Based on the argument of the plaintiff in the case that gave rise to the general repercussion of the issue, the fixed rate of 25% disrespects, in addition to other principles, the principle of progressivity of income tax established in art. 153, §2 of the Federal Constitution:
"Art. 153. It shall be incumbent on the Union to institute taxes on:
...
III - income and earnings of any kind;
...
§Paragraph 2 The tax provided for in item III:
I - shall be informed by the criteria of generality, universality and progressivity, in the form of the law;"
As of the date of publication of this article, the STF has not ruled on the issue.
However, if there is an understanding that the fixed rate of 25% disrespects the principle of progressive income tax, the Supreme Court could set a precedent for discussing the unconstitutionality of all the fixed rates determined by Normative Instruction 208/2002, including the rate for royalties.
Therefore, the recommendation would be to wait for the Supreme Court's decision on the matter to verify the possibility of a judicial discussion on the constitutionality of the fixed rate on royalties.
The importance of submitting the Final Exit Declaration
It is important to submit the Final Exit Declaration to the Receita Federal in order to be considered a non-tax resident in Brazil. Without this, you will be considered a tax resident in Brazil, even if you are domiciled abroad.
With the advance of bilateral agreements between countries on tax matters, and the instantaneous exchange of information online and using artificial intelligence, the risk of double tax residency, double taxation and tax evasion being detected is enormous.
If a Brazilian who starts living abroad fails to submit the Final Exit Declaration, in addition to the risk of being assessed by the tax authorities for paying undeclared taxes retroactively, the taxpayer could face criminal charges for tax evasion.
Remember that tax evasion is not just a crime in Brazil. If dual tax residency is detected in both countries, both will be able to check whether the income has been properly declared and, if there are any inconsistencies, both will be able to charge the taxpayer with administrative and criminal charges of tax evasion.
We therefore advise you to carry out tax planning before moving abroad or, if you are already domiciled abroad, to seek regularization as soon as possible, as well as tax planning according to your needs.
On this blog you will always find up-to-date and relevant information on tax and migration legislation, so you can avoid problems with the tax authorities. Feel free to comment on your experience and share the post with others who need help.
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