Foreign Investments In Brazilian Real Estate Investment Funds Are No Longer Subject To The Tax On Exchange Transactions (IOF)

By means of Decree No. 7894, of January 30, 2013 (Decree 7894/2013), published in the Official Gazette of the Union of January 31, 20131, the Brazilian government decided to reduce from 6% to zero the Tax on Exchange Transactions (Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários - IOF)2 in the exchange transactions made as from January 31, 2013, for the acquisition of units (quotas) of local Real Estate Investment Funds (Fundos de Investimento Imobiliário - FII) regulated by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM)3.

This tax benefit only applies to foreign investments involving the acquisition of units of FII traded on the stock exchange. If a foreign investor acquires these units out the stock exchange, the transaction continues to be subject to payment of the IOF at the rate of 6%.

The measure now adopted represents an incentive which may attract foreign investors to this specific market.

The Brazilian government did not change, however, the withholding income tax (Imposto de Renda na Fonte - IRF) that is levied on the income from the FII paid to foreign investors, at the rate of 15%.

By force of 12431, of June 24, 2011 (Law 12431/2011), the applicable rate of the IRF due on income generated by bonds and securities of public distribution, issued by legal entities that are not classified as financial institutions and that are regulated by CVM or the Brazilian Monetary Council (Conselho Monetário Nacional - CMN), has been reduced to zero. To obtain this tax benefit, these bonds and securities will have to be acquired between January 1, 2011 and December 31, 2015 and the income must be paid to a beneficiary resident or domiciled abroad. Law 12431/2011 has been subsequently amended by Law No. 12715, of September 17, 2012 (Law 12715/2012), which extended such tax benefits to the Certificates of Real Estate Receivables (Certificados de Recebíveis Imobiliários - CRI)4.

Therefore, the IRF tax exemption (zero rate) only applies to foreign investors if the earnings result from income originated from the acquisition of real estate financing securities, such as the Brazilian CRI. This benefit is not applicable, however, if the foreign investor is domiciled in a favored tax country or dependency5.

According to the evaluation made by the FII managers, this measure should make the yield of this product more appealing than its equivalent in the United...