Foreign Investment In Brazil Via FIP

There has been a significant increase of investment in Brazilian companies via Private Equity Funds ("FIP"), created under Brazilian Securities and Exchange Commission - CVM Instruction No. 391, dated July 16, 2003. The recent granting of fiscal benefits to foreign investors investing in FIPs is one of the reasons for this phenomenon.

The FIP may acquire shares, debentures, subscription bonds and other convertible securities of public or private companies, and is required by applicable regulation to participate in the decision-making process of the company.

As private companies are not registered with the CVM, in order to be eligible to receive investments from a FIP, they must adopt certain minimum corporate governance practices. Among other requirements, corporate disputes of the company must be resolved through arbitration and the company must submit its financial reports for audit on a yearly basis by CVM-registered independent auditors.

The FIP must have an administrator authorized by the CVM, as well as written regulations relative to investment policy, quotaholder rights, capital calls and redemptions. The FIP may issue more than one class of quotas, subject to different voting rights and fees. Thus, the same vehicle can accommodate investors of distinct particularities. Nonetheless, FIP quotaholders, regardless of the class, will always have the right to an undivided interest in the fund's portfolio, which cannot be segregated among classes of quotas.

Especially for foreign investors, the FIP receives a favorable tax treatment on the basis of recent legislation.

The withholding income tax rate applicable to earnings from FIP investments is reduced to zero when the earnings are paid to an individual or collective beneficiary domiciled abroad, as long as, cumulatively:

the FIP investment was made in accordance with National Monetary Council rules (Resolution No. 2.689, dated January 26, 2000);

the beneficiary, individually or together with related parties, does not hold 40% or more of the quotas issued by the FIP, nor has the right to receive more than 40% of the income generated by the FIP;

the FIP's portfolio does not, at any time, consist of more than 5% in bonds or fixed-rate financial instruments, except for convertible debentures and bonds...