Changes in the Tax Benefit for Non-Resident Investors in Brazilian Private Equity Investment Funds (FIP)

Bill No. 4188/2021 (“PL 4188”), approved yesterday (October 3, 2023) in the House of Representatives and definitively in the National Congress, brings modifications to Law No. 11,312, dated June 27, 2006, which concerns the zero rate of income tax applicable to income and capital gains of Non-resident Investors (“NRI”) in Private Equity Investment Funds (“FIP”).

This approval was eagerly expected by the market and simplifies the requirements for enjoying the Zero Rate, essentially making it easier for NRI to qualify for the tax benefit. Among others, PL 4188 promotes the following changes:

• 40% Test: It repeals the requirement that NRI could not hold 40% or more of the FIP quotas or quotas that granted them the right to 40% or more of the income distributed by the FIP (the “40% Test”). Now, investors can hold any percentage of the fund quotas.
• Portfolio Requirement Simplification: FIP portfolios will solely have to comply with the portfolio composition requirements established by the Brazilian Securities and Exchange Commission (CVM). The requirements that provided for (i) a minimum investment of 67% in shares, subscription bonuses, or convertible debentures issued by corporations in Brazil, and (ii) a maximum investment of 5% of net equity in debt securities, except for convertible debentures or government bonds, were repealed.
• Investment Entities: PL 4188 introduces a new requirement, providing that NRI will only be eligible for the Zero Rate if the FIPs are classified as “investment entities,” in accordance with future regulation from the National Monetary Council (CMN).
• Extension of the Zero Rate: The Zero Rate will also apply to (i) NRI in redemptions and repurchases of Private Equity Investment Funds in Infrastructure (FIP-IE), and (ii) to sovereign wealth funds, even if they are residents or domiciled in favorable tax jurisdictions.

PL 4188 has been definitively approved in the National Congress and will proceed for presidential sanction. The President of the Republic will have 15 business days to either sanction or veto PL 4188 upon receiving it. Following the sanction, the resulting law will be published, and any vetoes (partial or total) will be reviewed by the National Congress.

Please click here to view a one-pager. 

For more information about these changes, please explore the Asset Management Services & Investment Funds and Tax practices at Mattos Filho