Taxation of financial investments in Brazil

Taxation of financial investments in
Brazil
Clarissa Giannetti Machado
© 2014 Trench, Rossi e Watanabe Advogados
Agenda
1. General Tax Overview
a) Brazilian Tax Residency
b) Foreign Tax Residency


Low Tax Jurisdictions
Privileged Tax Regimes
2. Investments in Brazil
a) Public Bonds and Shares
b) Private Equity
c) Real Estate


FII
CRI, LCI and LH
d) Investment Funds exclusive for foreign investors
e) Special purpose debentures
© 2014 Trench, Rossi e Watanabe Advogados
General Overview
Investor – Brazilian Tax Residency
Who is a Brazilian tax resident?
•
•
•
Permanent domicile in Brazil.
Entrance in Brazil with intention to stay
Working visa
Tax implications
•
Fixed Income/Public bonds: regressive rates based on the holding period.




22,5% - holding period up to 180 days;
20% - holding period from 181 and up to 360 days;
17,5% - holding period from 361 and up to 720 days;
15% - holding period as of 720 days.
•
Securities (publicly traded shares): 15%
•
Real Estate Funds: 20% upon capital gain and earnings. A 0% rate may be levied
upon earnings if some requierements are met.
•
Real Estate bonds (CRIs and LCI) – 0%
•
Private Equity Funds (FIP) : 15% levied upon earnings and capital gain.
© 2014 Trench, Rossi e Watanabe Advogados
Investor – Foreign Tax Residency
Who is not Brazilian tax resident?
•
•
Stays less than 184 days in Brazil within the last 12 months
Enters the country with no intention to stay permantly
Tax implications
•
Investors located in a low tax jurisdiction are taxed as a Brazilian resident.
•
Special Tax Regime: foreign investors (individuals or legal entities) that are not
domiciled in a low tax jurisdiction (i.e, in a country that does not tax the income or
that the income rate is lower than 20%) may be entitled to lower tax rates when
investing in Brazil (fixed/variable income or investment funds).
Applicable WHT under the Special Tax Regime: 0%, 10% or 15%
Specific procedures (from a regulatory standpoint) should be followed (Res.
2698/4373).
© 2014 Trench, Rossi e Watanabe Advogados
Summary
WHT - Regular
tax jurisdiction
WHT - Low tax
jurisdiction and
residents
Public bonds
0% *
22.5% to 15%
SWAP
10%*
22.5% to 15%
Investment
Fixed income funds –
Short term
Fixed income funds –
Long term
Other fixed income
investments
15%*
15%*
15%*
22.5% to 20%
22.5% to 15%
22.5% to 15%
Investment
Futures/Forward/Optio
ns in the Stock
exchange
Shares in the stock
exchange (variable
income)
Private Equity Fund
Capital gains from
private transactions
(Law 4,131/62)
Interest on Equity
(IOE)
Dividends from profits
generated as from
1996
WHT–
Regular tax
jurisdiction
WHT -Low tax
jurisdiction and
residents
0%*
15%
0%*
15%
10%*
15%
15%
25%
15%
25%
0%
0%
* Investment in accordance with Res. 2689/4373
© 2014 Trench, Rossi e Watanabe Advogados
Low Tax Jurisdictions*
American Samoa
American Virgin Islands
Andorra
Anguilla
Antigua and Barbuda
Aruba
Ascension Island
Bahamas
Bahrain
Barbados
Belize
Bermuda Islands
British Virgin Islands
Brunei
Campione D’Italia
Cayman Islands
Cook Islands
Channel Islands
(Alderney, Guernsey,
Jersey, and Sark)
Dominica
Costa Rica
Cyprus
Djibouti
Federation of Saint
Christopher and Neveis
French Polynesia
Saint Kitts & Nevis
Gibraltar
Grenada
Hong Kong
Isle of Man
Kiribati
Labuan
Lebanon
Liberia
© 2014 Trench, Rossi e Watanabe Advogados
Liechtenstein
Macao
Madeira Islands
Maldives
Malta
Mauritius Islands
Marshall Islands
Monaco
Monserrat Islands
Nauru
Netherlands Antilles
Niue Islands
Norfolk Island
Occidental Samoa
Oman
Panama
Pitcairns Islands
Qeshm Islands
Santa Lucia
Saint Helena Islands
Saint Pierre et Miquelon
Islands
Saint Vincent & Grenadines
San Marino
Seychelles
Singapore
Solomon Islands
Swaziland
Tonga
Tristan da Cunha
Turks & Caicos Islands
United Arab Emirates
Vanuatu
* Normative Ruling No 1,037/2010
Privileged Tax Regimes*
— Uruguay – “Inversion Financial Entities” (Safis) until December 31, 2010
– Denmark – holding companies that do not perform substantive economic
activity
– Netherlands – holding companies that do not perform substantive economic
activity – THIS PROVISION IS CURRENTLY SUSPENDED
– Iceland – International Trading Companies (ITC)
– United States of America – State Limited Liability Companies (LLC), whose
corporate ownership is composed by non-residents, not subject to the
federal income tax
– Spain – “Entidades de Tenencia de Valores Extranjeros” (E.T.V.Es.)
– Malta – International Trading Companies (ITC) and International Holding
Companies (IHC)
– Switzerland – legal entities incorporated as holding company, domiciliary
company, auxiliary company, mixed company and administrative company
SPECIAL TAX REGIME?
© 2014 Trench, Rossi e Watanabe Advogados
* Normative Ruling No 1,037/2010
Financial Investments
Public Bonds and Shares
Public Bonds
 Earning deriving from public bonds paid to foreign investor are subject to 0% WHT, except
if the investor is domiciled in a low tax jurisdiction.
 IOF – exchange: 0%.
 Example of Public Bonds:
i.
NTN-B: IPCA;
ii.
NTN-C: IGP-M;
iii.
NTN-H: TR;
iv. NTN-M: Libor;
v.
LFT: Selic
© 2014 Trench, Rossi e Watanabe Advogados
Public Bonds
 Treaties to avoid double taxation executed by Brazil may establish that the
interest paid by public bonds from one country will not be subject to taxation in
the other country.
 Currently, Brazil has signed treaties with the following countries:
a) South Africa;
b)
c)
d)
e)
f)
g)
h)
i)
j)
Argentina;
Austria*;
Belgium;
Canada;
Chile;
China;
Korea;
Denmark;
Ecuador;
© 2014 Trench, Rossi e Watanabe Advogados
k)
l)
m)
n)
o)
p)
q)
r)
s)
t)
Spain;
Philippines;
Finland;
France;
Hungary;
India;
Israel;
Italy;
Japan;
Luxembourg;
u) Mexico;
v) Norway;
w) Netherlands;
x) Peru
y) Portugal;
z) Slovak Republic;
aa)Czech Republic;
bb)Sweden;
cc) Turkey;
dd)Ukraine.
11. 3. b) Interest arising from securities, bonds or debentures issued by the Government of a Contracting
State or any agency (including a financial institution) owned by that Government, and paid to a resident of
12
the other Contracting State shall be taxable only in the first mentioned State.
Securities (publicly traded shares)
 Capital gains deriving from the sale by a foreign investor of securities in the Brazilian
stock exchange are subject to 0% WHT, except if the foreign investor is domiciled in a low
tax jurisdiction.
 IOF – exchange: 0%.
 Example of Securities
i.
Petrobras
ii.
Ambev
iii.
Brasil Foods
iv. Braskem
© 2014 Trench, Rossi e Watanabe Advogados
Private Equity Fund (FIP)
Private Equity Fund - (FIP)
• AVOID LOW TAX JURISDICTION
Foreign Investor
• FOLLOW CENTRAL BANK
PROCEDURES (Res. 2689/4373)
Foreign Investor
Brazilian
Individuals
Brazilian Investor
• BEST STRUCTURE:
EQUITY/INCOME <40% (i.e., income
and capital gains from FIP to foreign
investor: 0%WHT)
FIP
Legal entity
Legal entity
Legal entity
Legal entity – taxed as standard legal entity (presumed profit method x actual profit method)
FIP – in general, not subject to taxation in Brazil (not considered legal entity)
Foreign Investor –15% WHT upon earnings and 0% WHT upon capital gains. Also a 0% IOF- Exchange rate applies.
Direct distributionof dividends by legal entities – 0%WHT and IOF/Exchange
LEGAL BASIS:
•
Articles 2 and 3 of Law nº 11,312/06
•
Articles 15-B, XVI and XVII of Decree nº 6,306/07
© 2014 Trench, Rossi e Watanabe Advogados
Private Equity (FIP): “40% TEST” = 0%WHT
‒
Law no. 11,312/06, Article 3:

‒
“… The foreign investor cannot hold, individually or jointly with
related parties, quotas representing (a) 40% or more of all the
FIP’s quotas or (b) more than 40% of the total income generated
the FIP”
Definition of related party for application of Article 3:


“ Individual: (a) relatives up to the second degree, and (b) the
company under his/her control or under the control of any relative
up to the second degree; and
Legal entity: the entity that controls, is controlled by or affiliated
with the quotaholders, as defined in art. 243, paragraphs 1º and 2º
of Law No. 6404/76 (“Corporation Law”)”
© 2014 Trench, Rossi e Watanabe Advogados
Private Equity (FIP): “40% TEST”
Non-resident investors
Delaware
A
25%
Delaware
C
Delaware
B
25%
25%
?
A A’ A’’
Delaware
A
Delaware
D
Delaware
C
Delaware
B
25%
25%
25%
B B’ B’’ C C’ C’’ D D’ D’’
25%
Delaware
D
25%
Brazil
Brazil
FIP
FIP
S.A.
S.A.
© 2014 Trench, Rossi e Watanabe Advogados
S.A.
S.A.
S.A.
S.A.
Private Equity (FIP): “40% TEST”
Foreign Investor
A
Foreign Investor
B
– AVOID LOW TAX
JURISDICTION
Feeder
Fund
< 40%
Foreign Investor
C
Foreign Investor
D
< 40%
< 40%
FIP
SPE
SPE
SPE
(corporation)
(corporation)
(corporation)
– FOLLOW CENTRAL
BANK PROCEDURES
(Res. 2689/4373)
– BEST STRUCTURE:
EQUITY/INCOME <40%
(i.e., income from FIP to
foreign investor:
0%WHT)
Feeder – Potential structure for foreign investors that do not want to invest directly in the FIP. In order to benefit of the 0%
WHT on gains. Feeder should also hold less than 40% of the FIP quotas or entitlement to FIP’s returns – otherwise, 15%
WHT.
© 2014 Trench, Rossi e Watanabe Advogados
18
Private Equity Investment Fund (FIP): “40% TEST”
‒
Potential Issues:




“Substance” of direct foreign entities
Controlling shareholder and Sister companies x concept of related
parties.
Carried interest (income x fees): what does it mean hold “total
income generated by the fund”?
Low tax jurisdictions
© 2014 Trench, Rossi e Watanabe Advogados
Real Estate investments
Real Estate Investment Fund - (“FII”)
Foreign Investor
Foreign Investor
• AVOID LOW TAX JURISDICTION
Brazilian
Individuals
Brazilian Investor
FII
Real Estate
Property
CRIs
SPE
Real Estate
Real estate property – not taxed (not a legal entity) / SPE taxed as standard legal entity
FII – in general, not subject to taxation in Brazil (some exceptions apply)
Foreign Investor – 0% to 15% WHT on income received from FII, depending on the case.
Investments on FII are subject to 0% IOF/Exchange.
LEGAL BASIS:
•
Article 3º, II of Law nº 11,033/04
•
Articles 66, §4 and 69 of Normative Ruling nº 1,022/10
•
Articles 15-B, XVI and XVII of Decree nº 6,306/07
© 2014 Trench, Rossi e Watanabe Advogados
• FOLLOW CENTRAL BANK
PROCEDURES (Res. 2689/4373)
1.
2.
3.
Real Estate Securities (Certificados de Recebíveis Imobiliários –
“CRI”)
•
Real estate securities can only be issued by a Securitization Company
•
The Securitization Company acquires real estate receivables and issues bonds
back on those credits
•
Can have fixed or floating interest, as also official price indexes such as IGP-M.
Real Estate Credit Bonds (Letras de Crédito Imobiliário – “LCI”)
•
Bonds granted by financial institutions and back by mortgages and fiduciary
credits
•
Can have fixed or floating interest
Mortgages Bonds (Letras Hipotecárias – “LH”)
•
Bonds granted by financial institutions and back only by mortgages credits
•
Can have fixed or floating interest
TAXATION: Earnings and capital gains derived from LH, LCI and CRI are exempt from income taxes and IOF/Exchange.
LEGAL BASIS:
• Article 3º, II of Law nº 11,033/04
• Articles 66, §4 and 69 of Normative Ruling nº 1,022/10
• Articles 15-B, XVI and XVII of Decree nº 6,306/07
© 2014 Trench, Rossi e Watanabe Advogados
Investment funds for foreign
investors
Investment funds for foreign investors
•
Article 97 of Law nº 12,973/04
•
Earnings and capital gains deriving from an investment fund exclusive to foreign investor
and paid to a foreign investor not domiciled in a low tax jurisdiction are exempt from
income tax.
•
Only aplicable if the following requirements are met:
a)
The investor can not be resident or domiciled in a low tax jurisdictions
b)
The investment fund portfolio must be destined to:
i.
cash;
ii.
investments/securities subject to income tax exemption;
iii. investments/securities subject to 0% income tax.
© 2014 Trench, Rossi e Watanabe Advogados
Special purpose Debentures
Requirements
•
•
•
•
•
•
•
•
Foreign investor may not be domiciled in a low tax jurisdiction/special tax
regime.
Issuer: legal entity not classified as financial institution
Issuance method: public offering
Amounts must be applied on research, development and innovation
projects.
Fixed interest rate
Average term higher than 4 years
issuer can not repurchase the debentures on the first 2 years
periodical payment of earnings, if any, with a minimum gap of 180 days
Foreign Investor – 0% WHT and IOF/Exchange on earnings and capital gains
LEGAL BASIS:
•
Article 1 of Law nº 12,431/11
•
Articles 15-B, XVI and XVII of Decree nº 6,306/07
© 2014 Trench, Rossi e Watanabe Advogados
Thank you!
Clarissa Giannetti Machado
[email protected]
(tel: 5511 30486786)
© 2014 Trench, Rossi e Watanabe Advogados

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