What are the limits to the tax advantages granted to non-resident investors in Brazil?

In some situations, Brazilian tax legislation grants different treatment to non-resident investors in the country, especially those who invest in the stock market. However, it is important that taxpayers do not over-interpret these benefits and observe the limits, especially with regard to the concept of “stock market”, to avoid the risk of questioning by the federal tax authorities.

As a rule, investors who are not tax residents in Brazil are taxed in the same way as individuals who are resident in Brazil (art. 18 of Law No. 9,249/1995). However, in some specific situations, the legislation provides different tax treatment, generally aiming to encourage certain conduct or behavior, encouraging non-residents to invest funds in the country.

Among these specific situations, it is worth mentioning two that are very relevant.

The first deals with the zero income tax rate on capital gains obtained from the sale of shares in a Private Equity Investment Fund (FIP) (art. 3 of Law No. 11,312/2006). The requirements for taking advantage of this benefit were even relaxed by recent legislative changes that occurred at the end of last year.

The second, mentioned at the beginning, deals with the non-incidence of income tax on gains obtained from stock exchange transactions (art. 81 of Law No. 8,981/1995).

This specific type of investment is regulated by Resolution No. 4373 of the National Monetary Council (CMN). For this reason, it was agreed to refer to investors who are not residents of the Brazilian capital market as “Investors 4373”.

With regard to these investors, a question arises regarding their taxation. What is the limit for tax advantages? Will income tax not be levied on any sale made by them, provided that they are Investors 4373, or will it be necessary to observe the requirement of sale occurring on the stock exchange?

It may not seem so, but publicly-held companies do not always sell shares on the stock exchange. In some situations, these sales occur on a restricted basis.

An example of this is the so-called “Subsequent Offerings of Shares with Restricted Efforts”, which are nothing more than operations in which a company already listed on the stock exchange issues new shares for the purpose of raising funds on the market, but with restrictions to the general public. The offer, as a rule, is directed to a select group of investors.

In this type of situation, the big question is: will Investors 4373 be able to continue to benefit from not paying income tax?

The Federal Revenue Service (in a very recent statement) understands that this is not the case, and for very simple reasons. The Revenue Service argues that the purpose of not charging income tax is to encourage the financial and capital markets. Such incentive would not occur in the case of sales with restrictions for the circulation in the general market (Cosit Consultation Solution No. 228/2024). This type of manifestation sends us a message: Investors 4373 will not always benefit from not paying income tax. Despite the significant tax advantages for investors of this nature, it is important that taxpayers do not try to stretch the rope too much when interpreting the legislation, avoiding falling into unnecessary tax risks.