On October 31, 2023, Law No. 14,711 (“Law 14,711”) was published providing for changes in the tax legislation applicable to investments made by non-residents in Brazilian Private Equity Funds (“FIP”). This law has been long awaited and is now celebrated by the Private Equity industry in Brazil as, among other measures, it significantly simplifies the requirements for non-resident investors in FIPs to be entitled to zero rate withholding income tax on income and gains arising from these investments (“favorable tax treatment“).
Law 14,711 amended Law 11,312, of 2006 (“Law 11,312“), which provides for the taxation of investments in FIP quotas, especially with regard to the requirements of the favorable tax treatment for investors resident or domiciled abroad who carry out financial transactions in Brazil in accordance with the rules and conditions established by the National Monetary Council (CMN Resolution 4,373 of September 29, 2014 – “CMN“) – “4,373 Investor“, as summarized below:
- Suppression of the tax requirement on the investment types of the FIP portfolio. Law 11,312 required the FIP to allocate at least 67% of its equity in shares, subscription warrants and convertible debentures issued by joint stock companies. Now, with the amendments brought by Law 14,711, there is no requirement imposed by the tax legislation on the different types of investments made by FIP to allow the applicability of the favorable tax treatment. FIP continues to be subject only to the general investment rules imposed by the Brazilian Securities and Exchange Commission (“CVM”);
- Suppression of the residual portfolio composition requirement. The prohibition imposed by the tax legislation on the FIP holding debt securities in the portfolio in excess of 5% of the FIP’s net assets no longer applies. FIPs are now only subject to the requirements imposed by the CVM.
- Suppression of the 40% dilution test. To be entitled to the favorable tax treatment, 4,373 Investor could not have quotas of the FIP, alone or jointly with related persons, in an amount representing 40% or more of the total amount of the quotas of the FIP or, irrespective of the amount of quotas held, such quotas cannot grant rights to receive more than 40% of the total income produced by the FIP. As from yesterday, 4,373 Investor will be able to benefit from the favorable tax treatment regardless of the stake it has in the FIP (i.e. even if it has 40% or more of the FIP quotas).
- FIP as investment entity. Law 14,711 provides that the favorable tax treatment only applies to the FIP that is qualified as an investment entity in accordance with the rules established by CMN.
- Sovereign wealth funds from low-tax jurisdictions. Express permission to apply the favorable tax treatment to income and capital gains arising from investments made by 4,373 Investors qualified as sovereign wealth funds (which are defined as investment vehicles abroad whose assets are made up exclusively of funds from the sovereign savings of the respective country), even if they are resident of countries defined by Brazilian tax legislation as low-tax jurisdictions.
- FIP-IE and FIP-PD&I. Law 14,711 clarifies that income paid to 4,373 Investor by FIPs for Infrastructure (“FIP-IE”) and by FIPs for innovation, research and development (“FIP-PD&I”) both regulated by Law 11,478 of 2007, is also entitled to the favorable tax treatment.
Taking the above into consideration, from now on, in order to be entitled to the favorable tax treatment, non-resident investors in FIPs treated as investment entities will in essence only have (i) to register its investment with the Brazilian Central Bank in accordance with CMN Resolution 4,373, and (ii) be located in a jurisdiction that is not a low tax/”blacklisted” jurisdiction.
Lefosse’s Tax Team closely monitors the changes that impact the Brazilian market. For further clarification on this matter, or others that may be of interest to you, contact our professionals.
