An extract from The Securitisation Law Review, 3rd Edition
The Brazilian securitisation market has received considerable attention during the past years for its growth and for the competitive economic environment that sustains it through consumption and an expansion in the availability of credit, despite the overall effects of the covid-19 pandemic to the Brazilian economy. As a result, securitisation has been explored by financial institutions as a concept that may create conditions that improve their profits and reduce costs.
By enhancing diversification of financing sources, securitisation transactions have created longer-term mortgage loans and investments, improved asset liquidity and increased housing development. They have also become an important sector in the context of Brazil's capital markets and economy2 and have thus attracted many participants into this market, including banks and financial institutions.
This type of transaction is mainly used with the aim of obtaining funding from investors at a more accessible cost, which is often essential if large projects and undertakings are to be feasible. Another advantage is that this type of structure segregates the risks associated with the company that generated the receivables, also making it possible to back debts up with assets.
In general, securitisation in Brazil is commonly structured by means of the following vehicles, details of which are provided in this chapter:
- receivables investment funds (FIDCs);
- financial credit securitisation companies (FCSCs);
- real estate credit securitisation companies (RECSCs); and
- agribusiness credit securitisation companies (ACSCs).
The aforementioned securitisation activities are part of Brazil's financial and capital markets, which are essentially composed of regulatory bodies, such as the National Monetary Council (CMN), and supervisory bodies, such as the Central Bank of Brazil and the Securities and Exchange Commission (CVM), which supervise, regulate and inspect financial institutions, stock exchanges, investment funds and securitisation companies, among others.i Regulatory agencies
Below is a brief summary of the purposes of the above-mentioned principal regulatory agencies.CMN
The CMN3 is the highest authority in the Brazilian financial system and is responsible for formulating monetary and credit policies with the goal of promoting the economic and social development of Brazil. The primary objectives of its policies, among others, are as follows:
- adjusting the volume of payment methods to the needs of the Brazilian economy;
- regulating domestic currency value;
- regulating foreign currency value and maintaining the balance of payments in Brazil;
- assisting investment in funds by financial institutions;
- encouraging enhancements in the funds of institutions and securities;
- protecting the liquidity and solvency of financial institutions;
- coordinating monetary, credit, budget, tax and public debt policies; and
- defining the organisation and operational policies to be followed by the Brazilian securities market.
The Central Bank of Brazil is the authority competent to implement the monetary and credit policies drawn up by the CMN,4 as well as to inspect financial institutions in the private and public sectors. In addition, the Central Bank of Brazil may sanction such institutions in accordance with the applicable law.
Moreover, the Central Bank is also responsible for exercising control over credit and foreign capital, receiving compulsory withholdings and voluntary demand deposits of financial institutions, and executing rediscount transactions and loans to banking financial institutions, as well as acting as a depository of gold and foreign currency reserves.
The Central Bank of Brazil is also responsible for controlling and approving the incorporation, functioning, transfer of control and equity reorganisation of financial institutions.CVM
CVM regulates, develops, controls and inspects the securities market, in accordance with Law No. 6,385/1976 and Law No. 6,404/1976.
CVM is a quasi-governmental agency connected with the Ministry of Economy and has jurisdiction over the entire Brazilian territory. It has independent administrative authority, legal standing and its own assets.
CVM is also responsible for regulating the examination and inspection of publicly held companies, the negotiation and intermediation of the securities and derivatives markets, the organisation, functioning and operation of stock markets, commodities and futures markets, and the management and custody of securities.
Law No. 10,303/2001, which amended certain provisions of Law No. 6,404/1976, granted jurisdiction to CVM to regulate and supervise financial and investment funds that were originally regulated and supervised by the Central Bank of Brazil.ii Securitisation vehiclesFIDCs
As the main vehicle currently used for securitisations in the local market, FIDCs are regulated and supervised by CVM, pursuant to the applicable regime in force, namely CVM Ruling No. 356/2001. FIDCs are incorporated in the form of a 'condominium' (i.e., a pool of assets), which invests at least 50 per cent of its portfolio in receivables.
In addition to CVM Ruling No. 356/2001, FIDCs that invest mainly in distressed credits (e.g., non-performing credit rights, future flow credits and credit rights originated by public sector companies) are subject to the rules set out in CVM Ruling No. 444/2006.
Investments in quotas publicly issued and distributed by FIDCs are generally available to foreign investors, who can subscribe and pay in the quotas, in Brazil, through the foreign exchange market.
FIDCs' administration may only be performed by multi-service banks, commercial banks, the Federal Savings Bank, investment banks, brokerage firms, securities dealerships, or credit, finance and investment companies.
The greatest advantage FIDCs have over RECSCs and FCSCs is their tax treatment; because they are organised as a pool of assets, they are not subject to the usual corporate taxes.
The FIDCs' quotas may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).5FCSCs
All financial credits qualify for securitisation, including those originating from loans, financing and leasing transactions by multi-service, commercial and investment banks; credit, financing and investment companies; real estate credit companies; leasing companies; mortgage companies; savings and loans associations; the Federal Savings Bank; and joint-stock companies specifically organised for the acquisition of such credits.
FCSCs are regulated under CMN Resolution No. 2,686/2000.6 These securitisation vehicles are incorporated as corporations and can raise the necessary funds for acquisition of credits through equity or debt instruments, which may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).RECSCs
The securitisation of real estate credits in Brazil is almost always made through RECSCs,7 which were created by Law No. 9514/1997 and have since been used increasingly as a vehicle for securitisation transactions involving real estate receivables.
RECSCs are non-financial entities that are incorporated as corporations and registered with the CVM as publicly traded companies for disclosure purposes only (i.e., such entities are not required to have their shares publicly traded, but only to adhere to the same disclosure standards as publicly traded companies).
RECSCs are the only entities in Brazil authorised to issue the Brazilian equivalent of mortgage-backed securities (CRIs). A CRI is a security that is backed by real estate receivables, which may be acquired from third parties (originators). Usually, the receivables are related to credits from real estate financing contracts, credits from build-to-suit lease agreements or typical lease agreements, and credits arising from other rights related to real estate property. The CRIs may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).ACSCs
ACSCs are securitisation companies authorised to issue Agribusiness Receivables Certificates (CRAs), which are securities regulated by Law No. 11,076/2004 and CVM Ruling No. 600/2018.
These securities may be freely negotiated and are backed by agribusiness credit rights, arising from transactions between rural producers, or their cooperatives, and third parties, including financing or loans related to the production, trading, processing and manufacturing of products, and agricultural and animal husbandry inputs or machines and improvements used in agriculture and animal husbandry activities.
The definition of agribusiness encompasses all commercial and industrial relations regarding agriculture and animal husbandry (i.e., agricultural and animal husbandry-related production or extraction activities, with end products such as meat, leather, milk, sugar, coffee, soya and fruit).
The CRAs may be offered through a public offering (under CVM Ruling No. 400/2003) or through a public offering with restricted placements (under CVM Ruling No. 476/2009).iii Relevant tax law
Normative Ruling No. 1,585/2015 was enacted by the Brazilian Federal Revenue Office with the purpose of updating and consolidating rules regarding the taxation of income and capital gains recognised by local and foreign investors in financial transactions carried out in the Brazilian markets.
Before the introduction of Normative Ruling No. 1,585/2015, it was common for investors to contribute their equity interest in corporations to investment funds and, whenever corporations paid dividends, they were paid directly to the quota holders or fund investors, and those amounts were exempted from income tax as the payments would retain the legal character of dividends (which are exempted from income tax under the current tax regulations).
According to this regulation – the legality of which is debatable as regards this specific provision – the direct on-payment of dividends by investment funds whose portfolios are focused on equity interest to their quota holders are to be treated as a legal act that equates to a redemption or amortisation of quotas, and therefore withholding tax will apply at the general rate of 15 per cent.Income tax exemption on capital gains on various securities investments of natural persons
Under the previous regime, certain debt securities (such as CRAs and CRIs) were exempted from income tax; nevertheless, they were not exempted from tax on capital gains. Pursuant to the provisions of Normative Ruling No. 1,585/2015, these investments are now exempted from tax on capital gains – a positive change that had been requested by the market for a long time.Changes in capital gains rates
Under Brazilian tax law, the general rule is that non-resident investors are subject to the same tax rules that are applicable to individuals who are tax residents in Brazil in respect of income and capital gains derived from transactions carried out in Brazilian financial and capital markets.
In this scenario, capital gains made by foreign investors on the disposition of shares in Brazilian companies have generally been subject to withholding tax at a rate of 15 per cent. As from 1 January 2017, however, Law No. 13,259/2016 changed this rate to a progressive regime under which the applicable rates vary as follows:
- 15 per cent on gains that do not exceed 5 million Brazilian reais;
- 17.5 per cent on the portion of gain exceeding 5 million reais, but lower than 10 million reais;
- 20 per cent on the portion of gain exceeding 10 million reais, but lower than 30 million reais; and
- 22.5 per cent on the portion of gain that exceeds 30 million reais.
Only if the investor is based in a tax-haven jurisdiction8 would these rates be increased to a flat 25 per cent rate.
Capital gains accrued on the disposition of Brazilian listed stock (when carried out on the Brazilian Stock Exchange by an investor registered pursuant to the terms and conditions of CMN Resolution No. 4,373/2014 and CVM Ruling No. 560/2016 and who is not located in any blacklisted tax-haven jurisdiction) qualify for full exemption from withholding tax. As a result, if an investor registered in accordance with the rules noted above disposes of shares in a Brazilian listed company at a gain, through the Brazilian Stock Exchange, this transaction would be exempt from any withholding tax in Brazil.
In the case of such an investor, there are also arguments to sustain the position that capital gains earned outside of the stock exchange should not be subject to the assessment of the withholding tax at the progressive rates from 15 per cent to 22.5 per cent, but actually be subject to the assessment of the withholding tax at a flat 15 per cent rate.Potential changes in taxation applicable to investment funds
In 2018, the lower house of the National Congress, the Chamber of Deputies and the Senate proposed two new bills,9 the contents of which were analogous to provisions originally brought the previous year in a bill10 that was not approved by Congress and thus not converted into law.
The new legislative bills substantially alter the rules for the deferral of taxation applicable to closed-end investment funds, in an attempt by the government to eliminate the tax deferral regime for these legal entities. According to those bills, those investment funds would be taxed according to the rules currently applicable to open-end funds.
Among the main changes proposed in the bills, the following are of particular note:
- automatic taxation of investment fund gains (known as the 'come-cotas' regime);
- retroactive taxation on all gains accrued by closed-end funds up to May 2019; and
- taxation on spin-off, merger and transformation transactions of closed-end funds made on or after 1 January 2019.
Until now, the bills were not converted into law. However, in 2019, the Brazilian government proposed a new provisional measure11 at the National Congress with the same wording of the not previously approved bills of law. While the provisional measure has expired, the bills are pending before specific congressional committees. For this reason, and taking into account that the 2017 bill was not converted into law, it is important to highlight that no tax effects are expected at present.
Furthermore, similar to several other countries, Brazil has been passing certain progressive transparency-related tax regulations, mostly based on concepts such as beneficial ownership provisions and in line with recent Organisation for Economic Co-operation and Development guidelines on base erosion and profit shifting.
Since 1 July 2017, Brazilian regulations imposed the obligation for certain Brazilian entities and investors holding assets in Brazil to disclose to tax and regulatory authorities the taxpayer identification numbers (or CNPJs) of non-resident investors who qualify as the final beneficiaries of a given Brazilian investment (e.g., stocks of Brazilian companies, owners of fixed-income investment funds and quotas of other investment funds).Potential tax reform
Further to the above, the Brazilian government has recently proposed a Brazilian tax reform, by means of which the government intends to promote a series of changes concerning the taxation of Brazilian legal entities, investment funds and individuals, as well as the taxation of transactions executed in the financial and capital markets as a whole, mainly under the argument that the reform would simplify the Brazilian tax regime and make it more distributive.
The main changes related to the taxation of investment funds derive from previous bills of law: the Brazilian government is once again proposing the elimination of the tax deferral regime of these entities, the immediate taxation, in January 2022, of the accrued and undistributed profits of closed-end funds and the taxation of spin-off, merger and transformation transactions of closed-end.
The tax reform also proposes taxation on dividends distributed by Brazilian legal entities, which would be accompanied by a corresponding reduction on the Corporate Income Taxation. Moreover, it provides an increased margin for the tax exemption of income attributable to Brazilian individuals and a simplification of the current tax regime applicable to transactions carried out in the financial and capital markets (mainly by means of the standardisation of both tax rates and periods for calculation of the tax impacts).
If the Brazilian tax reform were to be approved in 2021, those changes would only come into force from January 2022 onwards; however, the discussions are still ongoing and there is no assurance that the proposal will not go through changes until its approval (or rejection) by the National Congress.