Provisional Measure 1,137/2022 introduces significant tax incentives for investments by non-resident investors in the Brazilian capital markets

On 09.22.2022, Provisional Measure No. 1,137 (“MP 1,137”) was published to introduce significant changes on the taxation applicable to investments performed by non-resident investors into (1) Brazilian Private Equity Funds (Fundos de Investimento em Participações – “FIP”); and/or (2) certain bonds and securities publicly distributed, quotas of Credit Rights Investment Funds (Fundos de Investimento em Direitos Creditórios – “FIDC”) that invest into these bonds and securities, financial bonds (Letras Financeiras) or quotas of investment funds that observe the requirements established by MP 1,137.

Investments into FIP

For non-resident investors that invest into FIPs in accordance with the rules of the Brazilian Monetary Council (Resolution 4,373, of 2014) – “4,373 Investor”, the good news are:

• MP 1,137 revoked the specific tax requirement that obliged a FIP to invest at least 67% of its equity into shares, debentures convertible into shares and warrants of Brazilian companies. As such, the tax and regulatory requirements of the FIP’s portfolio would be aligned.
• It revoked the residual requirement applicable to FIP’s portfolio in order for the 4,373 Investor to benefit from WHT exemption on the income and gains arising from its investment in the FIP’s quota (the FIP was prohibited to have in its portfolio more than 5% in debt securities).
• It also revoked the 40% dilution requirement for the WHT exemption on the income and gains of the 4,373 Investor to apply. If MP 1,137 is approved as proposed, a 4,373 Investor may benefit from the WHT exemption even it holds more than 40% the FIP’s quotas.
• MP 1,137 expressly provides that the 4,373 Investor WHT exemption on income and gains also applies to investments made by sovereign funds (defined as non-resident investment vehicles which assets are composed exclusively by savings from the relevant country), even if domiciled in a low tax jurisdiction (as defined by the Brazilian tax legislation).

On the other hand, the prohibition for 4,373 Investors that are domiciled in a low tax jurisdiction to benefit from the WHT exemption was now extended also to 4,373 Investors that invest through entities that benefit from privileged tax regimes, as defined by the Brazilian tax regulations (e.g., US State LLCs, which are invested exclusively by non-US investors and are not subject to federal income tax).

MP 1,137 also expressly provides that the 4,373 Investor would benefit from WHT exemption on income and gains from its investments into quotas of Infraestructure Private Equity Fund (Fundo de Investimento em Participações em Infraestrutura – “FIP-IE”) and Intensive R&D Private Equity Fund (Fundo de Investimento em Participação na Produção Econômica Intensiva em Pesquisa, Desenvolvimento e Inovação – “FIP-PD&I”) – based on the current legislation, there were doubts around the applicability of the benefit on income from these types of funds.

Investments into bonds and securities, FIDC, Financial Bonds and others

WHT exemption was also introduced for income received by 4,373 Investors in connection with the following investments:

• Bonds and securities publicly offered, issued by Brazilian resident legal entities that are not considered as a financial institution under Brazilian law.
• Quotas of FIDCs, to be regulated by the Brazilian Security and Exchange Commission, which invest into credit rights originated from Brazilian resident legal entities that are not considered as a financial institution under Brazilian law.
• Financial Bonds (Art. 37 of Law 12,249/2010).
• Quotas of investment funds that invest exclusively and based on any proportion into (1) the bonds and securities mentioned above, (2) assets which the income would benefit from WHT exemption if invested directly by a 4,373 Investor, (3) publicly traded federal securities and (4) buyback transactions backed by publicly traded federal securities or quotas of investment funds that invest into publicly traded federal securities.

The WHT benefit is not applicable to 4,373 Investors domiciled in low tax jurisdictions or benefitted by privileged tax regimes, except if classified as a sovereign fund.

The WHT benefit is also not applicable to transactions performed between related parties.

Applicability of the modifications proposed

If MP 1,137 is approved (and converted into law) keeping its current wording still in 2022, its provisions will become applicable as of 01.01.2023. However, the wording of MP 1,137 still needs to be discussed and approved at the Brazilian Congress and, thus, it may be significantly changed.

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.