On October 3, 2023, the Brazilian National Congress approved the bill of law n. 4,188/2021 (known as the “legal framework of guarantees”) that among other changes, modified the legal requirements for the application of 0% Withholding Income Tax rate for the earnings and capital gains derived by non-residents investors out of investments in private equity funds (Fundos de Investimento em Participações – FIPs).
The main changes can be summarized as follow:
- Extinguishment of the 40% test: The non-resident investor can hold any percentage of the fund’s quotas or hold the right to receive any percentage of the fund’s earnings.
- Alignment of portfolios’ rules with the regulations issued by the Brazilian Securities Commission regulation.
- Extension of the 0% tax rate benefit for non-resident investors that invest in infrastructure investment funds (FIP-IE) and to sovereign funds, even if such funds are located in tax havens.
- New requirement: the FIP must be qualified as an investment entity, in accordance with regulations to be issued by the National Monetary Council.
The original wording of the bill of law (and its version approved by the House of Representatives) provided that the 0% Withholding Income Tax rate would not be applicable to non-resident investors domiciliated in privileged tax regimes (in addition to the non-resident investors domiciliated in tax havens). Nevertheless, the Senate didn’t approve this restriction and, upon the new round of analysis, the House of Representatives, kept the non-inclusion of the restriction to non-resident investors domiciliated in privileged tax regimes.
The modifications proposed by the bill of law n. 4,188/2021 have previously been introduced by Provisional Measure 1,137/2022, but since it was not converted into law, it ended up losing its effectiveness. The bill of law n. 4,188/2021 will be sent for presidential sanction, which should take place within 15 working days of the receipt. If the President present any vetoes, the vetoes will be subject to consideration by the Congress, that can overturn the presidential vetoes. If sanctioned by the President, the law shall be published.