Over the past few years, Brazil has undergone a constant and significant development of its equity and debt capital markets’ regulatory framework. The Brazilian capital markets regulatory framework has been subject to various amendments and updates in an attempt by the local regulators to simplify and modernise rules, promote higher standards of efficiency regarding public offerings as well as the adoption of better corporate governance requirements, and to foster access to the capital markets by Brazilian issuers and investors.
Despite the recent economic crisis and recent political developments, a significant number of public offerings have been implemented in the local markets, especially over the past four years (in which the Brazilian economy has demonstrated signs of recovery).
The number of issuances of debt and fixed income securities continue to present solid growth in 2019 due to, among other reasons, the reduction by the federal government of the Brazilian basic interest rate (SELIC rate), and it is worth highlighting the debentures offerings performed by companies such as Neoenergia, Rumo, Cosan and BRF as well as bond offerings structured for foreign investors such as those carried out by Marfrig, Natura, Petrobras and Cielo. Likewise, equity offerings have played an important role in the local capital markets, being restricted equity offerings2 such as those implemented by Linx, Notre Dame, Localiza, Movida, IRB, Hapvida and Burger King, and which are key to the increase in the number of transactions. In addition, as the domestic economy shows signs of recovery, initial public offerings such as those from Banco Inter and SBF were also verified. For illustration purposes and in accordance with the Brazilian Financial and Capital Markets Association (ANBIMA) database,3 from January to July 2019, local capital markets transactions involved more than 200 billion reais.
A public policy of the recently elected federal government has seen investments in infrastructure, the privatisation of public companies and the performance of several reforms to reduce public expenses and bureaucracy, which has had a positive effect on market perceptions regarding Brazil. Specifically, it is worth mentioning that long-term infrastructure financing performed by means of capital markets transactions has been gaining prominence over the past few years, considering the consolidation of the use of instruments such as infrastructure debentures, created by Law No. 12,431, in view of the large quantity of local companies that have relied on public offerings of these types of infrastructure debt instruments to obtain the funding required for their infrastructure projects. According to information released by the federal economy department, since the enactment of this type of debt security in 2012, a total of approximately 250 public offerings were implemented until July 2019 for a total amount of approximately 65 billion reais.
i Current legal framework
The Brazilian financial and capital markets system is a highly regulated sector, and is essentially composed of regulatory bodies such as the National Monetary Council (CMN) and the National Council of Private Insurance, and supervisory bodies such as the Central Bank of Brazil and the Brazilian Securities Commission (CVM), which supervise, regulate and inspect, as the case may be, publicly held corporations, financial institutions and stock exchanges, among other entities.
According to the Brazilian securities law (Law 6,385, of 7 December 1976, as amended), the CVM regulates, develops, controls and inspects the securities market. It is also responsible for regulating:
- the examination and inspection of publicly held companies;
- the trading and intermediation of the securities and derivatives markets;
- the organisation, functioning and operation of the stock markets, and commodities and futures markets; and
- the management and custody of securities.
Typically, federal laws applicable to the capital markets in Brazil contain general provisions, and their main purpose is to establish what Brazilian capital markets comprise, who may be the agents of the market, the different independent agencies that have powers of oversight and the limits of their authority. The regulations that set forth the specific rules with which each player and transaction has to comply are the CVM’s instructions, Central Bank circulars and CMN resolutions. This system benefits the Brazilian capital markets, as the enactment of laws is a very bureaucratic procedure that cannot keep pace with the constant changes financial and capital markets are subject to, and the enactment of Central Bank, CMN and CVM regulations involves a more quick and effective way of regulating the markets.
Most of the relevant capital markets regulations have been issued by the CVM in an attempt to update and modernise the Brazilian market. Note the following in particular:
- CVM’s Normative Ruling No. 358, of 3 January 2002, which contains rules on the disclosure and use of relevant information regarding publicly held corporations, and restrictions on the trading of securities;
- CVM’s Normative Ruling No. 361, of 5 March 2002, with rules on tender offers;
- CVM’s Normative Ruling No. 400, of 29 December 2003, which sets forth the rules applicable to public offerings of securities in the local market;
- CVM’s Normative Ruling No. 476, of 16 January 2009, which contains rules applicable to automatic registration of public offerings to professional investors (restricted offers);
- CVM’s Normative Ruling No. 480, of 7 December 2009, with provisions on registration as a publicly held corporation in Brazil;
- CVM’s Normative Ruling No. 559, of 27 March 2015, with provisions on the approval of depositary receipt programmes for Brazilian securities, to be negotiated abroad; and
- CVM’s Normative Ruling No. 560, of 27 March 2015, with provisions on the registration, requirements and disclosure of information regarding foreign investors.
The structure of the Brazilian financial and capital markets is also composed of ANBIMA, which is a self-regulatory agency that created a set of rules for increased corporate governance for its associates (inter alia, banks, underwriters, brokerage firms, investment banks) to comply with. Currently, ANBIMA has a partnership with the CVM to expedite the registration of public offerings. By means of this partnership, ANBIMA is responsible for examining and making demands as regards the documents for public offerings (ANBIMA’s time limit to make demands is much shorter than the CVM’s on a regular public offer), and after ANBIMA is satisfied with the documents, they are subjected to final approval of the public offering by the CVM.
Brazil currently has one registered stock exchange that allows companies to publicly trade their shares, debentures and other equity and debt securities, the B3 SA - Brasil, Bolsa, Balcão (formerly known as BM&FBOVESPA). In addition to the regulations provided by the CMN, the CVM and the Central Bank, publicly held companies that wish to trade their shares on the stock exchange must also comply with B3’s regulations (which contemplate, inter alia, regulations on minimum corporate governance requirements that must be observed by listed corporations).
II THE YEAR IN REVIEW
i Developments affecting debt and equity offerings
Provisional Measure No. 881
Provisional Measure No. 881, Economic Freedom Provisional Measure, was enacted on 30 April 2019, and its main goals are:
- to put into force a declaration of the rights of economic freedom;
- to embody the principles of freedom in the exercise of economic activities;
- to put into place a presumption of good faith; and
- minimal and exceptional state intervention in the economic domain.
As one of its main innovations, Provisional Measure No. 881 establishes amendments to the Brazilian Civil Code to include a specific chapter focusing on investment funds, with particular emphasis on the limitation of liability of quotaholders and fiduciary service providers of such collective investment vehicles. Such long-awaited innovation seems to be compatible with the growing relevance and sophistication that investment funds in their various classes have experienced in Brazil, including within the local capital markets and in specific structured segments such as private equity, venture capital, real estate and securitisations.
Within such context, Provisional Measure No. 881 allows that funds’ by-laws establish a limitation of the liability of each quotaholder in proportion to the value of their quotas; and limitations of the liability of trust service providers to perform their respective duties without any solidarity.
It is now expected that this provisional matter will be converted into a federal law over the next few months.
CVM Resolution No. 809 to increase the efficiency of capital market regulation
To increase the efficiency of capital markets regulation and to observe certain international practices, on 19 February 2019, the CVM issued Resolution No. 809 reduced certain requirements verified in registration processes for registered public offerings under CVM Normative Ruling No. 400.
As per the Resolution, issuers will now be able to request confidential treatment from the CVM when requesting the registration of public offerings of shares; or when registration as an issuer with the CVM is performed simultaneously with a public offering of shares registration request. In other words, analysis of such requests shall be kept from public scrutiny until the approval of any of the requested registrations; or until the disclosure of a notice to the market and a preliminary prospectus within the offering – whichever occurs first. It is worth pointing out that the confidential review request is voluntary. If required, issuers shall indicate the period during which such information shall remain confidential and the reason for the confidentiality request.
Another important innovation brought about by CVM Resolution No. 809 is that companies are authorised to perform public offerings within the 16-day period prior to the disclosure of their financials – the blackout period – to expand the time frame available for the performance of public offerings.
Infrastructure investment funds
After receiving suggestions and recommendations from the markets through a public hearing, on 25 March 2019, the CVM enacted Normative Ruling No. 606 to create and set the fundamental regulation of infrastructure investment funds.
Within such context, institutions authorised by the CVM to manage securities portfolios may set up investment funds that, in order to be entitled to the tax benefits and advantages provided by Law No. 12,431 (i.e., witholding income tax exemption), must invest resources of not less than 85 per cent of a fund’s net equity in infrastructure debentures or other securities, or both, as indicated in Article 2 of Law No. 12,431.
Considering the relevant number of infrastructure debentures outstanding in the Brazilian capital markets, several infrastructure funds are expected to be set up in the near future.
New rules applicable to the issuance of financial bills
On 27 June 2019, the CMN published Resolution No. 4,733, which provides for new rules applicable to the issuance of financial bills.
Financial bills were developed by Provisional Measure 472 of 15 December 2009, converted into Law No. 12,249, of 11 June 2010, in response to market demand for the creation of a long-term funding instrument that could be issued by financial institutions. In 2010, the CMN issued the first regulation on the issuance of financial bills, which was later amended in 2012 by Resolution No. 4,123.
Financial bills are debt securities that can be issued by financial institutions for long-term financing and may be publicly offered on the local capital markets.
The amendments introduced by Resolution No. 4,733 aim to promote the expansion of negotiations of financial bills. The main updates are as follows:
- a reduction of the minimum amount of financial bills without a subordination clause from 150,000 reais to 50,000 reais;
- a provision for due diligence commitments to be observed by the intermediary institutions participating in the distribution, placement and trading of financial notes to ensure the provision of information regarding the investment and its suitability for the investor profile;
- an authorisation for the exchange of financial bills by the issuer institution considering as reference the market value of the redeemed security, less the tax obligations arising from the transaction;
- the admission of the issuance of financial bills with maturity of over 36 months containing repurchase option clauses; and
- a possibility for the Brazilian Central Bank to regulate the authorisation, in general, of the classification of the funds raised through financial bills in the formation of the reference equity of the issuing institutions (subordinated debt).
Resolution No. 4,733 became valid as of 1 October 2019.
ii Relevant tax law
Recently, the Federal Revenue Offices enacted Normative Ruling No. 1,585 of the Brazilian Federal Revenue (IN 1,585) with the aim of updating and consolidating rules regarding the taxation of income and capital gains recognised by local and foreign investors in financial transactions carried out in the Brazilian markets.
Before the introduction of IN 1,585, it was common that investors contributed their equity interest in corporations to investment funds, and whenever corporations paid dividends, they were paid directly to the quotaholders of the funds, and those amounts were exempted from income tax as the legal nature of the payments would remain as dividends (which are exempted from income tax under the current tax regulations).
According to this new regulation – the lawfulness of which in respect of this specific provision is debatable – the direct on-payment of dividends by investment funds whose portfolios are focused on equity interests to their quotaholders would be treated as a legal act equated with a redemption or amortisation of quotas; therefore, withholding tax (WHT) would apply at the general 15 per cent rate.
Specific rules for new types of investment
On 5 September 2013, the CMN issued Resolution No. 4,263 regulating the issuance by Brazilian financial institutions of a new funding instrument: the structure transaction certificate (COE). A COE is a ‘certificate issued against initial investment, representing a single and indivisible set of rights and obligations, with a remuneration structure presenting characteristics of derivative financial instruments’ and may be issued exclusively by multiservice banks, commercial banks, investment banks and savings banks in book entry form and upon registration in the registry and settlement systems authorised by the Central Bank or the CVM.
According to IN 1,585, the profits of COEs are subject to income tax at a regressive rate from 22.5 to 15 per cent. If the settlement of a COE occurs through the delivery of assets, including shares, the acquisition cost of the asset can be deemed as the acquisition cost of the COE. Losses arising out of COE investments cannot be compensated with profits on equity transactions by a natural person; nevertheless, legal entities can deduct such losses from their taxable profits.
Exemption from income tax on capital gains of a natural person on investments in various securities
The former regulation exempted certain debt securities (real estate credit bills; agribusiness credit bills; agricultural receivable certificates; certificate of agricultural deposits and agricultural warrants; certificate of agribusiness credit rights; rural product notes) from income tax; nevertheless, they were not exempted from tax over capital gains. According to the provisions of IN 1,585, these investments are exempted from tax over capital gains – a positive change that had been requested by the market for a long time.
Changes in capital gains rates
Under Brazilian tax law, the general rule is that non-resident investors are subject to the same tax rules that are applicable to individuals who are tax residents in Brazil when it comes to income and capital gains derived from transactions carried out in Brazilian financial and capital markets.
In this scenario, capital gains derived by foreign investors on the disposition of shares in Brazilian companies have been generally subject to WHT at a 15 per cent rate. Effective sine 1 January 2017, however, Brazilian law (under Law 13,259/2016, as converted from Provisional Measure 692/2015) changed that rate to a progressive regime under which the applicable rates vary as follows:
- 15 per cent on gains that do not exceed 5 million reais;
- 17.5 per cent on the portion of gain exceeding 5 million reais but that is lower than 10 million reais;
- 20 per cent on the portion of gain exceeding 10 million reais but that is lower than 30 million reais; and
- 22.5 per cent on the portion of gain that exceeds 30 million reais.
Only if an investor is based in a blacklisted tax haven jurisdiction would these rates be increased to a flat 25 per cent rate.
Capital gains accrued on the disposition of Brazilian listed stock, when carried out in the Brazilian Stock Exchange by an investor registered pursuant to the terms and conditions of Resolution No. 4,373/2014 that is not located in any blacklisted tax haven jurisdiction qualifies for a full exemption from WHT. As a result, if a 4,373 investor disposes of shares in a Brazilian listed company at a gain in the Brazilian Stock Exchange, this transaction would be exempt from any WHT in Brazil.
Potential changes in taxation applicable to investment funds
In 2018, the National Congress’ lower house, the Chamber of Deputies, and the Senate proposed two new bills of law: Bill No. 10,638 on 30 July 2018 (PL 10,638/18) and Bill No. 336 on 11 November 2018 (PL 336/18), with analogous contents to the provisions originally brought about by Provisional Measure No. 806 (MP 806/17), which was not approved by the National Congress and thus was not converted into law.
The legislative bills substantially amend the rules for the deferral of taxation applicable to closed-end investment funds in an attempt by the government to eliminate the tax deferral regime for these legal entities. According to those bills of law, investment funds would be taxed according to the rules currently applicable to open-end funds.
Among the main changes brought about by the proposed legislation, one should note in particular:
- the automatic taxation of investment fund gains (the come-cotas regime);
- the retroactive taxation of all gains accrued by closed-end funds up to May 2019; and
- the taxation of spin-off, merger and transformation transactions of closed-end funds made as of 1 January 2019.
At this point in time, both bills of law are pending analysis before specific committees at Congress. For this reason, and taking into account that MP 806/17 was not converted into law, it is important to highlight that no tax effects are expected at this moment.
In addition, Brazil, like several other countries, has been progressively passing certain tax transparency regulations, mostly based upon concepts such as the beneficial ownership provisions as oriented by recent BEPS and OECD guidelines.
As of 1 July 2017, Brazilian regulations have imposed an obligation on certain Brazilian entities and investors holding assets in Brazil to disclose to the tax and regulatory authorities in their corresponding local CNPJs (tax ID numbers) the non-resident investors that qualify as the final beneficiaries of a given Brazilian investment (e.g., stocks of Brazilian companies, owners of fixed-income investment funds, quotas of other investment funds such as private equity funds, aeroplanes).
III OUTLOOK AND CONCLUSIONS
Brazil has a comprehensive legal framework in terms of securities laws and regulations applicable to investors and issuing companies, and requirements that must be observed by each type of equity or debt security. In recent years, local regulators have enacted a number of rules completing and updating this legal framework to provide better access to the capital and financial markets by local companies, and detailed guidance and transparency to local and foreign investors who are willing to acquire securities issued in Brazil.
This effort – witnessed in recent years with the enactment of the rules described in this chapter and others enacted in previous years – is recognised by market players. In fact, its results have been verified in practical terms: in spite of the current economic and political crisis affecting Brazil, a significant number of debt and equity securities public offerings have been observed in the local market during the past few months, evidencing that both investors and issuing companies are increasingly relying on the capital markets for their (short as well as long-term) funding and capital needs.
1 Ricardo Simões Russo is a partner and Marcello Pompilio and Felipe Assunção are associates at Pinheiro Neto Advogados. Vinicius Pimenta Seixas (associate) assisted with the tax law section.
2 Restricted public offerings are the ‘476 offerings’, which are granted with automatic registration provided that the securities are only offered to a limited number of professional investors.
3 For further information, refer to the ANBIMA’s Capital Markets Bulletin, as of July, 2019, available at https://www.anbima.com.br/pt_br/informar/relatorios/mercado-de-capitais/boletim-de-mercado-de-capitais/captacoes-em-acoes-registram-o-maior-volume-semestral-da-serie-historica.htm (last access on 9 September 2019).