PM No. 651/2014: Amendments to Tax Legislation – Taxation applicable to Financial and Capital Market and PIS/COFINS
July 22, 2014
On Friday, July 11, 2014, Provisional Measure (“PM”) No. 651, of July 10, 2014 was published on the Federal Official Gazette, which has made several amendments to the Brazilian tax legislation. Among other subjects, PM No. 651/2014 has established a new deadline for joining the “Refis da Crise” program, which has already been the object of our comments in V&G Extra Newsletter (Portuguese version) No. 242, of July 11, 2014. The present V&G News Extra covers subjects related to new Income Tax (“IT”) rules applicable to the financial and capital market, as well as to the Contributions to the Social Integration Program (“PIS”) and to the Social Security Financing (“COFINS”), divided into five main topics of interest, namely:
- Pay-up of Investment Funds and Clubs with Financial Assets (Article 1 of PM 651/2014)Article 1 of PM 651/2014 establishes that the manager of the investment fund or investment club shall be liable for the collection and payment of the IT due where capital gains are obtained upon the pay-up of quotas with financial assets, except for financial assets which are subject to the WHT, in which case the liability for its collection shall belong to the institution or entity that pays of the relevant income to the final beneficiary (even where such entity is not the original payer).Nevertheless, the investor/quota-holder that pays up a fund’s quotas with financial assets shall:
(a) demonstrate the cost of acquisition of the relevant assets, by making available to the tax liable agent the following documents: acquisition brokerage invoice; subscription report; purchase, sale or donation agreement; IT return or average cost of acquisition statement. The quota-holder is liable for the accuracy, integrity and completeness of the information so provided, and in case the cost/value of the relevant investment is not so demonstrated, it shall then be deemed as equal to zero for purposes of calculating the relevant capital gains;
(b) provide the tax liable agent, in advance, with the funds necessary for the collection of the aforementioned IT and of the Tax on Credit, Foreign Exchange, Insurance or Bonds’ and Securities’ Transactions (“IOF”), specially on the mode applicable to Bonds’ and Securities’ transactions (“IOF/TVM”), where applicable.
Please note that the Brazilian Federal Revenue (“RFB”), by means of Interpretative Declaratory Act (“ADI”) No. 07, of May 24, 2007, has manifested its understanding in the sense that the pay-up of investment fund quotas with assets shall be carried out based on the market value of the relevant assets (which has not been covered by the PM under analysis).
The newly enacted PM also establishes that this shift of the tax liability towards the investment fund’s or investment club’s manager does not apply to paid-up real estate assets, in which case such tax liability remains with the investor. Furthermore, the PM expressly forbids the pay-up of financial assets which are not under the custody of or booked with a legal entity duly authorized by the Securities Commission (“CVM”) or by the Central Bank of Brazil (“BACEN”) to provide such services.
II. Fixed-Income Indexed Investment Funds (Article 2 through 4 of PM No. 651/2014)
Articles 2 through 4 of PM No. 651/2014 have established the tax treatment applicable to income and capital gains obtained in connection with investments carried out by means of the so-called “Fixed-Income Indexed Investment Funds”.
In this context, Article 2 of PM No. 651/2014 establishes that such income and capital gains shall be subject to the Withholding Income Tax (“WHT”), exclusively upon the redemption or disposal of the quotas, or upon the distribution of income (i.e., without the levy of the “come-cotas”), based on tax rates that vary in accordance with the average re-pricing term of the Funds’ financial assets portfolio[1], namely:
(i) a 25% ratewhere the average re-pricing term of the relevant portfolio is equal to or less than 180 days;
(ii) a 20% rate where the average re-pricing term of the relevant portfolio is greater than 180 days and equal to or less than 720 days;
(iii) a 15% rate where the average re-pricing term of the relevant portfolio is greater than 720 days.
The tax treatment established by PM No. 651/2014 applies to Investment Funds (a) whose quotas are listed for trading in the secondary market managed either by a stock exchange or an over-the-counter (“OTC”) entity; (b) whose portfolios are composed by financial assets which seek to reflect the variations and profitability of fixed income indexes; and (c) whose regulations establish that at least 75% of their portfolios shall correspond to financial assets which comprise the standard fixed income index.
Fixed-Income Indexed Investment Funds’ quotas shall be mandatorily registered with a central asset depository authorized by the CVM or by the BACEN.
In the event of noncompliance with the minimum percentage of 75% of financial assets that comprise the standard fixed income index, a 30% WHT rate shall apply during the non-compliance period.
The following persons/entities shall be liable for the collection of the WHT:
(i) where the quotas are disposed of in the secondary market, the institution or entity which carries out the payment of income or gains to the final beneficiary, even where such institution/entity is not the original paying source; and
(ii) in case the redemption of quotas or distribution of any amounts takes place, the manager of the Fixed-Income Indexed Investment Fund.
The information regarding the cost of acquisition or value of the financial investment shall be provided to the institution or entity referred to in item “i”:
(a) by the stock exchange or OTC entity, whether or not authorized by the investor to do so, where the acquisition is carried out by means of such institution or entity;
(b) by the stock exchange or OTC entity, duly authorized by the investor to do so, where the acquisition is carried out by means an institution or entity other than the one liable for the collection of the WHT;
(c) by the investor itself, where the trading of the quotas in the secondary market is not carried out in a stock exchange or OTC.
In the event that the investor does not provide the aforementioned authorization (item “b” above), or does not duly demonstrate the cost of acquisition or value of the financial investment (item “c” above), such values shall be deemed as equal to zero, for purposes of calculating the WHT taxable basis.
The tax treatment described above shall enter into force as of January 01, 2015.
III. Tax Treatment applicable to Stock Loans (Articles 6 through 15 of MP No. 651/2014)
Articles 6 through 15 of PM No. 651/2014 establish the tax treatment applicable to loan transactions involving publicly traded stock, carried out within entities dealing with the clearing and settlement of bonds and securities, duly authorized by the CVM, as well as to loan transactions involving bonds and other securities.
Whilst reproducing the tax treatment established by Articles 58 through 63 of Normative Instruction No. 1,022, of April 05, 2010, PM No. 651/2014 has also introduced a few new rules regarding the tax treatment to be applied to the aforementioned transactions, among which we highlight the following:
(i) IT exemption for individual or corporate lenders, domiciled in Brazil or abroad, in relation to amounts paid as revenues by the issuing companies of the stock during the term of the loan agreement and reimbursed to the lender by the borrower, and no longer as a restitution of the amount lent;
(ii) levy of a 15% IT rate upon the amount of Interest on Capital (“IOC”) distributed (original amount) by the issuing companies of the stock lent under a loan agreement whose “borrower” is either (a) subject to a tax immunity, (b) an investment fund or an investment club; (c) a complimentary pension entity; (d) an insurance company; or (e) an Individual Programmed Retirement Fund, items c, d and e in the event that there is the investment of the respective provisions, technical reserves and benefit plan funds; and whose “lender” is an individual or legal entity subject to the IT. The liability for the collection of the IT belongs to the manager of the relevant investment fund or investment club, or to the entity liable for the investment of the funds corresponding to provisions, technical reserves and benefit plans in the remaining cases (i.e. the tax liable agent of the relevant borrowers). Such levy of the IT shall be considered as final taxation, and does not give rise to any refund or compensation rights.
(iii) With regard to loans involving bonds and other securities, the IT shall be levied based on the regressive tax rates established by Article 1 of Law No. 11,033, of December 21, 2004, upon the income distributed by the relevant bond or security subject to the loan transaction, wherever the “borrower” is either (a) subject to a tax immunity, (b) an investment fund or an investment club; (c) a complimentary pension entity; (d) an insurance company; or (e) an Individual Programmed Retirement Fund, items c, d and e in the event that there is the investment of the respective provisions, technical reserves and funds from benefit plans; and whose “lender” is an individual or legal entity subject to the IT. The IT shall be collected at a 15% rate by the borrower of the bonds or securities, and the difference between such 15% rate and the applicable rate established by Article 1 of Law No. 11,033/2004 shall be collected by the lender of such bonds or securities; and
(iv) also with regard to loans involving bonds and other securities, PM 651/2014 clarifies that, where the object of the relevant loan corresponds to variable income securities traded in stock exchanges, the borrower of such securities shall, upon their repurchase, ascertain any net gains or losses obtained/incurred in connection thereto.
The tax treatment described above shall enter into force as of January 01, 2015.
IV. Individual Taxpayers – Exemptions applicable to investments in stock (Articles 16 through 19 of PM No. 651/2014
PM No. 651/2014 has granted an Individual Income Tax (“IIT”) exemption to investors who invest in stock, in the special cases expressly provided for in Articles 16 through 19, which are briefly presented below:
(i) Exemption, until December 31, 2023, on capital gains obtained in connection with the disposal of stock within stock exchanges (“Special Stock”), issued by companies which have/do the following:
(i.1) differentiated corporate governance practices (and ae thus qualified under a special segment of the stock exchange);
(i.2) market value lower than BRL 700 million;
(i.3) annual gross revenue lower than BRL 500 million; and
(i.4) primary distribution corresponding to at least 67% of the total amount of stock issued by the relevant company.
For purposes of the aforementioned exemption, the Special Stock shall have been purchased as of July 11, 2014. Stock purchased prior to this date shall not be subject to the exemption under the terms that have been explained above; however, for purposes of calculating the tax due in connection therewith, their cost of acquisition shall be adjusted to the highest value between the cost of acquisition effectively paid and the average closing price of the 30 trading sessions preceding the date of publication of the aforementioned PM. The same benefit (adjustment of the cost) shall apply to stock which is not disposed of until December 31, 2023, in which case the applicable parameter shall be the 30 trading sessions preceding December 31, 2023.
(ii) Exemption applicable to income obtained by individual taxpayers in connection with the redemption of Stock Investment Funds (“SIF”) quotas, provided that the relevant investment fund has:
(ii.1) a portfolio composed of at least 67% of Special Stock;
(ii.2) minimum redemption term of 180 days;
(ii.3) a “SIF – Access Market” designation;
(ii.4) at least 10 quota holders, each of which holding, whether individually or jointly with other persons connected thereto, no more than 10% of the issued quotas.
In the event that the SIF – Access Market comes to be disqualified as such, the taxation applicable to SIFs (currently, 15%) shall then be applicable. Nevertheless, it is possible to maintain the exemption benefit in case the Fund’s portfolio: (a) has maintained at least 50% of its portfolio in Special Stock; (b) re-establishes the required proportion in no longer than 30 days; and, cumulatively, (c) no recurring disqualification takes place until the last day of the fiscal year following the original disqualification.
Companies whose stock is qualified as Special Stock for tax purposes in accordance with PM No. 651/2014 shall be listed in CVM’s website (www.cvm.gov.br). Currently, the companies so listed are the following:
(a) Brasilagro Cia Bras. De Prop. Agrícolas (AGRO3);
(b) CR2 Empreendimentos Imobiliários S/A (CRDE3);
(c) General Shopping Brasil S/A (GSHP3);
(d) HRT Participações em Petróleo S/A (HRTP3);
(e) Nutriplant Indústria e Comércio S/A (NUTR3);
(f) Renar Maçãs S/A (RNAR3); e
(g) Senior Solution S/A (SNSL3).
The aforementioned amendments made by PM No. 651/2014 shall enter into force on the date of their publication (July 11, 2014).
V. PIS and COFINS – Disposal of equity participations (Articles 30 through 32 of PM No. 651/2014)
In Article 30 of the aforementioned PM, there is a mere adaptation of the PIS and COFINS legislation to the current classification of bookkeeping accounts and assets: although the exclusion of gross income from the revenue obtained in connection with the sale of goods qualified as “permanent assets” (Article 3, paragraph 2 , item IV of Law No. 9,718, of November 27, 1998) has been maintained, it now falls under the bookkeeping caption “non-current assets qualified as investment, real estate and intangible assets”, in line with article 178 of Law No. 6,404 of December 15, 1976 (“Corporations Law”).
Specifically with regard to the disposal of equity participation, the following rules have been established:
(a) revenues obtained in connection with the disposal of equity participation shall necessarily be subject to the cumulative taxation methodology (in accordance with Law No. 9,718/98), regardless of the taxation methodology adopted by the relevant taxpayer (i.e., such revenues now correspond to a type of revenue that is excluded from the PIS and COFINS non-cumulative methodology, in accordance with Article 8 of Law No. 10,637, of December 30, 2002 and Article 10 of Law No. 10,833, of December 29, 2003);
(b) In case the relevant equity participations are booked in the investment account (i.e., in case they correspond to permanent equity participations), the revenue obtained in connection with their disposal shall be excluded from the PIS and COFINS taxable basis (i.e., such revenue shall not be subject to the levy of such contributions);
(c) In case the relevant equity participations qualify as current assets, the revenues obtained in connection with their disposal shall be subject to PIS at a 0.65% rate and to COFINS at a 4% rate, under the cumulative methodology (thus, please note that the COFINS rate has been increased specifically in these cases). Nevertheless, even under the cumulative methodology, the PM under analysis expressly allows the amount spent on the purchase of such equity participation (cost of acquisition) so disposed of to be deducted for purposes of calculating of the PIS and COFINS taxable basis.
The aforementioned rules shall enter into force as of January 01, 2015.
[1]The frequency and calculation methodology of the average re-pricing term shall be established by the State Secretary of Treasury.
THIS IS MERELY AN INFORMATIVE NEWSLETTER, RESTRICTED TO VELLOZA & GIROTTO CLIENTS. QUESTIONS AND CLARIFICATIONS ON THE MATTERS CONTAINED HEREIN SHOULD BE ADDRESSED TO OUR OFFICE.
