Brazil: Private Equity Investment Funds – FIP: Changes to the income tax rules applicable to the non-resident investors

In brief

Law No. 14,711, resulting from the conversion of Bill No. 4,188/2021, was published on October 31st. Among several provisions, this new law changes the requirements to benefit from the zero rate of Income Tax applicable to both income and capital gains of non-resident investors (“NRI”) in Private Equity Investment Funds (“FIP”).

Below we detail the main changes provided for in the Law.

In more detail

Revocation of tax requirements

• The tax law had previously established certain specific requirements for the NRIs of FIPs to enjoy the zero rate of income tax on income and capital gains:
  • the FIP portfolio should be composed of at least 67% in shares, convertible bonds and warranties (“bônus de subscrição“);
  • debt bonds could not exceed 5% of the fund’s net equity.
• The requirements related to the portfolio diversification of FIPs have been revoked.
• Therefore, the only requirement that remains is that the FIPs comply with the diversification limits and investment rules established by the Brazilian Securities and Exchange Commission (“CVM”).

The 40% Test

• The benefit of the zero rate is no longer restricted to those NRIs that comply with the 40% limit on participation in the fund’s shares or income, as previously provided in the legislation (“40% Test”).

Entitlement to the 0% rate

• While on one hand the 40% Test has been revoked, on the other, a new requirement has been introduced, in the sense that the zero rate benefit will only apply to FIPs that are classified as “Investment Entities”. The National Monetary Council (“CMN”) should regulate the requirements for classifying FIPs as “Investment Entities”.
• Moreover, the prohibition on applying the zero rate benefit to those NRIs who are residents in low tax jurisdictions (black list) has been upheld.

Other situations of application of the 0% Tax Rate Benefit

• Another new feature of Law No. 14.711 is that the zero rate benefit will apply to FIP shareholders who are sovereign wealth funds, even if they are residents or domiciled in low-tax jurisdictions.
• Finally, the new legislation expressly extends the zero rate benefit to NRIs that invest in Infrastructure Private Equity Investment Funds (“FIP-IE”) and/or in Intensive Economic Production in Research, Development and, Innovation Private Equity Investment Funds in (“FIP-PD&I”).