Capital gains earned by foreigners (or rather, by non-residents in Brazil) who make direct investments in private equity funds are, as a rule, exempt from income tax.
Since, capital gains are considered to be the positive results obtained: i) in operations carried out on shares, commodities, futures and similar exchanges, with the exception of combined operations that allow the obtaining of predetermined income; and ii) in operations with gold, a financial asset, outside the stock exchange.
This special taxation regime for foreign investors requires the identification of the direct investor (that is, the fund's shareholder), includes investment funds, such as the Equity Investment Fund (“Fundo de Investimento em Participações – FIP”) and proves to be an important instrument for attracting available capital in the international market.
For this purpose, the foreign investor (individuals or legal entities domiciled or headquartered abroad), in addition to being identified, cannot be located in a tax haven (a country that does not tax income or in which income is taxed at a rate lower than 20%, or, still, whose legislation imposes secrecy regarding the corporate composition of legal entities or their ownership), and cannot hold more than 40% of the fund's shares.
In this case, the foreign investor must be locally represented by an agent (custodian) domiciled in Brazil, who is responsible for presenting all the information required by the local authorities: Securities Commission (“Comissão de Valores Mobiliários – CVM”); Brazilian Central Bank (“Banco Central do Brasil – Bacen”); and Federal Revenue Service of Brazil (“Secretaria da Receita Federal do Brasil – SRFB”).
Since their financial assets (shares, fund quotas and other financial investments) must be registered and kept in custody or in a bank deposit with a local financial institution (bank, brokerage or distributor of securities) co-responsible, together with the custodian agent.
Furthermore, the local custodian must register the foreign investor before the CVM - operating code of CVM; the SRFB - Federal Tax ID (“Cadastro Nacional de Pessoas Jurídicas – CNPJ” or “Cadastro de Pessoas Físicas – CPF”); and to Bacen - electronic registration at Sisbacen (“Sisbacen - Sistema de Informações do Banco Central”). In addition to the capital gain, the aforementioned exemption also applies to profits and dividends distributed.
Fixed income investments and other types of income are taxed at the rate of 15%, while investments in equity funds, swap operations and operations carried out in future settlement markets outside the stock exchange are taxed at the rate of 10%.
In cases where there is income tax, this occurs in the payment or credit of income, with the exception of investments in investment funds, in relation to which the incidence of withholding income tax occurs exclusively on the redemption of quotas.
Furthermore, foreign investors operating in Brazil without complying with the requirements and conditions described above will be subject to the same tax effects applicable to Brazilian investors. The same applies to foreign investors from tax havens.
In this case, therefore, the income earned by foreign investors from tax havens is subject to withholding income tax at the rate of 15%, in the case of: i) net capital gains on the cash market for shares, in stock exchange; ii) net capital gains in other equity markets on the stock exchange and organized over-the-counter markets; iii) equity funds; iv) over-the-counter futures settlement market, including flexible options.