Investing in the real estate business in Brazil continues to be an attractive opportunity for foreign investors, despite the remarkable development of this market in the recent years.
When analyzing such opportunity, foreign investors should become familiar with the related legal issues. Corporate matters, real estate aspects (e.g., limitations on acquisitions of rural land) regulatory matters (e.g., regulations of the Central Bank and of the Brazilian Securities Commission - "CVM" if a fund is used as a vehicle), labor issues, etc. should be object of attention.
Without exhausting this intricate subject, this article briefly comments on the tax and other implications applicable to three vehicles which are generally considered as alternatives for investing in real estate in Brazil.
The following are available vehicles for this purpose: (i) an ordinary real estate company ("imobiliária"), which could be either a limited liability company or a corporation; (ii) an investment fund in equity stakes ("FIP"), which would invest in a corporation which in turn would acquire real estate; or (iii) a real estate investment fund ("FII"), which would directly invest in real estate.
Tax considerations on each of such alternatives (including a few corporate and regulatory aspects) are commented below.
I. Real Estate Company ("Imobiliária")
A real estate company is a legal entity duly organized in Brazil which would purchase real estate.
The transfer of funds by foreign investors to be invested as equity in a Brazilian real estate company is subject to the foreign currency exchange tax ("IOF") at a 0.38% rate. The foreign direct investment in the Brazilian company should be registered with the Brazilian Central Bank ("RDE"), which is important for purposes of calculating capital gains as described below.
The company may also be funded with debt, in which case IOF would be imposed at a 0% rate. Debt should also be registered with the Brazilian Central Bank ("ROF") and thin capitalization rules, if applicable, should be complied with for purposes of deduction of interest due by the real estate company.
If investors decide to sell their equity in such company in the future, capital gains would be subject to withholding tax at a 15% (or 25% if investor is resident in a tax haven, as indicated in the Brazilian black list). Capital gains correspond to the positive difference between the sales price and the cost as reflected in the registration of investment in the Central Bank.
Distribution of dividends by the Brazilian company to the investors would be subject to withholding tax at a 0% rate (even if investor is resident in a tax haven). The Brazilian company would be subject to IOF at a 0% rate when remitting dividends to investors. Income deriving from the real estate business would be subject to ordinary taxation in Brazil at the company's level.
A Brazilian limited liability company or corporation should have its organization and subsequent corporate acts filed and registered with the Board of Trade.
II. Investment Fund ("FIP")
In contrast to a real estate company, a FIP is not a legal entity and there is no taxation at FIP's level. The FIP holds a corporation which acquires real estate. Foreign investment in a FIP should be registered under Resolution 2689/2000.
The transfer of funds into Brazil to be invested in a FIP is currently subject to IOF at a 2% rate. The return of said funds to the foreign investors is subject to IOF at a 0% rate.
Income distributed by a FIP to its foreign investors is subject to a 15% withholding tax rate (and amortization of FIP's quotas is subject to such withholding tax on the positive difference of the amount distributed and the investor's cost) or to a 0% rate if the following requirements are met:
- the FIP portfolio is composed by minimum of 67% of shares,
convertible debentures or warrants ("bônus de
subscrição") of Brazilian corporations and
applicable regulations of CVM are complied with;
- FIP's investor does not hold quotas of the FIP, solely or
together with related parties, which equals or exceeds 40% of all
issued quotas or whose quotas, isolated or combined with quotas
held by related parties, attribute income higher than 40% of the
total income recognized by FIP;
- FIP does not hold in its portfolio, at any time, bonds in a
percentage higher than 5% of its net equity, excluded from this
limit public bonds and convertible bonds; and
- the investor is not located in a tax haven.
The benefit of the FIP structure is the avoidance of withholding tax on capital gains which is triggered on sales of shares directly held by foreign investors. The FIP – and not the foreign investors – would sell shares in the corporation running the real estate business, recognizing capital gains which would not be taxable at FIP's level. The distribution of the proceeds deriving from such equity sale by the FIP to investors would be subject to withholding tax at a 0% rate to the extent that the requirements above are met.
The corporation held by the FIP would be subject to ordinary taxation in Brazil and dividends distributed to FIP would not be subject to withholding tax. Dividends received by the FIP and passed on to investors would be subject to withholding tax at a 0% rate. Dividends would be subject to IOF at a 0% rate.
The corporation should have its organization and subsequent corporate acts filed and registered with the Board of Trade. The FIP should be registered with the Brazilian CVM.
III. Real Estate Investment Fund ("FII")
Another alternative is the FII. In contrast with the previous alternatives, in which a company is the acquirer of real estate, the FII itself directly acquires real estate in Brazil (and an operating company is not necessary).
The transfer of funds to be invested in a FII would be currently subject to IOF at a 6% rate and the return of said funds to IOF at a 0% rate. Foreign investment should be registered under Resolution 2689/2000 and FII should comply with applicable regulations of CVM.
Provided that the FII does not invest its funds in real estate projects which have as constructor, partner, promoter ("incorporador") a FII investor that holds, solely or combined with related parties, more than 25% of the FII quotas, the FII is not subject to taxation at the fund's level (otherwise it is ordinarily taxed as a real estate company). A FII is also required to distribute at least 95% of its income determined on a cash basis on June 30th and December 31st each year.
Income deriving from a FII and paid to non-resident investors is subject to withholding tax at a 15% rate (or 20% if investor is located in a tax haven).
If the quotas of the FII are exclusively negotiated in the stock exchange or in the over-the-counter market, and provided that there are minimum 50 (fifty) quotaholders, income deriving from quotas of FII held by individuals are not subject to income tax, an interesting feature of this vehicle. This benefit is not applicable to an individual who holds quotas of the FII equal to or higher than 10% or more of the total quotas issued by the FII or whose quotas attribute to such individual income higher than 10% of the income recognized by the FII.
The FII should be registered with the CVM.
In any of the three structures above, please be informed that the acquisition of real estate by a company or by a FII is subject to a municipal tax on real estate transfer ("ITBI") which rate varies depending on the Municipality where the real estate is located. In São Paulo, ITBI rate is of 2%. Moreover, Brazilian Civil Law requires that transfer of real estate be implemented by means of public deeds ("escritura"), which imply notary public's costs as well.
The above represents a general view on some tax and other implications of vehicles available for investing in real estate in Brazil, but is far from being a full list of potential technical and practical issues that a foreign investor should consider in its plans and models for investing in real estate in Brazil.
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.