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Mechanisms for investment in Brazilian Real Estate
Luciano Garcia Rossi
September 2009
2
1. Direct Investment in Brazilian Properties
2. Equity Investments
3. Real Estate Funds (FIIs)
4. Private Equity Funds (FIPs)
Summary
3
1. Direct Investment in Brazilian Properties
4
Urban Properties
Restrictions for Acquisition
Fee farm system - Seafront properties, few municipalities
Zoning restrictions
Taxation
IPTU calculated based on the assessed value (city tax)
Foreign Investor (Corporate or Individual)
Income from Real Estate: 15% withholding tax (WHT)
Capital gains: 15% (WHT); 25% for tax haven investors
5
Rural Properties
Restrictions for Acquisition
Direct Acquisition – Law 5,709/71
Does not apply to Brazilian companies after 1988
Free up to 3 modules
INCRA authorization - from 3 to 50 modules
Foreigners cannot own more than 25% of the area of a municipality (up to 40% under one nationality)
Strict interpretation in the Amazon region
Border areas – 150km from international borders – Law 6,634/79
Need of authorization from Brazilian Defence Council (CDN)
Companies – majority of capital held by Brazilians
Violation – null and void + penalty of 20% the transaction
6
Rural Properties
Other Limitations for Acquisition
Mining Rights
Environmental constraints – legal reserve
Indian reservations
Former slave communities (quilombolas)
Georeferencing
Any properties from 500ha (all properties after Nov. 2011)
GPS measurement + neighbours acceptance + INCRA certification
Taxation
ITR calculated based on declared value (federal tax)
7
Restricted Areas
Environmental Reserves
Indigenous Reserves
Border Zone
8
2. Equity Investments
9
Type of Company:
Brazilian corporation - S.A.
Limited liability company – Ltda.
Setting up:
Board of Trade, CNPJ, Election of Managers
Time for incorporating a company: 30/60 days
Taxation (foreign investors)
Dividends – tax exempt
Interest on Shareholders’ Equity - 15% WHT; 25% (tax haven)
Capital Gains - 15% WHT; 25% (tax haven)
IOF tax – 0.38% inbound and outbound
Equity Investments – SPE (Law 4131)
10
Stock Exchange:More than 30 real estate companies listed in Bovespa (28 in Novo
Mercado)Largest players: CYRELA (CYRE3)
MRV (MRVE3)
GAFISA (GFSA3)
BR MALLS (BRML3)IMOB index (12 companies) - total value of US$17.3 Billion in July
2009
Taxation (foreign investors) - transactions in the market
Dividends – tax exempt
Interest on Shareholders’ Equity - 15% WHT; 25% (tax haven)
Capital Gains - tax exempt; 15% WHT for tax havens
IOF tax – not applicable
Equity Investments – Stock Exchange (R 2689)
11
3. Real Estate Investment Funds (FIIs)
12
FII Offerings
FIIs created in 1993: Law 8668
Regulated by CVM Ruling 472 / 2008
Tax benefits for Brazilian individuals only
Number of FII Offerings (primary)
15
7
22
7
31
4
30
281 280
35 73
979
518 498
2003 2004 2005 2006 2007 2008 aug/ 2009
FII Issue Volume (MM of R$)
Source: CVM
13
Legal Basis: Law 8,668/93, as amended CVM Ruling 472/2008
Concept: Investment fund designed to invest in real estate projects – Mechanism similar to US REITs
Main Characteristics: No corporate identity Closed-end fund: redemption of quotas not permitted Determinate or indeterminate term No minimum investment amount
FII – Basic Features
14
Permitted Investments
Real estate properties and rights
Equity of real estate companies
SPEs with real estate business
Other funds (FIPs, FIIs, FIDCs)
Real estate receivables certificates (CRIs) and other instruments
Possibility of funds for QIBs – waiver of requirements (e.g., prospectus)
New flexibility on approval of acts (change in bylaws, new quotas)
Appraisal reports – approved by quotaholders - not necessarily market value
Law 12,024 - shall stimulate acquisition of CRIs and other instruments
FII Investments
15
FII earnings derived from real estate business are not subject to income tax.
Earnings derived from fixed or variable yield investments - WHT according to the same rules applying to financial investments by legal entities. May be offset against any WHT by the FII on distributing profits to quotaholders
FII shall pay out to quotaholders at least 95% of profits reported, as determined on a cash basis, every 6 months (June 30 and December 31)
Any FII that has a quotaholder (and related parties) as developer, builder or partner having over 25% of the quotas – tax assessed as a legal entity
Foreign Investor (individual or legal entity) Quota earnings: 15% WHT; 20% for tax haven Capital Gains: 15% income tax; 20% for tax haven
FII Tax Assessment
16
4. Private Equity Funds (FIP)
17
Change in FIP Offerings
1271423 2120
4775
2226420050
5229
2003 2004 2005 2006 2007 2008 aug/ 2009
FIP Issue Volume (MM of R$)
Number of FIP Offerings (primary)
39 6
72
13
86
25
2003
2004
2005
2006
2007
2008
aug/
2009
FIPs created in July 2003 by way of CVM Ruling 391
In June 2006, FIP foreign investors were granted a tax benefit under Law 11,312
Source: CVM
18
FIP – Basic Features
Basic Rule: CVM Ruling 391/03
Concept: Investment fund in (1) securities representing equity, (2) with participation in the management of the invested company
Main Characteristics: No corporate identity Closed-end fund: quota redemption is not permitted Determinate term Qualified Investors + Minimum Investment of R$100,000
19
FIP Investments
Investments in securities representing equity
Investments Permitted:
(a) shares(b) debentures(c) subscription bonds(d) other securities that can be converted in or exchanged for shares
All securities above may be issued by either publicly-held or closely-held companies.
Investment in fixed-yield funds for routine FIP expenses
Effective influence on the invested company
20
Taxes Assessed on FIP Quotaholders
Foreign Investors – Individual or Legal Entity
Law 11,312/06: Tax benefit (0% WHT on FIP earnings paid to quotaholders) provided the quotaholder meets the following requirements:
only individuals or legal entities resident abroad
investment made via Resolution 2689
quotaholder or related party may not hold more than 40% of FIP quotas or earnings
FIP may not have more than 5% debt bonds in its portfolio (net assets)
FIP quotaholder may not be located in a tax haven
If the requirements above are not met, WHT will be due on earnings paid out by the FIP at the rate of 15%
21
SPC 1 SPC 2 Other investments
Offshore
Brazil Up to 40% of
FIP
Up to 40% of
FIP
Up to 40% of
FIP
FIP Structure – Feeder Funds
Investors
Investment
Vehicle
Investors Investors
Investment
Vehicle
Investment
Vehicle
FIP
22
FII FIP
Manager Portfolio Manager Financial institutions
TermDeterminate or indeterminate
Determinate
Minimum Investment
No minimum Minimum of R$100,000 + QIBs only
Object
Real estate, equity of real estate business, debt instruments, other funds
Equity or equity-related instruments of S.A.s + effective influence. Any type of business
Taxation15% WHT on quota earnings and on capital gains (20% for tax havens)
Zero percent WHT on earnings if all conditions are met (otherwise 15%)
Main focusBrazilian individuals (tax benefits)
Foreign investors
FII vs FIP
23
Luciano Garcia Rossi
Tel: (55 11) 3247-8673
Fax: (55 11) 3247-8600
E-mail: [email protected]
Pinheiro Neto Advogados
Rua Hungria, 1100
01455-000 São Paulo – SP
BRAZIL
www.pinheironeto.com.br
9.689.275
Contact Information