Provisional Measure (“MP”) No. 1,137 reduced to 0% the rate of Withholding Income Tax (“WTH”) levied on income earned by investors residing abroad on several securities issued by the private sector.
The measure is applicable to income earned between January 1st, 2023 and December 31st, 2027, and includes, among others, securities subject to public distribution, such as debentures, as well as Receivables Investment Funds (Fundos de Investimento em Direitos Creditórios – “FIDC”), Financial Bills (Letras Financeiras), and Investment Funds that invest exclusively in specific assets, including the aforementioned securities.
The reduction of WHT to 0% is valid only for bonds or securities subject to public distribution, issued by private legal entities that are not classified as financial institutions.
Regarding FIDC, the reduction affects only the funds regulated by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – “CVM”) whose originator or grantor is not a financial institution.
To benefit from the WHT reduction to 0%, the investment must also be made in accordance with CMN Resolution No. 4,373/2014. The benefit is not applicable to transactions entered into between related parties or to income earned by an investor domiciled in a tax haven or beneficiary of a privileged tax regime, with the exception of those made by sovereign wealth funds.
Additionally, the MP also changes the tax treatment of resident and non-resident investors in Equity Investment Funds (Fundos de Investimento em Participações – “FIP”) and harmonizes the tax treatment of non-resident investors in Infrastructure Equity Investment Funds (Fundos de Investimento em Participações em Infraestrutura – “FIP-IE”) and Investment Funds in Participation in Economic Production Intensive in Research, Development and Innovation (Fundos de Investimento em Participação na Produção Econômica Intensiva em Pesquisa, Desenvolvimento e Inovação – “FIP-PD&I”).
FIP
MP 1,137 revokes the former requirement, which existed only in the tax legislation, that FIPs invest at least 67% of their assets in shares, subscription warrants (bônus de subscrição), and debentures convertible into shares, meaning that the classification of FIPs for tax purposes will now be based exclusively on CVM regulations.
In relation to non-resident investors, the MP revokes two requirements for them to benefit from the 0% tax rate:
i. the requirement that the investor does not hold, individually or together with related parties, more than 40% of the shares or income of the fund (i.e., 40% test); and
ii. the requirement that the fund’s portfolio does not exceed 5% of its assets in debt securities.
On the other hand, the MP included investors who are beneficiaries of a privileged tax regime among those prohibited from enjoying the 0% WHT rate. The rule previously affected only the investor resident or domiciled in a tax haven.
This amendment directly impacts certain structures that use investment vehicles incorporated in the United States as Limited Liability Companies (“LLCs”) for investing in FIP(s).
Investments in FIPs made by sovereign wealth funds can benefit from the 0% tax rate, even if they are located in tax havens.
FIP-IE and FIP-PD&I
With regard to income earned by non-resident investors in FIP-IE(s) and FIP-PD&I(s), the MP extended the application of the 0% WHT rate, according to the same rules applicable to investments in FIP(s).
In this respect, the MP seeks to harmonize the tax treatment applicable to non-resident investors in FIP-IE(s) and FIP-PD&I with the one existing in relation to FIP, which already ensured the application of the 0% WHT rate to income and not only to capital gains.
