Provisional Measure1 1,184/23 (PM), published on 28 August 2023, makes changes in the taxation of investment funds in Brazil and introduces a periodic taxation mechanism for closed-end and exclusive funds (come-cotas).
Key changes introduced by the PM include:
1. Introduction of periodic taxation (come-cotas) for closed-end funds
- 20% for short-term funds, with taxation ranging from 22.5% to 15% on liquidity events
- 15% for long-term funds, with taxation ranging from 22.5% to 15% on liquidity events
Withholding income tax (WHT) will be charged in May and November of each year.
2. Responsibility of the fund administrator for the WHT on disposal of quotas
Upon disposal of shares, the shareholder, if requested by the administrator, must pay the WHT in advance. The disposal will be prohibited if the administrator does not have the necessary financial resources to fulfill the tax obligation.
3. Investment funds subject to specific regimes: Private equity funds (FIPs), stock funds (FIAs) and exchange-traded funds (ETFs), with the exception of fixed-income ETFs and funds investing at least 95% of their net worth in these funds
The income earned in these funds, if they are classified as investment entities and meet criteria related to their investment portfolio composition, will be taxed exclusively on liquidity events at a rate of 15%.
Investment entities must meet the following requirements:
- Have a professional management structure at the fund or shareholder level, when organized as funds or investment vehicles, in Brazil or abroad
- Be represented by managers or service providers with the authority to make investment and divestment decisions at their discretion, with the purpose of generating returns through capital appreciation, income, or both
- Comply with regulatory requirements set by the National Monetary Council — CMN
4. FIPs, FIAs, ETFs, and funds of funds not classified as investment entities
If the funds do not meet the requirements for classification as investment entities, they will be subject to WHT at a rate of 15%, under the periodic taxation (come-cotas) regime and the same rate on liquidity events.
Positive or negative income resulting from the valuation or devaluation of shares or stocks issued by Brazilian legal entities representing control or affiliation of entities invested by the fund's portfolio may be excluded from the periodic taxation (come-cotas) calculation base, provided the accounting requirements are met.
The unrealized gains earned through 31 December 2023, in previously non-subject closed-end funds will be taxed according to the rules below, at the taxpayer's option:
|Tax rate||Payment base||Payment form||Payment due|
|Option 1||15%||Income earned through 31 December 2023||24 installments plus interest||31 May 2024|
|Option 2||10%||Income earned through 30 June 2023||Four installments||29 December 2023|
|Income earned from 1 July 2023 through 31 December 2023||Single installment||31 May 2024|
For private equity funds/stock funds/ETFs that do not qualify as investment entities (item 4, above), earnings controlled in sub-accounts may be excluded from the calculation base.
Closed-end investment funds that explicitly provided, as of the date of the Provisional Measure, for their extinction and irrevocable liquidation by 30 November 2024, will not be subject to come-cotas.
6. Merger, split or transformation
The merger, split or transformation of investment funds will be taxable events as follows:
- Events occurring through 31 December 2023 will not be taxable, provided that: (i) the fund is not subject to periodic taxation (come-cotas) in 2023, and (ii) the tax rate to which its shareholders are subject in the resulting fund operation is equal to or higher than the rate to which they were subject immediately preceding the operation.
- Events occurring from 1 January 2024 will be taxable events, except when involving funds listed in item 3, above (funds not subject to come-cotas).
7. Non-Resident Investors (INR)
A 15% tax rate on income will apply, with the exception of stock funds, subject to a 10% rate (15% for investors located in jurisdictions with favorable taxation).
The PM does not change the treatment of INR investments in Public Bond Investment Funds, FIPs, Emerging Business Investment Funds (FIEE), or investment funds with shareholders exclusively resident or domiciled abroad, as per article 97 of Law No. 12,973 of 13 May 2014.
8. Funds subject to the previous regime
In addition to those already mentioned, the following funds remain subject to the previous regime:
- Real Estate Investment Trusts (REITs) and Investment Funds in Agro-Industrial Production Chains (FIAGRO)
- Infrastructure Investment Funds — FIP-IE and Investment Funds in Intensive Economic Research, Development, and Innovation (FIP-PD&I)
- Investment funds covered by Law No. 12,431 of 24 June 2011
9. Other changes
REITs (Fundo de Investimento Imobiliário or FII) and FIAGRO must have at least 500 shareholders for income to be taxed at a 0% rate (previously the requirement was 50 shareholders).
The tax treatment in cases of usufruct will consider the beneficiary of the income, even if they are not the owner of the investment.
Different tax treatment will be applied to each class of shares if investment funds have different share classes with distinct rights and obligations and segregated assets.
For additional information with respect to this Alert, please contact the following:
EY Assessoria Empresarial Ltda, São Paulo
- Ana Luiza Lourenco
- Fabio Martins
- Jose Massari
- Felipe Melo
Ernst & Young LLP (United States), Latin American Business Center, New York
- Ana Mingramm
- Douglas Campos
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
- Raul Moreno, Tokyo
- Luis Coronado, Singapore
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
1 Provisional measures are a type of Decree, signed and published by the President, with the power of law that needs to be approved by the Congress within 60 calendar days from publication (extendable by another 60 calendar days) to be enacted as a Federal law.