On October 31, 2023, Law 14,711 was published providing changes in the tax legislation applicable to investments made by non-residents in Brazilian Private Equity Funds (“FIP”). Among other measures, it significantly simplifies the requirements for non-resident investors in FIPs to be entitled to zero withholding income tax (WHT) rate on income and gains arising from these investments (“favorable tax treatment“).
As an introduction, investments made by non-resident investors in the financial and capital markets in Brazil, which include acquisition of shares of listed companies and quotas of investment funds, depositary receipts, among other securities, are subject to the rules provided in Resolution 4,373/2014, issued by the National Monetary Council (“CMN” and “Resolution 4,373”, respectively).
For non-resident investors not located in Favorable Tax Jurisdiction (“FTJ”), the gains and income earned through quotas will be taxed as income tax at a rate of 0%. Until the publication of Law 14,711, this favorable tax treatment was not applicable if: (i) the respective quotaholder holds, independently or jointly with related individuals, 40% or more of all quotas of the fund or whose quotas allowed an income greater than 49% of the total income earned by the FIP or FIEE (Investment Fund in Emerging Companies); (ii) the FIP or FIEE had in their portfolio, at any time, debt securities corresponding to more than 5% of their net equity (except for debentures convertible into shares, subscription bonus and public securities); (iii) the FIP or FIEE portfolio was not composed of, at least, 67% of a corporation, debentures convertible into shares, subscription bonus and public securities; and (iv) FIP or FIEE did not fulfill other regulatory requirements contemplated by law.
Law 14,711 amended Law 11,312 of 2006 (“Law 11,312“), which provides for the taxation of investments in FIP quotas, especially about the requirements for the favorable tax treatment for investors resident or domiciled abroad in accordance with the rules and conditions established by the Resolution 4,373, as summarized below:
- The mandatory composition of the fund portfolio in accordance with the rules established by CVM regulations was revoked (that is, a minimum composition of 67% of shares of public limited companies, debentures convertible into shares and subscription bonuses);
- FIPs for Infrastructure (“FIP-IE”) and by FIPs for innovation, research and development (“FIP-PD&I”) are now covered by the benefits;
- The rule of maximum investment of 5% of the net worth in debt securities has been revoked, except for convertible debentures or public bonds;
- The impediment for shareholders to hold 40% or more of the total shares issued by the fund or their income was revoked;
- Shareholders cannot have residence or domicile in a country with favorable taxation to take advantage of the application of the zero rate;
- The favorable tax treatment is now available for sovereign wealth funds resident or domiciled in countries with favorable taxation;
- The fund must be qualified as an investment entity, according to regulations to be published by the CMN.
The new rules are immediately applicable from the date of publication of the Law (October 31, 2023).
The tax impacts of Law 14,711 should be analyzed on a case-by-case basis, and our tax team is available to further discuss about this matter.