Guarantees By Brazilian Equity Investment Funds (FIPS)

The Brazilian Equity Investment Fund (Fundo de Investimento em Participações - FIP) is legally characterized as a co-ownership of proceeds from several investors with the purpose of investing in financial assets. The FIP has no legal personality and must be registered with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM). Designed specifically for the private equity sector, the FIP is required to participate in the decision process of portfolio companies. Its main attraction is the fact that any income or capital gains earned by a foreign investor in a FIP is not subject to any Brazilian withholding income tax, provided that certain requirements are met. The FIP also enjoys several other tax benefits.1

These requirements are the following: (i) the investment must be made in accordance with the provisions of Resolution No. 2689 of January 26, 2000 (Res. 2689/2000), issued by the Brazilian Monetary Council (Conselho Monetário Nacional - CMN)2; (ii) the foreign investor cannot hold, individually or jointly with related persons, shares representing (a) 40% or more of all the FIP' units or (b) 40% or more of the total income of the FIP; (iii) the FIP cannot hold in its portfolio, at any time, debt securities exceeding 5% of the FIP's net equity; and (iv) foreign investors cannot be residents in a favored taxation country or dependency.3

The provisions of CVM Instruction No. 391 of July 16, 2003 (CVM Instr. 391/2003), which regulates the incorporation, management and operation of the FIPs, have been amended by CVM Instruction No. 535, of June 28, 2013 (CVM Instr. 535/2013).

CVM Instr. 535/2013 allows the administrator of the FIP to provide directly or indirectly guarantees on behalf of the investment fund, subject to the approval of qualified majority of the unitholders (cotistas), i.e. unitholders gathered in General Assembly representing at least two-thirds of the units (cotas) issued by the FIP, and it also aims to match the deadline for decision by the General Assembly on the FIP's financial statements required by CVM Instruction No. 409 of August 18, 2004. The original deadline was 30 June of each year and from now on shall be 150 days after the end of the fiscal year of the FIP, laid down in the fund's bylaws. These changes are better explained below.

For the existing FIPs, however, the qualified majority is not sufficient and the unanimous approval of the unitholders gathered in General Assembly is...