Equity investments in
However, the regulatory rules concerning foreign investment in the Brazilian financial market were simplified as from March 31 2000, through the Resolution 2,689 of the Monetary National Council (CMN). In this sense, to benefit from tax reductions, the foreign investors do not need to hold vehicles such as the known Annex IV (portfolio of investment) and VI (fixed income fund).
As per local legislation, before investing in
Additionally, the foreign investor must fill in and sign an identification form, that shall be used to register the investment and which requires the following information to be provided: name of the investor, location, country, type of activity, type of investment (joint or private portfolio); name and qualification of the representative; taxation treatment of the investor and the representative. This identification should be held by the representative of the foreign investor together with the representation agreement in order to show to BACEN or to CVM when requested.
The foreign investors that come through the above-mentioned regulations would only be authorized to invest in transactions contracted and registered within the exchanges and organized over - the - counter markets approved by CVM, or within the over - the - counter markets provided that the transaction is registered and the relevant clearances approved and recognized by BACEN and CVM.
If complied with these rules, investors are subject to a more favorable tax treatment.
Withholding income tax rate
Generally, revenues of foreign investors in
However, according to the article 783 of Federal Decree 3000, income earned in the Brazilian capital market, by non-resident investors, also not residents of tax havens, that have complied with the rules mentioned above, is subject to the following rates:
(i) 10% on earnings from investment funds – variable income, in swap operations and in future operations carried over-the-counter; (ii) 15% in other cases including applications in fixed income funds. Capital gains are exempted, though, with few exceptions.
§ As from 2006, foreign investors in the Brazilian financial market benefit from a withholding tax rate reduction (under certain conditions) regarding income derived from Brazilian public bonds, investment funds destined exclusively to nonresidents and which portfolio includes at least 98% of Brazilian public bonds, from quotas held in participation investment funds and in funds investing in participation investment funds and in emerging companies’ investment funds. Yet, the tax benefits do not apply to nonresident investors domiciled in a tax haven jurisdiction.
§ As from October 2009, foreign exchange operations related to the inflow of funds into the Brazilian financial and capital markets trigger the Tax on Financial Operations, at a rate of 2%.
Revenues are segregated as follows:
Income comprises remuneration on invested capital such as interest, commissions, premiums, discounts, dividends (as stated above, dividends on profits earned as from January 1, 1996 are not subject to withholding tax), profit participation, positive results carried on investments in investment funds and clubs, in swap operations (whether registered or not in the stock exchange market) and in operations carried out in the futures market (not within the stock exchange market), with any asset.
Capital gains are positive results derived from operations carried out on the stock, commodities, future or similar exchange markets except for joint operations with pre-fixed results, and from operations with gold as a financial asset, outside of the stock exchange market.
Fixed income on financial investments
The withholding income tax on income is generally calculated on the positive difference between the sales amount, net of Tax on Financial Operations – IOF when applicable, and the amount originally invested.
The withholding tax is payable on the date of the redemption, renegotiation, assignment or settlement of the fixed income operations or on receipt of the income or credit. Income deriving from investment funds will be taxed only upon redemption.
Other relevant Brazilian tax issues
Find below some recent developments in Brazilian legislation that could be relevant for Foreign Investors:
New thin capitalization and tax deductibility rules
On June 14, 2010, Provisional Measure 472/2009, which introduced new thin capitalization rules in
The Law establishes that interest paid or credited by a Brazilian entity to a related party (individual or legal entity), resident or domiciled abroad, not constituted in a tax haven or in a jurisdiction with privileged tax regime, may only be deducted for income tax purposes if the interest expense is viewed as necessary for the activities of the local entity and the following requirements are met: (i) the amount of debt granted by the foreign related party (which has participation in the Brazilian entity) does not exceed twice the amount of its participation in the net equity of the Brazilian entity; (ii) the amount of debt granted by a foreign related party (which does not have participation in the Brazilian entity) does not exceed twice the amount of the net equity of the Brazilian entity; (iii) the total amount of debt granted by foreign related parties as per (i) and (ii) does not exceed twice the sum of participation of all related parties in the net equity of the Brazilian entity; or in case debt is only granted by related parties that do not have a participation in the Brazilian entity (iv) the total amount of debt granted by all of these related parties does not exceed twice the amount of the Brazilian entity’s net equity. If one of the mentioned 2:1 ratios is exceeded, the portion of interest related to the excess debt amount will not be deductible for Brazilian income tax purposes.
Similar provisions are also applicable to interest paid or credited by a Brazilian entity to an individual or legal entity (whether or not a related party) resident or domiciled in a tax haven or in a jurisdiction under privileged tax regime. In these cases, the interest expense would only be deductible for Brazilian income tax purposes if it is viewed as necessary to the company’s activities, as referenced above, and the total amount of the Brazilian entity’s debt with any foreign party resident or domiciled in a tax haven or in a jurisdiction under privileged tax regime, does not exceed 30% of the Brazilian entity's net equity.
The two above-mentioned rules also apply to cases where a guarantor, representative or any other intervening party is a related party or resident of a tax haven / privileged tax regime jurisdiction (respectively).
The Law also provides that amounts paid, credited, delivered, used or remitted under any title, directly or indirectly, to related or unrelated individuals or legal entities which are resident or domiciled in a tax haven or in a jurisdiction under privileged tax regime will only be viewed as deductible for Brazilian income tax purposes if all of the following conditions are met: (i) the effective beneficiary of the payment is identified; (ii) there is evidence that the payment beneficiary has operational capacity (i.e., substance); and (iii) there is adequate documentation to support the relevant payments and the corresponding supply of goods, rights or utilization of services.
New tax havens list issued by the Brazilian tax authorities
On June 7, 2010, Brazilian tax authorities issued a Normative Instruction (NI RFB 1,037/2010), with an updated tax havens list. The regulation is divided in two separate articles. Article 1 enumerates jurisdictions which are considered not to tax income or to tax it at a rate lower than 20 percent, or that deny access to information regarding shareholding and ownership of assets and rights. The main change made to the new tax haven list was the inclusion of
Article 2 of the NI, by its turn, enumerates jurisdictions which are considered to have "privileged tax regimes", as set forth in Brazilian legislation. The following types of entities were included in the updated list: Holding Companies located in Luxembourg; Financial Investment Corporations (SAFI) located in Uruguay – up to December 31, 2010; Holding Companies located in Denmark; Holding Companies located in The Netherlands; International Trading Companies (ITC) located in Iceland; Offshore Companies (KFT) located in Hungary; Limited Liability Companies located in the US, owned by non-residents and not subject to US federal income tax; Holding Companies (ETVE) located in Spain; and International Trading Companies (ITC) and International Holding Companies (IHC) located in Malta.
It is initially understood that the concept of privileged tax regime (article 2) is subject to stricter transfer pricing, thin capitalization and tax deduction rules. As for the jurisdictions included in article 1, besides the tax consequences applicable for those under article 2, the withholding income tax rate due on capital gains and cross-border payments such as services fees, royalties and interests is increased from 15% to 25%