Withholding Income Tax: zero rate extended to foreign investments in Private Equity Funds

Law eases requirements for eligibility to zero rate on income from investments in equity funds

Issued on October 31, Law No. 14,711/2023 created the "Legal Framework for Guarantees", which outlined new provisions on loan guarantees and credits. However, the same act also addressed another relevant topic, as it extended the zero-rate Withholding Income Tax (IRRF) on income earned by residents abroad from investments in Brazilian Private Equity Funds (FIPs).

Read on to learn more on what has changed:

Suppression of limitations for investors

Under the previous rules, the zero rate was not applicable to investors who, whether alone or jointly with related persons, held at least 40% ownership in a Private Equity Fund (FIP) or held membership units granting them the right to receive 40% or more of the income produced by the fund.

The new law has repealed this requirement, extending the benefit to investors domiciled abroad regardless of their ownership stake in the funds, only maintaining that the beneficiaries not be under the jurisdiction of a tax haven.

Flexibility in portfolio composition for FIPs

Previously, the benefit was not applicable to FIPs whose portfolios:

• held debt securities exceeding 5% of their net worth, or
• were not made up of at least 67% shares in corporations, convertible debentures and subscription warrants.

Now, a FIP portfolio must comply only with the regulations laid down by the Brazilian Securities and Exchange Commission (CVM).

It should be noted, however, that the funds must be classified as investment entities, as per the rules of the National Monetary Council (CMN).

Extension of the benefit to other types of funds

The zero rate has been extended to:

• Infrastructure Private Equity Investment Funds (FIP-IE);
• Private Equity Investment Funds for Innovation, Research and Development (FIP-PD&I); and
• Sovereign wealth funds (SWF).

Tax support for investors

DPC offers complete solutions for investors who wish to remain tax compliant in Brazil, shedding light on how their financial investments are taxed in the country. Reach out to our experts at:  dpc@dpc.com.br.