Taxation

Tax obligations

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.

Organisational taxes

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).

Tax treaties

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.