Executive Order No. 930/20, published on March 30 (MP 930), provides for the tax treatment applicable to exchange variations in investments made by financial institutions and other institutions authorized to operate by the Central Bank of Brazil (Bacen) in a foreign controlled company.
The purpose is to mitigate the influence of these transactions on the Brazilian foreign exchange market and reduce operating costs, especially those related to margin deposits. To this end, MP 930 seeks to reduce the asymmetry between the tax treatment applicable to foreign exchange variations related to investments made by Brazilian financial institutions in foreign controlled companies and the effects of hedge transactions implemented to cover exposure in foreign currency.
As a practice, domestic banks that hold investments in foreign controlled companies contract hedge transactions in order to neutralize the effects of the foreign exchange variation of these investments on their assets. Normally, these transactions are carried out through dollar futures contracts.
The results of the foreign exchange variation of the investment abroad do not affect the taxation by the Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL). However, the result of the hedge transaction is included in the calculation basis for these taxes. This asymmetry in tax treatment imposes on banks the need to contract for excess protection (overhedge).
According to the explanatory memorandum for MP 930, this asymmetry in tax treatment produces various undesirable effects, with increased transaction costs and impact on tax collection. These effects are worsened at times of greater volatility in the foreign exchange market, as in the current scenario. Considering that the financial institution may, at some point, decide to divest itself of its investments abroad, the dismantling of foreign exchange positions in Brazil could exert unwanted influence on the foreign exchange market.
In order to eliminate the need to contract for an overhedge, MP 930 proposes equity in the tax treatment: both the foreign exchange variation of the portion of the investment in a foreign controlled company covered by the hedge and the foreign exchange variation itself from the respective hedge will now be considered in the calculation basis of the IRPJ and CSLL due.
Thus, as of the fiscal year of 2021, the foreign exchange variation of the portion of the amount of the investment made by financial institutions and by other institutions authorized to operate by Bacen in a foreign controlled company with coverage of risk (hedge) shall be computed in the determination of the IRPJ and CSLL of the controlling legal entity domiciled in Brazil, in the proportion of:
- 50% in the fiscal year 2021; and
- 100% from the fiscal year 2022 onwards.
MP 930 also dealt with the presumed credit calculated by financial institutions whose extrajudicial liquidation or bankruptcy has been declared (pursuant to article 3 to article 9 of Law No. 12,838/13). According to MP 930, this presumed credit will be applied, until December 31, 2022, to the balance of credits arising from tax losses and negative social contribution basis arising from foreign exchange risk hedging transactions of the investment in a foreign controlled company, originated in the period from January 1, 2018, to December 31, 2020.
The presumed credit shall be calculated only by financial institutions whose extrajudicial liquidation or bankruptcy has been declared after publication of the executive order.