Tax Advantages Of Brazilian Real Estate Investment Funds

The FII (Fundo de Investimento Imobiliário) is a vehicle for investments in the Brazilian real estate industry. A FII may hold in its portfolio an extensive variety of assets, including real property, mortgage and other real estate bonds, real estate companies' securities, as well as equity in other investment funds. With regard to certain classes of such assets, the FII, if properly structured, may provide relevant tax benefits, especially for investors who are natural persons.

The FII is a flow-through entity not subject to the usual income and revenue taxes applicable to Brazilian companies. At the investor's level the gains obtained with the investment in a FII may be subject to income tax in Brazil 1, which (as well as the applicable rate) will depend on (i) how the gains were obtained, (ii) whether the investor is a natural or legal entity, and (iii) where the investor is resident, domiciled or set up.

Gains arising from distribution of proceeds, as well as amortization or redemption 2 of quotas will be taxed as follows:

(1) natural persons, whether resident or domiciled in Brazil or abroad: are exempted from income tax, provided that (a) the FII quotas are traded exclusively in exchanges, (b) such quotas are held at least by 50 different investors, and (c) the investor that intends to benefit from the exemption neither holds more than 10% of the FII quotas nor is entitled to more than 10% of the FII's proceeds; and (2) legal entities and natural persons not exempted: are subject to income tax at a fixed rate of 20%, if the investor is resident, domiciled or set up in Brazil, and 15%, if the investor is resident, domiciled or set up abroad, of the proceeds distributed (in case of amortization or redemption, though, only the investor's net gain is taxed). Such tax, where applicable, will be levied at the moment the FII transfers profits to investors. The FII's administrative manager must withhold and pay on investors' behalf the amount due.

It is noteworthy that FIIs must transfer to investors at least 95% of their profits recognized in each semester on a cash-basis accounting system (in accordance with financial statements dated as of June 30 and December 31). Such a rule is targeted at avoiding that profits remain untaxed indefinitely.

Direct distribution of dividends by invested companies to the FIII's investors is exempted from income tax. On the other hand, direct payment of interests on net equity (juros sobre o capital próprio)...