The Government also wants to raise additional funds to give it greater room for budgetary manoeuvre and this has prompted the introduction of new rules to increase taxes and reduce tax benefits, making the situation even worse.
Among all of the new provisions, one in particular may directly affect the net proceeds for sellers in M&A transactions. Provisional Measure No. 692 (PM 692), released September 22 2015, increased the tax burden for capital gains realised by Brazilian resident individuals upon disposal of assets.
Additionally, although PM 692 does not specifically mention capital gains assessed by foreign investors, it may also apply to these in certain circumstances, because Brazilian law determines that the capital gains of foreign investors generally follow the tax rules of individuals resident in Brazil.
Thus, based on the PM, capital gains will generally be subject to income tax (IT) at progressive rates, instead of the existing flat rate of 15%:
- 15% on the portion of gains up to 1 million Brazilian reais ($260,000);
- 20% on the portion of gains exceeding R$1 million and lower than R$5 million;
- 25% on the portion of gains exceeding R$5 million and lower than R$20million; and
- 30% on the portion of gains over R$20 million.
In principle, gains on sales made during 2015 remain subject to 15% tax, whereas sales carried out from 2016 onwards will follow the new progressive rates. However, as PM 692 still needs to be approved by the National Congress (within 120 days) and converted into law by the President before it becomes permanent, there is still some uncertainty as to what the scenario will be in 2016.
It should be noted that PM 692 only changes the general capital gains rules, and does not modify specific provisions and exemptions granted, for example:
(i) 15% for net gains assessed on transactions carried out by individuals on stock exchange; or
(ii) exemption generally granted to foreign investors not located in favourable tax jurisdictions on gains assessed on transactions carried out on stock exchange. Moreover, as investments made by foreign investors through private equity funds (FIP) would remain exempt upon certain requirements, it is advisable to analyse the available structures for each investment acquisition in advance.
In this context, such tax matters are driving the discussions about structures on M&A transactions. While, on the one hand, it might be desirable to conclude a sale in 2015 to have a lower tax burden on the capital gain for the sellers, on the other hand sellers may choose to sell the business in a more attractive national scenario.
Andrea Bazzo Lauletta (+55 11 3147 7761; email@example.com) is a partner at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, a principal International Tax Review correspondent firm in Brazil.
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