On April 15, 2026, the Brazilian Federal Revenue Service (“RFB”) published COSIT Ruling No. 56/2026, consolidating the position that U.S. Limited Liability Companies (“LLC”) whose membership is composed of non-U.S. residents and which are treated as pass-through entities under U.S. federal tax law fall squarely within the concept of privileged tax regime set forth in item VII of Article 2 of RFB Normative Instruction No. 1,037/2010.

The ruling expressly rejects the argument that taxation of LLC profits at the members’ level, at U.S. federal progressive rates ranging from 10% to 37%, would be sufficient to exclude such entities from the privileged-regime classification. According to the RFB, the qualification derives from the very structure of the regime as provided under U.S. law, and not from the effective tax burden actually borne in each fiscal year — particularly because, through these entities, foreign-source income (especially passive income) may not be subject to U.S. federal income tax at all.

Implications for Brazilian-resident individual investors

As a consequence of the LLC’s classification as a privileged-regime entity, the automatic annual taxation regime set forth in Article 5, §5, item I, of Law No. 14,754/2023 (the “Offshore Law”) becomes applicable. In summary, LLC profits must be determined as of December 31 of each calendar year in accordance with Brazilian accounting standards (BR GAAP), supported by financial statements signed by a duly qualified professional, and are subject to Brazilian individual income tax (IRPF) at a flat rate of 15%, assessed pro rata to the member’s interest, regardless of actual distribution.

Collateral consequences of the privileged-regime classification

The scope of the ruling extends beyond the automatic taxation of profits:

• Classification as a privileged-regime entity cumulatively triggers further restrictive regimes: application of the transfer pricing rules set forth in Law No. 14,596/2023, regardless of the existence of a related-party relationship;

• a stricter thin-capitalization rule, with the debt-to-equity ratio reduced from 2:1 to 0.3:1 (30% of net equity) for purposes of interest deductibility; and

• an increased withholding tax (IRRF) rate of 25% on outbound remittances falling within the scope of withholding.

Implications for venture capital structures

The ruling is particularly sensitive for international flip structures of the Cayman/Delaware Sandwich type, in which a Delaware LLC typically occupies the intermediate tier between a Cayman holding vehicle and the Brazilian operating company. The customary defense line for such structures relied on Article 5, §8, of Law No. 14,754/2023, which excludes dividends and equity-based income received from subsidiaries with active income exceeding 60% from the passive-income test set out in item II. Ruling No. 56/2026, however, operates on item I (privileged regime / favorable tax jurisdiction), an autonomous and alternative criterion that is not neutralized by §8.

Points of attention

Dry income: the 15% annual taxation applies regardless of any actual distribution, which may compel distributions solely for the purpose of funding the Brazilian controller’s IRPF liability.

Opaque vs. transparent regime in the individual tax return: the election for the transparency regime of the controlled entity (Article 8 of Law No. 14,754/2023) is irrevocable and must be reassessed in light of the RFB’s new position.

Normative Instruction No. 2,180/2024: §3 of Article 25 may broaden the taxable base of the opaque tier by requiring the inclusion of income from indirectly held subsidiaries with active income, an issue that warrants case-by-case mapping.

Comparable jurisdictions: LLPs in Canada and the United Kingdom operate with identical fiscal transparency but are not listed in the exhaustive roll of RFB Normative Instruction No. 1,037/2010. While the exhaustive nature of the list prevents automatic classification, the substantive equivalence signals a meaningful risk of assessments in ongoing transactions and of future normative inclusion.

 NEXT STEP

An immediate review of international structures involving LLCs in their corporate composition is recommended, with particular emphasis on (i) mapping the nature of income earned at each offshore tier, (ii) reassessing the election between the opaque and the transparent regime in the 2026 individual income tax return, (iii) aligning the financial statements with BR GAAP, and (iv) analyzing cash-flow capacity to meet the annual IRPF liability without triggering involuntary distributions.

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