Brazil: Guarantees By Brazilian Equity Investment Funds (FIPS)

Last Updated: 1 July 2013
Article by Walter Stuber

The Brazilian Equity Investment Fund (Fundo de Investimento em Participações - FIP) is legally characterized as a co-ownership of proceeds from several investors with the purpose of investing in financial assets. The FIP has no legal personality and must be registered with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM). Designed specifically for the private equity sector, the FIP is required to participate in the decision process of portfolio companies. Its main attraction is the fact that any income or capital gains earned by a foreign investor in a FIP is not subject to any Brazilian withholding income tax, provided that certain requirements are met. The FIP also enjoys several other tax benefits.1

These requirements are the following: (i) the investment must be made in accordance with the provisions of Resolution No. 2689 of January 26, 2000 (Res. 2689/2000), issued by the Brazilian Monetary Council (Conselho Monetário Nacional - CMN)2; (ii) the foreign investor cannot hold, individually or jointly with related persons, shares representing (a) 40% or more of all the FIP' units or (b) 40% or more of the total income of the FIP; (iii) the FIP cannot hold in its portfolio, at any time, debt securities exceeding 5% of the FIP's net equity; and (iv) foreign investors cannot be residents in a favored taxation country or dependency.3

The provisions of CVM Instruction No. 391 of July 16, 2003 (CVM Instr. 391/2003), which regulates the incorporation, management and operation of the FIPs, have been amended by CVM Instruction No. 535, of June 28, 2013 (CVM Instr. 535/2013).

CVM Instr. 535/2013 allows the administrator of the FIP to provide directly or indirectly guarantees on behalf of the investment fund, subject to the approval of qualified majority of the unitholders (cotistas), i.e. unitholders gathered in General Assembly representing at least two-thirds of the units (cotas) issued by the FIP, and it also aims to match the deadline for decision by the General Assembly on the FIP´s financial statements required by CVM Instruction No. 409 of August 18, 2004. The original deadline was 30 June of each year and from now on shall be 150 days after the end of the fiscal year of the FIP, laid down in the fund´s bylaws. These changes are better explained below.

For the existing FIPs, however, the qualified majority is not sufficient and the unanimous approval of the unitholders gathered in General Assembly is required to change the fund´s bylaws in order to allow the granting of guarantees.

There are also changes to the delivery period of the financial statements of FIPs to CVM, which now is 120 days after the end of the fiscal year of the FIP. The former term of only 90 days was considered extremely short. In addition, the deadline of 30 June of each year to the General Assembly to decide on these financial statements is 150 days after the end of the fiscal year.

The wording of article 6 of CVM Instr. 391/2003, which lists the matters to be covered in the FIP´s bylaws, was amended to include the following new items: (xxi) possibility of use of property and rights, including securities, in amortization of units, as well as the liquidation of the FIP, with the establishment of criteria detailed and specific to the adoption of these procedures; (xxii) closing date of the fiscal year; and (xxiii) possibility of the General Assembly of unitholders to resolve on the provision of guarantees (fiança), aval, acceptances (aceites), or any other form of co-obligation, on behalf of the FIP.

Pursuant to the provisions of article 35, item III of CVM Instr. 391/2003, the administrator of the FIP was expressly forbidden to give guarantees, aval, acceptances, or otherwise be a surety (i.e. to agree with any other form of co-obligation), directly or indirectly, on behalf of the investment fund. However, compliance with this prohibition has been waived in the recent past in several precedents of CVM´s Board, observed some safeguards4. The three main reasons for the granting of this waiver were: (i) the target audience of the FIPs, formed by qualified investors5; (ii) the provision of guarantees, which shall not be subject to the discretion of the administrators, because it will be appreciated by unitholders gathered in General Assembly; and (iii) the provision of a guarantee to creditors of the invested companies, which could become the capital of these companies less expensive, given the investment strategy of the FIPs.

The new wording of article 35, item III approved by CVM Instr. 535/2013 enables the FIP´s administrator to give guarantees, aval, acceptances, or otherwise be a surety with the approval of qualified majority of the unitholders gathered in General Assembly, provided that this possibility is expressly contemplated in the FIP´s bylaws. Furthermore, the new sole paragraph of article 35 establishes that if any guarantees are provided by the FIP, the FIP´s administrator must ensure the wide dissemination of information on all the existing guarantees through at least the disclosure of the material fact and ongoing provision with emphasis of such information on the administrator´s webpage.

In this way, the new wording follows the line of the numerous precedents of CVM's Board, recognizing the ability of the FIP´s investors to take qualified investment decisions and the benefit that the guarantee by the FIP may mean for the success of invested the companies and consequently to the creation of value for unitholders of the FIP.

Finally, with regard to the term for decision of the General Assembly of the unitholders on the financial statements of the FIP presented by the administrator, CVM Instr. 535/2013 corrected an error of CVM Instr. 391/2003. Article 6, item XXII of CVM Instr. 391/2003 stipulates that the FIP´s bylaws must establish the end of the fiscal year, which may be different from December 31. However, article 15, item I of CVM Instr. 391/2003 determines that the decision of the General Assembly about the financial statements must be held until June 30 of each year. Depending on the end of the fiscal year of the FIP, this might be operationally impossible. For this reason, CVM Instr. 535/2013 provides that the term for this decision will be up to 150 days after the end of the fiscal year.


1 There are various other tax benefits of this type of vehicle. The FIP is not subject to the Corporate Income Tax (Imposto de Renda de Pessoa Jurídica - IRPJ) and Social Contribution on Profits (Contribuição Social sobre o Lucro Líquido - CSLL), and it is not subject to Profit Participation Program Contribution (Contribuição para o Programa de Integração Social - PIS) or Social Security Financing Contribution (Contribuição para Financiamento da Seguridade Social - COFINS). It is also not subject to taxation with respect to the acquisition and disposal of investments in Brazil, such as the shares of corporations in which the FIP may invest, which makes it a very attractive vehicle for private equity investment. Currently, most of the exchange transactions related to the inflow and the outflow of funds into Brazil are subject to Brazilian Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF) at a rate of 0.38%. IOF is currently levied at a rate of zero percent on the foreign exchange transactions related to the inflow and outflow of investments in the FIP.

2 Res. 2689/2000 authorizes foreign entities to resort to all investment mechanisms available to Brazilian investors in the Brazilian financial and capital markets and also regulates foreign investment in the Brazilian financial and capital markets.  In order to make an investment in a FIP, foreign investors should comply with the requirements set out in Res. 2689/2000. A foreign portfolio investor under Res. 2689/00 must (a) appoint at least one representative in Brazil that will be responsible for complying with registration and reporting requirements and reporting procedures with the Central Bank of Brazil (Banco Central do Brasil – Bacen) and CVM; (b) complete the appropriate foreign investor registration form; (c) be registered as a foreign investor with CVM; (d) register the foreign investment with Bacen; (e) appoint a tax representative in Brazil; and (f) obtain a taxpayer identification number from the Brazilian federal tax authorities.

3 The expression "favored taxation country or dependency" (país ou dependência com tributação favorecida) is used in the Brazilian tax legislation instead of tax haven or fiscal paradise (paraíso fiscal) and means any country or dependency of a country that does not impose tax on income or, when imposes, it is a low-tax country, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20% (maximum). The definition is contained in article 24 of Law 9.430, of December 27, 1996, which introduced the transfer pricing regulations in Brazil.

4 In all the concrete cases that have already been assessed, the CVM´s Board conditioned the granting of the waiver to the following factors: (i) the unanimous prior approval of the unitholders gathered in General Assembly; and (ii) the measures taken by the administrator to ensure that the acquirer of units formally states that he/she/it is aware of the lien on the FIP´s net worth prior to be accepted as a unitholder.

5 According to the provisions of article 109 of CVM Instruction No. 409, of August 18, 2004, the following are considered qualified investors: (a) financial institutions; (b) insurance companies and capitalization societies; (c) private welfare opened or closed capital organizations; (d) individuals or legal entities that hold financial investments in an amount superior to R$ 300 thousand and that additionally attest in writing their qualified investor condition according to an own term, set forth in Annex I to CVM Instr. 409/2004; (e) investment funds directed exclusively to qualified investors; (f) portfolio administrators and securities consultants authorized by CVM, in relation to their own monies; and (g) own social security regimes instated by the Federal Government, by the States, by the Federal District or by Municipalities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Walter Stuber
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