Heritage funds, also known as endowments or philanthropic funds, have recently been regulated by Presidential Decree No. 851, of September 10, 2018.
These funds are sets of private assets organized, managed, and administered by an asset management organization with the purpose of providing a long-term funding for the supported institutions or the institutions holding the funds. As a general rule, only proceeds of the donations are applied to projects. The fund serves as a regular and stable source of funding for institutions whose purpose is the development of education, science, technology, research and innovation, culture, health, environment, social assistance, and sports activities. For the time being, such institutions may be public or private non-profits.
The regulation delimited the areas of activity of the institutions supported and left out, for example, human rights. Agents involved in the legislative process of the MP suggest the linking of areas of activity according to the broader scope of article 3 of Law No. 9,790, of March 23, 1999 (the OSCIPs Law).
Nonetheless, the MP has made important advances in encouraging donations in Brazil by improving the corporate governance of the fund management organization, therein providing for a separation of responsibilities between those who manage the fund and the institution supported. Also within the scope of corporate governance, the fund's management organization must include in its bylaws, among other things:
- which institutions are supported, and a qualified quorum is needed to change them;
- the obligation to set up a board of directors (CA) and an audit committee (CF) and, for heritage funds with assets over R$ 5 million, investment committees (CI), as well as the rules of composition, competencies, form of election, or nomination of their members and the possibility regarding whether donors may sit on such bodies;
- the form of approval of policies of management, investment, redemption, and use of the funds of the heritage fund; and
- prohibition on the allocation of funds for purposes other than those provided for in the bylaws and the granting of guarantees to third parties using the assets owned by the heritage fund.
The regulation also obliges heritage funds to adopt internal mechanisms and procedures of integrity, auditing, and incentives for reporting irregularities, as well as the preparation of codes of ethics and conduct for managers and employees. Fund management organizations with shareholders' equity exceeding R$ 20 million must have their financial statements submitted to independent auditors.
The MP also provides that the CA should be composed of at least two independent directors and a maximum of seven members for a term of two years, with the possibility of renewal. The MP provides that it is the responsibility of the CA to deliberate on amendments to the bylaws, contrary to the Civil Code, which considers the general meeting exclusively competent in this regard. Another important measure of transparency for investors is the provision that individuals or representatives of donor legal entities representing more than 10% of the total composition of the fund may participate in deliberative meetings of the CA as observers.
The CI, to be appointed by the CA, is responsible for recommending to the CA the investment policy and the rules for the recovery and use of funds, to coordinate and supervise the actions of those responsible for managing funds, and to prepare an annual report on the management of funds. Another important advance of the MP for the professionalization of management of heritage funds is the possibility of hiring, by the management organization, of an entity to manage funds registered with the Brazilian Securities and Exchange Commission (CVM), allowing for the payment of a performance fee.
The CF must be composed of three members nominated by the CA, and members who sat on the CA may not be nominated. The members of the CA, CF, and CI may be remunerated at an amount limited to the highest remuneration of the highest-ranking leader of the institution supported.
Despite the many positive aspects of corporate governance, there is a tightening and bureaucratization of the structure that may increase costs and inhibit donations from large fortunes. It should be observed that there is room for simplification of the governance structure.
It is important that the optional executive body of the executive organization be a non-profit institution or an international entity recognized and represented in Brazil, which is engaged by the managing organization to assist and coordinate the supported institution in the development of projects and programs.
The new rule regulates the relationship between the supported institution and the management organization, therein requiring the execution of a partnership instrument and the execution of programs, which must establish, respectively, (i) the cooperation link between them and determine the purpose of the public interest to be supported; and (ii) how the funds will be spent.
The MP was published days after the fire at the National Museum of Brazil in Rio de Janeiro and, in order to alleviate the tragedy, included permission for a larger percentage of the donations, not just their income, to be invested in the recovery or preservation of works and heritage and in emergency interventions to maintain the services provided by the supported institution.
One of the main innovations of the MP is the matching of financial donations to management organizations that support cultural projects to donations made to cultural projects for the purposes of article 3 of Law No. 8,313, of December 23, 1991 (the Rouanet Law), it being possible to deduct income tax of up to 6% for individuals and up to 4% for legal entities. The limitation of such tax benefit to only cultural projects may have a perverse effect by inhibiting investments in other areas covered by the heritage funds.
It should be noted that, according to Law No. 9,249, of December 26, 1995, and Presidential Decree No. 2,158-35, dated August 24, 2001, the donor legal entity taxed per the actual income regime may deduct the amount of the donation up to the limit of 2% of operating income, in the case of donations to civil society organizations (OSCs). The extension of this benefit to heritage funds would enable the search for new potential sources of funding for such organizations, which mostly work in the aforementioned social areas, delimited by the MP itself.
It is also observed that, in the State of São Paulo, the Tax on Transferences Causa Mortis and Donation of any Assets or Rights (ITCMD) is the responsibility of the grantee, therein applying a rate of 4% (the maximum rate established by the Federal Senate is 8%) over the amount donated. Entities whose social objectives are to promote human rights, culture, or the environment are exempt from this tax. Pursuant to the terms of article 4, item IV, of Decree No. 46,655/02, the ITCMD does not affect the transfer of assets and rights to the equity of educational and social assistance institutions that enjoy immunity only in relation to assets linked to essential purposes, which do not include assets for use as a source of income.
Considering that the ITCMD would be applicable to donations to funds and, in most cases, to donations from funds to supported institutions, there is debate regarding possible exemption from the ITCMD in donations to OSCs and heritage funds. According to a study by a researcher with FGV, Rafael Oliva, and the report Sustentabilidade econômica das organizações da sociedade civil – Desafios do ambiente jurídico brasileiro atual ["Economic Sustainability of Civil Society Organizations - Challenges in the Current Brazilian Legal Environment”], FGV Direito SP, the funds raised with ITCMD, including inheritances and donations, correspond to 1 % of net current revenue. By separating the amount raised with ITCMD from the taxable event, it is possible to find that 52% comes from donations, and only 1% of the total collected, or 0.0168% of the net current income of the state, without separating from this amount donations to OSCs.
The MP already has 114 suggestions for amendment. To organize advocacy with respect to the topic, the Institute for Development of Social Investment (IDIS) launched the Coalition for Philanthropic Heritage Funds, of which Machado Meyer is a signatory. Three of the main purposes of the initiative are (i) to expand the area of activity of the supported institutions (article 3 of the OSCIPs Act), (ii) extend the MP tax benefit for all causes; and (iii) reduce governance constraints for managing organizations, in order that large fortunes not be discouraged from donating.
 SPALDING, Erika. Os Fundos Patrimoniais Endowment no Brasil [“Endowment Heritage Funds in Brazil”]. São Paulo, 2016.