Brazil: Foreign Investments In Brazilian Real Estate Investment Funds Are No Longer Subject To The Tax On Exchange Transactions (IOF)

Last Updated: 4 February 2013
Article by Walter Stuber

By means of Decree No. 7894, of January 30, 2013 (Decree 7894/2013), published in the Official Gazette of the Union of January 31, 20131, the Brazilian government decided to reduce from 6% to zero the Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF)2 in the exchange transactions made as from January 31, 2013, for the acquisition of units (quotas) of local Real Estate Investment Funds (Fundos de Investimento Imobiliário – FII) regulated by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM)3.

This tax benefit only applies to foreign investments involving the acquisition of units of FII traded on the stock exchange. If a foreign investor acquires these units out the stock exchange, the transaction continues to be subject to payment of the IOF at the rate of 6%.

The measure now adopted represents an incentive which may attract foreign investors to this specific market.

The Brazilian government did not change, however, the withholding income tax (Imposto de Renda na Fonte – IRF) that is levied on the income from the FII paid to foreign investors, at the rate of 15%.

By force of 12431, of June 24, 2011 (Law 12431/2011), the applicable rate of the IRF due on income generated by bonds and securities of public distribution, issued by legal entities that are not classified as financial institutions and that are regulated by CVM or the Brazilian Monetary Council (Conselho Monetário Nacional – CMN), has been reduced to zero. To obtain this tax benefit, these bonds and securities will have to be acquired between January 1, 2011 and December 31, 2015 and the income must be paid to a beneficiary resident or domiciled abroad. Law 12431/2011 has been subsequently amended by Law No. 12715, of September 17, 2012 (Law 12715/2012), which extended such tax benefits to the Certificates of Real Estate Receivables (Certificados de Recebíveis Imobiliários – CRI)4.

Therefore, the IRF tax exemption (zero rate) only applies to foreign investors if the earnings result from income originated from the acquisition of real estate financing securities, such as the Brazilian CRI. This benefit is not applicable, however, if the foreign investor is domiciled in a favored tax country or dependency5.

According to the evaluation made by the FII managers, this measure should make the yield of this product more appealing than its equivalent in the United States, known as Real Estate Investment Trust (REIT). Today, discounting the impact of the IRF (15%) on the income generated by this type of investment, the net gain would correspond to 5.61% a year, which exceeds the 4.38% of REITs in the United States.


1 This change was introduced by Decree 7853/2012 which contains the new paragraph 3 of article 15-A of the Tax on Exchange Transactions (IOF) Regulation approved by Decree No. 6306, of December 14, 2007.

2 The IOF is a regulatory tax and the rates can be decreased or increased by the Executive Branch from zero to 25% (ceiling) whenever the authorities decide to foster or reduce the inflow of foreign currency funds into the country, in accordance with the monetary and exchange policy goals adopted by the Brazilian government.

3 The FII is an investment vehicle structured as a closely-held fund aimed at developing real estate-related projects (empreendimentos imobiliários) such as construction, acquisition of property, investments in projects enabling the growth of the housing and services in both urban and rural areas, for subsequent sale, letting or leasing. The incorporation, administration, operation, public offering for distribution of units and information disclosure of FII is regulated by CVM Instruction No. 472, of October 31, 2008, as amended.

4 The CRI are securities backed by real estate receivables, which are very similar to mortgage pass-through securities issued in the United States. Only Brazilian real estate securitization companies are permitted to issue CRI, which were created in order to allow these companies to raise funds from investors on terms compatible with underlying real estate transactions. They are negotiable, fixed income securities originated through receivables securitization contracts, which identify the real estate receivables backing them.

5 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). It means any country or dependency of a country that does not impose tax on income or, when it does impose, it is a low-tax country, in which the applicable income tax rate is equivalent to any percentage varying between zero and 20 per cent (maximum).

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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