Long-term Direct Investment Incentives - Law 12,431/11
How to invest in Brazil
Income derived from bonds or securities acquired as from 1 January 2011 and issued by a Brazilian nonfinancial institution (as defined by article 1 paragraph 3 of Law 12,431/11) is subject to a 0% withholding tax if paid to a nonresident that is not located in a tax haven (i.e. black-listed) jurisdiction and certain other criteria are met.
More specifically, to qualify for the exemption, the bonds and securities must be publicly offered and regulated by the Brazilian Exchange Commission/National Monetary Council and be indexed by predetermined interest rates linked to certain inflation indexes or to the predetermined interest rate known as the “Referential Rate.” The following requirements also must be met on a cumulative basis:
- The average weighted duration of the bonds or securities must be more than four years;
- There can be no issuer/seller repurchase option available in the first two years after the bond/security is issued, and early redemption or pre-payment;
- There can be no resale commitment by the investor;
- There must be periodic payments of income, with interest payment periods having a minimum term of 180 days;
- There must be evidence that the bonds or securities have been negotiated in regulated markets; and
- There must be a simplified procedure (to be defined by the National Monetary Council) that indicates the funds were allocated to investment projects, including funds allocated to R&D and innovation.
The exemption above shall only apply to non-resident beneficiaries that invest according to regulations and conditions set forth by the National Monetary Council. The benefit was also extended to investment funds held by non-residents that own at least 85% of its portfolio on the aforementioned bonds.
Income derived from debentures acquired as from 1 January 2011 issued by a Special Purpose Entity (SPE) established to carry out investment projects in infrastructure areas or intensive economical production in R&D and innovation that will be deemed a priority by the Federal Executive Branch will be subject to a 0% withholding tax if paid to a Brazilian resident individual, and a 15% withholding tax if paid to a Brazilian legal entity (including financial institutions). Conditions similar to items (1) through (6) above also apply to debentures issued through 31 December 2030.
Law 12,431/11 clarified that the income can be excluded from taxable income and losses are disallowed under the actual income method with such debentures.
A 20% (twenty per cent) penalty on the total debenture issued amount shall be imposed to the SPE’s corporate participants that do not implement such projects.
The 0% withholding tax also applies to income derived from investments funds, the portfolios of which consist of at least 85% of the above-described debentures or by investment funds that holds at least 95% in investment funds, provided the fund quotas are held by a nonresident that is not located in a tax haven or by a Brazilian individual. The withholding tax rate is increased to 15% if the fund quota holder is a Brazilian legal entity.
Brazilian Participation Fund (FIPS)
A Brazilian Participation Fund or "FIP" (Fundos de Investimento em Participações) is not classified as a legal entity, but represents a co-ownership of proceeds from several investors for the purpose of investing in financial assets. A FIP is regulated by the Brazil's Securities and Exchange Commission (CVM), and is subject to certain regulatory and administrative requirements and associated costs under Resolution 4,373/14. FIPs have been introduced in the Brazilian legal system in 2003.
For Brazil tax purposes, the income and capital gains earned by a FIP is exempt from Brazil income tax, and the investor is subject to zero withholding tax on distributions of FIP income, provided that following requirements are satisfied:
- The beneficiary is an individual or collective investor who is resident or domiciled abroad;
- Such foreign investor must not own more than 40% of the FIP's quotas or is not entitled to receive more than 40% of FIP's income (individually or together with a related person);
- Such foreign investor is not domiciled in a tax favorable jurisdiction.
The FIP portfolio must hold a minimum of 90% of listed (or non-listed) shares in a Brazil S.A, debentures, and convertible securities (including convertibles debt securities) of a Brazilian listed or non-listed company in order to satisfy with the 0% withholding tax rate, the FIP cannot hold debt securities exceeding 5% of the FIP's net equity.
Any interest earned by the FIP on debt securities will not be taxed in Brazil, and there should be no Brazil withholding on distributions of this income by the FIP to its investors (subject to the exception for Tax Haven investors).
FIP infrastructure and FIP R&D and Investment
Law 12,431/11 confirmed the amendments applicable to an “FIP-IE” (Fundo de Investimento em Participacões em Infra-Estrutura), as well as introduced the FIP-PD&I (Participacao na Producao Economica Intensiva em Pesquisa). The FIP-IE structure was originally introduced to foster investment in certain infrastructure sectors such as energy, transportation, water and sanitation. The new FIP-PD&I aims projects of intensive economical production in research, development and innovation that comply with the regulations set by the Ministry of Science and Technology (MCT).
According to Law 12,431/11, at least 90% of the assets of an FIP-IE and FIP-RD&I must be invested in shares, warrants, debentures (whether or not convertible) or other securities issued by an SPE authorized by the Brazilian Exchange Commission. The FIP-IE and FIP-RD&I shall have a minimum 5 investors, with each investor limited to owning no more than 40% of the quotas issued by the FIP or obtaining income greater than 40% of the total proceeds of the funds. Capital gains derived by an individual from the sale of the shares of an FIP-IE and FIP-RD&I are exempt (previously subject to a 15% withholding tax). Gains derived by a legal entity are subject to a 15% withholding tax between the positive difference between the redemption amount and the acquisition cost of the quotas.