Brazil: Corporate Tax Review 2017

In this article, Igor Nascimento de Souza at Madrona Advogados explores recent developments in the Brazilian corporate tax space. 

Corporate Tax

The development of any country’s infrastructure sector is an important factor for its competitiveness in attracting domestic and foreign investment. In an increasingly globalised economic environment, with transnational companies seeking to produce in places with higher efficiency gains, countries that have well-developed infrastructure can attract investment to the detriment of those who do not.

Well-designed roads, railways and ports, cheap and abundant electricity, and high-quality sanitation, among others, reduce the production cost for businesses, making them more competitive. The acquisition cost of commodities is basically the same across any industry, since prices are quoted in existing large trading exchanges across the world. Efficiency gains in industry will basically be found in cutting costs in manpower, logistics and transport, energy, and taxes. Much of this cost is linked to the state of local infrastructure. As the infrastructure of the country develops, it reduces the production cost and increases the profitability of national industry.

Developed countries have very good infrastructure, but high labour costs. Emerging economies may have an underdeveloped infrastructure, but their labour costs are low. An important factor for attracting investment to developing countries will always be the improvement of transport, logistics and energy infrastructure. These investments also affect local labour, because they come with an increased need for skilled labour, leading to higher rates of employment and tax revenue. This creates a virtuous circle for the country’s socioeconomic development. This is why countries in need of infrastructure investment make use of incentive programmes to encourage foreign investment. Waivers may be granted in return for companies investing in the national infrastructure; these are generally offset by the gains that come with later investment and improved production methods.

One of the most relevant incentives offered by these countries concerns taxation. This promotes economic activity; namely the exemption from tax of an industry and consequent loss of tax revenue is offset by the volume of investment made by that industry, or the trade that investment generates. 

In Brazil, tax incentives are granted for the benefit of the national infrastructure. If used appropriately, they can be decisive factors for domestic and foreign investors considering Brazil as an investment opportunity. This article will outline how some of these incentives work.

The Special Incentive Scheme for Infrastructure Development

Law No. 11,488 of 15 June 2007 created the Special Incentive Scheme for Infrastructure Development (REIDI). This law suspended the requirement to contribute to the Social Integration and Training of Civil Servants Programmes (PIS/PASEP) and Social Security Financing (COFINS), levied on domestic sales of new machines, appliances, instruments and equipment, and building materials, as well as provision of services for use in infrastructure works, for legal entities that have approved infrastructure projects in the transportation, ports, energy, sanitation and irrigation sectors. The law also suspended the requirement for PIS/PASEP-import and COFINS-import contributions, when such goods or construction materials are directly imported by such legal entities.

The suspension of these taxes is converted into a zero rate after the use of the goods or construction materials in infrastructure work, as deemed eligible for said benefits by REIDI.

These same benefits also apply to the revenue of a legal person holding public service concession contracts, whose infrastructure work has been deemed eligible by REIDI, and who has exploration rights; or the unconditional contractual right to receive cash or some other financial asset. They also apply to revenue from the leasing of a machine, apparatus, instruments and equipment for use in infrastructure works.

It is therefore important that any company wishing to carry out infrastructure projects in Brazil, in the transportation, ports, energy, sanitation and irrigation sectors, is aware of this benefit and takes the necessary measures to register for it. This could enable a major cost reduction for the development and implementation of the project. 


Another important tax benefit for the infrastructure sector we believe will play a key role in the funding of future projects are debentures incentivised by Law No. 12,431 of 24 June 2011. According to article 2 of this law, investors in debentures issued to raise funds for investments aimed at the implementation, expansion, maintenance, recovery, adaptation or modernisation of enterprises in certain sectors (logistics and transport, urban mobility, energy, telecommunications, broadcasting, sanitation, and irrigation) will, if designated as “priority projects” by the federal government, be subject to tax on the income from these debentures at zero per cent, in the case of individuals, and 15 per cent in the case of investor corporations.

Under the regulations brought by Decree No. 8,874, of 11 October 2016, “priority projects” relate to award processes for permission, lease, permit or public-private partnership pursuant to Law No. 11,079, 30 December 2004; and those that comprise the Investment Partnership Programme (PPI), mentioned in Law No. 13,334, of 13 September 2016.

The main features of these debentures are as follows:  

•  they shall be repaid at a fixed interest rate, linked to price index or reference rate;
•  they have a weighted average maturity of more than four years;
•  they guarantee the repurchase of the securities by the issuer or a third party within two years of issue, and the early settlement through redemption or prepayment, unless regulated by the National Monetary Council;
•  periodic payment of income, if applicable, has intervals of at least 180 days;
•  they are verified by the Central Bank of Brazil in their respective areas of competence; and
•  there is a simplified procedure demonstrating commitment to allocate the funds raised in the future payment, or reimbursement of expenses or debts related to investment projects.

Other market incentives for financing infrastructure activities are established by national legislation. Domestic and foreign investors may be interested in investment funds that seek to invest directly or indirectly in companies and infrastructure projects. Already, we see managers of national and international firms raising capital for these types of projects. Investment funds were not previously used as the main vehicles for infrastructure financing, especially when attracting non-resident investors’ funds. They are now being encouraged, with stricter governance rules and under the supervision of Brazil’s Securities Commission. This also brings comfort to foreign investors – mainly because fund managers, who have a fiduciary duty to safeguard investors’ interests, should participate in decisions made by investee companies, with effective influence over strategic policies and management, notably by appointment to the board of directors and controlling shareholdings. 

Under article 3 of Law No. 12,431/2011, as amended by Law No. 12,715 of 17 September 2012, where investment funds have at least 85 per cent of net assets invested in infrastructure debentures, the shareholders will have their rate of income tax, levied on the income produced by the fund, reduced to: 

•  zero per cent where the beneficiary is resident or domiciled abroad, and carrying out financial operations in his or her country in accordance with the rules and conditions established by the National Monetary Council, except in a country that does not tax income, or whose maximum income tax rate is lower than 20 per cent; or
•  15 per cent, when assessed on legal, taxable persons solely at the source.

The same benefit also applies to holders of investment fund shares holding at least 95 per cent of the funds allocated in units of investment funds which invest 85 per cent of its equity incentive in infrastructure bonds. Any amount of income constituting a return on capital, including capital gain earned on the sale of shares of funds, is eligible for this incentive.

Article 4 of Law No. 12,431/2011 amended articles 1 and 2 of Law No. 11,478, of 29 May 2007, to change the taxation on equity investment funds for emerging companies and infrastructure (FIP-IE), reducing the tax rate on gains earned by individuals selling fund shares, as well as on income distributed to them, from 15 per cent to zero per cent. The same treatment is extended to income of a beneficiary resident or domiciled abroad, except for those resident or domiciled in a country with low taxation. In the case of legal entities, both the gains earned in the sale of fund units and income distributed by the funds will be taxed at 15 per cent.

The FIP-IE will target its investment in new infrastructure projects, considered as investments in closed or open capital corporations specifically created to invest in energy, transport, water and sanitation, irrigation, and other areas considered as priorities by the federal government.

At least 90 per cent of the equity of FIP-IE must be invested in shares, warrants, debentures, convertible or not, or other securities issued by corporations, as long as authorised by Brazil’s Securities Commission to develop the infrastructure projects mentioned above.

Still, the FIP-IE must have at least five shareholders and each shareholder may not hold more than 40 per cent of the shares issued by the FIP-IE or earn income from the fund above 40 per cent of the total income of the fund.

There are other federal tax incentives for infrastructure projects in specific sectors as well as state tax incentives, which we do not discuss in this article, but which investors should be aware of, as any financial modelling that does not consider all the incentives in effect, will cause unnecessary loss in the return on investment.

Brazil, following the example of other countries, has very attractive tax legislation for investment in infrastructure, which, together with the supervision and control mechanisms established by the Brazilian Securities Commission should provide national and foreign investors confidence.

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