Investments by foreign investors in Brazilian financial and capital markets are regulated by the National Monetary Council (the "CMN"), the Brazilian Securities and Exchange Commission (the "CVM") and the Brazilian Central Bank ("Central Bank"). The main regulation governing such investments - CMN Resolution 2,689 - was replaced on September 29, 2014 by a new set of rules, enacted by CMN Resolution 4,373, which will come into effect on March 30, 2015.

As a general rule, foreign investments in Brazil must be registered with the Central Bank. Registration of foreign investments may be divided into two main categories: (i) foreign direct investments which are regulated by Law 4131/62 ("Direct Investment"); and (ii) investments made in the Brazilian financial and capital markets, which requires the use of a local custodian to represent the foreign investor, regulated by CMN Resolution 4,373 ("Portfolio Investment").

Registration under both structures generally enables foreign investors to convert into foreign currency dividends, other distributions and sales proceeds and to remit such amounts abroad.

Portfolio Investment also affords favorable tax treatment to foreign investors who are not resident in a tax haven jurisdiction as defined by Brazilian tax laws.

New rules

There are three main amendments to the existing rules.

First of all, CMN Resolution 4,373 delegates to the CVM the task to detail and qualify specific transactions allowed under the new regime. Prior to that, the CMN left for the CVM or the Central Bank little room for construction on the governing rules. For example, opposed to the existing regime, the CVM will henceforth be the responsible agency to detail the transactions not subject to the restriction of the regulation on trading of assets outside, or not registered with, organized securities markets.

The CVM and the Central Bank are expected to enact rules until the new regime comes into force.

Additionally, the new rules now allow the investments under the Portfolio Investment to be registered either in Brazilian reais or in foreign currency, resembling the rules applicable mainly to Direct Investment. Prior to that, investments in Brazilian reais were not available for Portfolio investment.

Finally, rules on foreign investments in depositary receipts (DRs) backed by securities issued by Brazilian companies were also amended. Prior to the new resolution, only shares were eligible to be the underlying assets of DRs.

Now, both securities issued by Brazilian companies registered with the CVM and assets registered in the Reference Net Equity issued by financial institutions and other institutions registered with the CVM may support DRs.

This amendment is expected to enhance DRs programs, which were limited to equity-related securities.

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