Investment funds in Brazil: regulatory overview

A Q&A guide to investment funds law in Brazil.

This Q&A is part of the global guide to investment funds. It provides a high level overview of investment funds in Brazil, looking at both retail funds and hedge funds. Areas covered include a market overview, legislation and regulation, marketing, managers and operators, restrictions and requirements, tax and upcoming reform.

To compare answers across multiple jurisdictions, visit the Investment Funds Country Q&A tool.

This Q&A is part of the Multi-jurisdictional Guide to Investment Funds law. For a full list of jurisdictional Q&As visit www.practicallaw.com/investmentfunds-mjg.

Contents

Retail funds

1. What is the structure of the retail funds market? What have been the main trends over the last year?

Open-ended retail funds

In 2014, the Brazilian funds industry included 14,569 investment funds (including open-ended retail funds) with a total net worth of about BRL2,682 trillion, according to the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais) (ANBIMA).

ANBIMA is the Brazilian investment fund industry self-regulatory entity. Its main objective is to assist the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM) develop, modernise and improve the investment funds industry.

Although the industry is still small if compared to developed countries, it is heavily regulated and has considerable potential for future growth.

Closed-ended retail funds

The Brazilian regulatory framework allows the formation of closed-ended retail funds. The closed-ended retail funds industry has developed considerably over the past years, but it is still small if compared to the open-ended retail funds industry in Brazil and also compared to closed-ended retail fund industries in other developed and developing countries.

Considering that investments in closed-ended investment funds cannot be redeemed at any time and at the investors' discretion, most of the closed-ended investment funds focus on fewer liquid assets which, in Brazil, are commonly targeted at qualified investors.

 

Regulatory framework and bodies

2. What are the key statutes, regulations and rules that govern retail funds? Which regulatory bodies regulate retail funds?

This chapter refers to investment funds (open-ended or closed-ended investment funds targeted at the general public and qualified investors) currently governed by Rule 409/04. On 17 December 2014, the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM) issued Rule 555/14, which revokes Rule 409/04 and will be in full force and effect as from 1 July 2015, governing the formation, registration and operation of investment funds in Brazil from that date.

In view of the above, all subsequent answers are based on the provisions set out in the new Rule 555/14. In addition, the answers below do not necessarily apply to the following investments funds, among others, which are subject to different legal regimes (see Question 16):

  • Private equity funds.

  • Securitisation funds.

  • Real estate investment funds.

Open-ended retail funds

Regulatory framework. The main laws and regulations applicable to retail investment funds are:

  • Federal Law No. 6,385/76, as amended, which regulates Brazilian capital markets and established the CVM.

  • CVM Rule 438/06, as amended, which consolidates the accounting rules applicable to retail investment funds.

  • CVM Rule 539/14, as amended, which covers the suitability rules and consolidate the definitions of qualified and professional investors.

  • CVM Rule 555/14, which the formation, registration and operation of retail investment funds in Brazil.

  • Monetary Council (Conselho Monetário Nacional) (CMN) Resolution No. 3,334/05, as amended, which sets out the rules applicable to financial institutions acting as fund managers and portfolio managers.

  • CMN Resolution No. 3,568/08, as amended, which, among others, addresses the foreign exchange controls applicable to investment funds investing abroad.

In addition to the regulatory framework, the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais) (ANBIMA) enacted rules that establish certain standards and market practices in connection with investment funds that are more stringent than those required by the applicable law and regulations. In this sense, all investment funds managed and administrated by entities that are members of ANBIMA or that have adhered to ANBIMA's code of regulation and best practices for investments funds, are also subject to these self-regulatory rules.

Regulatory bodies and self-regulatory entities. The CMN and the CVM regulate and supervise the investment funds industry. The Central Bank of Brazil regulates and supervises financial institutions acting as fund managers and portfolio managers, or service providers for investment funds (such as custodians).

Closed-ended retail funds

Regulatory framework. Closed-ended retail funds are subject to the same regulations as open-ended retail funds (see above, Open-ended retail funds).

Regulatory bodies and self-regulatory entities. Closed-ended retail funds are supervised by the same regulators and self-regulatory entity as open-ended retail funds (see above, Open-ended retail funds).

 
3. Do retail funds themselves have to be authorised or licensed?

Open-ended retail funds

Retail investment funds must be registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM). The registration procedure is simple and generally automatically achieved when the documents and fund information are delivered to the CVM through its online system. However, the CVM may at any time request changes to and clarifications in relation to the fund's charter documents.

An investment fund is formed by a resolution of its fund administrator, which must also approve the fund's bye-laws. The requirements for the fund's bye-laws include, among others, information about (Rule 555/14):

  • The fund's administrator, portfolio manager and custodian, including its complete qualification and registration with the CVM.

  • The fund's term of duration and investment policy.

  • The fund's target investors.

  • The fund's administration, management fees and fees payable to the fund's custodian.

  • All the expenses that can be charged from the fund.

  • Any applicable condition to investments or redemption of shares, including the conditions for receiving investment orders.

  • All rights and obligations attributable to the fund's investors.

  • Reporting rules applicable to the fund.

  • The risk factors of the fund.

The main documents to be provided to the CVM are (Rule 555/14):

  • The fund's bye-laws.

  • Registration forms related to the fund's administrator and portfolio manager, as well as to other service providers retained by the fund.

  • Evidence of the fund's enrolment with the Brazilian tax authorities (Cadastro Nacional da Pessoal Jurídica) (CNPJ).

  • The fund's main characteristics, if it is not targeted exclusively at qualified investors (see Question 5).

The Brazilian legal framework treats all distributions of shares (quotas) of investment funds as public offerings of securities, subject to the CVM's regulation. This regulation is conducted by placement agents within the Brazilian securities distribution system (see Question 4, Open-ended retail funds). However, public offerings of open-ended retail funds do not require prior registration with the CVM (Rule 555/14).

Closed-ended retail funds

Closed-ended retail funds must be registered with the CVM. As a general rule, the registration process of a closed-ended investment fund is not automatic, and depends on prior review by the CVM. This procedure is generally completed within two to three months.

The documents required to form and register a closed-ended retail fund are generally the same as for open-ended retail funds (see above, Open-ended retail funds). In addition, distributions of shares (quotas) of closed-ended retail funds may be submitted to the CVM for prior registration, as opposed to open-ended retail funds (see above, Open-ended retail funds). Distributions of shares of funds targeted exclusively at qualified investors are automatically achieved upon filing of the proper documentation with the CVM. Distributions of shares of funds targeted exclusively at up to 75 professional investors and placed with up to 50 professional investors are exempted from prior registration with the CVM.

Foreign funds

Under the Brazilian legal and regulatory framework, public offerings of securities are subject to prior registration with the CVM. They must always be conducted by placement agents within the Brazilian securities distribution system, even if the securities were issued and authorised for trading in other jurisdictions. In addition, the issuer of securities subject to the public offering in Brazil must also be registered with the CVM.

CVM rules must be observed when public offerings of Brazilian Depositary Receipts (BDRs) issued by a depositary institution in Brazil are registered. BDRs are certificates representing securities issued by listed companies incorporated or based in other jurisdictions. The Brazilian regulatory framework does not provide rules applicable to registration of public offerings of securities issued by investment companies and investment funds formed or based outside Brazil and their issuers. In addition, the CVM's Board of Officers officially decided that the Brazilian regulatory framework does not admit the issuance of BDRs by investment companies or investment funds formed or based overseas.

Foreign funds are the main target investment of a particular kind of investment fund in Brazil that is able to invest up to 100% of its net equity in assets located outside Brazil. This is provided that the shares of such investment funds are targeted exclusively at professional investors and certain other requirements are met.

 

Marketing

4. Who can market retail funds?

Open-ended retail funds

Only placement agents within the Brazilian securities distribution system are authorised to market open-ended retail funds, which include:

  • Financial institutions.

  • Brokerage firms.

  • Securities houses.

  • Individuals registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM).

Closed-ended retail funds

Closed-ended retail funds are subject to the same regime as open-ended retail funds (see above, Open-ended retail funds).

Foreign funds

The same rationale applicable to public offerings of securities issued by foreign funds applies to the marketing of securities issued by foreign funds (see Question 3, Foreign funds).

 
5. To whom can retail funds be marketed?

Open-ended retail funds

As a general rule, open-ended retail funds regulated by Rule 555/14 can be marketed to general investors. However, depending on the complexity, the investment policy, the risks to which the fund is subject to and the level of disclosure, the investment funds can be restricted to qualified investors or to professional investors.

In general, professional investors are:

  • Financial institutions and other entities duly authorised by the Central Bank of Brazil.

  • Insurance companies and savings companies (sociedades de capitalização).

  • Open and closed-ended pension funds.

  • Legal entities and individuals owning financial assets in an amount greater than BRL10 million.

  • Investment funds.

  • Investment clubs, provided that their portfolio is managed by a securities portfolio manager authorised by the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM).

  • Independent agents, portfolio managers, securities analysts and consultants authorised by the CVM.

  • Non-resident investors.

In general, qualified investors are:

  • All professional investors.

  • Legal entities and individuals owning financial investments in an amount greater than BRL1 million.

  • Individuals that have been approved in technical qualification examinations or have certifications approved by the CVM as requirements to be independent investment agents, portfolio administrators, securities analysts and consultants.

  • Investments clubs, provided that its portfolio is managed by one or more investors that are qualified investors.

Closed-ended retail funds

Closed-ended retail funds are subject to the same regime as open-ended retail funds (see above, Open-ended retail funds).

Foreign funds

The same rationale applicable to public offerings of securities issued by foreign funds applies to the marketing of securities issued by foreign funds (see Question 3, Foreign funds).

  

 

Managers and operators

6. What are the key requirements that apply to managers or operators of retail funds?

Open-ended retail funds

Financial or non-financial legal entities that intend to act as administrators or portfolio managers of investment funds in Brazil must meet all of the following requirements (see Question 14):

  • Be formed and have their principal place of business in Brazil.

  • Their corporate purpose must include asset management activities in Brazil.

  • Have a partner or an officer properly authorised by the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM) to act as an asset manager in Brazil.

  • Have a securities research and analysis department (the services of this department can be outsourced to third parties authorised by the CVM).

  • Be authorised by the CVM to act as an asset manager in Brazil.

Closed-ended retail funds

Closed-ended retail funds are subject to the same regime as open-ended retail funds (see above, Open-ended retail funds).

Foreign funds

Foreign funds are not subject to Brazilian laws and regulations (see Question 3, Foreign funds), therefore the requirements described above do not apply.

 

Assets portfolio

7. Who holds the portfolio of assets? What regulations are in place for its protection?

Open-ended retail funds

Investment funds are not formed as legal entities (corporations) in Brazil. However, they can exercise rights and undertake obligations towards third parties, including the right to sue and to be sued. Under Brazilian law, investment funds are organised as condominiums, which have joint ownership of assets.

Investors act as joint owners of all assets of the investment fund by acquiring shares (quotas), which correspond to a notional fraction of the net worth of the fund. Ownership of the shares does not grant investors direct ownership of the underlying assets, which cannot be segregated among the investors of the fund.

In addition, investors are liable for the fund's obligations towards third parties. This liability is also proportional to each investor's interest in the net equity of the fund.

The portfolio of assets of an investment fund is held by a custodian, which is a financial institution authorised by the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM) to carry out this particular activity. Investments in Brazilian investment funds are not covered by any type of deposit insurance.

Closed-ended retail funds

Closed-ended retail funds are subject to the same regime as open-ended retail funds (see above, Open-ended retail funds).

 

Legal fund vehicles

8. What are the main legal vehicles used to set up a retail fund and what are the key advantages and disadvantages of using these structures?

Open-ended retail funds

Legal vehicles. Legal vehicles are not generally used to set up retail funds in Brazil (see Question 7, Open-ended retail funds).

Advantages. Investment funds are usually the most tax-efficient structure to be adopted by local and foreign investors who are interested in owning financial assets in Brazil, even when there is only one investor involved.

Disadvantages. Investment funds must be registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM), as they are subject to the CVM's regulation and oversight. In addition, there are certain inherent costs associated with the formation, registration and operation of investment funds that would not apply if assets were held through local limited liability companies. These costs include registration and other fees due to the CVM and the Brazilian Financial and Capital Markets Association (Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais) (ANBIMA), fees due to the administrator, portfolio manager, custodian, auditor and other service providers of the fund.

Closed-ended retail funds

Legal vehicles. The issues surrounding the use of legal vehicles for closed-ended retail funds are the same as for open-ended retail funds (see above, Open-ended retail funds).

Advantages. See above, Open-ended retail funds.

Disadvantages. See above, Open-ended retail funds.

 

Investment and borrowing restrictions

9. What are the investment and borrowing restrictions on retail funds?

Open-ended retail funds

Brazilian retail investment funds are divided into four different classes depending on the main features of their investment policy (Rule 555/14):

  • Fixed-income funds.

  • Equity funds.

  • Foreign exchange funds.

  • Multi-market funds.

The classes also determine the investment restrictions applicable to each investment fund, which mostly refers to the percentage of the net equity of the fund that must be invested in each type of securities, and also to the ability of the fund to enter into transactions with derivatives and transactions involving assets located outside Brazil.

In addition, investors in different types of funds are subject to different tax rules. Investment funds targeted exclusively at qualified and professional investors (see Question 5) enjoy more flexibility to specify their investment policies, and are subject to certain allowances, including being able to:

  • Accept financial assets and securities for the purposes of subscriptions and redemptions of shares.

  • Waive the preparation of the prospectus.

  • Charge administration and performance fees according to flexible rules described in their bye-laws.

  • Establish flexible criteria applicable to the valuation of shares and redemptions.

  • Observe less conservative concentration and diversification limits for the underlying assets.

Investment funds can invest in the following main classes of assets (Rule 555/14):

  • Brazilian federal treasuries.

  • Derivative transactions.

  • Shares, debentures, subscription bonuses, promissory notes, and any other securities, the issuance or trading of which has been approved by or registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM).

  • Collective investment agreements or securities registered with the CVM and publicly offered, that result in interest, partnership, or remuneration rights, including those resulting from the provision of services whose revenue arises from the efforts of the entrepreneur or of third parties.

  • Deposit certificates or receipts.

  • Gold, as a financial asset.

  • Any securities, contracts, and transactions constituting direct or indirect obligations of financial institutions.

  • Warrants, commercial purchase and sale agreements for the future delivery of goods and products or future provision of services, certificates representing such agreements, and any other receivables, certificates, transactions, and agreements expressly provided for in the fund's bye-laws.

Rule 555/14 also provides for concentration and diversification limits to be observed for the investment fund's portfolios of assets. As a general rule, concentration and diversification limits vary according to the class of the fund and refer to both:

  • The type of asset or security (for example, debentures, shares, derivatives, bonds, and funds shares).

  • The issuer of the relevant assets and securities (for example, financial institutions, investment funds, private companies, or the federal government).

In addition, investment funds are generally prevented from investing in shares issued by its administrator or portfolio manager. Exceptions are made in very specific cases.

Brazilian investment funds can also invest up to 100% of their net equity in assets located outside Brazil, provided that certain requirements are met (see Question 3, Foreign funds). Retail investment funds can also invest in assets located outside Brazil, subject to the following limits related to the net equity of the fund:

  • 100% for funds targeted exclusively at professional investors.

  • 40% for funds targeted exclusively at qualified investors.

  • 20% for all other types of funds.

Retail investment funds are also allowed to enter into derivatives transactions on either:

  • Stock, and futures and commodities exchanges.

  • The over-the-counter (OTC) market, if the transactions are registered with a settlement system authorised to operate by the Central Bank of Brazil or the CVM.

Leverage limits are defined by:

  • Rule 555/14 for each specific class of fund.

  • The fund's bye-laws.

Retail investment funds cannot be leveraged by borrowing.

Retail investment funds are allowed to use their assets as security in transactions to which the fund is a party, irrespective of whether the transactions are conducted on stock exchanges or OTC exchanges. Investment funds typically provide security in derivatives transactions but are expressly prevented from providing any type of security or guarantee, except if approved by shareholders representing at least two thirds of the shares issued by the fund.

Closed-ended retail funds

The investment and borrowing restrictions for closed-ended retail funds are the same as for open-ended retail funds (see above, Open-ended retail funds).

 
10. Can the manager or operator place any restrictions on the issue and redemption of interests in retail funds?

Open-ended retail funds

The manager can place restrictions on the issuance and redemption of interests in open-ended retail funds, subject to the provisions in Rule 555/14 and the fund's bye-laws.

The fund manager can decide to issue further shares and stop the issuance of shares in an open-ended fund, provided this action applies to all investors. Differential treatment of investors or potential investors of the same fund is not permitted. In addition, in certain specific illiquidity circumstances, fund managers can suspend redemptions to protect the best interests of investors. As a general rule, such treatment must also be equal to all investors (in the funds targeted exclusively at professional investors, the administrator is authorised to suspend new investments exclusively from new investors, and continue to accept investments from the investors).

The fund manager can also determine mandatory redemption of shares, provided that:

  • The bye-laws or the shareholders authorise such procedure.

  • The mandatory redemption of shares is applied equally, simultaneously and proportionally to all shareholders.

  • No exit fee is charged from the investors.

Closed-ended retail funds

The fund's general meeting of investors can decide to issue further shares. Therefore, each new share issuance by a closed-ended fund is subject to the investors' prior approval.

In relation to redemption, the fund's bye-laws must provide a redemption timetable for its shares, which can only be changed by the fund manager with the investors' prior authorisation, under the fund's bye-laws.

 
11. Are there any restrictions on the rights of participants in retail funds to transfer or assign their interests to third parties?

Open-ended retail funds

Shares in open-ended retail funds cannot be subject to any form of assignment and therefore cannot be traded on the secondary market, except in the following cases:

  • Judicial or arbitral decision.

  • Fiduciary transfer transactions.

  • Foreclosure.

  • Universal succession.

  • Dissolution of conjugal partnership or common-law marriage that results in the division of property.

  • Alterations in the management or portability of pension plans.

Other than that, investors can only exit the investment by redeeming their shares in accordance with the periods and procedures set out in the fund's bye-laws.

Closed-ended retail funds

Shares in closed-ended funds can be privately traded or listed for trading on the secondary market and stock exchanges. Intermediaries trading fund shares targeted exclusively at qualified investors must ensure that the purchasers on the secondary market are also qualified investors.

 

Reporting requirements

12. What are the general periodic reporting requirements for retail funds?

Open-ended retail funds

Investors. Fund managers must periodically provide documents and information to investors (Rule 555/14). Such documents and information include:

  • On a daily basis (or, for funds that do not have daily liquidity, on a period compatible with their liquidity), information on share price and the fund's net asset value.

  • On a monthly basis:

    • an individualised report to each shareholder with basic information about the fund and the administrator, its contact information, the balance and value of the shares, as well as profitability of the fund;

    • the balance sheet of the fund;

    • portfolio composition and diversification;

    • profile of investments; and

    • the report (lâmina) of essential information, if any.

  • Information about the performance of the fund by the end of February each year (except for the funds targeted to qualified investors).

  • Disclosure, without restrictions, in the administrator's website of information about the performance of the fund for the last 12 months ending on 31 December and the last 12 months ending on 30 June of each year.

Regulators. Fund managers must provide documents and information periodically to the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM) on a daily, monthly, semi-annual and annual basis (Rule 555/14). The information is the same disclosed to investors (see above).

In addition, fund managers must inform the CVM and disclose immediately to all shareholders any material act or fact that relates to the operation of the fund or the assets comprising its portfolio. The disclosure must be in such a way as to give all shareholders or prospective investors access to information that may reasonably influence the share price or the investors' decision to buy, sell, or maintain these shares.

Closed-ended retail funds

Investors. The reporting requirements for closed-ended retail funds are the same as for open-ended funds (see above, Open-ended retail funds).

Regulators. The reporting requirements for closed-ended retail funds are the same as for open-ended funds (see above, Open-ended retail funds).

 

Tax treatment

13. What is the tax treatment for retail funds?

Open-ended retail funds

Funds. Retail funds are generally not subject to taxation on revenues and capital gains arising from their own transactions (at portfolio level). However, some specific exceptions may apply, such as financial revenue assessed by real estate funds. Therefore, as a general rule, any gains and income realised by funds related to their portfolios are not subject to taxation in Brazil.

Resident investors. If the investment fund is categorised as a long-term investment fund (that is, a fund with an average portfolio maturity period in excess of 365 days), the investors' income is subject to withholding income tax (WHT) On redemption at decreasing rates of:

  • 22.5% on investments with a maturity period not exceeding 180 days.

  • 20% on an investment with a maturity period ranging from 181 days up to 360 days.

  • 17.5% on an investment with a maturity period ranging from 361 days up to 720 days.

  • 15% on investments with a maturity period exceeding 720 days.

If the investment fund is categorised as a short-term investment fund (that is, a fund with an average portfolio maturity of 365 days or less), the investors' income is subject to WHT as follows:

  • On redemption at the decreasing rate of:

    • 22.5% on investments up to 180 days; and

    • 20% on investments longer than 180 days.

  • Income earned on redemption or amortisation of shares is calculated as the positive difference between:

    • the amount redeemed or amortised; and

    • the acquisition price of the shares.

  • Specifically in the case of fixed income open-ended funds, income tax is levied on the last business day of May and November (come- cotas) at the rates of 15% (for long-term funds) or 20% (for short-term funds). These payments are further complemented up to the WHT due (decreasing rates described above) on redemption of the shares.

  • Equity funds investments are assigned a different tax regime. Under this regime, if the investment fund's portfolio comprises at least 67% of stocks traded in the spot market (for example, the OTC market) of stock exchanges or similar entities, the investor's income is subject to a flat 15% WHT on the redemption of shares.

  • Some resident investors may qualify for specific exemptions (such as Brazilian pension funds), which must be reviewed on a case-by-case basis.

For Brazilian corporate resident investors the income generated by investments in investment funds should be subject to regular corporate income taxation. The amount collected as WHT is generally treated as an advance payment and can be set-off against corporate income tax due.

Tax on financial transactions/securities (Imposto sobre Operações Financeiras) (IOF/securities). IOF/securities is charged at 1% per day rate on the amount corresponding to the redemption, assignment or renegotiation of the fund's shares, limited to a percentage of the income assessed on the transaction. The applicable rate varies according to the investment's term. For transactions with a term equal to or longer than 30 days the current applicable rate is 0%. The IOF/securities rate can be increased, at any time, by the federal government (up to 1.5% per day). However, the eventual changes are only applicable for future transactions.

Non-resident investors. As a general rule, non-resident investors are subject to the same tax treatment applicable to individual resident investors (see above, Open-ended retail funds: Resident investors). However, non-resident investors who are not domiciled in a favourable tax jurisdiction (FTJ) and carry out investments in the Brazilian financial and capital markets under the rules of CMN Resolution No. 2,689/00 are granted a more favourable tax treatment. An FTJ for investment in capital markets purposes is generally defined as a country or location that either:

  • Does not impose income tax.

  • Taxes incomes at a maximum rate lower than 20%.

In this respect, Ordinance No. 488, dated 28 November 2014 has reduced the minimum tax rate that should be imposed for a jurisdiction to be considered an FTJ, or as a privileged tax regime defined in Law No. 11,727 of 23 June 2008 (PTR), from 20% to 17%. These are known as "Modified FTJ" and "Modified PTR". While it is commonly understood that the concepts of Modified FTJ and Modified PTR are only specifically applicable for the purposes of transfer pricing, thin capitalization rules and controlled foreign corporation (CFC) rules, the possibility of the tax authorities extending the concepts to foreign investments in the Brazilian financial and capital markets cannot be ruled out. Prospective investors should consult their own advisors on the impact of such concepts in light of their specific circumstances.

Income realised by these qualified non-resident investors in connection with investment in Brazilian retail funds other than the equity type of fund is subject to a 15% rate WHT. Income realised in connection with investments made in equity funds is subject to a 10% rate WHT. The come-cotas taxation does not apply to non-resident investors irrespective of the qualification of the investment fund as an open-ended or closed-ended fund.

The authorisation to make investments under Resolution CMN No. 2,689/00 is given when the non-resident investor complies with several requirements, such as:

  • Appointing a legal representative in Brazil.

  • Filling out the application form referenced in CMN Resolution No. 2,689/00.

  • Obtaining the relevant registration with the CVM as a foreign investor.

  • Obtaining the registration with the Central Bank of the funds remitted by the "2,689 investor" to Brazil.

  • Executing a securities custody agreement to operate foreign investment accounts with an institution authorised by the CVM to have custody over assets.

Non-resident investors that are resident or domiciled in a FTJ are subject to the same tax treatment applicable to investors resident in Brazil and are not entitled to more beneficial tax treatment.

Tax on financial transactions/ Foreign Exchange (IOF/FX). The conversion of foreign currency into Brazilian reais (and vice-versa), such as those required to invest in a Brazilian investment fund, is subject to IOF/FX at a currently applicable 0% rate, both on the related inflow and outflow of funds. The IOF/FX rate can be increased at any time by the Brazilian Executive branch up to 25%, but only for future transactions.

Closed-ended retail funds

Funds. The same tax treatment applies to closed-ended and open-ended retail funds (see above, Open-ended retail funds: Funds).

Resident investors. Income realised in connection with investment in closed-ended retail funds is subject to WHT at the same decreasing rates described above, contingent on the qualification of the fund as long-term or short-term (see above, Open-ended retail funds: Resident investors). However, the periodical come-cotas taxation does not apply for closed-ended funds.

In addition, gains realised by individual resident investors on the sale of the closed-ended fund's shares are subject to a 15% income tax. For Brazilian corporate resident investors the gains should be subject to regular corporate income taxation.

Non-resident investors. The same tax treatment applies to closed-ended and open-ended retail funds (see above, Open-ended retail funds).

Gains realised by non-resident investors domiciled outside of a FTJ on the sale of fund shares on a stock exchange (including the organised OTC market) may be exempt from income tax. However, tax authorities may challenge the exemption in the case of fixed-yield funds, which in their opinion should be subject to the following tax treatment.

Gains realised on the sale of funds' shares by means of transactions carried out by non-resident investors domiciled in a FTJ or carried out in the non-organised OTC markets are subject to 15% income tax.

IOF/securities.  The same tax treatment applies for closed-ended and open-ended retail funds (see above, Open-ended retail funds).

IOF/FX. The same tax treatment applies for closed-ended and open-ended retail funds (see above, Open-ended retail funds). 

Quasi-retail funds

 
14. Is there a market for quasi-retail funds in your jurisdiction?

There is no market for quasi-retail funds in Brazil. However, the authors believe the current regulation of investment funds in Brazil can accommodate this type of investment.

 

Reform

15. What proposals (if any) are there for the reform of retail fund regulation?

On 17 December 2014, the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM) issued Rules 554/14 and 555/14, which will both be in full force and effect from 1 July 2015. Rule 554/14 establishes the definition of qualified investors and professional investors, applicable to the entire regulatory framework (see Question 5). Rule 555/14 revokes Rule 409/04, governing the formation, registration and operation of investment funds in Brazil. All answers and explanations provided are based on such new rules.

In addition to that, there is currently a project in the CVM to amend CVM Rule 306/99, that relates to the administration and management of a portfolio of securities, including investment funds (see Question 5). Such a project intends to review the requirements for the registration of asset managers and also intends to create two distinct categories of registered entities:

  • The fiduciary administrators who will be responsible for direct and indirect custody of the asset, controllership, bookkeeping and, in general terms, supervision of the portfolio managers.

  • Portfolio managers who will be responsible for managing the securities portfolio. Except in some previously established cases, the CVM intends to restrict the registration of fiduciary administrators to financial institutions.

 

Hedge funds

16. What is the structure of the hedge funds market? What have been the main trends over the last year?

Currently, regulations do not allow the formation of hedge funds in Brazil. No investment vehicle is available that could act with the flexibility and diversity of investments required by a hedge fund to achieve its investment objectives. For example, Brazilian funds (except for private equity, receivables, and real estate funds):

  • Can only purchase assets registered with trading systems, such as the OTC market and stock exchanges.

  • Except for the funds targeted to companies listed on an access market, cannot purchase shares issued by unlisted companies and unlisted funds.

In addition, funds must be categorised according to the classes provided in Rule 555/14 (see Question 9) and, according to the type of investors, each class is subject to concentration limits and specified investment diversification.

Multi-market funds

A Brazilian multi-market fund is similar to an international hedge fund (see Question 9, Open-ended retail funds). This fund can invest in numerous assets, and has fewer concentration and investment diversification criteria than other classes of funds. However, a multi-market fund has its activities considerably restricted because it cannot invest directly in, for example:

  • Unlisted assets and companies.

  • Real estate.

  • Derivatives that are not registered on the stock exchange or OTC markets.

However, it is possible that a multi-market fund targeted at professional investors can provide in its bye-laws that its investment policy includes investments in private equity funds, securitisation transactions and real estate funds in addition to other financial assets usually available for funds regulated by Rule 555/14. In this scenario, a multi-market fund could be exposed to listed and unlisted assets and companies (through other specific vehicles), securitisation and real estate.

Private equity funds

Private equity funds are regulated by CVM Rule 391/03, as amended. Their purpose is to buy shares and convertible securities issued by listed or unlisted companies. Private equity funds must participate in the management and business of the companies in which they invest. However, private equity funds cannot allocate their investment to the financial and derivatives markets as their main investment strategy.

Securitisation funds

Securitisation funds are regulated by CVM Rule 356/01, as amended, and CVM Rule 444/06, and are funds with the purpose of purchasing any class of receivables, including future receivables and distressed assets. Receivables funds cannot allocate their investment to the financial and derivatives markets as their main investment strategy.

Real estate funds

Real estate funds are regulated by CVM Rule 472/08, as amended. Their purpose is to acquire:

  • Real estate.

  • Rights in connection with real estate.

  • Certain assets and securities issued by public listed companies, performing real estate activities and duly registered with the CVM, such as:

    • shares;

    • debentures and warrants;

    • shares of other real estate, investment, private equity, and receivables funds whose investment policy exclusively carries out investment in real estate-related activities;

    • other assets and securities set out in CVM Rule 472/08.

Real estate funds cannot allocate their investment to the financial and derivatives markets as their main investment strategy.

 

Regulatory framework and bodies

17. What are the key statutes and regulations that govern hedge funds in your jurisdiction? Which regulatory bodies regulate hedge funds?

Currently, regulations do not allow the formation of hedge funds in Brazil (see Question 16).

 
18. How are hedge funds regulated (if at all) to ensure compliance with general international standards of good practice?

Not applicable.

 

Marketing

19. Who can market hedge funds?

Not applicable.

 
20. To whom can hedge funds be marketed?

Not applicable.

 

Investment restrictions

21. Are there any restrictions on local investors investing in a hedge fund?

Not applicable.

 

Assets portfolio

22. Who holds the portfolio of assets? What regulations are in place for its protection?

Not applicable.

 

Requirements

23. What are the key disclosure or filing requirements (if any) that must be completed by the hedge fund?

Not applicable.

 
24. What are the key requirements that apply to managers or operators of hedge funds?

Not applicable.

 

Legal fund vehicles and structures

25. What are the main legal vehicles used to set up a hedge fund and what are the key advantages and disadvantages of using these structures?

Open-ended retail funds

Not applicable.

Closed-ended retail funds

Not applicable.

 

Tax treatment

26. What is the tax treatment for hedge funds?

Not applicable.

 

Restrictions

27. Can participants redeem their interest? Are there any restrictions on the right of participants to transfer their interests to third parties?

Not applicable.

 

Reform

28. What (if any) proposals are there for the reform of hedge fund regulation?

There are no current proposals for the reform of hedge fund regulation.

 

Online resources

Securities and Exchange Commission of Brazil (Comissão de Valores Mobiliários) (CVM)

W www.cvm.gov.br/ingl/indexing.asp

Description. The Securities and Exchange Commission of Brazil's (CVM) website in English, which provides Rules 306, 356, 391, 409, 472, 539 and 555 translations (for guidance only).

Legislation portal

W www4.planalto.gov.br/legislacao/legislacao-1/leis-ordinarias/legislacao/legislacao-1/leis-ordinarias/2011-leis-ordinarias#content

Description. Brazilian legislation website, maintained by the Legislative Branch of Brazil.

Legislation portal (Law 6,385/76)

W www.planalto.gov.br/ccivil_03/leis/L6385compilada.htm

Description. Website that provides direct access to Law 6,385/76.

Legislation portal (Law 12,431/11)

W www.planalto.gov.br/ccivil_03/_ato2011-2014/2011/Lei/L12431.htm

Description. Website that provides direct access to Law 12,431/11.

Legislation portal (Decree 6,306/07)

W www.planalto.gov.br/ccivil_03/_Ato2007-2010/2007/Decreto/D6306.htm

Description. Website that provides direct access to Decree 6,306/07.

Central Bank of Brazil

W www.bcb.gov.br/?english

Description. The Central Bank of Brazil's website in English.

Central Bank of Brazil (Resolution 3,334/05)

W www.bcb.gov.br/pre/normativos/res/2005/pdf/res_3334_v2_P.pdf

Description. Website that provides direct access to Resolution 3,334/05.

Central Bank of Brazil (Resolution 3,568/08)

W www.bcb.gov.br/pre/normativos/res/2008/pdf/res_3568_v9_P.pdf

Description. Website that provides direct access to Resolution 3,568/08.

Central Bank of Brazil (Resolution 4,373/14)

W www.bcb.gov.br/pre/normativos/res/2014/pdf/res_4373_v1_O.pdf

Description. Website that provides direct access to Resolution 4,373/14.

Central Bank of Brazil (Resolution 3,568/08)

W www.bcb.gov.br/rex/legce/Ingl/Ftp/Resolution3568.pdf

Description. Website that provides direct access to the English version of Resolution 3,568/08 (for guidance only).



Contributor profiles

Marina Procknor, Partner

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados

T +55 11 3147 7882
F +55 11 3147 7770
E marina@mattosfilho.com.br
W www.mattosfilho.com.br

Professional qualifications. Brazil, 1998

Areas of practice. Banking, finance and investment funds; capital markets.

Non-professional qualifications. Bachelor of Laws, Pontifícia Universidade Católica de São Paulo; Master of Laws (LLM), Northwestern University School of Law; Certificate in Business Administration, Kellogg School of Management of Northwestern University

Languages. Portuguese, English

Ana Carolina Nomura, Senior Associate

Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados

T +55 11 3147 7823
F +55 11 3147 7770
E cnomura@mattosfilho.com.br
W www.mattosfilho.com.br

Professional qualifications. Brazil, 2005

Areas of practice. Banking, finance and investment funds; capital markets.

Non-professional qualifications. Bachelor of Laws, Universidade de São Paulo

Languages. Portuguese, English


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