- Share investment funds (fundos de investimentos em participações, “FIPs”) are tax effective Brazilian vehicles for investing in private and public-listed companies.
- FIPs must be registered with Brazil’s Securities Commission (Commissão de Valores Mobiliários, “CVM”).
- Foreign investors generally pay 0% on the capital gains obtained from the sale of units (quotas) held in FIPs, while the FIPs themselves are taxed at between 0% and 15% (depending on the investments made and the FIP’s structure) on their income and capital gains.
What is a share investment fund (“FIP”)?
A share investment fund (fundo de investimento em participações, “FIP”) is a close-ended fund that operates somewhat like an investment trust. FIPs can acquire various types of securities in Brazilian privately held and public-listed companies.
How do you register a FIP?
A FIP must be registered with the CVM. Among other things, the application must contain the name of the FIP’s independent auditors, the minimum and maximum number of units (quotas) to be distributed (as well as their respective value), the FIP’s set up costs and “other relevant information relating to the distribution”.
If the FIP has a prospectus, then it needs to be submitted to the CVM for approval as well.
Who can hold units (quotas) in a FIP?
Only sophisticated investors (investidores qualificados) can hold units (quotas) in a FIP. These investors generally need to hold more than R$1 million in financial assets.
What assets can a FIP hold?
FIPs can invest in shares, debentures and convertible bonds, among other types of securities.
FIPs cannot invest in derivatives except for the purposes of asset protection. However, they can trade options over shares in companies that the FIP holds shares in, but only for the purposes of adjusting the acquisition price via an increase or decrease in the number of shares held, or to sell these shares in the future as part of a disinvestment strategy.
FIPs must “participate in the decision-making process of the company it invests in, with effective influence on its definition of strategic policy and management”. This can be attained by holding the majority of the voting shares or via contractual or procedural arrangements (exceptions to this rule are very limited).
Where FIPs invest in privately held companies, the companies must have specific corporate governance rules, such as making agreements with related parties available to all shareholders, opting for arbitration as the means of dispute resolution and being audited by independent auditors registered with the CVM.
FIPs must keep at least 90% of its net equity invested. Also, FIPs can hold up to 20% of its assets abroad, except for those registered as “multi-strategy foreign investment” funds.
What must the FIP’s bylaws provide?
The Regulations provide no less than 25 compulsory requirements for a FIP’s bylaws. These include:
- the FIP’s investment policies, indicating the types of assets that may be held, explaining the risks of concentration and lack of liquidity of these assets, including the possibility of cash calls;
- how capital is to be returned if the funds are not invested as set out in the FIP’s bylaws;
- the FIP’s decision-making process for investments; and
- whether new quotas can be issued and whether preference rights apply.
What types of FIPs are there?
There are five different types of FIPs that may be registered with the CVM:
- Seed Capital;
- Emerging Companies;
- Infrastructure and Intensive Economic Production in R&D and Innovation; and
Seed Capital FIPs
Seed Capital FIPs can only invest in corporations (sociedades anônimas) and limited partnerships (sociedades limitadas). These companies must:
- have an annual gross revenue of no more than R$16 million in any of the last three fiscal years; and
- not be directly or indirectly controlled by a company or group of companies with total assets greater than R$80 million or with annual gross revenue greater than R$100 million at the end of the fiscal year immediately prior to the first investment by the FIP.
The second requirement will not apply if the company is controlled by another FIP and the FIP does not have consolidated accounts with any of its unit (quota) holders.
Emerging Companies FIPs
Emerging Companies FIPs can only invest in corporations (sociedades anônimas). These companies must:
- have annual gross revenue of no more than R$300 million in the last three fiscal years; and
- not be directly or indirectly controlled by a company or group of companies with total assets greater than R$240 million or annual gross revenue greater than R$300 million at the end of the fiscal year immediately prior to the first investment by the FIP.
As with Seed Capital FIPs, the second requirement will not apply if the company is controlled by another FIP and the FIP does not have consolidated accounts with any of its unit (quota) holders.
Infrastructure and Intensive Economic Production in R&D and Innovation FIPs
Infrastructure FIPs (“FIPs-IE”) and Intensive Economic Production in R&D and Innovation FIPs (“FIPs-PD&I”) must invest in various securities in corporations (sociedades anônimas), private or public-listed.
The investments must be in new infrastructure and projects requiring “intensive economic production in research, development and innovation” in the energy, transportation, water and basic sanitation, irrigation sectors as well as other specific areas selected by the Brazilian Federal government from time to time.
FIPs-IE and FIPs-PD&I must:
- make their investments within 180 days of obtaining registration with the CVM;
- have, at least, five unit (quota) holders, with each shareholder neither holding more than 40% of the units issued by FIP nor having the right over more than 40% of the income from the FIP.
Multi-Strategy FIPs are the most flexible. It allows investments in various company types and sizes. Multi-Strategy FIPs may even invest abroad.
Who may be fund directors (administradores) and managers (gestores)?
Only a person who is authorised by the CVM to professionally manage securities portfolios can be appointed as a director (administradores) of a FIP. The director has the power to retain the services of portfolio managers and consultants, among others. The director must make the necessary filings with the CVM and keep the unit holders (quotistas) informed via various reports and ensure that the FIP keeps proper accounts.
The FIP must retain the services of a company that is registered with the CVM as a securities portfolio manager to act as its manager (gestor). The role of the fund manager is to advise the FIP, and negotiate and execute the FIP’s transactions, among other things.
How are FIPs taxed?
Generally, capital gains and income made by FIPs are taxed between 0% to 15%, depending on the type of investments made and the structure of the FIPs.
Foreign unit (quota) holders are generally taxed at 0% on capital gains obtained on the sale of the units (quotas), but may be subject to higher taxes if the holder is regarded in a tax haven (as set out in Normative Instruction 1,037/2010).
Last modified: September 21, 2020