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The New Era for Foreign Investments in Brazil with Law No. 14,711/23

 

Por Demétrio Romaniewicz*

Brazil, amidst a global landscape of economic and political uncertainties, is emerging as an increasingly attractive destination for Foreign Direct Investment (FDI). In 2023, the country solidified its position as the second-largest FDI destination globally, attracting $64 billion in investments. This prominent position was bolstered by recent legislative reforms, including the enactment of Law No. 14,711/23, which introduced significant changes to the tax regime for non-resident investors, particularly in the private equity sector.

Global Context and FDI Attraction

The global context is marked by challenges such as high inflation and interest rates, especially in the United States. In contrast, Brazil has benefited from relative stability, making it an appealing destination for investors seeking diversification and new opportunities. Law No. 14,711/23 is part of this effort to create a more favorable business environment, facilitating the flow of foreign capital into the country.

The Private Equity Sector in Brazil

Private equity is a crucial sector for Brazil’s economic development, particularly in areas such as technology, infrastructure, and agribusiness. Private Equity Investment Funds (FIPs) are the primary vehicles for channeling these investments, allowing investors to acquire stakes in Brazilian companies and contribute to their expansion and modernization.

Previously, the regulatory environment for FIPs in Brazil was considered complex and restrictive, especially for foreign investors. However, Law No. 14,711/23 introduced changes that simplify this landscape, making the private equity sector even more attractive.

 Key Changes Introduced by Law No. 14,711/23

  1. Portfolio Composition Requirements Flexibility: Before the new legislation, FIPs were required to allocate at least 67% of their assets in stocks, convertible debentures, or subscription bonuses. With Law No. 14,711/23, this requirement was eliminated, providing greater freedom for fund managers to diversify their investment strategies according to market opportunities.

  2. Elimination of Debt Securities Restriction: Previously, FIPs were limited to holding a maximum of 5% of their assets in debt securities. This limitation has been removed, allowing for more flexible and adaptable resource allocation based on market opportunities without the restrictions that previously limited potential returns.

  3. Abolition of the 40% Dilution Test: Another significant change was the elimination of the restriction that prevented a single investor or group of connected investors from holding 40% or more of the FIP’s quotas. Now, large investors can participate more actively in FIPs without restrictions that previously hindered investment consolidation.

  4. Qualification as an Investment Entity: To benefit from favorable tax treatment, FIPs must be qualified as investment entities according to the rules established by the National Monetary Council (CMN). This ensures that funds are professionally managed and compliant with international governance practices.

 Reducing Bureaucracy and Costs

The simplification of rules under Law No. 14,711/23 also significantly reduces bureaucracy and the costs associated with regulatory compliance. Previously, compliance requirements involved high costs in terms of time and financial resources. Fund managers now operate with greater agility and fewer bureaucratic hurdles.

For foreign investors, this means faster and more efficient entry into the Brazilian market, without the barriers that previously limited or delayed the investment process. The increased freedom for managers to adapt their strategies to market conditions can result in higher returns and mitigated risks.

 Taxation of FIPs Before Distribution to Investors

A central issue for foreign investors is the taxation of income earned by FIPs before being remitted to investors. Law No. 14,711/23 simplified taxation for foreign investors, particularly by exempting them from withholding income tax on income and capital gains from FIP investments, provided that the funds are qualified as investment entities.

However, it is important to note that despite this exemption for foreign investors, FIPs may still be subject to taxation on profits generated within the fund before distribution to quota holders. Taxation within the FIP will depend on the fund’s structure and the type of income generated. Nonetheless, the new legislation offers a more favorable base for international investors, minimizing the tax burden on returns when capital is repatriated.

 Conditions and Funds Applicable to Foreign Investors

Foreign investors can now benefit from favorable tax treatment when investing in a variety of funds, including:

  • Private Equity Investment Funds (FIPs): Focused on acquiring stakes in Brazilian companies.

  • Infrastructure Investment Funds (FIP-IE): Specialized in infrastructure projects such as energy and transportation.

  • Innovation and Research Investment Funds (FIP-PD&I): Targeting research, development, and innovation sectors.

  • Real Estate Investment Funds (FIIs): Investing in real estate properties.

  • Real Estate Investment Funds-FII: Similar to FIIs, but with specific regulations that may offer differentiated tax treatments.

CMN and CVM Rules for Foreign Investors

CMN Resolution No. 4,373/2014: This resolution establishes that non-resident investors must register their investments with the Central Bank of Brazil, ensuring control and monitoring of foreign capital flow into the country. It also requires these investors to be represented by authorized institutions, facilitating compliance with local regulations.

CVM Instruction No. 560/2015: This CVM instruction establishes the need for clear documentation and identification for non-resident investors, ensuring transparency in their operations in the Brazilian market. It also requires periodic reports and the implementation of strict controls to monitor and report the activities of these investors.

Conclusion

Law No. 14,711/23 marks a significant advancement for the private equity sector in Brazil, simplifying rules and making the regulatory environment more accessible and less bureaucratic for foreign investors. Amidst global economic uncertainty, Brazil stands out as an attractive destination for international capital, offering a dynamic and more favorable fiscal environment.

For foreign investors looking to diversify their portfolios and explore new opportunities in emerging markets, Brazil offers an attractive combination of regulatory stability and economic opportunities. However, it is essential that these investors consult professionals specialized in tax, regulatory, and international law in Brazil to maximize the benefits offered by the new legislation while ensuring compliance with local regulations and interaction with involved jurisdictions, such as those that tax global income, thus avoiding benefiting from a tax incentive in Brazil but being fully taxed in their country of origin.

The compliance rules with Brazilian regulations remains crucial especially now for foreign investors in the light of the new law definitions and obligations. It is strongly recommended that investors seek the guidance of a Brazilian lawyer who specializes in international cases, operations, and taxation. This legal consultation is key to fully benefiting from the faster and more accessible opportunities that the new law provides.

 

*Demétrio Romaniewicz é advogado na RMSA e atua no setor Internacional.

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