The taxation of Brazilian Receivables Investment Funds (know as FIDCs) has been a key concern for fund managers and Brazilian and foreign investors.
This is because, in order for FIDCs to benefit from one of their greatest advantages – deferral of Income Tax (IT) collection until the moment of income distribution, amortization, or redemption of shares – local regulations now require them to be classified as an “investment entity” pursuant to the requirements established under Federal Law No. 14,754/2023 and Resolution No. 5,111/2023 of the National Monetary Council (CMN).
Otherwise, the applicable IT will be levied under the “come-cotas” regime, which requires investors to calculate their earnings in May and November of each year, subject to withholding IT on the capital gains obtained.
Below are 2 key points regarding the taxation of FIDCs as investment entities or those subject to the ‘come-cotas’:
1. Criteria for FIDCs to Qualify as an Investment Entity: To be recognized as an investment entity – and thereby allow its investors to be eligible for tax deferral – a FIDC must meet specific requirements, including: (i) portfolio composition: at least 67% of the fund’s assets must be receivables; (ii) professional and discretionary management: the fund must be managed on a discretionary basis by professional agents or service providers (e.g., fund administrator and manager); and (iii) fund’s constitutional documents: the fund’s bylaws and other constitutional documents, if applicable, must define the strategies to be adopted by the fund manager to generate returns for investors.
The CMN Resolution provides examples of cases where a FIDC would not be classified as an investment entity, including: (ii) FIDCs with an investment committee in which majority individual investors make decisions and issue orders to the manager regarding the fund’s portfolio composition; and (ii) FIDCs where majority individual investors have the authority to determine or veto investment or divestment decisions.
2. Application of the “Come-Cotas” Regime for FIDCs That Do Not Qualify as Investment Entities: If a FIDC fails to meet the criteria for classification as an investment entity, its investors will be subject to the “come-cotas” taxation – requiring income calculation in May and November each year and withholding IR on capital gains, according to the tax rates applicable to long-term funds (portfolios with an average maturity exceeding 365 days) and short-term funds (portfolios with an average maturity of 365 days or less).
Given this regulatory landscape, it is crucial for FIDC managers and investors to carefully assess the requirements for investment entity classification and the benefits of tax deferral.
