Equity Investment Funds (known as “FIP” – Fundo de Investimento em Participações) is the vehicle used by the venture capital and private equity industry for the acquisition of minority, majority or all equity in target companies or convertible debt instruments issued by them.
FIPs are classified as Seed Capital, Emerging Companies, Infrastructure, R&D and Multi-strategy. In Brazil, FIPs are largely used for tax planning, because of its specific tax regime.
They are regulated and submitted to the supervision of the Brazilian Securities and Exchange Commission (CVM), specially by CVM Instruction 578 of 2016. The Brazilian Internal Revenue Service (Receita Federal) highly supervises whether the FIPs followed their business purpose, according to their regulation, to check if there was tax evasion (legal) or tax avoidance (illegal).
From the tax standpoint, FIPs are interesting because the general rule is that taxation happens in one moment: when selling equity (sale, redemption or amortization of quotas). Then, capital gains will be submitted subject to a withholding income tax (WHT) on a 15% rate.
Plus, there are tax benefits for individuals who invest in Infrastructure and R&D Equity Funds, known as “FIP-IE” and “FIP-PD&I”: capital gains will be tax exempt, whether quotas are negotiated on the stock market or not. But only if the FIP follow the determinations of the Act n. 11.478 of 2007.
For foreigners investing in FIPs the WHT rate will be 0% if the following criteria are met: (i) do not be resident or domiciled country regarded as tax haven for Brazilian authorities and (ii) do not own more than 40% of the FIP’s quotas or receive more than 40% of FIP’s of the distributed income (individually or together with a related person or company).
These are some of the main aspects of the FIPs. But there are many specific criteria to consider, in terms of legislation and concerning CVM and the Brazilian IRS regulations. The analysis must be on a case-by-case basis to maximize the tax efficiency.