Among the various measures taken by the Brazilian government to stimulate investments in infrastructure and research and development projects, one of them refers to issuance of debt securities to raise funds for such investments, which may be issued as debentures or any other type of securities admitted in Brazilian legislation (Capex Debentures).
Capex Debentures must comply with the following conditions: (a) subject to public distribution; (b) fixed interest rates linked to price index or Brazilian referential rate; (c) prohibition to renegotiate interest rates; (d) average maturity of more than four years; (e) prohibition for the issuer or any related party to repurchase or redeem the securities during the first two years; (f) prohibition for the buyer to assume any repurchase commitment; (g) payment of coupons with intervals of at least 180 days; (h) evidence of registration of such debentures with official registration system based on Central Bank or Brazilian Securities and Exchange Commission (CVM); and (i) a simplified procedure to evidence the commitment to allocate the raised funds in the future payment of expenditures with the investment projects, including those related to research, development and innovation. If the issuer fails to comply with the investments, there is a penalty of 20% on the total amount raised.
By complying with these rules, the Capex Debentures are subject to special tax rules for foreign investors that do not reside in a tax haven jurisdiction, as long as such foreign investors get registered under the 2,689 Regulations with the Brazilian Central Bank and the CVM (those investors will then be known as 2689 Investors).
Upon inflow of funds, 2689 Investors are subject to zero Tax on Foreign Exchange Transactions (IOF/ FX). If they were investing in normal fixed income securities, there would be a 6% IOF/FX. In addition, zero rate also applies on the outflows of funds. The rates of IOF/FX may be changed at any time by the President, up to a maximum of 25%.
With regards to withholding income tax, the rate is reduced from 15% to zero on all income distributions by the issuer of Capex Debentures to 2689 Investors. In case of Brazilian resident individuals, the applicable rate is also zero, and in case of a Brazilian company, the applicable withholding income tax is 15%. In case of beneficiary resident in a tax haven jurisdiction, the applicable rate is 25% – Brazil adopts the blacklist system to determine whether or not a jurisdiction should be considered as tax haven.
It is interesting to note that, once the issuer complies with the conditions to issue the debentures, if the issuer fails to use the funds properly on infrastructure and/or R&D projects, the issuer is punished with a 20% penalty; there are no adverse consequences to the foreign investors, as the actual use of the funds is not something that is under the investors' control.
Finally, the public distribution may be performed in a simplified manner as established by CVM Instruction no. 476, which establishes a procedure for the issuance of debentures to qualified investors. Provided that certain requirements are met, especially a limited distribution effort (in which no more than 50 investors may be contacted and only 20 may actually make the investment), an offering of the so-called debentures 476 are exempted from registration with the CVM.
Ana Cláudia Utumi