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
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
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
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
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.