Forms of vehicle
What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?
The most commonly used vehicle for private equity investments is the private equity investment fund (FIP or Fund), which requires active participation and influence in the administration and decision-making process of the invested companies.
The FIP does not have a separate legal personality: it is classified as a co-ownership, hence it is understood as a pool of assets owned by the quotaholders. This means that the FIP, aside from having its own accountability, procedural capacity and equity, is not considered to have a separate legal personality and must be represented by its administrator.
As set out in current Brazilian regulations and also as a consequence of the fact that the FIP does not have a legal personality of its own, the quotaholders may be held liable in the case of loss.
Despite the above considerations, adverse consequences for investors have been highly uncommon so far. The administrator, along with other service providers as applicable, is held liable for most of the legal consequences in relation to compliance with legal requirements and fiduciary duties.
Forming a private equity fund vehicle
What is the process for forming a private equity fund vehicle in your jurisdiction?
The process of constituting a FIP usually takes around 10 days to be concluded as from the conclusion of the negotiation of the By-Laws of the FIP.
The most important agent involved in the incorporation of a FIP is the administrator, who must necessarily be a legal person duly licensed by the Brazilian Securities Commission (CVM) to exercise the activity and to perform portfolio management services. Other agents may or may not be involved in the Fund’s further activities as service providers. Despite the fact that hiring these agents is not mandatory under the regulations, it is not common to deal with FIPs that do not count at least one portfolio manager, whose main task is to decide on the management of the FIP’s portfolio, taking investment decisions.
The FIP’s by-laws shall be registered before a notary. The registered by-laws, the tax number and the name of an independent auditor shall be filed with the CVM and all the information regarding the quota offering. The CVM shall automatically grant the register. The current FIP regulations do not demand any minimum capital, which results in this being defined in the fund’s by-laws.
The Fund, as well as its administrator and manager, may optionally follow the Brazilian Association of Financial and Capital Market Entities (Anbima) Regulations and Best Practices Codes (the Codes). The Anbima is a self-regulating agency of the Brazilian capital market whose Codes submit its adherents to its supervision. Once institutions adhere to the appropriate Codes, the Anbima grants it a seal that may be announced, for example, on the sponsors’ websites. Since the Codes and the Anbima’s actions are fairly strict when it comes to governance and ethics within financial institutions, the seal tends to increase investors’ trust in the vehicle.
Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records, or a corporate secretary, and how is that requirement typically satisfied?
A FIP must be administered by a legal person duly registered and authorised by the CVM to manage portfolios. There are some service providers that may or may not be demanded by the FIP and hired by the administrator, such as custodians, portfolio managers and consultants.
The FIP is not required to have a registered office, which in practice means that its headquarters and all back-office activities are attributed to the administrator. It is, however, required to have its own books and records, such as the minutes book of quotaholders’ meetings and the registry book of nominative quotas. The administrator is responsible for keeping all the information in the books up to date.
Access to information
What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?
The identities of investors and the amount of their capital commitments are not publicly disclosed. The CVM website allows free access to the following Fund documents:
- reference forms;
- trial balances;
- composition of the portfolio;
- daily data, such as net worth value and number of quotaholders;
- Fund’s fact sheet;
- financial statements; and
- monthly profile.
In addition, the minutes of quotaholders’ meetings, except for their identities, are usually published on the administrator’s or manager’s websites. The FIP is also required to publish material facts whenever they occur.
Some of these documents must be periodically updated and submitted to the CVM, such as daily and monthly data, financial statements, which must be presented annually together with the independent auditor’s report, and the reference form, and are commonly referred to as periodical obligations. The consequences of non-compliance with these obligations may lead to a daily fine of up to 500 reais imposed on the administrator, who is responsible for keeping the documents up to date.
Limited liability for third-party investors
In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?
Investors may be held liable for the FIP’s losses in the case of negative net worth, in which case the investors, aside from losing all the capital invested, would also be required to deploy capital in order to cover losses.
Fund manager’s fiduciary duties
What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that fund’s manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?
Fiduciary duties are established for the FIP’s administrator and are extended to the manager, none of which may be modified. The administrator is fully responsible for compliance with fiduciary duties, as well as jointly with the manager for the latter’s fiduciary duties.
Fiduciary duties are that both the administrator and the manager exercise their activities aiming at achieving the best conditions for the FIP, employing the care and diligence that an active person of integrity normally employs when running his or her own businesses, acting with loyalty when it comes to the quotaholders’ interests and avoiding all practices that may jeopardise the fiduciary relationship established between them. Also, both the administrator and the manager must exercise or ensure the exercising of all rights resulting from the FIP’s net worth and activities, aside from what may be disposed within the complementary information form about policies regarding the FIP’s voting rights, and actively defend the quotaholders’ rights with the diligence demanded by each circumstance, always adopting every measure to ensure that such rights are to be effectively used.
CVM and Anbima have recently been paying special attention to the fiduciary duties of both the administrator and the investment manager.
Does your jurisdiction recognise a ‘gross negligence’ (as opposed to ‘ordinary negligence’) standard of liability applicable to the management of a private equity fund?
The FIP’s administrator is responsible for every breach of fiduciary duty and non-compliance with existing regulatory obligations under Brazilian law. There is no distinction in applicable laws and regulations between gross or ordinary negligence when it comes to the administrator’s liability, as well as the liability of all service providers that may exist under the FIP’s structure.
Other special issues or requirements
Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?
FIPs are closed-ended funds. This means that their quotas cannot be withdrawn until the fund is liquidated. The amortisation of quotas is permitted if approved by the quotaholders’ meetings or by the manager.
A FIP is registered before the CVM and shall be classified within one of the following categories, according to the composition of its portfolio:
- seed capital;
- emerging companies;
- infrastructure; and
- intensive economic productions in research, development and innovation.
Fitting within each of these structures is undertaken according to the following criteria:
- annual gross revenues of the target companies;
- the FIP’s portfolio composition; and
- will to influence the decision-making processes of the invested companies.
The type of FIP that best fits the objectives of the administrator must be reflected in its category.
In general, the FIP must keep at least 90 per cent of its net worth invested in the following portfolio assets as established by existing regulation, which may change according to the category:
- subscription bonuses;
- simple, non-convertible debentures; and
- other securities convertible into shares, either issued by private or public Brazilian companies, as well as limited liability companies.
In general and with certain exceptions, FIPs are allowed to invest up to 33 per cent of their resources in non-convertible debentures.
Multi-strategy FIPs are restricted to professional investors, as detailed in question 25, and may invest up to 100 per cent of their resources in foreign assets (see question 31).
Fund sponsor bankruptcy or change of control
With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity fund’s sponsor?
Generally, a company under liquidation and bankruptcy proceedings (except for Chapter 11-like restructuring proceedings) shall not continue with its regular activities. Although there is no regulatory provision for such cases, it should be reasonably interpreted that a quotaholders’ meeting should be convened to change or terminate the administrator under a liquidation or bankruptcy proceeding.
Regulation, licensing and registration
Principal regulatory bodies
What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the regulators’ audit and inspection rights and managers’ regulatory reporting requirements to investors or regulators?
The principal regulatory body that would have authority over a private equity fund and its manager is the CVM. As mentioned above, there is also a self-regulatory body called the Anbima, which only has jurisdiction over its members.
The CVM has broad audit and inspection rights over its supervised entities. Investment managers must be previously licensed by the CVM. Also, such entities have continuing filing and disclosure obligations with the CVM, such as annually filing a form of reference which must be continuously updated), filing codes of conduct, compliance manuals and money laundering prevention mechanisms, among others.
Funds also have several reporting obligations (see question 8).
All such reporting information must be made available at the managers’ and the CVM’s websites.
What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?
There are no additional requirements other than those listed in question 2.
Registration of investment adviser
Is a private equity fund’s manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?
Yes. The portfolio manager must be registered with the CVM and, in order to do so, it must assign at least one director to lead on the activity of portfolio management. This director must also be registered with the CVM.
Fund manager requirements
Are there any specific qualifications or other requirements imposed on a private equity fund’s manager, or any of its officers, directors or control persons, in your jurisdiction?
The FIP manager, as well as any other fund manager, must be duly registered with the CVM and, as such, must comply with the requirements set by the regulatory entity. The requirements vary as applied to individuals or legal entities, are listed by current Brazilian laws and may be summarised as follows.
The individual manager must, aside from being able to dispose of his or her own goods:
- have a residence in Brazil;
- have a higher degree qualification, either from Brazil or elsewhere;
- take a certification exam, which must have had its methodology and content previously approved by the CVM - this exam is nowadays set and applied by certain certified institutions, such as the Anbima and the charted financial analyst organisation;
- have an immaculate reputation;
- not be prevented or suspended from exercising an administrative position at financial institutions or other entities regulated by the CVM, the Central Bank of Brazil (BACEN), the Private Insurance Agency or the National Private Pension Agency;
- not have convictions for bankruptcy, corruption, money laundering or other related crimes; and
- not be prevented from managing his or her own assets as a result of an administrative or judicial decision.
The legal entity that wishes to provide these services must comply with the following:
- have its headquarters in Brazil;
- include in its corporate aims the administration and management of securities portfolios;
- assign the activity of management of securities portfolios to one or more statutory directors, who must also be authorised by the CVM to do so under the criteria listed above; and
- assign compliance activities to a statutory director.
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity fund’s manager or investment adviser or their employees.
There are no specific rules, laws or other regulatory mechanisms regarding political contributions by FIPs, whether about disclosure or limitations of any kind. However, since 2015, pursuant to a Brazilian Supreme Court decision, no kinds of political financing by legal entities are allowed - only individuals, and up to the limit of 10 per cent of their annual net revenues, can contribute to parties, candidates or their campaigns.
Even though an FIP, as stated in question 1, is not recognised as a legal entity owing to its lack of legal personality, it could be fairly reasonable to assume that the prohibition would be extendable to any investment funds.
Use of intermediaries and lobbyist registration
Describe any rules - or policies of public pension plans or other governmental entities - in your jurisdiction that restrict, or require disclosure by a private equity fund’s manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities. Describe any rules that require a fund’s investment adviser or its employees and agents to register as lobbyists in the marketing of the fund to public pension plans and governmental entities.
There are no specific rules, policies or regulations that restrict or require disclosure by an FIP in the marketing of the fund to public pension plans and other governmental entities.
Describe any legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.
There are no legal or regulatory developments emerging from the recent global financial crisis that specifically affect banks when it comes to investing in FIPs. However, a federal law dating from 1964 establishes the written authorisation of BACEN as a requisite for any private banks to participate in companies in general.
Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.
Investment funds formed under Brazilian law (including the FIP) are not subject to income tax on revenues and gains arising from their portfolio transactions. Thus Brazilian income tax is charged only at the level of the investors on income or gains arising from the redemption, amortisation or sale of FIP quotas.
The redemption or amortisation of quotas is currently subject to withholding income tax (WHT) at a 15 per cent rate levied upon the positive difference between the redemption or amortisation amount and the quotas’ acquisition cost. Capital gains arising from the sale of FIP quotas are also subject to WHT at 15 per cent.
Brazilian legislation, however, has reduced to zero per cent the WHT rate applicable to income arising from investments carried out under the rules of Resolution CMN No. 4,373, dated 29 September 2014, by non-resident investors not domiciled in favourable tax jurisdiction through FIPs (4,373 Investor), provided certain requirements are met, as detailed in question 18.
Local taxation of non-resident investors
Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?
Income and gains earned by 4,373 Investors are subject to WHT at a zero per cent rate provided all the following requirements are met:
- 4,373 Investor does not hold, individually or with related parties, 40 per cent or more of all quotas issued by the FIP or have the right to receive 40 per cent or more of the total income earned by the FIP;
- the FIP does not hold bonds in an amount equivalent to more than 5 per cent of net assets, except if such bonds are convertible debentures, warrants or bonds and notes issued by the Brazilian federal government;
- the FIP’s portfolio is composed of at least 67 per cent of shares, convertible debentures and warrants issued by corporations; and
- the FIP complies with other portfolio requirements issued by CVM.
If the above requirements are not met by either the FIP or its investors, income and gains arising from redemption, amortisation or sale of quotas subscribed and paid-up by 4,373 Investors will be subject to WHT at 15 per cent.
Non-resident investors must obtain a federal taxpayer identification number in order to invest in the financial and capital markets in Brazil, as well as assign a local representative to fulfil tax obligations from such investments.
Local tax authority ruling
Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?
Under Brazilian law, it is not necessary or desirable to obtain a ruling from Brazilian tax authorities in order to enforce the tax treatment applicable to FIPs. All FIPs formed under Brazilian law are subject to the same ground rules, aside from the exemption mentioned in question 18.
Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?
Aside from potential regulatory and administration fees, no other significant organisational taxes are due.
Special tax considerations
Please describe briefly what special tax considerations, if any, apply with respect to a private equity fund’s sponsor.
Administrators and investment portfolio managers of FIPs are subject to regular corporate taxation in Brazil (ie, Corporate Income Tax - IRPJ, Social Contribution on Net Profits - CSLL, Contribution to the Social Integration Programme - PIS and Contribution for the Social Security Financing - COFINS), as well as other Brazilian taxes potentially levied on the activities carried out by such entities (eg, the Tax on Services - ISS).
Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.
With the purpose of avoiding double taxation, Brazil has entered into treaties with 33 countries. These treaties follow the model established by the Organization for Economic Cooperation and Development and provide rules on taxation mainly upon profits, dividends, interests, royalties, capital gains and other income. As a rule, in regard to investment funds, tax treaties usually do not provide for a more favourable tax treatment if compared with the tax regime set forth by Brazilian law.
Other significant tax issues
Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?
On 6 May 2016, the Brazilian Internal Revenue Service issued Normative Instruction No. 1,634, under which the procedures to obtain a Tax ID number are regulated. This Normative Instruction sets forth obligations for non-resident investors (including certain 4,373 Investors) to disclose information on the ultimate beneficial owners existing under the corporate investment chain.
Selling restrictions and investors generally
Legal and regulatory restrictions
Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.
The public distribution of quotas generally needs to be registered with the CVM.
However, usually FIP quotas are distributed through public offers with restrictions, in accordance with CVM Instruction 476/09. Such distributions are exempt from registration with the CVM.
Such distributions are subject to the following restrictions:
- restricted to professional investors;
- no more than 75 potential investors may be contacted; and
- no more than 50 investors may acquire quotas.
Types of investor
Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).
Not every person is allowed to invest in an FIP. Investments are restricted to qualified or professional investors, which are defined as follows.
- Financial institutions and all other entities existing under BACEN regulation;
- insurance companies and capitalisation companies;
- closed and open supplementary pensions entities;
- individuals or legal entities whose financial investments add up to over 10 million reais and, additionally, state their professional investor status in a specific declaration;
- investment funds;
- investment clubs, as long as their portfolios are managed by duly registered managers with the CVM;
- autonomous investment agents, portfolio managers, analysts and investment advisers duly registered with the CVM, when it comes to their own finances; and
- non-resident investors.
- Professional investors;
- individuals or legal entities whose financial investments add up to 1 million reais and, additionally, who state their qualified investor status in a specific declaration;
- individuals who took certification exams or are otherwise approved by the CVM under the requirement to register as independent investment agents, portfolio managers, analysts and investment advisers, when it comes to their own finances; and
- investment clubs, as long as their portfolios are managed by one or more quotaholders understood as qualified investors.
Identity of investors
Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?
The identity of funds investors is generally protected by bank secrecy laws and must not be disclosed unless certain conditions are met.
However, for the purposes of applicable anti-money laundering laws, securities transactions above a specific threshold must be communicated to the Financial Activities Control Board of the Ministry of Finance.
Licences and registrations
Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?
Intermediaries selling interests in private equity funds must be registered with the CVM as intermediaries.
Investment managers may distribute quotas of FIPs managed by them, if certain specific legal requirements are observed.
Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.
Money laundering is a felony under current Brazilian laws and is punishable with penalties from fine-paying to imprisonment. Aside from these consequences, participants in the financial and capital markets proven to have committed these offences may lose their licences.
Current regulations demand that administrators and portfolio managers, as well as financial institutions in general, elaborate, publish online and implement internal rules that allow them to identify their customers, the origin of resources that they intend to apply and to constantly track their profiles as a way to reduce money laundering schemes involving financial and capital markets.
BACEN demands that all information regarding investors and transactions conducted by financial institutions remain stored for a minimum period of five years as from the closing of the account or last transaction performed or demanded by the investor. Such information must remain available to the authorities for audit.
Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?
FIPs are able to list on a securities exchange as far as they are regularly constituted with the CVM.
One of the greatest advantages is that FIPs are closed-ended funds and, as such, the negotiation of their quotas on the securities exchange market makes it easier for quotaholders to increase liquidity options for their investments as an alternative to withdrawal or waiting for amortisation. The main disadvantage regards the expenses that come with listing the FIP quotas on organised markets, since more registers and licences are needed, and for every public offer the supervisory fees itemised in question 2 become due.
Restriction on transfers of interest
To what extent can a listed fund restrict transfers of its interests?
Listed FIPs may restrict transfers to qualified investors only.
Participation in private equity transactions
Legal and regulatory restrictions
Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?
Current regulations impose concentration limits to the portfolio’s composition, which may vary among the types of FIPs listed in question 8. Aside from the exceptions, FIPs may invest in shares, subscription bonuses, non-convertible debentures, other securities convertible or exchangeable into shares of listed or non-listed companies, as well as equity interests of limited liability companies. The FIP may invest up to 33 per cent of its net equity in one type of financial asset.
FIPs may invest up to 20 per cent of their net equity in assets located abroad, as long as such assets are economically equivalent to those listed above. A foreign investment is defined according to its issuer’s headquarters, as long as the issuer does not have 90 per cent or more of its net equity in national assets, or the issuer, despite having headquarters in the country, has 50 per cent or more of its net equity in assets abroad. In the case of a FIP whose by-laws allow investing in foreign assets, as long as it is solely available to professional investors and includes ‘foreign Investments’ in its official denomination, it may invest up to 100 per cent of its net equity in such assets.
Compensation and profit-sharing
Describe any legal or regulatory issues that would affect the structuring of the sponsor’s compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsor’s ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.
Usually, the investment manager’s compensation is established as management and performance fees.
Management fees are usually established as a percentage of the Fund’s net worth. Performance fees in local funds are usually set as a percentage of the fund’s profits on the capital invested plus a hurdle rate, which is usually an inflation-indexed rate plus a fixed rate.
Management and performance fees are provided for in the Fund’s by-laws, treated as services rendered and taxed as such.
Transaction fees charged by the investment manager or related companies should be approved by the quotaholders’ meeting, since the regulations require such approval in case of conflicts of interest. Many FIPs’ by-laws forbid the payment of transaction fees in such cases.