January 4, 2011 – The PE industry has welcomed Brazil’s plan to cut taxes on foreign investments in PE funds and some stock investments. Investors look likely return to the Fundos de Investimento em Participacoes (FIPs) local PE vehicle following news that the IOF tax would drop to 2% from 6% for foreign exchange transactions by overseas investors into FIPs and VC funds. “The reduction is very positive,” says John Michael Streithorst, GM for PE at Banco Modal.
“I would hope that this is a sign that [president Dilma Rousseff] is sensitive to private sector investment and is making the distinction between long-term investment capital and short-term speculative flows,” says Cate Ambrose, president of the Latin American Venture Capital Association. “It shows there is greater sophistication among policymakers and regulators to understand that PE is investing in companies, providing growth capital rather than speculating on the value of the real,” she adds.
The government had increased the IOF tax to 6% from 2% last year via 2 hikes, hoping to staunch a flood of short-term money into the country, which was exacerbating BRL appreciation. PE players questioned why foreign investments into FIPs were subject to the tax, arguing that PE is long-term. Some foreign investors quickly abandoned the FIP vehicle in favor of investing directly in Brazilian assets, explains Andrea Bazzo, an attorney with Sao Paulo law firm Mattos Filho. She notes that by investing directly, foreign investors would be subject to a capital gains tax of a minimum of 15% when they eventually exited. However, they switched to this strategy with the expectation that the government would eventually reduce the tax, she says. Now that the IOF has dropped to 2%, these investors should migrate back to FIPs to avoid paying capital gains tax.