Amidst economic deterioration, political uncertainty, currency devaluation and weak markets at home, the Brazilian Federal Revenue issued Normative Ruling # 1.585 on August 31, 2015 to consolidate and update the tax rules applicable to investments in the Brazilian capital and financial markets.

Normative Ruling # 1.585 permits share investment funds (FIAs), whose net asset value is comprised of at least 67% publicly-traded shares and of units of funds that hold said shares, to invest in offshore share investment funds.

Until the enactment of the ruling, only local hedge funds (FIMs) could invest in such offshore share investment funds.

In practice, this provision will potentially reduce the rate of the withholding income tax levied on the earnings and gains paid out from FIAs that hold investments in stock markets outside Brazil.

For local investors, while earnings and gains paid out from FIMs may be subject to withholding tax rates ranging from 15% to 22.5% (which varies according to maturity) plus a surcharge of income tax payment due every six months (so-called "eat-units" or come cotas) that reduces the number of units of the investor—the same earnings and gains paid out from a FIA will be subject to a flat withholding income tax rate of 15% (regardless of maturity) levied only upon the amortization of its units.

This measure surprised many of the Brazilian asset mangers that were already on a flight-to-quality trajectory and betting on a strengthening US dollar.

We expect Brazilian investors to see this as an opportunity to diversify their portfolios, and asset managers outside Brazil to view it as an opportunity to expand their client base.