New Measures To Encourage The Brazilian Capital Market

On June 16, 2014, the Brazilian Minister of Finance announced the tax benefits that will be adopted with the goal of opening a new source of fund raising for companies that normally do not have access to the local capital market, particularly the small and mid-size companies known as small caps, and also aimed to reconnect investors (individuals) to the stock market.

The package of measures includes the exemption of taxes on capital gains for trading of shares issued by small caps, the extension of the tax exemption for infrastructure debentures and the standardization of fixed income market indices investment funds (Exchange Traded Funds - ETFs). A new provisional measure (medida provisória) will be enacted by the Federal Government to regulate these matters.

The first measure is to extend to the capital gains for the purchase and sale of shares of small caps the same tax treatment given to infrastructure, real state and agribusiness securities and investment funds. In all these cases, the income tax rate has been reduced to zero. For other companies the applicable tax rate continues to be 15%. Therefore, this benefit (zero rate) only applies to small caps, which are defined as "companies with market value of less than R$ 700 million or which have gross revenue for the preceding financial year to the Initial Public Offering (IPO) of shares of less than R$ 500 million". This tax benefit applies until 2023 and includes transactions performed in the secondary market or involving individuals that invest either directly or through investment funds1.

In addition to this tax exemption, the small caps will have simpler rules for disclosure of information, which can be done through the internet.

Furthermore, two investment funds set up by the Brazilian Development Bank (Banco Nacional de Desenvolvimento Econômico e Social - BNDES) will facilitate these transactions. The first Fund will have R$ 1 billion to be used by BNDES Participações S.A. – BNDESpar to buy 20% of the shares of IPOs made by small caps. There is another Fund in the amount of R$ 250 million, whose resources will also be invested in these transactions.

The Ministry of Finance is creating a working group composed of members of the Federal Government, the Brazilian Stock Exchange (BM&FBovespa) and the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) destined to tax simplification. The members of this group will simplify the rules of payment of the...