On 22 September 2022, Brazilian President Jair Bolsonaro enacted Provisional Measure N° 1,137/2022 (PM 1,137), which removes the withholding tax (WHT) on income paid to foreign investors derived from certain financial investments, and eases ruling restrictions to Private Equity Investment Funds (Fundos de Investimento em Participações, or FIPs).
To be eligible for a 0% withholding tax rate on income distributions, prior to PM 1,137, a foreign investor could not hold more than a 40% interest in an FIP. That 40% limit has now been eliminated. From 2023 onward, a foreign investor may have full ownership in an FIP and still benefit from 0% WHT.
It should be noted that foreign investors resident in a jurisdiction with a privileged tax regime or in a low tax jurisdiction will not be eligible for this reduction.
There are several other points in PM 1,137 that will also help foster foreign investments in Brazil:
- Sovereign investment funds based in low tax jurisdictions are now eligible for the 0% withholding tax rate.
- A foreign investor that holds an investment in a private equity fund dedicated to investing in infrastructure or innovation / research and development (referred to as FIP-IE and FIP-PD&I respectively) is now eligible for the tax exemption.
- Foreign investors are now eligible for a 0% WHT rate on income distributions related to several other financial investments, such as: debt securities issued by Brazilian private companies, fixed income securities (Letra Financeira), dedicated securities investment funds, and credit rights investment funds (Fundos de Investimento em Direitos Creditórios or FIDCs).
Provisional Measure N° 1,138/2022 (PM 1,138) was also enacted on 22 September. This reduces the withholding tax on payments remitted abroad by Brazilian resident individuals to cover personal expenses incurred during overseas travel (e.g., for hotels, insurance and ship cruises). This WHT will be just 6% for 2023 and 2024, reduced from 25%.
This tax reduction aims to improve the competitiveness of Brazil-based tourism agencies against foreign online agencies operating in the domestic market, especially considering that foreign online agencies only pay 6.38% tax (Imposto sobre Operações Financeiras or IOF – Tax on Operations of Credit, Exchange and Insurance), which gives them the competitive edge on their Brazilian counterparts.
PM 1,138 notes the tax rate will decrease to 6% for 2023 and 2024, and will be slightly higher for the following years, as shown here:
Withholding Tax Rate – Tourism-related payments overseas
- Year: Percentage
- 2022: 25%
- 2023: 6%
- 2024: 6%
- 2025: 7%
- 2026: 8%
- 2027: 9%
According to the Ministry of Tourism, PM 1,138 will prevent the loss of over 350,000 Brazilian tourism industry jobs and will boost overseas travel in the next four years, reactivating a sector drastically affected by the pandemic and currency fluctuations. PM 1,137 will help Brazil’s investment and GDP rates by increasing non-speculation foreign investment (particularly in FIPs), creating job opportunities, and developing infrastructure and research projects in Brazil.
If you’d like to discuss how these changes will affect you and your business, get in touch with our team in São Paulo.
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