Aiming to foster a long-term credit and financing market in Brazil, the Brazilian Government issued on December 31, 2010 a Provisional Measure (the Provisional Measure 517) establishing amongst other rules the reduction to a “zero rate” of the WHT levied on the income arising from publicly-issued debentures and other bonds issued by Brazilian companies and paid to foreign beneficiaries.
The “zero rate” benefit is valid only for debentures and bonds not issued by local financial banks that were acquired by foreign investors as from January 1, 2011 and is applicable only to foreign investors not based in low tax jurisdictions (tax havens) or subject to privileged tax regimes2. In addition, in order to benefit from these favorable tax terms, the publicly-issued debentures and bonds must in summary: (i) consist of long-term instruments - subject to an average four-year maturity term; (ii) cannot be repurchased by their issuer in the first two years from their issuance date; (iii) cannot be subject to any binding resale agreement agreed to the debenture holder; and (iv) any income arising from such debentures and bonds must be paid to the holder within 180 days or more3.
The Provisional Measure 517 also established, subject to certain conditions, (i) the reduction of the WHT levied on the income arising from Equity Investment Funds for Infrastructure Projects (called “FIP-IE”) paid to individuals and companies to a zero and a 15% rate, respectively and (ii) the reduction of the WHT levied on income derived from debentures and other bonds issued by special purpose companies set up for the development of infrastructure projects (considered as priority by the Brazilian Government), paid to individuals and companies, also to a zero and a 15% rate, respectively.
There are also other rules in the Provisional Measure 517/2010 which, as mentioned above, intend to help the formation and development of a long-term credit and financing market in Brazil. According to the Government, the BNDES (the National Bank for Economic and Social Development) currently is the only long-term financer in Brazil. The Government estimates that with the incentives established by the Provisional Measure 517, R$ 350 billion would be raised from the private sector.
Some of the tax rules above still need to be detailed by the Brazilian IRS and are still under discussion. Despite this, the important point to be noted is that the reduction of the IOF levied on investments made via FIPs, together with the reduction of the Brazilian WHT, indicates that the Government wants to encourage long-term and major foreign investment in Brazil, and perhaps submit them to a lower taxation. Good news at last!.