Executive Order 1,137, published on February 21 of this year, introduced a zero rate for withholding income tax (IRRF) on income paid to foreign investors. The goal is to attract foreign credit and encourage the issuance of private debt securities.

After republished in an extra edition of the Official Gazette of the Federal Government on the same date, MP 1,137 also changed the legal regime applicable to foreign investment, regulated by CMN Resolution 4,373, in equity investment funds (FIP), among others.

The MP incorporates some provisions that were being discussed in Congress in the scope of Bill 4,188, the substitute of which had already been approved by the House of Representatives in June of this year and became known as the Legal Framework of Guarantees.

The measure takes effect January 1, 2023, and must be converted into law within 60 days, extendable for another 60 days.

Main changes

Change Requirements and conditions - who can benefit
  • Foreign investor in FIP - Zero tax rate

The previous rules regarding the composition of FIP's portfolio (minimum limit of 67% of shares of joint stock companies, convertible debentures, subscription warrants, and debt securities in a percentage greater than 5% of the net equity) have been revoked.[1] There is compatibility and alignment with the rules of the Securities and Exchange Commission of Brazil (CVM).

The restriction on applying the zero tax rate to foreign investors who hold more than 40% of the FIP’s units was also revoked.

Expansion of the benefit to:

·       foreign investors who are shareholders in FIP-IE and FIP-PD&I; and

·       sovereign wealth funds.[2]

Important: expansion of the restriction on the application of the zero tax rate for investors domiciled in a tax-favored jurisdiction to beneficiaries of a privileged tax regime[3] (except sovereign wealth funds).

  • Other income* subject to a zero tax rate - produced by:

·       securities subject to public distribution, issued by private legal entities, excluding financial institutions;[4]

·       FIDC whose originator or grantor of the credit rights portfolio is not a financial institution and other institutions authorized to operate by the Central Bank of Brazil;

·       financial notes; and

·       investment funds that invest exclusively in:

-       securities mentioned above;

-       federal government securities;

-       assets producing exempt income referred to in the MP; and

-       repo operations backed by federal public securities or units of investment funds that invest in federal public securities.

*The MP defines income as "any amounts that constitute remuneration of invested capital, including that produced by variable income securities, such as interest, premiums, commissions, bonuses, and discounts, and positive results from investments in investment funds.”

·       The securities must be registered in a registration system authorized by the Central Bank of Brazil or by the CVM.

·       FIDCs and CRIs can have as objective the acquisition of receivables from only one assignor or debtor.

·       The FIDC units must be admitted for trading in an organized securities market or registered in a registration system authorized by the Central Bank of Brazil or by the CVM.

Exceptions: transactions entered into between related parties[5] and an investor domiciled in a tax-favored jurisdiction or beneficiary of a privileged tax regime do not qualify for the 0% tax rate (except in the case of a sovereign wealth fund).



[1] Repeal also applicable to the general regime for investments in FIP (15% tax rate).

[2] Foreign investment vehicles whose assets are composed exclusively of funds derived from the sovereign savings of the respective country.

[3] As per IN 1,037/2010.

[4] The following are considered to be financial institutions: banks of any kind; credit cooperatives; savings banks; securities distribution companies; foreign exchange and securities brokerage companies; credit, financing, and investment companies; real estate credit companies; and leasing companies.

[5] As defined in subsections I to VI and VIII of the head paragraph of article 23 of Law No. 9,430/96.