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Tax lifted on government bonds

On February 15 2006, the federal government passed Provisional Measure 281, which establishes specific rules of income tax for foreign investors investing in: (i) federal government bonds; or (ii) quotas of private equity funds (FIP), umbrella funds investing in private equity funds (FICFIP) and emerging companies investment funds (FIEE).

Foreign investors resident and domiciled abroad in a place that is not considered a low-tax jurisdiction by Brazilian law and that complies with the regulations issued by the National Monetary Council for investments in Brazil (a foreign qualified investor) are entitled to certain tax benefits established by the Provisional Measure.

Foreign investors already benefit from an exemption for inland revenue purposes on the gains assessed on transactions carried out on the Brazilian stock, future and commodities exchange and on the organized over-the counter markets.

The new tax benefit established to foreign investors focuses on fixed income/debt investments. The Provisional Measure has provided an income tax rate of zero for investments made into: (i) federal government bonds held directly; or (ii) investments made in quotas of investments funds with a portfolio of at least 98% of federal government bonds.

In this sense, earnings generated on the federal government bond transactions, when paid, credited, delivered, used or remitted to foreign investors, are subject to a zero tax rate.

Additionally, earnings obtained by a foreign investor in its investments in quotas of FIF, FICFIP, and FIEE are subject to a zero tax rate. To apply this tax treatment, the foreign investor must not hold, alone or with a group of related parties, 40% or more of the quotas of the fund, or receive alone or with a group of related parties more than 40% of the fund's total gains. The target investment fund must comply with portfolio requirements and restrictions determined by the regulation. The Provisional Measure establishes that FIEE and FIP benefiting from the new tax treatment should have at least 67% of the portfolio allocated into shares of corporations, convertible debentures and/or warrants.

The Provisional Measure is now in force but to remain effective it must be approved by the Legislative Branch within 120 days and also be approved by the president.

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