Brazil eliminates withholding tax on key non-resident investors

Securities qualifying for the exemption include:

• corporate bonds issued to the public by Brazilian entities and registered in Brazil;
• receivables investment funds not issued by a financial institution (FI);
• financial bonds issued by FIs; and
• quotas from regulated Brazilian credit investment funds set up by Brazilian entities and registered or traded in Brazil, and that invest exclusively in corporate bonds or similar securities.

Bonds and quotas issued by financial and other institutions authorised by the Brazilian Central Bank do not qualify for the exemption, although financial letters from such institutions do.

The zero rate is not available to foreign private equity funds investors domiciled in low-tax jurisdictions or that benefit from privileged tax regimes, or when income arises from transactions performed between related parties. Disputes surrounding the regimes qualified as privileged by Brazilian tax rules could lead to certain controversies in the application of the zero rate, says law firm Machado Associados.

Moreover, foreign investors that are residents in greylisted jurisdictions, such as Delaware limited liability companies (LLCs), will be treated the same as foreign investors from blacklisted jurisdictions, such as Cayman limited partnerships (LPs). In future, investment structures that hold Brazilian private equity funds (FIPs) through Delaware LLCs will not be entitled to a tax exemption on gains and distributions from a FIP.

The provisional measure also repeals the 40 per cent ownership threshold requirement to grant a tax exemption to non-resident investors. For sovereign funds, the provision is applicable to residents of both blacklisted and whitelisted jurisdictions, requiring further analysis on the impacts involving those type of investors.

The measure, which is part of the Brazilian government's strategy to attract foreign investment, takes effect on January 1, 2023, subject to congressional approval. Non-resident investors thus have several months to sort out potential restructuring or migration to other structures or jurisdictions, says EY.

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Sources

• Machado Associados
• EY