Provisional Measure Modifies The Taxation On Investment Funds In Brazil

Tax

October 31, 2017, saw the issuance of Provisional Measure 806 (MP 806), which modifies the imposition of Withholding Income Tax (WHT) on several types of Investment Funds, establishing taxation for events that were previously regarded as tax exempt. In addition, modifications were made by MP 806 on Law 11,312/2006, which establishes the taxation on Brazilian Private Equity Funds (FIP).

The most important modifications impact Investment Funds that have been created as “closed condominiums,” i.e., Funds that do not allow the redemption of quotas during their existence. MP 806 establishes the taxation via WHT of undistributed revenues of those specific Investment Funds on May 31, 2018 (in a single tax imposition). The calculation basis for WHT in this case will be the positive difference between the equity value of the Fund quotas (increased by the revenues accrued to each quotaholder), and the acquisition cost, adjusted by all amortizations that have taken place. MP 806 also establishes a recurring tax imposition on the same grounds, which must occur on the last business day of May and November of each calendar year.

These modifications made by MP 806 are not applicable to certain types of Investment Funds, which, even if created as “closed condominiums,” are subject to specific statutory tax treatments. These are the following:

Brazilian Real Estate Funds (FII), which remain subject to taxation according to Law 8,668/1993. Brazilian Credit Rights Funds (FIDC) and Brazilian Investment Funds on Quotas of Credit Rights Funds (FIC-FIDC), which remain subject to taxation on the amortization, sale/disposition or redemption of the quotas. Brazilian Share Funds and Brazilian Investment Funds on Share Funds, which remain subject to taxation on the event of the redemption of the quotas. Brazilian Investment Funds composed solely by non-resident or non-domiciled investors, which shall be subject to taxation according to Law 8,981/1995. Brazilian Investment Funds and Brazilian Investment Funds in Quotas that, until October 30, 2017, have a specific provision in their regulations establishing that these Funds have a non-extendable closure date before December 31, 2018. In...