Brazil: Closed-end fund changes

Author: | Published: 11 Dec 2017
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Souza Cescon Barrieu & Flesch


Praia de Botafogo, 228 - 15º Andar - A
22250-906 Rio de Janeiro - RJ - Brazil



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Brazilian closed-end funds offer an advantageous investment platform since their earnings are only taxable upon distribution to investors. Conversely, income earned by Brazilian open-end funds is taxed every six months, the so-called come-cotas.

Targeting a boost in tax revenue, the Brazilian government recently enacted Provisional Measure No. 806 (PM 806) which significantly changed the taxation of closed-end funds.

As of January 1 2018, Brazilian closed-end funds will also become subject to six-monthly tax (on the last business day of May and November) at the rates of 15% or 20%, depending on whether the funds classify as long- or short-term investment funds.

Not only will income accrued from January 1 be taxed, but any realised or unrealised gains earned by the fund to date will become taxable on May 31, as if such gains were effectively distributed to the fund investors. The proposed changes will have a major effect on the local wealth management industry, which greatly benefited from the tax deferral afforded to closed-end funds.

Real estate funds, credit right funds and equity funds have been waived from periodical taxation and therefore income earned by such funds will still be taxable only upon distribution to investors.

Non-Brazilian residents investing in debt and equity instruments through the portfolio investment mechanism (regulated by National Monetary Council Resolution 4373/14) are, and will continue to be, exempt from periodical taxation, so income earned by non-Brazilian residents in connection with Brazilian investment funds will continue to be taxed upon distribution.

Another significant change is that private equity funds, the so-called FIPs, will only have their neutral tax status preserved if they meet the requirements under applicable regulations to qualify as investment entities. If they fail to qualify as investment entities, FIPs will be treated as legal entities for Brazilian tax purposes and thus any income accrued by them will be taxed at the rate of 34%. Accumulated earnings of those FIPs that do not qualify as investment entities will be taxed at 15% on January 2.

A FIP qualifies as an investment entity if, among other requirements, it is managed by a professional fund manager holding discretionary powers to represent the fund before the invested companies. Essentially, these rules were proposed to tax family-owned funds as if they were personal holding companies.

The tax exemption afforded to non-tax haven foreign investors holding (directly or indirectly) less than 40% of qualified FIPs remains unchanged so these investors will not be affected by the proposed changes.

PM 806 will come into effect on January 1 2018 if it is converted into law by the end of 2017.

Ramon Castilho Rafael Santos




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