In general, investment funds are not subject to taxation in Brazil, since they are considered see-through entities for tax purposes. Accordingly, the investor is the taxpayer, as he is the beneficiary of income earned by these funds’ portfolios from variable income (stock market, commodities etc) and/or fixed income investments.
A long-term fund is a fund which invests in fixed rate securities with a weighted average maturity term of more than 365 days (Law 11.033/04, article 1 and Law 11.053/04, article 6). The fund´s administrator is required to provide information regarding weighted average maturity term calculation of all assets on a daily basis if required by Tax Authorities in a Tax Audit.
Income earned by investors derived from an investment in a mutual fund is subject to withholding income tax in accordance with the following table (the period is counted from the date of acquisition and the date of redemption of the quotas - each acquisition):
|Term||Tax Rate (%)|
|From 181 days to 360 days||20.0|
|From 361 days to 720 days||17.5|
|More than 720 days||15.0|
IOF tax levied on investments in fixed rated investments (bond and investment funds - see Section 1.9), if applicable, is deductible at withholding income tax basis calculation. The Fund’s administrator is responsible for withheld and pays these taxes on behalf of investors.
A short-term fund is a fund which invests in securities that do not comply with long term fund rules (Law 11.033/04, article 1 and Law 11.053/04, article 6).
Income generated by an investment in a short term fund is subject to withholding income tax according to the period between the date of acquisition and the date of redemption of quotas. This period is calculated for each acquisition of quotas:
|More than 6 months||22.0|
This type of fund allows investors to withdraw their quotas and/or receive revenues only on pre-established dates statued at funds bylaws. Withholding income tax is due only at those times. Some types of funds are usually organized as closed funds is called Credit Assignment Investment Fund (Fundo de Investimento em Direitos Creditórios - FIDC), Real Estate investment fund (Fundo de Investimento Imobiliário); Investment in participation funds (FIP), due the characteristics of portfolio and objectives of investment.
In general, quotaholders are supposed to sale their quotes issued by these mutual funds at stock exchange or OTC market, due to the fact that there is no provision for redemption of quotes or this event would occur on future. If quotaholders earned capital gains on this transaction, he is supposed to calculate and to pay withholding income tax. Exceptions to this rule would be informed on comments regarding each type of mutual fund.Withholding income tax period.
The fund manager withholds income tax due at source on each maturity date of the fund, for funds whose maturity date periods are less than or equal to 90 days. For funds whose maturity date period is longer than 90 days and funds without maturity date, the tax is withheld on the last working day of May and November of each year and on the date of the redemption, if it occurs before.
In the case of long term fund, the fund manager should withhold and pay withholding income tax at the rate of 15 percent on the last working day of May and November of each year. The difference, if any (between the effective rate applying at the rates varying from 22.5 percent to 15 percent), must be withheld at the date of the redemption. If an investor keeps this investment for more than 720 days, no tax rate difference would be collected regarding this investment.
For short term funds, the fund manager should withhold and pay withholding income tax at a rate of 20 percent on the last working day of May and November of each year and on each redemption date between these two dates. The rate difference (2.5 percent) will be withheld on the date of redemption, if applicable, according to the rules for the fixed rated investments.
For stock funds the tax is withheld upon the redemption of quotas only.
The rate and classification of this kind of fund (long term or short term) should be informed by the fund manager to quota holders.
The transfer of an open fund is, in principle, not allowed. The only exceptions are court decision or succession (probate) (Brazilian Securities Commission (CVM) Instruction 409, article 12).
The transfer of a closed fund is allowed on transactions performed privately, on the stock exchange or the organized over-the-counter stock exchange on which the fund is listed (CVM Instruction 409, articles 12, paragraph 1°).
The gain is subject to withholding tax at source at the rate of 15 percent. For companies, the income tax withheld at source can be offset against income tax payable.
The main objective of this type of fund is to hold real estate investments (revenues from real estate rentals, such as shopping centers, built-to-suit buildings). At least, 95 percent of income generated by these funds should be distributed to quota holders (cash basis) on 30 June and 31 December of each year.
Revenues distributed by funds to quota holders are subject to withholding income tax at a rate of 20 percent.
Incorporated as closed funds, quota holders are supposed to sale their quotes at stock exchange markets or at OTC/private operation. In both cases, capital gains realized are subject to withholding income tax at a rate of 20 percent. Quota holders are supposed to pay withholding income tax levied on capital gains earned on this sale.
In case of redemption of quotes related to specific provision at mutual funds bylaws or liquidation of funds, withheld income tax is due over positive difference between value of quotes at redemption date and historical cost of acquisition of these quotes. In the case that an investor acquired these quotes at a secondary market (i.e. OTC operation or Stock exchange markets), he should present the negotiation note related to the acquisition of these quotes to mutual fund manager.
Individuals would be eligible for exemption of taxation (at source and at tax return) on revenues distributed by real estate mutual funds only if all conditions stated below are satisfied:
The stock fund is a fund which invests at minimum of 67percent of portfolio in stocks of public traded companies traded at stock markets in Brazil and/or abroad (only American Depositary Receipts - ADR; and Global Depositary Receipts - GDR). (article 73 of Law 8,981/95 and article 1 of Law 11.033/04).
15 percent rate of income tax is due at source solely at redemption of quotes (open fund) or when these quotes is traded at exchange markets, private transaction and/or at organized over-the-counter exchange markets (closed funds).
No IOF tax is due on redemption of stock mutual funds quotes.
Investment in participation in infrastructure (FIP-IE) and investment in intensive economic production of research, development and innovation (FIP-PD&I)
Article 4 of Law 12,431/11 amended Law 11,478/07 which rules Mutual Funds with purpose of investiment in shares, bond convertible or not in shares, shares subscription bonus issued by special purpose companies (SPC) created to develop infrastructure projects and intensive economic production of research, developmente and innovation projects considered priority under regulation to be issued by Brazilian Federal Government.
According to Law 11,478/07, Infra-structure projects and intensive economic production of research, development and innovation projects, projects approved by referred Ministery, with purpose of implementation, ampliation, maintenance, recovery, adequation or modernization of (sectors): transportation; energy; basic sanitation, irrigation and another priority areas defined by Federal Government. When the project is not related to infrastructure, but related to PD&I, this project should be approved by Minister of Science, Technology and Innovation.
In order to be considered as FIP-IE or FIP-PD&I, 90 percent of portfolio of this fund must be invested in shares, subscription bonus, bonds convertible or not in shares issued by these SPCs.
In case of these mutual fund does not follow these requirements (investing minimum of 90 percent of portfolio in in shares, subscription bonus, bonds convertible or not in shares issued by these SPCs), these funds should be liquidated or transformed into regular investment funds.
Individuals resident in Brazil: Income distributed by these funds as well as capital gains earned on sale of quotes of FIP-IE and FIP PD&I mutual funds are levied at zero rate for income tax, due solely at source.
All companies are levied at 15 percent rate for income tax, due solely at source. As a result of this provision, for companies subject to actual basis calculation tax regime (applicable for corporate income tax regime), revenues from this kind of investment could be excluded at corporate income tax basis calculation as well as losses from this investment are not deductible at corporate income tax basis calculation.
Investment in mutual funds that acquires bonds issued by special purpose company incorporated with purpose to develop infrastructure projects and investment in bonds issued by special purpose company with objective to develop intensive economic production of research, development and innovation projects – IE/PD&I long term bonds mutual funds
Article 3 of Law 12,431/11 allowed managers of mutual funds under supervision of CVM to constitute mutual funds with purpose of acquiring bonds issued by special purpose companies (SPC). These SPC should be incorporated with solely purpose of developing infrastructure projects or to invest in intensive economic production of research, development and innovation, considered priority under regulation to be issued by Brazilian Federal Government.
Decree 7,603/11 states that it is considered as infra-structure projects and intensive economic production of research, development and innovation projects, projects approved by referred Ministery, with purpose of implementation, ampliation, maintenance, recovery, adequation or modernization of (sectors): transportation and logistitcs; urban mobility; energy; telecommunications; radiodifusion; basic sanitation and irrigation. When the project is not related to infrastructure, but related to PD&I, this project should be approved by Minister of Science, Technology and Innovation.
These bonds should have the following characteristics in order to be eligible for these tax regime:
National Monetary Council will define formula for average time between date of issuance and date of redemption of these bonds, as well as for simplified procedures stated at item vi above.
In order to be considered as IE/PD&I long term bonds mutual funds, a minimum of 85 percent of portfolio of this fund must be invested in bonds issued by these SPCs as well as funds that invest in quotas of these funds must have at least 95 percent of portfolio invested in another infrastructure mutual fund.
In case of these mutual fund does not follow these requirements (investing minimum of 80 percent of portfolio in bonds issued by SPC; in case of FIC, investing at minimum 95 percent of portfolio in quotas of mutual funds that invest in bond issued by SPC), these funds should be liquidated or transformed into regular investment funds (short term and long term funds).
Individuals resident in Brazil: Income distributed by IE/PD&I long term bonds mutual funds are levied at zero rate for income tax, due solely at source. As there is no provision for exemption of capital gains earned on sale of these quotes, general taxation would be applicable, due exclusively at source at rate of 15 percent.
All companies are levied at 15 percent rate for income tax at source. Losses from this investment are not deductible at corporate income tax basis calculation.
Income and gains earned by Brazilian residents are taxed in two different ways.
The rules for inflow operations made by a non-resident investor, individual or group, through the floating exchange market, are governed by article 16 of Provisional Measure 2,189- 49/01 and National Monetary Council (CMN) Resolution 2.689, of 26 January 2000, as amended by CMN Resolution 2.742, of 28 June 2000 and CMN Resolution 3.245, of 25 November 2004.
The operational rules are the same regardless of the market which supplies the capital, that is, the foreign investor must have a representative entity in Brazil, fill out the form attached to CMN Resolution 2.689/00 and register with the CVM.
According to Normative Ruling 200/02, as from 1 October 2002, all non-resident investors are obliged to apply for a taxpayer registration at the Brazilian Internal Revenue Service.
If the representative entity is not a financial institution licensed by BACEN, the investor must appoint an entity that will be jointly responsible and this entity must be duly licensed by BACEN.
Pursuant to subparagraphs I and II of article 6 of CMN Resolution 2.689/00, the securities traded, as well as other financial operations performed by non-resident investor must:
Moreover, operations performed in the derivative or other future liquidation markets may only be registered or performed at stock exchanges, future exchanges, or over-the-counter markets organized by an entity authorized by CVM, or recorded in a register, liquidation, and custody system authorized by BACEN or regulated by CVM, within their respective jurisdictions.
Finally, article 8 of CMN Resolution 2.689/00 forbids the use of funds derived from the acquisition or sale of securities:
In this manner, income earned is subject to withholding income tax due solely at source at the following rates:
Capital gains, for investments made under CMN Resolution 2,689/00 rules purposes, is defined as being positive earnings from stock, commodities, and other similar exchange market transactions, and with gold traded outside commodity exchange markets, earned and paid by these funds. Such gains are not subject to withholding income tax.
Taxation of non-resident in a Brazilian resident fund (when the investor does not submit him/herself to Resolution 2,689 rules)
According to article 78 of Law 8,981/95, withheld income tax rules applicable to investments in investment funds by non-residents (provided said investors do not submit themselves to CMN Resolution 2,689 rules) are subject to same rules applicable for residents in Brazil. (See item 1.2).
According to article 7 of Law 9,959/00, tax haven residents are subject to the same taxation rules applicable for Brazilian Nationals, with respect to income earned from investments made at Brazilian financial markets (fixed an variable income) (see rules on topic 1.3 above). Article 4 of Law 10,451/02 extends Transfer Pricing rules to residents in Countries where the local legislation does not provide for the mandatory public disclosure of the identity of company shareholders.
Brazilian Internal Revenue Service issued Normative Ruling 1037/10, which contains a list of the countries (and regions) that are considered tax haven countries or countries that do not require the public disclosure of the identity of the company’s shareholders.
Although Law 10,451/02 does not expressly extend this new concept (tax havens are countries that do not require the public disclosure of shareholders) to income tax withholding legislation, it is possible that the tax authorities will understand that the same tax definition is applicable for income tax purposes.
Investment fund managers (such as full-service banks and investment banks) are subject to corporate income tax at the rate of approximately 25 percent as well as social contribution on net income (CSLL tax) at the rate of 9 percent. According to Article 17 of Law 11,727/08, CSLL tax rate is 15 percent, as from 1 May 2008. Fund managers could be incorporated as a non-financial entity. In this case, the CSLL tax rate still 9 percent.
PIS and COFINS taxes apply on gross income at 4 percent and 0.65 percent respectively, in case of financial institutions. For non-financial entities, the applicable rates are 7.6 percent (COFINS tax) and 1.65 percent (PIS tax) – for non-cumulative basis. Tax credits are allowed. For cumulative basis these taxes apply at 3 percent (COFINS tax) and 0.65 percent (PIS tax). No tax credits are allowed.
The service tax – ISS (municipality tax) is levied on the management fees. The tax rates are charged by the municipalities from 2 percent to 5 percent (minimum and maximum rates, established by Federal Constitution). The city of São Paulo charges the ISS at the rate of 2.5 percent on such services.
CVM Instruction 409/04 allows the redemption of quotas any time with or without pro-rata income. This issue must be addressed in the fund’s by-laws. On the other hand, IOF tax is payable if the investment is redeemed before 30 days from the date of investment. See details in topic 1.9 below.
Moreover, in general, funds do not distribute profits except when units are being redeemed.
The tax treaties settled between Brazil and other contracted countries do not have a specific provision for income and gains from mutual funds. No precedents are known on the applicability to mutual funds of these treaties by the tax authorities.
However, as a general rule, Brazilian tax legislation allows Brazilian resident (in the case of companies) to credit the amount of income tax paid on foreign income and gains against corporate income tax due in Brazil, regardless of the nature of the income. It is understood that this provision is applicable to income and gains derived from investments performed in foreign funds. This provision for compensation of tax paid abroad with the amount due in Brazili is applicable only in case that tax legislation of country which corporate taxes were paid has provision to compensate tax paid to Brazilian Government (reciprocity principle).
There are some requirements in order to be allowed to take the tax credit.
Basically, the foreign tax paid must have the nature of an income tax. The amount creditable in Brazil is limited to the one due on the same income in Brazil.
For individuals, the tax credit is allowed if the legislation in the country where the foreign tax was paid provides equal treatment for taxes paid in Brazil.
Brazilian legislation provides a tax deduction for individuals who invest in a special vehicle named FAPI (Fundo de Aposentadoria Programada Individual), which has the features of an investment fund combined with private pension plans.
The individual is entitled to a deduction of the amount invested in the FAPI, limited to a ceiling of 12 percent of his/her annual taxable income and the investor should contribute to the official social security. The redemption of quotas is subject to withholding income tax at the rate of 15 percent. The gross taxable income received must be included in the annual income tax return. The tax withheld at source may be offset against the total tax due.
The investor may opt to the withholding tax at source regime in which the revenue is subject to following rates (considering the accumulation period time of each contribution made).
|Up to 2 years||35|
|2 to 4 years||30|
|4 to 6 years||25|
|6 to 8 years||20|
|8 to 10 years||15|
|More than 10 years||10|
The option for this tax regime has to be made upon the first contribution.
The employer may deduct its contributions to the FAPI, limited to 20 percent of the employee’s salaries. According to Normative Ruling 497/05, this plan must cover more than 50 percent of its employees.
There are no transfer taxes on the purchase or sale by Brazilian funds of shares or securities in Brazilian or foreign companies.
Wealth, inheritance or gift tax (ITCMD) is a state tax and levied in Brazil. In the state of São Paulo, wealth, inheritance, and gift transfers are taxable as from 1 January 2001. (Law 10,705/00 with the wording of Law 10,992/01).
Currently, the ITCMD tax (for São Paulo State) rates are:
Other States have different rates.
On redemption of quotes (open fund)
Decree 6,306/07 establishes that there is an IOF tax on the value of the redemption of fixed income investments (including funds) at a maximum rate of 1 percent per day, limited to the income generated on this operation. The tax applies on a diminishing basis in accordance with a table that decreases according to the period of investment, from 96 percent to 0 percent of the redemption value. Therefore, no IOF is applicable when redemption takes place 30 or more days after investment.
There is also another IOF tax levied at the maximum rate of 0.5 percent, on the amount of the redemption, but is limited to the positive difference between the value of the quota on the day of redemption and the value for which it was redeemed. This IOF tax is applicable only to FIF funds whose internal rules establish a maturity period of more than 30 days. If is less than 30 days, the applicable IOF tax rule is the Decree 4,494/02 (commented on in the foregoing paragraph).
IOF tax levied on investments in funds or fixed rated bonds can be deducted in the income tax withholding calculation.
On foreign exchange operation
Article 15-A of Decree 6,306/07 states that IOF tax due on foreign exchange operations is due at following rates:
For domestic mutual funds, regarding inflow and outflow foreign currency exchange operations: 0.38 percent over the amount in Brazilian Reais converted into foreign currency (and vice-versa).
On financial derivatives operations
As from 16 September 2011, IOF tax is levied on financial derivatives operations, according to article 3 of Law 12,543/11.
Decree 7,563/11 was issued with purpose to rule IOF tax levied on financial derivatives operation. According to this legislation, IOF tax levied on financial derivatives operations is due at rate of 1 percent only when investors hold and increases sold positions in foreign currency financial derivatives operations or decreases bought positions in foreign currency financial derivatives operations. Futher financial derivatives are not levied by this IOF tax.
IOF tax is due if net sold exposition in foreign currency is higher than USD10 million.
IOF tax should be calculated and collected by funds administrator.
The issue of quotas by an investment fund is not subject to capital tax.
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