From Brazil with love...with excellent rates

A

A.P.B

Guest
Hi there,
I am an Irish national residing in Brazil(since 2001) and having informed my family and friends back home about interest rates from the financial institution i save with, which gives me a monthly return of 1.25%(average) and yearly 15.23%, (using the Rule of 72, these rates double my money every 4.6 years-not bad) they were wondering if it were possible from an Irish legal standpoint, to invest/save the same way by transfering funds to there to here.What would be the tax implications on such a matter ?
Many thanks for being out there !
 
Sorry to burst your bubble, but the higher interest rate exists for a reason: high inflation. In theory, there can be no possible gain here: If (ignoring transaction costs) you take €10,000, convert it to Brazilian money, put it on deposit for a year, take it (and accrued interest) back and convert back into Euro, you will find that you are in the exact same position as if you had left money in Euro.

I say "in theory". The theory is that money markets price all information into their decision making. If it were possible to get a higher real return by moving into the Brazilian currency, the market would move to do so; European deposit takers would then have to offer higher rates etc. etc.....

Theory and practice go in the same general direction, but - rather like two drunken friends walking home - they diverge from each other for periods. In practice, it is possible that you might do better by moving into Brazilian currency; or you might do worse; The headline interest rate of itself is not enough to be able to make any useful decision on this. For example, the world market may feel that Brazil will have to devalue. This may be reflected in the current exchange rate. Brazil may manage not to devalue. Then, you would probably be on a winner. Conversely, the Brazilian inflation rate might go through the roof, with interest rates limping behind; then you are on a loser.
 
A.P.B said:
Hi there,
I am an Irish national residing in Brazil(since 2001) and having informed my family and friends back home about interest rates from the financial institution i save with, which gives me a monthly return of 1.25%(average) and yearly 15.23%, (using the Rule of 72, these rates double my money every 4.6 years-not bad) they were wondering if it were possible from an Irish legal standpoint, to invest/save the same way by transfering funds to there to here.What would be the tax implications on such a matter ?
Many thanks for being out there !
Click to expand...

I don't see any legal issues from the Irish perspective, you are free to invest your money overseas if you want to, you just need to declare the interest on your tax return.

There are some other issues to consider if this rate of interest is obtained on deposits in Brazilian Real's (which I assume as it is highly unlikely you would get this rate on Dollars/Euros/Yen/Sterling)

a) Are there any exchange controls in Brazil
b) There is significant currency risk with this currency, at a quick glance over the last 4 years the FX rate to Euro has ranged from a low of EUR1 = BRL1.5749 to a high of EUR1 = BRL4.0112 and currently trades at EUR1 = BRL2.97748. If you had invested EUR1,000 5 years ago it would have bought about BRL1,615. Compounded at your rate of interest I calculate that would now be about BRL3,403 now, which converted back at todays rate is EUR1,250. That is still probably a little better than you would have got on a Euro deposit, but your risk is significantly higher. If you had needed the money urgently when it was at BRL4.0112 you would likely be down on the deal.
c) How stable are Brazilian banks? AIB or BOI are unlikely to go bust, some of the Brazilian ones may be more risky.
 
Re: From Brazil with love...and excellent rates

Hi,

Do they like roller-coasters ?

Dec 1998 1 euro = 1.25 real
Dec 2001 1 euro = 2.10
Dec 2002 1 euro = 3.75
Dec 2003 1 euro = 3.60
Dec 2004 1 euro = 3.60
Today 1 euro = 2.74
Tomorrow 1 euro = ???

Joe
 
Re: From Brazil with love...and excellent rates

There is a strong relationship between interest rates, exchange rates and expected inflation. The effect, is that you cannot really benefit from a higher rate overseas without taking a very significant risk that your gains will be wiped out by currency movements.

If your long term future is in Ireland, you should be putting most of your savings in euro denominated investment.

Brendan
 
Re: From Brazil with love...and excellent rates

I would be interested in the cost of property in Brazil? Lets say a penthouse 3 bed apartment in an upmarket area? Is there rental potential etc. If the currency situation vis a viz the Euro is in the Euro favour would it not be better to invest in property?
 
Re: From Brazil with love...and excellent rates

BOXtheFOX said:
I would be interested in the cost of property in Brazil? Lets say a penthouse 3 bed apartment in an upmarket area? Is there rental potential etc. If the currency situation vis a viz the Euro is in the Euro favour would it not be better to invest in property?
Click to expand...

As JPD points out the ex rate can fluctuate wildly so there is no way of knowing what the rate will be in ten years time for instance. if property prices stagnated or fell after you purchased and the real weakened over the period you owned the property you could see negative returns.
 
"There is a strong relationship between interest rates, exchange rates and expected inflation. The effect, is that you cannot really benefit from a higher rate overseas without taking a very significant risk that your gains will be wiped out by currency movements.

If your long term future is in Ireland, you should be putting most of your savings in euro denominated investment.

Brendan"

Yes this is true however in the effect of economy that develops the general economic theory is that the currency appreciates. See deutsche bundesbank documenation 2001-2002

[broken link removed]

Note this is a case for East europe and CEE so perhaps moving the currency to one of these countries that have high interest rates may produce the same result as brazil with a little bit of minimized risk.
 
Obviously you would insert the money to these countries when say the currency is weak to a marker of 20% its normal else you may get stung...
 
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