The investment funds market in Brazil is very active and has become more sophisticated in the last decade, especially with the enactment of CVM Resolution 175 of 23 December 2022, which completely changed the regulatory framework applicable to investment funds in Brazil.
The rise in the interest rate in the last couple of years, following a rise in inflation and other market speculations, has caused retail investors to avoid risks with variable income investments, which has led to further investment in fixed-income assets.
According to publicly available data published by the Brazilian Financial and Capital Markets Association (ANBIMA), the consolidated net equity of investment funds amounted to BRL8.2 trillion as of 30 November 2023, representing an increase of 10% in the last 12 months, despite the investment funds industry having reached a negative net funding (difference between investments and redemptions) of BRL177.4 billion, which possibly reflects the instability of the capital market in Brazil in 2023.
According to the latest ranking from the International Organization of Securities Commissions (IOSCO), Brazil is the fourth major capital market in the world in terms of investment funds industry.
Notwithstanding the negative result in net funding in 2023 for the total funds industry, alternative funds had positive results with investments in FIDCs totalling BRL22.8 billion and investments in FIPs totalling BRL44.1 billion (until November 2023). With the government’s intention to reduce the interest rates for 2024, the perspective for 2024 is positive for alternative funds.
The changes promoted by CVM Resolution 175 and recent tax reforms, which also bring beneficial changes for foreign investors, are expected to have a positive impact for the investment funds industry in 2024.
CVM Resolution 175 represents an important milestone for the evolution of the funds industry in Brazil, with a view towards reducing bureaucracy and costs, and increasing security for investors, bringing the industry closer to practices adopted in other jurisdictions – including, for example:
Investment funds in Brazil are regulated by the CVM under Federal Law No 6,385 of 7 December 1976 (the “Securities Law”) and the Brazilian Civil Code. The CVM is a governmental agency of the Ministry of Economy and is responsible for, inter alia, monitoring the investment funds industry and issuing regulations.
Resolution CVM 175 comprises a general part applicable to all categories of investment funds in Brazil, and contains annexes with specific rules applicable to the different categories of investment funds, such as:
Brazilian investment funds are organised as a special condominium – ie, a pool of financial assets jointly owned by the holders of interests in the fund, called “quotas”, under the structure of a co-ownership. The funds can be organised as an open-ended condominium (ie, redemption of quotas allowed during the fund’s term of duration) or a closed-ended condominium (ie, no redemption of quotas is permitted until the end of the fund’s term of duration or in the case of its early liquidation). Alternative funds are generally set up as closed-ended condominiums.
Pursuant to CVM Resolution 175, all funds will be entitled to create different classes of quotas with different economic and political rights, and with segregation of net worth. Subclasses of quotas will also be permitted only with respect to:
Other economic rights and political rights pertaining to subclasses of restricted classes (ie, those exclusively targeted at qualified and professional investors) may be included in the fund’s by-laws. The possibility of implementing different classes and subclasses of quotas as set forth in CVM Resolution 175 will enter into force on 3 April 2024.
Private Equity Funds (FIPs)
Currently regulated by CVM Resolution 175, FIPs are organised in the form of a closed-ended condominium restricted to qualified investors. FIPs are allowed to invest in shares, debentures, warrants and convertible debt securities issued by listed and unlisted companies. FIPs shall participate in the decision-making process of invested companies and have effective influence in the definition of their strategic polices and management (the “Influence Test”). FIPs are classified into the following categories.
FIPs may have classes of quotas with different economic and/or political rights, subject to the applicable regulation. As of April 2024, different classes of quotas will be entitled to “track” specified assets of the portfolio of the FIP.
Asset-Backed Securities Funds (FIDCs)
FIDCs may be organised as open-ended or closed-ended condominiums. Annex II of CVM Resolution 175 consolidates the rules applicable to FIDCs and FIDC-NPs (non-standard asset-backed securities funds) into a single regulation. CVM Resolution 175 allows non-qualified investors (retail) to subscribe/acquire senior quotas of the standard FIDCs. The subscription of quotas of a FIDC that allows investment in non-standard receivables is restricted to professional investors.
FIDCs may invest in receivables such as credit rights and underlying instruments originating from transactions in the financial, commercial, industrial, real estate, mortgage, leasing and service segments. A FIDC that allows investment in non-standard receivables may also invest in receivables such as litigated claims, government bonds and overdue receivables. FIDCs may have different classes of quotas (senior and subordinated). Senior quotas have priority in the amortisation and redemption of quotas, while the other classes of quotas will be subordinated to the senior quotas for amortisation and redemption. As per Resolution CVM 175, other economic and political rights may be attributed to FIDCs’ classes of quotas.
Real Estate Funds (FIIs)
FIIs are organised in the form of a closed-ended condominium and invest in real estate developments. FIIs may be targeted at general investors (retail) or at qualified investors.
Quotas of FIIs may be divided into series, with the specific purpose of establishing different dates for the payment of the quotas by the holders of each series of quotas. Quotas targeted at qualified investors may be divided into different classes with certain limitations. As of April 2024, quotas of FIIs will be allowed to be divided into different classes with different economic and political rights, and with segregation of net worth.
All Brazilian investment funds must be registered with the CVM, regardless of whether their quotas are subject to a public or private offer, or whether they are open-ended or closed-ended condominiums.
In order to set up alternative investment funds in Brazil, there should be a constitutive act from the administrator and the manager approving the formation of the fund and its by-laws. A minimum set of documents should be filed with the CVM for the registration of the fund, as per the applicable regulation.
CVM Resolution 175 sets forth that the registration of the fund will be granted automatically by the CVM upon filing of the required documents with the CVM through its electronic system.
Currently, the enrolment of the fund on the Federal Revenue Office taxpayer’s register is made concurrently with the registration of the fund with the CVM.
The public placement of quotas requires intermediation by a company pertaining to the so-called Brazilian Securities Distribution System. For closed-ended investment funds, such placement must also be registered with the CVM.
Such registration shall be effected pursuant to the Securities Law and CVM Resolution 160 (which replaced CVM Instruction No 400/2003 and CVM Instruction No 476/2009). Public offerings in Brazil follow the definition found in other jurisdictions – ie, a public offering takes place whenever it is directed to an undetermined group of people. The ordinary registration process with the CVM may take from four to six months on average. Public offerings are also subject to several other requirements, including:
The placement of quotas of closed-ended investment funds targeted at qualified and professional investors is subject to an automatic offering registration process with the CVM, pursuant to CVM Resolution 160. In such cases, there are no limitations with respect to the maximum number of investors to be assessed. A lock-up period may apply if the quotas of the investment fund subject to an automatic offering registration process with the CVM are subsequently traded to a different category of investors (eg, in the case of a fund/class of quotas targeted only at professional investors, no lock-up period will apply if they are traded to other professional investors; but a 180-day lock-up period will apply if they are traded to qualified investors and a 12-month lock-up period will apply if they are traded to retail investors).
Liability is limited to the value of the quotas held by each investor, provided that such limitation is expressly provided in the fund’s by-laws. Otherwise, quotaholders will be liable for any negative equity of the fund, meaning they could be called to invest more in the fund than their original committed capital.
Considering that the quotaholders’ liability shall be disciplined in the annexes of each class of quotas (as part of the fund’s by-laws), it is possible for the same fund to create different classes of quotas with unlimited and limited liability.
CVM Resolution 175 has a chapter dedicated to the procedures to be observed by administrators and managers upon the verification that the net equity of a class of quotas with limited liability is negative.
Pursuant to CVM regulations, investment funds must disclose a variety of information to the CVM, the market or the quotaholders.
Any disclosure of information to quotaholders must be comprehensive, equitable and simultaneous, and the following materials must be made available on electronic channels and on the website of the administrator, the distributor (while the distribution is in progress) and, if applicable, the managing entity of the organised market where the quotas are admitted for trading:
Any marketing materials and other information provided to investors in public offerings must be:
The information cannot guarantee or suggest the existence of a guarantee of future results or risk exemption for the investor. Factual information must be accompanied by an indication of sources and differentiated from interpretations, opinions, projections and estimates.
The administrator of the fund is responsible for disclosing the following:
The administrator should also submit other documents to the CVM and, where applicable, to quotaholders and to the organised market where the quotas are admitted for trading, such as:
Where the quotas are admitted for trading, the administrator should also immediately disclose to the quotaholders, the CVM and the organised market any relevant act or fact that occurred or is related to the functioning of the fund or the assets that are part of the portfolio, which might reasonably influence the value of the quotas or the decision of the investors to acquire, sell or keep such quotas.
The following investors have been active in alternative investments:
Please see 2.1.1 Fund Structures for the legal structures typically used by alternative fund managers in Brazil.
According to Brazilian law, investment funds shall generally have a fiduciary administrator (principal fund “gatekeeper”) and an asset manager (responsible for the investment and divestment decisions, subject to the limitations set out in the fund’s by-laws), both of which are duly authorised by the CVM to provide securities portfolio-management services.
The fiduciary administrator shall be a legal entity, while asset managers may be either an individual or a legal entity (for FIPs, the manager shall be a legal entity in any event). In addition, entities may be registered as “full administrators”, which means they can act as both fiduciary administrator and asset manager, provided they comply with the Chinese wall requirements.
CVM Resolution No 21 of 25 February 2021 sets forth the minimum criteria applicable to fiduciary administrators and asset managers, including that they must be domiciled or have their headquarters in Brazil.
FIIs may be administered by:
Investors are divided into three categories in Brazil:
According to current CVM regulation, FIPs and FIDCs are restricted to qualified investors, while FIIs can also be marketed to non-qualified investors (ie, retail investors). As mentioned in 2.1.1 Fund Structures, CVM Resolution 175 allows senior quotas of FIDCs to be targeted at non-qualified investors.
CVM Resolution No 30/2021 sets forth the criteria for qualified investors (including individuals or legal entities that hold financial investments in an aggregate amount exceeding BRL1 million) and professional investors (including individuals or legal entities that hold financial investments in an aggregate amount exceeding BRL10 million and non-resident investors).
Non-professional or non-qualified investors are considered retail investors.
For more information on the regulatory regime applying to alternative funds in Brazil, please see 2.1.1 Fund Structures.
ANBIMA (a private and voluntary self-regulatory association) establishes rules for the market regarding enforcement and control, as well as codes of best practice for its members (which include asset managers, banks, brokers, securities dealers and investment advisers). It monitors the application of such codes and issues penalties for non-compliance.
Brazilian regulations set forth rules regarding the composition of the portfolio of alternative funds and certain limitations, as summarised below.
A FIP must maintain at least 90% of its net assets invested in securities (the “90% Rule”), which will not apply during the term set forth in the regulations for the FIP to consummate an investment after a capital call. For purposes of the 90% Rule, the regulations set forth that amounts may be added to the net assets invested in securities, such as amounts for the payment of the FIP’s expenses (limited to 5% of the committed capital), funds deriving from a divestment (subject to certain conditions), etc.
If the issuer of the securities targeted by the FIP is a privately held company, certain governance requirements must be observed by such issuer.
There is no maximum or minimum number of companies in which a FIP may invest, nor is there a maximum or minimum percentage of shares (ie, equity interest) that a FIP must hold in an invested company, provided in any case that the Influence Test is met and subject to certain concentration limits.
FIPs may invest up to:
FIPs may invest in quotas of other FIPs or of equity funds. FIPs may not invest in credit rights – except those issued by invested companies of the fund.
FIDCs may acquire credit rights and other assets of the same debtor, or a co-obligation of the same debtor, within the limit of 20% of its net equity. This limit may not be applied if the fund is targeted at professional investors. The limit may also be increased if certain requirements are met (eg, the debtor is a publicly-held company or has financial statements audited by an independent auditor registered with the CVM). The fund may acquire credit rights originated or assigned by the administrator, manager, custodian or specialised consultant, or by parties related to them in certain situations, namely:
Other rules regarding the composition of the portfolio and limitation on investment by issuer and by type of investment can also be included in the fund’s by-laws.
The properties, assets and use rights to be acquired by FIIs must be subject to prior evaluation by the administrator, the manager or an independent third party, subject to the requirements set out in the regulations. FIIs that invest predominantly in securities must respect the limits of application by issuer and by type of financial assets established in the general rules on investment funds. Such limits do not apply to investments by FIIs in quotas of FIPs, FIIs, certificates of real estate receivables and quotas of FIDCs.
FIIs can maintain a portion of their assets permanently invested in investment funds or fixed-income securities, public or private, to meet liquidity needs.
The main service providers, such as the fiduciary administrators, asset managers, custodians and bookkeepers, have to be established in Brazil and be duly authorised by the CVM (with the exceptions applicable to FIIs) or by a recognised local authority.
Administrators and portfolio asset managers must comply with the requirements of CVM Resolution 21, as explained in 2.2.2 Legal Structures Used by Fund Managers.
Please see 2.3.2 Requirements for Non-local Service Providers.
Please see 2.1.2 Common Process for Setting Up Investment Funds.
Conduct rules set forth in CVM Resolution 160 apply, specifically silence period rules, which set forth that the offer participants are expressly prohibited from publicising the public offering, including through statements regarding the fund, in the following periods:
The marketing and distribution of quotas of investment funds in Brazil are made by members of the Distribution System.
Under the applicable regulation, the asset manager may act as the distributor of quotas of the funds under its investment management or administration, subject to the adoption of certain procedures and policies applicable to distributors.
All marketing materials of investment funds must:
Conduct rules set forth in CVM Resolution 160 also apply (such as silence period rules, full and proper disclosure, etc).
In the case of open-ended investment funds targeted at retail investors, the administrator must prepare an essential information sheet, including information such as:
Please see 2.2.3 Restrictions on Investors for more information on the investors to whom alternative funds can be marketed in Brazil.
Notification is required only after the use of marketing material as permitted under CVM Resolution 160, which shall be sent to the CVM within one business day after its use.
During the period between the beginning of the quiet period (as indicated in 2.3.5 Rules Concerning Pre-marketing of Alternative Funds) and the date of disclosure of the notice to the market, the offer participants must limit the disclosure and use of information regarding the public offer strictly to the purposes related to the preparation of the public offering, warning recipients about the reserved nature of the information transmitted.
After the beginning of the market-offering period, the offering participants may widely publicise the public offering, provided that the conditions set forth in CVM Resolution 160 are observed, including by means of disseminating:
The permitted communications must:
The permitted communications must refrain from:
Please see 2.2.3 Restrictions on Investors for more information on the restrictions relating to certain categories of investors in certain types of alternative investment funds.
The administrator and the manager of an investment fund have fiduciary duties towards the fund and its quotaholders, and shall be liable for any damages caused to the quotaholders in the case of non-compliance with the fund’s by-laws or the applicable laws and regulations.
The CVM may apply penalties to service providers for any violation of the fund’s by-laws or the applicable laws and regulations – including fines, suspension of authorisation or registration for the exercise of the administration and/or management activities, or temporary disqualification to carry out such activities, up to a maximum of 20 years.
The CVM usually responds to day-to-day questions by email within a reasonable timeframe, and is also open to virtual or face-to-face meetings, which may be requested online through the CVM’s website. Complex queries should be submitted to the CVM by means of a formal consultation, which may take longer for the CVM to respond to. Filings of registration processes are all done electronically through the CVM’s website.
Each alternative fund is allowed to invest in certain types of assets, as provided by its specific regulation. For types of investments and the applicable regulation for each alternative fund, please see 2.1.1 Fund Structures and 2.3.1 Regulatory Regime.
Pursuant to Brazilian regulations, investment funds must engage a custodian duly authorised by the CVM, which will be responsible for managing the bookkeeping of the investment fund’s assets. For FIIs, the custody service is not required for financial assets that represent up to 5% of the fund’s net equity, provided that such assets are admitted for trading on a stock exchange or organised over-the-counter market, or are registered in a registration or financial settlement system authorised by the Central Bank of Brazil or the CVM.
The main regulations regarding risk, borrowing restrictions and the valuation and pricing of the assets held by investment funds are set up by CVM Resolution 175, as described in 3.4 Operational Requirements.
In addition to the general rules, Normative Annex IV of CVM Resolution 175 provides that FIPs that obtain direct financial support from development agencies are authorised to contract loans directly from such development agencies, limited to an amount corresponding to 30% of the FIP’s assets. In addition, the FIP’s administrator and asset manager may contract a loan on behalf of the fund only in cases authorised by the CVM (in practice, a consultation should be submitted to the CVM requesting authorisation for such borrowing) or to cover the default of quotaholders who have not paid their subscribed quotas. The last case will also be applied to classes of quotas destined for qualified or professional investors of all other categories of funds as set forth in CVM Resolution 175.
As for FIDCs, the administrator may not currently borrow or grant loans on behalf of the fund, which only allows the granting of loans and the assumption of debts as a result of transactions carried out in the derivative market.
FIIs are not currently allowed to borrow or grant loans. They may borrow their equities and securities, provided that such loans are processed exclusively through services authorised by the Brazilian Central Bank or the CVM, or are to provide guarantees for their own operations.
Also, for each type of alternative fund, the CVM regulates the accounting standards for the recognition, classification and measurement of assets and liabilities, as well as those for:
These are expressly provided by the following:
According to Brazilian law, insider dealing and market abuse are illegal activities subject to administrative, civil and criminal sanctions. CVM penalties for such activities include warnings, fines and suspension, and even prohibition from trading in the capital markets.
Please see 2.4 Operational Requirements.
Based on the fact that an investment fund does not present a formal corporate existence, being classified only as a flow-through entity in Brazil, it is not considered a legal entity for Brazilian tax purposes and is subject to special income tax treatment.
In this context, an investment fund can invest in different assets and sell the investments with gains. Such gains will not be subject to Brazilian taxes at the level of the investment fund, but they may be taxed upon their distribution to investors.
Pursuant to Law No 11,312/2006, gains and earnings obtained by the investors of a FIP whose portfolio is compliant with CVM regulations are generally subject to withholding income tax (WHT) at a 15% rate. Law 11,312 also established a specific tax treatment applicable to foreign investors who invest in a FIP by means of the mechanisms provided for by Resolution 4,373 issued on 29 September 2014 by the National Monetary Council, provided that certain requirements are met. Under the specific tax treatment, gains and earnings recognised by foreign investors as a result of the amortisation, redemption or sale of the FIP quotas are subject to WHT at a 0% rate.
The legal requirements to avail of the specific tax treatment afforded to foreign investors have been significantly changed by Law 14,711/2023, which was enacted on 30 October 2023.
The legal requirements originally set forth by Law 11,312 and the ones set forth by Law 14,711/2023 for application of the specific tax regime are as follows.
Residence of investors
Finally, Law 14,754/2023 modified the tax regime applicable to funds in general, and introduced the come-quotas taxation for closed funds. There are, however, certain exceptions. FIPs that qualify as investment entities and comply with the portfolio composition requirements established by the CVM are not subject to such regime.
Law No 11,478/2007 provides that any income (including capital gains) received by Brazilian individuals from FIP-IEs benefits from 0% WHT, provided that the general legal requirements for 0% benefits are met (ie, the requirements applicable to FIP-IEs – see 2.1.1 Fund Structures).
Legal entity quotaholders of a FIP-IE are subject to WHT at a rate of 15% on the income earned upon the redemption and amortisation of quotas, and in the case of liquidation of the fund or the sale of the quotas. For foreign investors, the same specific tax treatment afforded to FIPs applies to FIP-IEs. The original tax treatment applicable to foreign investors in FIP-IEs was also changed by Law 14,711.
Gains on distributions by a FIDC are subject to WHT. The general WHT applicable is regressive, depending on whether the fund is qualified as a long-term investment (if the FIDC portfolio has a term of more than 365 days) or a short-term investment (if the FIDC portfolio has a term of less than 365 days), as follows.
According to Law 14,754/2023, an FIDC that qualifies as an investment entity and has a portfolio composed of at least 67% of credit rights is not subject to the come-quotas taxation.
There is a difference in taxation concerning Brazilian individuals, legal entities and non-resident investors. Legal entities should consider WHT as an anticipation to corporate income tax (IRPJ). For individuals and non-resident investors, on the other hand, WHT is definitive.
In addition to WHT for the investor, for open-ended funds there is also a tax on financial transactions (IOF, Títulos) if the redemption occurs before the 30th day of investment, on a regressive-rate basis.
WHT applies at the rates indicated above to investments in FIDCs held by foreign investors, although foreign investors in low-tax jurisdictions benefit from a flat 15% rate.
Taxation of an FII’s accrued gains only occurs at the level of the investors, and the respective treatment will depend on the location of the investor. There is one exception to this rule, as Law No 8,668/93 establishes that FIIs investing in any real estate enterprise that has a quotaholder holding (individually or jointly with an affiliate) of more than 25% of the quotas of the FII as developer, constructor or partner will be taxed as a legal entity. Under Law No 8,668/93, the FII will be obliged to distribute its results to the quotaholders twice a year.
The gains on distributions by the FII and the gains derived from the sale of the FII’s quotas are generally subject to WHT at a rate of 20%. Gains on distributions made to and gains derived from the sale of the quotas by beneficiaries not located in low-tax jurisdictions that invest in Brazil via the mechanics of Resolution 4,373 are subject to WHT at a 15% rate.
However, if the FII is listed and the quotas are sold within the stock exchange, gains earned by foreign investors not located in low-tax jurisdictions would be subject to WHT at a rate of 0%. The application of the 0% WHT to a sale performed within an over-the-counter market is controversial. In addition, gains on distributions made to individuals are exempt when the quotaholder holds less than 10% of the fund’s quotas or rights to receive income not exceeding 10% of the fund’s total income, and when the FII has at least 100 quotaholders and quotas are traded exclusively on the stock exchange or organised over-the-counter market. Besides, according to Law 14,754, the tax exemption does not apply to a group of individuals that qualify as related parties if they jointly own 30% or more of the FII’s quotas, or if they are entitled to receive earnings that represent more than 30% of the total gains of the FII.
Brazilian retail funds are also organised as condominiums (pools of assets) and can be organised as closed-ended or open-ended funds, as mentioned in 2.1.1 Fund Structures.
Retail funds are regulated mainly by CVM Resolution 175’s Normative Annex I (called FIFs), and are classified as follows.
In addition, Normative Annex V of CVM Resolution 175 regulates exchange-traded funds (ETFs), which are retail funds formed as open-ended funds. ETFs’ quotas are required to be admitted for trading in stock exchanges or organised markets. Brazilian-formed ETFs may be backed by variable-income and fixed indexes, and at least 95% of their net equity must be invested in:
The process for setting up the common structures used for retail funds in Brazil is similar to the process for alternative investment funds; please see 2.1.2 Common Process for Setting Up Investment Funds.
Retail funds are automatically registered with the CVM as of the filing of the requested set of documents.
The rules regarding the limited liability of retail fund investors are the same as for alternative investment fund investors; please see 2.1.3 Limited Liability.
The disclosure requirements for retail funds are the same as provided for alternative investment funds; please see 2.1.4 Disclosure Requirements.
Please see 1.1 State of the Market and 2.2.1 Types of Investors in Alternative Funds.
Please see 3.1.1 Fund Structures for more information on the legal structures used by retail fund managers in Brazil.
There is no legal requirement regarding the type of investor to which retail funds can be marketed in Brazil.
Please see 3.1.1 Fund Structures for more information on the regulatory regime applicable to retail funds.
Limitations on the Composition of the Portfolio
A retail fund must invest its equity in financial assets that are registered in a registration system, or that are the object of custody or a central deposit, in all cases with institutions duly authorised to perform such activities by the Central Bank of Brazil or by the CVM. This is not applicable to quotas of open-ended investment funds duly registered with the CVM. A retail fund may not invest in quotas of funds that hold an interest in such retail fund.
FIFs are subject to the following concentration limits when investing in financial assets abroad.
Under CVM Resolution 175, the limits applicable to classes of quotas targeted at qualified investors may be exceeded if certain requirement are met.
Limits per Issuer
The concentration limits per issuer for FIFs are as follows, according to the general rules:
CVM Resolution 175 also sets forth that there will be no limits per issuer when the issuer is an investment fund and the investment policy provides for the acquisition of fungible assets from a single issue of securities.
Limits by Type of Financial Asset
The concentration limits per type of financial asset for retail funds are as follows, according to the general rules.
There is no concentration limit per type of financial asset for investment in:
FIFs targeted at professional investors are exempted from the concentration limits. FIFs targeted at qualified investors may increase the percentage of the concentration limits.
For ETFs that seek to reflect the variations and profitability of fixed-income indexes (ie, fixed-income ETFs), financial assets that are not part of the benchmark index but are of the same nature as those with different issuances will be admitted, limited to 20% of the ETF’s net equity.
Please see 2.3.2 Requirements for Non-local Service Providers.
Please see 2.3.2 Requirements for Non-local Service Providers.
Please see 3.1.2 Common Process for Setting Up Investment Funds.
Please see 2.3.5 Rules Concerning Pre-marketing of Alternative Funds.
Please see 2.3.6 Rules Concerning Marketing of Alternative Funds.
Please see 3.2.3 Restrictions on Investors.
Please see 2.3.8 Marketing Authorisation/Notification Process.
Please see 2.3.9 Post-marketing Ongoing Requirements.
Please see 3.2.3 Restrictions on Investors and 2.3.10 Investor Protection Rules.
Please see 2.3.11 Approach of the Regulator.
As described in 3.1.1 Fund Structures, each retail fund is allowed to invest in certain types of assets.
Like alternative funds, retail funds must also engage a custodian, which shall be an entity duly authorised by the CVM.
Upon becoming quotaholders, all investors must confirm, through the formalisation of an adhesion and risk-acknowledgment term, that they had access to the entire content of the by-laws and the essential information sheet, if applicable, and that they are aware of the risk factors related to the fund.
The administrator and the asset manager are not allowed to borrow or grant loans on behalf of the fund, except in cases authorised by the CVM or specific cases set forth in the regulations. Investment funds may use their assets to provide guarantees for their own operations, as well as lend and borrow financial assets, provided that such loan operations are processed exclusively through services authorised by the Brazilian Central Bank or the CVM.
The fiduciary administrator is required to have a manual regarding its valuation practices for both liquid and illiquid assets available on its website. Also, all investment funds must follow international accounting standards.
ETFs may carry out lending transactions with respect to the securities of the portfolio, in the manner regulated by the CVM and in accordance with the limits and conditions set forth in the ETF’s by-laws.
Resolution CVM 175 sets forth the possibility of the manager/administrator borrowing to cover for negative equity of a class of quotas.
Please see 3.4 Operational Requirements.
As investment funds do not have legal personality and generally are not subject to taxation on income and gains derived from their portfolio transactions, no tax arises at the fund level. Therefore, taxation may occur in relation to the investors specifically and not to the fund itself.
Earnings out of quota redemption/amortisation are generally subject to WHT, which is regressive, depending on whether the fund is qualified as a long-term investment (if the fund portfolio has a term of more than 365 days) or a short-term investment (if the fund portfolio has a term of less than 365 days), as follows.
Law No 14,754/2023 also introduced the come-quotas taxation to closed-ended funds, as of 1 January 2024. Previously, such regime was only applicable to open-ended funds.
There is a difference in taxation concerning Brazilian individuals, legal entities and non-resident investors. Legal entities should consider WHT as an anticipation of their corporate income tax (IRPJ); on the other hand, for individuals and non-resident investors, WHT is definitive.
Specific tax treatment applies to foreign investors, as described in previous sections.
In addition to income tax for the investor, for open-ended funds there is also a tax on financial transactions (IOF, Títulos) if the redemption occurs before the 30th day of investment, on a regressive rate basis.
Brazilian law distinguishes variable-income ETFs from fixed-income ETFs, as follows:
The distribution from a variable-income ETF is tax-exempt (exemption is not applicable for undistributed gain), and the distribution from a fixed-income ETF is taxed at the following rates:
Certain ETFs are not subject to the come-quotas modality of taxation, so accumulation is possible, and taxation is deferred upon disposal as per capital gains tax rules. In this sense, ETFs that qualify as an investment entity, comply with the portfolio composition, classification and reclassification established by the CVM, and have quotas listed on a stock exchange or organised over-the-counter market (an exception is made for fixed-income ETFs) are not subject to the come-quotas taxation.
Gains on the disposal or redemption of quotas of a fixed-income ETF are calculated using the same rates as apply to distributions.
Gains on the disposal of quotas of a variable-income ETF in a Brazilian stock exchange are subject to the net gains regime at a rate of 15%, and gains arising from the redemption of quotas of a variable-income ETF are subject to a rate of 15%, as per capital gains tax rules.
CVM Resolution 175 came into force on 2 October 2023 (except for some specific rules that come into effect later) and significantly changed the regulatory framework applicable to investment funds in Brazil.
On 28 August 2023, the Brazilian federal government issued Provisional Measure No 1,184/2023, through which it aimed at modifying several aspects of the Brazilian tax framework applicable to investors of funds incorporated in Brazil.
Among other provisions, the main change envisaged by the new rules was the extension to the closed-end funds of the fictional amortisation of quotas in May and November of each calendar-year (come-quotas).
Later on, the federal government presented Bill of Law No 4,173/2023, which encompassed the changes proposed by Provisional Measure No 1,184/2023. Bill of Law 4,173/2023 was converted into Law 14,754/2023 on 12 December 2023. As the changes proposed by Provisional Measure No 1,184/2023 are introduced into the Brazilian legal framework, Provisional Measure No 1,184/2023 will likely lose its effectiveness.
Some of the changes introduced by Law 14,754/2023 are described below.
If the funds do not comply with such requirements, they will be subject to the come-quotas taxation, and WHT will be due at a 15% rate.
Funds of funds
Funds that invest 95% of their net assets in FIPs, ETFs (variable income) and FIDCs (classified as investment entities), FIAs, FIIs, Fiagros, FIP-IE, FIP-PD&I and infrastructure investment funds are not subject to the come-quotas taxation.
Foreign quotaholders of Brazilian investment funds are not subject to the come-quotas taxation if they are not domiciled in a low-tax jurisdiction.
Foreign quotaholders investing under Resolution 4,373 will continue to be subject to the WHT upon distribution of earnings and gains and at the amortisation or redemption of quotas.
Different quota classes
In those cases where the investment fund has different quota classes, with different rights and obligations, and a segregated net equity of the fund for each class, each quota class will be considered a fund for tax purposes.
The transference of quotas among different subclasses of a class is not considered a taxation event for the purposes of the imposition of the WHT, if there is no change in quota ownership and no distribution to quotaholders.
Law 14,754/2023 introduced the tax treatment that should be observed in mergers, spin-offs and transformations of investment funds.