The Federal Government issued Provisional Measure No. 1,184/2023 (“MP 1,184/23”) to change the taxation system for closed-end investment funds, making them equivalent to open-end funds by introducing a periodic taxation system, known as “come-cotas”. Before the measure, withholding income tax (“IRRF”) was levied on closed-end funds only on the distribution, amortization or disposal of quotas, with rates varying between 15% and 22.5%; now, both open-end and closed-end funds are subject to the 15% “come-cotas”, applied annually in May and November, with IRRF remaining levied on the date of income distribution, amortization, redemption or disposal, at the same rates.
In addition, Provisional Measure 1,184/23 provides for a supplementary charge of up to 7.5% when income is distributed or quotas are amortized, redeemed or sold, so that the IRRF totals: (a) 22.5%, for investments with a term of up to 180 days; (b) 20%, for investments with a term of 181 to 360 days; and (c) 17.5% for investments with a term of 361 to 720 days. For investments of more than 720 days, there will be no additional charge, and only the final rate of 15% will apply.
With regard to short-term funds, i.e. those whose portfolio has an average term of 365 days or less, the come-cotas rate will be 20%. If an investment is redeemed within 180 days, an additional 2.5% IRRF will be charged.
The Provisional Measure also determines that losses calculated at the time of amortization, redemption or sale of quotas may be offset exclusively against gains calculated in the same investment fund or in another fund managed by the same legal entity, provided that it is subject to the same tax regime.
The changes are intended to reflect the change in the tax agenda announced since the beginning of the year by the Federal Government, which aims to recompose the tax base to finance public policies. However, there is an imminent possibility of an increase in the maintenance costs of investment funds of this nature, which could have significant consequences for the private financing market, especially in the agribusiness sector, with the evasion of credit that was previously allocated – or intended to be allocated – in these structures.
In the case of Investment Funds in Agro-Industrial Production Chains (“FIAGRO”), the provisional measure intends to increase the number of shareholders required to be exempt from Income Tax on distributed income, from 50 (fifty) shareholders – currently provided for in Law No. 14.130/2021 – to 500 (five hundred) shareholders. In addition, Provisional Measure 1,184/23 restricts the application of this income tax exemption to funds whose shares are actually traded on the stock exchange, a benefit that was previously extended to all whose shares were admitted to trading on the stock exchange.
In addition to the aforementioned changes, Provisional Measure 1,184/23 provides for other changes and specificities regarding the taxation of Real Estate Investment Funds (“FIIs”), Equity Investment Funds (“FIPs”), Equity Investment Funds (“FIAs”) and Market Index Investment Funds (“ETFs”).
Provisional Measure 1.184/23 is now in force, but needs to be processed in Congress within a maximum of 120 (one hundred and twenty days) before it can be converted into law, otherwise it will lose its effectiveness. Be that as it may, the measure will only take effect from January 2024, but it is also possible to bring the scheme forward to this year at the taxpayer’s discretion, an exceptional case in which a rate of 10% will be applied.
In view of the legislative change that incorporates substantial changes that must be taken into account in the tax planning of closed-end investment funds, we are available for any clarification on the impacts of the new regime and its applications, especially to advise you on the implementation of the new rules.
Atenciosamente,
Passos e Sticca Advogados Associados – PSAA