The case may redefine how Brazil draws the line between income taxation and inheritance rules.
Brazil’s Federal Supreme Court (STF) has agreed to review the constitutionality of levying income tax (IRPF) on capital gains realized by donors during lifetime transfers of assets to heirs — particularly when such donations are considered early inheritances, or adiantamento de legítima. The case, now under general repercussion (RE 1.326.559), is being led by Justice Gilmar Mendes and may have wide-reaching consequences for wealth planning in Brazil.
At stake is whether a capital gain, calculated as the difference between an asset’s acquisition value and its fair market value at the time of donation, should be taxed as income to the donor — even when there’s no financial return involved.
The Legal Background: When Donation Becomes “Income”
Brazilian tax authorities have relied on two key legal provisions — Article 3, §3 of Law 7.713/1988 and Article 23, §2, II of Law 9.532/1997 — to support the taxation of capital gains upon donation when the asset is transferred at market value.
This typically occurs in family succession planning, where parents donate assets to children and report them at a higher value than their original purchase cost. Under current rules, the donor is considered to have realized a gain and owes income tax on it.
But this interpretation has been challenged. In the underlying case, the Federal Court of Appeals for the 4th Region (TRF-4) ruled in favor of the taxpayer, stating that donations do not constitute income for the donor, as there is no new wealth or economic availability generated by giving something away without compensation.
Two Opposing Views at the STF
Justice Gilmar Mendes noted in his analysis that there is currently no settled precedent on this issue within the Supreme Court. Two main interpretations are in conflict:
1. In favor of taxing the gain:
Proponents argue that the capital gain reflects an increase in wealth — at least in legal terms — and that taxing it is justified even without cash realization. They view the donation as simply the occasion chosen to trigger taxation that already exists in principle.
2. Against taxing the gain:
Opponents maintain that giving away an asset is not a taxable event for income tax purposes, because it doesn’t create new income or economic benefit for the donor. They also argue that taxing the donor’s gain — while the same transfer is already taxed under the state-level gift and inheritance tax (ITCMD) — creates unconstitutional double taxation (bis in idem).
The Role of Constitutional Principles
The TRF-4’s decision emphasized two foundational constitutional principles:
- Taxpayer’s ability to pay (capacidade contributiva)
- Prohibition of double taxation (vedação ao bis in idem)
According to the appellate court, the donor experiences no economic enrichment from the act of donation — quite the opposite — and therefore should not be subject to income tax.
Justice Gilmar Mendes echoed these concerns in his statement on general repercussion, pointing out the need to scrutinize:
- The material and formal validity of the legal provisions imposing this tax;
- The definition of “income” and “gain” under Article 43 of Brazil’s National Tax Code (CTN);
- The reach of legal reserve clauses, since Article 146 of the Constitution requires that the scope of taxable events be defined by complementary law, not by ordinary statutes or regulations.
What Happens Next?
With the general repercussion granted, the STF’s final ruling will become binding across the Brazilian judiciary. The practical consequences could be significant:
- If the Court finds the taxation unconstitutional, the federal government may have to:
- Cease charging income tax on these types of donations;
- Refund taxpayers who challenge prior assessments;
- Propose a new legal framework through complementary legislation.
- If the Court upholds the current interpretation, this will consolidate the Federal Revenue’s authority to tax capital gains on donations — potentially increasing the tax burden on lifetime estate planning and asset restructuring.
Why This Matters: A Critical Moment for Succession Planning in Brazil
This case underscores the growing importance of tax-conscious estate planning in Brazil. Families using adiantamento de legítima to pass on wealth may face substantial income tax liabilities depending on how the STF rules.
Tax advisors, estate planners, and families with structured succession plans should follow RE 1.326.559 closely. The decision could reshape how Brazil approaches the boundary between income taxation and free asset transfers, with direct implications for high-net-worth individuals and family businesses.