Brazil: Recent Modifications to Brazilian Tax Law: Tax Benefits Related to the Investments in the Infrastructure Sector and Changes in the Financial Market Taxation

Last Updated: 11 January 2011
Article by Christiano Chagas, Roberto Casarini and André Novaski

Originally published January 10, 2011

Keywords: recent modifications, Brazilian tax law, tax benefits

On December 31, 2010, Brazil enacted Provisional Measure 517 (MP 517/10) and Decree No. 7.412 (Decree 7412/10), which generally provide several tax benefits intended to foster the development of infrastructure in Brazil and changes in the taxation related to investments in Brazilian financial and capital markets.

Alterations Brought by MP 517/10

Foreign Investment in Bonds and Securities. The income paid by bonds or securities with public negotiation issued by legal entities (that are not classified as financial institutions) that are acquired on or after January 1, 2011, when paid to beneficiary resident or domiciled abroad, is now subject to Withholding Income Tax at zero rate. The benefit is not applicable if the foreign investor is domiciled in a tax haven jurisdiction. Moreover, the benefit depends on the observance of several requirements and limitations in the issuance.

Investment in Debentures Issued by Special Purpose Companies (SPCs) Used in the Implementation of Infrastructure Projects. The income derived from investments in debentures issued by SPCs incorporated to invest in infrastructure projects in what the federal government considers to be priority areas will be subject to reduced WHT rates, levied exclusively at source, at the following rates: (i) zero, when the income is paid to an individual or (ii) 15 percent, when the income is earned by Brazilian legal entities. It is important to note that the foreign investor would able to obtain the zero rate tax benefit mentioned above related to this specific issuance.

Investment in Funds with Portfolios Composed of Debentures Issued by SPCs. The investment in funds with at least 85 percent of the fund's net equity allocated in debentures issued by SPCs are subject to reduced WHT rates: (i) zero, when the income is paid to Brazilian individual or to foreign investor, except if the investor is domiciled in tax haven jurisdiction, and (ii) 15 percent, when the income is paid to Brazilian legal entity.

Investment in Infrastructure Private Equity Funds (FIP-IE). The income tax rate on the income and capital gains earned by Brazilian individuals from investments in FIP-IE was reduced to zero. The capital gains earned by Brazilian legal entities at the disposal of the FIPs-IE quotas in transactions carried out within or without a stock exchange was reduced to 15 percent rate. It is worth mentioning that several rules regarding the requirements for constitution of the FIP-IEs were also altered.

Taxation on the Secondary Market. MP 517 has modified the income tax assessment on the payment of periodic income of bonds and securities, bringing to an end a distortion that used to harm those who had acquired bonds or securities in the secondary market. In this sense, MP 517 determines that the assessment of income tax on the periodic income paid to the acquirer will take into consideration the cost of acquisition of the bond or security. 

RENUCLEAR. The federal government instituted the Special Regime for Development of Nuclear Power Plant (RENUCLEAR). This special regime grants the suspension, which may be converted into an exemption, of the tax on industrialized goods and the import tax that would be levied in the acquisition or import of assets by Brazilian legal entities that have approved infrastructure projects for implementation in generation of electric energy from nuclear origin.

Alterations Brought by Decree 7412/10

Decree 7412/10 reduced the tax levied on foreign exchange transactions (IOF/Exchange) and IOF levied on transactions involving bonds and securities (IOF/Bonds) assessed on determined exchange transactions, as follows.

Investment in Private Equity Funds (FIPs) and Venture Capital Funds (FMIEEs). Decree 7412 reduced from 6 percent to 2 percent the rate on the liquidation of exchange transactions performed on or after January 1, 2011 by a foreign investor for inflow of funds, including by means of simultaneous transactions, for acquisition of quotas of FIPs and FMIEE, as well as in the quotas of investment funds that invest in quotas of FIPs and FMIEEs.

Conversion of Depositary Receipts or Direct Investment. Since January 1, 2011, the Decree determines the application of 2 percent rate in the simultaneous foreign exchange transactions for the inflow of funds derived from the cancellation of depositary receipts or redemption of direct investment carried out according to Law 4131/62.

Dividends and Interest on Net Equity (JCP). The remittances of dividends and JCP are subject to IOF/Exchange at zero rate, regardless if the foreign investment was carried out according to Law 4131/62 or Resolution 2689/00 (Direct Investment or Portfolio Investment). The prior regulations determined that remittances of dividends and JCP related to investment carried out according to Law 4131/62 were subject to IOF/Exchange at a 0.38 percent rate.

Financing Obtained from Abroad. The foreign exchange transactions related to the inflow and outflow of funds referring to funds obtained from loans entered into by Brazilian companies with entities domiciled abroad are subject to zero percent, without making any restriction as regards the date of the loan. The prior regulations determined that the zero rate was applicable only to financing obtained on or after October 23, 2008.

IOF/Bonds. The IOF/Bonds that used to be levied on the transactions involving private bonds and securities was reduced to zero rate. It is worth mentioning that a transaction involving public bonds is still subject to the assessment of the IOF/Bonds. Moreover, some provisions were included clarifying the responsibility for collection and calculation basis of the IOF/Bonds on transaction involving conversion of stocks into depositary receipts.

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Founded in 2001, Tauil & Chequer Advogados is a full service law firm with approximately 90 lawyers and offices in Rio de Janeiro, São Paulo and Vitória. T&C represents local and international businesses on their domestic and cross-border activities and offers clients the full range of legal services including: corporate and M&A; debt and equity capital markets; banking and finance; employment and benefits; environmental; intellectual property; litigation and dispute resolution; restructuring, bankruptcy and insolvency; tax; and real estate. The firm has a particularly strong and longstanding presence in the energy, oil and gas and infrastructure industries as well as with pension and investment funds. In December 2009, T&C entered into an agreement to operate in association with Mayer Brown LLP and become "Tauil & Chequer Advogados in association with Mayer Brown LLP."

© Copyright 2011. Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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