BRAZIL Law and Practice Contributed by: Ihury Bastos Pereira Darmont, Filipe Starzynski, Karyn Yoshisaki, Ariel Goldstein and Artur Marangoni Cabral Fagundes, Darmont Advogados
duly registered with the CVM and headquartered in the country. On the other hand, most alternative investment funds may hire investment consultants or specialised ser - vice providers located in other jurisdictions, provided that ultimate responsibility for administration and management remains with the Brazilian entities reg - istered by CVM. 3.6 Taxation of Carried Interest In Brazil, taxation on investment funds varies depend - ing on the type of investor and the nature of the vehi - cle. There are, in summary, two main types of taxation that may be applied to investment funds: taxation on transactions and taxation on invested assets. In taxation on transactions, taxes are levied whenever there is a movement of resources in the fund, such as a redemption or a distribution of income. In this case, a Withholding Income Tax (WIT) rate is applied to the capital gain, which is calculated as the differ - ence between the sale price of the fund’s quotas and their purchase price. In the case of taxation on invested assets, taxes are levied twice a year, on the last business day of May and November, based on the income obtained in the period (previous six months) – a mechanism known as come-cotas . Nonetheless, there are special invest - ment funds that can be created to defer this obliga - tion. For resident investors, whether individuals or legal entities, taxation is generally based on WIT ( Imposto de Renda Retido na Fonte – IRRF ). Traditionally, such tax may apply in accordance with the following regressive rates: • short-term fixed income funds in Brazil are taxed at a rate of 22.5% for investments held up to 180 days and 20% for those held from 181 to 360 days. • long-term fixed income funds follow a regressive schedule: investments held up to 180 days are taxed at 22.5%, from 181 to 360 days at 20%,
from 361 to 720 days at 17.5%, and those held for more than 720 days at 15%. Nonetheless, and especially for alternative investment funds, there are other rates and rules. For instance, for Credit Rights Investment Funds, Multimarket Invest - ment Funds and Private Equity and Venture Capital Investment Funds, it is possible to have a fixed tax rate of only 15%, provided that their structure com - plies with certain rules, especially of management control and administrative discretion of the vehicle, as well as certain levels of net liquidity and asset com - position. In this sense, it is very important within the process of creation of the vehicle to observe the above- mentioned rules and decide if the fund will be cre - ated to reach the tax-rate regime enacted by Law No 14,754/2023 (being classified according to Brazilian rules as “investment entities” ( entidades de investi- mento ) and adopt the above-mentioned regime, as well as observe whether it will attend to the deferred tax payment or the anticipated tax-payment regime ( come-cotas ). Furthermore, other types of funds, such as Real Estate Investment Funds and Investment Funds for Agroin - dustrial Production Chains, have specific tax rates as well as tax relief for their investors. Financial investments made by non-resident investors in investment funds are, typically, benefited. Generally, in this regard, it should be noted that distri - butions made to non-resident investors not domiciled in locations considered as tax havens will be sub - ject to WIT at beneficial rates and specific tax relief, depending on the type of investment fund and its port - folio. On the other hand, distributions made to non- resident investors domiciled in locations considered as tax havens will be subject to WIT at a higher rate. The tax treatment of pension funds in Brazil depends on their legal structure and the type of investment fund allocated. Nevertheless, as a general principle, income and returns earned by Brazilian pension funds are exempt from income tax, and any withholding tax applied to gains is regarded as definitive.
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