Foreign Exchange
Brazilian Foreign Exchange Rules Simplified
Brazilian Federal Law No. 14.286/21 entered into force on December 30th, 2022, and established a new legal framework for the Brazilian foreign exchange market. The legal provisions aim to modernize, simplify, and consolidate the legislation of the foreign exchange and international capital market in Brazil, promoting the development of the business environment and making foreign exchange operations less bureaucratic.
With the purposes of reducing barriers to exports and imports of goods and services and to promoting the free movement of capital, Law No. 14.286/21 and the Resolutions published by the Brazilian Central Bank to regulate the Law brought significant changes in the operational aspects of the Brazilian exchange market, such as:
- The execution of exchange agreements is no longer required for the closing of FX transactions, which may be carried out by any means such as telephone call, WhatsApp or e-mail.
- Bank accounts held by residents and non-residents in Brazil shall be granted equal treatment.
- Brazilian bank accounts may now be held in foreign currencies. We note that this rule still needs to be regulated by the Central Bank of Brazil so that it becomes available for personnel accounts. So far, this possibility is only available for brokerage houses, insurance companies and credit managers.
- Remittances abroad by way of profits, dividends, interests no longer need to be registered with the Brazilian Central Bank.
- Individuals are now allowed to trade foreign currency in kind provided that such transactions are carried out occasionally and not professionally and do not exceed the US$500 cap per transaction.
- The list of transactions which set forth obligations enforceable in Brazil that can be paid in foreign currency was expanded.
- Private compensation of credits and debits between residents and non-residents through simple accounting entries are now permitted.
- The external interest indicator was updated due to the extinction of LIBOR.
The legal changes make foreign capital more attractive, both for investments in the financial and capital markets as well as for direct investment in long-term opportunities such as companies and infrastructure projects and concessions.
The Law will contribute to make transactions in Brazil involving foreign currency simpler, more agile, and competitive for individuals and companies, making the exchange market more accessible for those who send or receive funds from abroad.
Investment Funds
Resolution 175 CVM: Investment Funds Compilation of Rules and Modernization
The Resolution 175 issued by the Brazilian Securities Commission (CVM) was published in the end of 2022 for the purposes of regulating the constitution, operation, and disclosure of information of investment funds, as well as the rendering of services for such funds. The Resolution replaces 38 existing rules on the subject and consolidates the rules on investment funds in a single normative act.
In addition to disciplining important concepts about funds already introduced by the “Economic Freedom Law” of 2019 (Law No. 13,874/2019), the Resolution formalizes practices already adopted by the market and seeks to align the local industry with international standards, increasing the attractiveness for foreign investors and the access from local investors to more diversified and sophisticated investment opportunities.
In this sense, Resolution 175 details how “classes” and “subclasses” of quotas/shares can be created.
Moreover, the law establishes that shareholders’ liability may be limited to the value of the acquired shares. It may not seem like an important change, but until then, if an investment fund assumed a leveraged position, for example, which resulted in losses to the point of its net worth becoming negative, the shareholders could be called upon to contribute additional capital. According to the Resolution, funds need to define, in regulations, what type of liabilities shareholders will have before the fund.
It is believed that the new structure of division of funds into classes and subclasses, with limited and unlimited liability, will allow the creation of several layers, simplifying, in the medium and long terms, the operation of investment funds.
Another point raised by the new rule was the distribution of risks and responsibilities among the agents involved. Currently, within the universe of funds, there are four major roles: manager, administrator, custodian, and distributor. Before the Resolution, the custodian and the administrator were responsible for most of the obligations and, consequently, were responsible for most of the risks. However, the manager was entitled to most part of the remuneration. CVM updates brought more transparency to investors regarding service providers fees, and more balance to fund managers responsibilities.
Tax
Provisional Measure No. 1,171/2023: Innovations to the tax regime for assets abroad held by individuals residing in Brazil.
On April 30, 2023, the Brazilian Federal Government published Provisional Measure (“MP”) No. 1.173/2023 providing for a new tax regime for income received abroad. Among other aspects, the new rule aims to institute the automatic taxation of income tax on income earned by individuals with residence in Brazil from financial investments, controlled entities, and trusts abroad.
According to Article 2 of the MP, this income must be reported in the Annual Tax Return and separated from other income and capital gains, observing the following progressive table:
Offshore entities: Members of offshores will be highly impacted by the new rule. The main impact is the end of deferral, a tax instrument widely used by people who invest in offshore entities. The members of these offshore companies were only taxed when the resources of these companies were distributed. With the new MP, the profits and capital gain obtained abroad will be taxed regardless of distribution and in proportion to the interest held by the members in the offshores capital stock or equivalent.
Trusts: Foreign trusts will also be impacted by the rule. Assets and rights under foreign trusts will be considered as remaining under the settlor’s ownership even after the creation of the trust for purposes of taxation. Thus, the income and capital gains relating to the assets and rights held by the trust will be taxed as if they were under the settlor’s titularity.
The MP does not have automatic application and needs to be approved by the Brazilian National Congress and converted into law within 60 days (extended for another 60 days) to take effect as of January 2024. If approved, it is expected that the text will undergo changes.
Nazione
Brasile
