Provisional Measure creates new tax benefits for NRI and reduces tax benefits requirements for FIP quotaholders’ NRIs
On September 22, 2022, it was published on the Federal Government’s Official Gazette (“DOU”) Provisional Measure No. 1,137, of September 21, 2022 (“MP No. 1,137/2022”), which reduced to zero the Withholding Income Tax (“WHT“) rate on certain financial investments made in the Brazilian financial and capital markets by non-resident investors (“NRI“) , as well as amending article 3 of Law No. 11,312/2006, which provides for a zero WHT rate on income and gains earned by NRIs on investments in Private Equity Funds (“FIP”).
The measure sought to reduce the requirements for income generated by bonds or securities (“TVM“), by credit rights investment funds (“FIDC“), or by FIP to be eligible to a zero WHT rate, aiming at increasing the attractiveness of these TVMs to foreign investors, thus expanding the access to foreign capital of Brazilian companies issuing such TVMs.
However, MP No. 1,137/2022 also introduced a new restriction, hitherto non-existent, for NRIs which are beneficiaries of a “Privileged Tax Regime”, pursuant to article 24-A, sole paragraph, of Law No. 9,430/1996. Previously, the tax rules only restricted the enjoyment of tax benefits to NRIs resident or domiciled in a country that does not tax income, or that taxes it at a rate lower than 17% (pursuant to article 24 of the aforementioned Law No. 9,430/1996 together with Ministry of Economy Ordinance No. 488/2014 – “Tax Haven”).
Below is a brief summary of the changes introduced by MP No. 1,137/2022.
I. Zero WHT rate for NRI in Certain Financial Investments
MP No. 1,137/2022 reduced to zero the WHT rate (“Zero WHT Rate”) levied on income paid, credited, delivered, or remitted to NRI, when produced by:
(i) bonds and securities (TVM) subject to public distribution, issued by legal entities governed by private law, excluding financial institutions (“FI”) and other institutions authorized to operate by the Central Bank of Brazil (“BACEN”);
(ii) Credit Rights Investment Funds (FIDC), regulated by the Securities and Exchange Commission (“CVM”), whose originator or assignor of the credit rights portfolio is not a FI or institution authorized to operate by BACEN and whose quotas are admitted to trading or registered in a registry system authorized by BACEN or CVM, within the scope of their competences; and
(iii) Financial Bills, referred to in article 37 of Law No. 12,249/2010;
(iv) quotas of investment funds that invest exclusively and in any proportion:
(a) in the securities mentioned in item “i” above;
(b) in assets that produce exempt income to the NRI;
(c) in federal government bonds; and
(d) in repurchase (or “repo”) agreements (operações compromissadas) backed by federal public bonds or quotas of investment funds that invest in federal public bonds.
For this Zero WHT Rate, in line with the concept of FI already adopted for the purposes of the zero rate applicable to securities referred to in article 1 of Law No. 12,431/2011, qualify as FIs banks of any kind, credit unions, savings banks, securities distributor companies and securities brokerage companies, credit, financing and investment companies, real estate credit companies, and leasing companies.
With regard to the concept of “income”, the MP reproduced the concept contained in subparagraph “a” of paragraph 2 of article 81 of Law No. 8,981/1995, which establishes that are included in such definition any amounts that constitute remuneration of invested capital, including income produced by variable income securities, such as interest, premiums, commissions, goodwill and discount and gains on mutual funds’ investments.
Regarding the application of the aforementioned Zero WHT Rate within the scope of income generated by TVM, FIDC and Financial Bills defined above, in addition to MP No. 1,137/2022 to prevent the referred to benefit to transactions entered into by related parties, pursuant to the terms of subparagraph I to VI and VIII of the heading of article 23 of Law No. 9,430/1996, it is worth noting that the major innovation concerns the express prohibition of the application of the Zero WHT Rate to the NRI which is a beneficiary of a privileged tax regime (“Privileged Tax Regime NRI“), in the form of article 24-A of Law No 9,430/1996 (and not only to NRI which are resident or domiciled in Tax Havens).
I.1. Sovereign Funds
In addition, MP No. 1,137/2022 also determines that the Zero WHT Rate applies to income earned by “Sovereign Funds” that carry out financial transactions in Brazil in accordance with the rules and conditions established by the National Monetary Council (“NMC”), albeit the aforementioned Sovereign Funds are domiciled in a Tax Haven.
To this end, MP No. 1,137/2022 defines Sovereign Funds as foreign investment vehicles whose assets are composed of resources exclusively from the sovereign savings of the respective country.
On this point, it is worth remembering that, even before the enactment of MP No. 1,137/2022, Sovereign Funds that carry out financial transactions in Brazil in accordance with the rules and conditions established by NMC, including those based or incorporated in a Tax Haven, already benefited from the Zero WHT Rate on income arising from certain securities and FIDC quotas pursuant to article 1 of Law No. 12,431/2014. However, the Brazilian Tax Authority (through Normative Instruction No. 1,585/2015, article 92, paragraph 15) expressed its interpretation in the sense that, particularly for the purposes of this zero rate, Sovereign Funds should only be understood as foreign investment vehicles whose assets are comprised of resources coming from the sovereign savings of the respective country (which is also a requirement for the purposes of the new Zero WHT Rate introduced by MP No. 1,137/2022) and that additionally meet certain requirements, namely: (a) present, in a public access environment, a defined purpose and investment policy; (b) present, in a public access environment and at least annually, its sources of funds; and (c) make available, in a public access environment, the rules for funds redemption by the government. These additional requirements, however, were not required by MP No. 1,137/2020 for the purposes of application of the new Zero WHT Rate to Sovereign Funds, with the only condition required by said MP being that Sovereign Funds fit as an investment vehicle abroad whose equity is comprised of resources coming exclusively from the sovereign savings of the respective country.
II. Broadening of the Zero WHT Rate applicable to FIPs to also Cover FIP-IE and FIP-PD&I and Change in the Requirements and Conditions for their Enjoyment
As it is known, prior to the enactment of MP No. 1,137/2022, article 3 of Law No. 11,312/2006 provided for a Zero WHT Rate on income and gains earned by NRI in FIP transactions.
However, in what it particularly refers to FIPs in Infrastructure (“FIP-IE”) and FIPs in Intensive Economic Production in Research, Development and Innovation (“FIP-PD&I”), the Law that regulated them, that is Law No. 11,478/2007, provided for the levy of income tax at a zero rate only on gains earned by NRIs on the sale of quotas, while revenues from these investment funds were subject to WHT at a rate of 15% (or being exempted, if earned by an individual, as it is possible to construe from article 2, paragraph 3 of Law No. 11,478/2007 combined with articles 85, paragraph 4, and 88, sole paragraph, of Normative Instruction RFB No. 1,585/2015).
With the new rule brought by MP No. 1.137/2022, however, the aforementioned tax benefit was expanded, in order to encompass both the gains arising from the sale of quotas and the revenues from FIP-IE and FIP-PD&I quotas earned by NRIs upon their distribution, redemption, including due to the liquidation of the fund, and/or amortization of its quotas.
II.1. Requirements and Conditions for Enjoyment of the Zero WHT Rate applicable to FIP, FIP-IE and FIP-PD&I
The new rule introduced by the aforementioned MP No. 1.137/2022 also brought changes to the law regarding the necessary requirements for the enjoyment of the Zero WHT Rate applicable to revenues and gains arising from NRI investments in FIPs.
As it is known, prior to the enactment of MP No. 1,137/2022, Law No. 11,312/2006 provided in its article 2, paragraph 4 that FIPs, in addition to observing the limits of diversification and the investment rules contained in the regulation established by CVM, should also have their portfolio comprised of at least sixty-seven percent (67%) of shares of corporations, debentures convertible into shares and subscription bonuses for the purposes of their tax classification (“67% Requirement” ).
In addition, with regard to the Zero WHT Rate applicable to NRIs that were FIP quotaholders, the aforementioned Law established that this tax benefit:
i. would not be granted to an NRI quotaholder who was the holder of quotas that, alone or together with related parties (as defined also by the same Law), represented 40% or more of the total quotas issued by the FIP or whose quotas, individually or together with related parties, grant to it the right to receive income which is greater than 40% of the total income earned by the FIP (“40% Requirement”);
ii. would not apply to FIPs that hold in their portfolios, at any time, debt securities in a percentage greater than 5% of their net worth, being an excluded of this limit the debt securities mentioned in paragraph 4 of art. 2 of this Law and government bonds (“FIP Portfolio Requirement”); and
iii. would not apply to residents or domiciled in a Tax Haven (“Non-Tax Haven Requirement”).
With the enactment of MP No. 1,137/2022, however, both the 67% Requirement (previously applicable to FIPs for the purposes of their overall tax classification) and the 40% Requirement and FIP Portfolio Requirement (previously applicable specifically for the purposes of the Zero WHT Rate related to NRI quotaholders), were revoked consequently, with the validity of said MP, its observance is no longer required for the purposes of enjoying the aforementioned Zero WHT Rate.
Notwithstanding the above, it should be noted that, with regard to the Non-Tax Haven Requirement, MP No. 1,137/2022 brought an additional restriction, limiting the application of the Zero WHT Rate in question to NRI quotaholders which are not only resident in a Tax Haven, but who are also not beneficiaries of a Privileged Tax Regime.
This is because, as it is known, Law No. 11,312/2006, prior to the application of MP No. 1,137/2022, did not establish a prohibition in the same sense for the NRI beneficiary of a Privileged Tax Regime, but only for those domiciled in a Tax Haven.
III. Effectiveness
In principle, to take effect as of January 1st, 2023, MP No. 1,137/2022 would not need to be converted into law until the end of this fiscal year.
However, particularly with regard to the Zero WHT Rate applicable to NRI which are FIP’s quotaholders, there is the possibility of interpreting that MP No. 1,137/2022 would be indirectly revoking the Zero WHT Rate previously applicable to NRIs which benefit of a Privileged Tax Regime, which could eventually give rise to a judicial discussion about the moment at which MP No. 1,137/2022 could take effect, in view of Grandfathering and Tax Legality Principles, in line with article 150, paragraph 6 of the Federal Constitution of 1988 – an issue that has been the subject of discussion even within the Brazilian Supreme Court.
Notwithstanding this, it is worth noting that MP No. 1,137/2022 came into force on the date of its enactment (that is 9/22/2022) and is expected to take effect as of 1/01/2023, and must be approved by the National Congress within the period of up to forty-five (45) days after its publication, under penalty of blocking the voting agenda of the legislative house in which it is being processed (the so-called urgency regime); as well as being converted into law within up to sixty (60) days, renewable for additional sixty (60) days, also counted from its publication (up to 1/20/2023), under penalty of losing its effectiveness.
The Tax Consulting team is available to provide any clarification on this topic.
Tax Consulting Team – Direct Taxes
Fernanda Junqueira Calazans
fernanda.calazans@velloza.com.br
(11) 3145-0954
Elisa da Costa Henriques
elisa.henriques@velloza.com.br
(11) 3145-0954
Juliana Hernandes Curiel Bastos
juliana.curiel@velloza.com.br
(11) 3145-0082
Denys Murakami Yamamoto
denys.yamamoto@velloza.com.br
(11) 3145-0959
