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10.6. Incentives

Tax Benefits on Financial Income

Zero-rate income tax for bonds and securities held by non-resident investors

Income tax is reduced to zero on earnings remitted to non-residents (except those located in countries or jurisdictions that do not tax income or tax it at a rate lower than 20%), in relation to(i) publicly traded bonds and securities issued by private companies (excluding financial institutions) purchased from 01 January 2011;(ii) closed-end credit rights investment funds,regulated by the Securities Commission (CVM)and not issued by financial institutions; and(iii) real-estate receivables certificates.

In order to benefit from the zero-rate over earnings,besides complying with a number of requirements, the funds raised by the issuer of the mentioned bonds and securities must be assigned to the funding of investment projects, including those directed to research,development and innovation (RD&I), within the requirements set forth by legislation.

WHT reduction – Brazilian-resident parties investing in debentures issued by SPEs

Income derived from debentures and other bonds, issued before 31 December 2015,that fulfill the above mentioned requirements and that are issued by specific purpose companies (SPEs) set up for the development of infrastructure projects, or projects for intensive economical production in RD&I considered as a priority by the Brazilian government, are granted a WHT reduction to: (i) a zero-rate, if paid to individuals; and (ii) a 15% rate, if paid to Brazilian-resident companies.

WHT reduction – Investment funds

Investing in debentures issued by SPEsbeneft from a number of concessions.Income earned (i) by the owners of specific investment funds that invest at least 85% of their net equity in the above mentioned debentures;as well as (ii) by the owners of investment funds that invest at least 95% of their financial resources in the investment funds described in item (i) will be subject to: (a) a zero-rate of WHT if they are individuals or foreign investors not based in tax havens and who invest in Brazil under the National Monetary Council Resolution 2,689; or (b) a 15% rate of WHT if they are Brazilian-resident companies.

Equity Investment Funds – FIP-IEand FIP-RD&I

With the objective of increasing investment in new infrastructure projects and fostering intensive economic production in RD&I projects,the Brazilian government has created the Equity Investment Funds for Infrastructure Projects(FIP-IE) and the Equity Investment Funds on Research, Development and Innovation (FIPRD&I), respectively.

The above mentioned new projects must be carried out by SPEs that are incorporated as corporations, in the following areas: energy,transport, basic sanitation, irrigation and other areas deemed to be a high-priority bythe Government. Existing projects may also be included in the event that an expansion takes place, if the expansion is treated as a new project and segregated in a specific purpose company.

The respective investment funds –FIP-IE and FIPRD&I – must invest at least 90% of their equity in any security issued by the above mentioned SPEs. Further, the funds must have at least five quota holders, and no quota holder must hold more than 40% of the fund’s quotas.Income from redemption of quotas, including liquidation, is taxed at 15%. Any gain on disposal of the related fund’s quotas will be taxed (i) at 0%for individuals who carry out these operations on or outside the stock exchange; and (ii) at 15% for legal entities, whether in operations on or outside the stock exchange.

Export Incentives

The various incentives available to exporters include the following:

  • Under the Special Customs Drawback Scheme,suspension and exemption can be obtained in respect of import duties, Federal VAT (IPI) and State VAT (ICMS) and other taxes and charges relating to imported goods that are used in the manufacturing of products for export. Currently,these benefits are also made available for local purchases as well, at a federal level. However,states do not yet offer the incentive relating to ICMS.    Exemption from Federal VAT (IPI), State VAT(ICMS), Tax for Social Security Financing(COFINS) and contributions to the Employees’Profit Participation Program (PIS) on exports of manufactured products.levied on remittances made abroad for payment of expenses relating to promotion, advertising and market research for Brazilian products,including booth rental, leasing, maintenance of offices and commercial representations, depots and warehouses; and export commission paid to overseas agents, except when paid to countries considered to be tax havens, in which case the taxis levied at the rate of 25%.
  • Exemption from income tax levied on remittances made abroad for interest due on export financing.
  • Exemption from the tax on financial operations(IOF) levied on the financing of export operations with goods deposited in a customs warehouse,including those using export bills and notes of credit.
  • The IOF rate is reduced to zero for any export earnings and insurance operations for export credits and international freight.
  • ICMS is not levied on the exporting of products,including commodities and semi-manufactured products or services.
  • A public low-cost export financing program(PROEX), managed by Banco do Brasil, finances or equalizes interest on exports of goods and services by medium and small businesses with gross annual revenues up to $ 60 million.
  • The National Bank for Economic and Social Development (BNDES) has financing programs to support exporters, such as the BNDES Exim,which offers financing for export goods.Export credit guarantee insurance is provided by Brazilian Insurance for Export Credit (SBCE) in two modalities: pre-credit risk (manufacturing)and credit risk (post-shipment), against commercial, political and extraordinary risks.
  • Other programs and special customs schemes may apply.

Industry Incentives

The import of capital goods and computer and telecommunications goods which are not available in the Brazilian market, might qualify for an Import Duty reduction, subject to government approval, in order to stimulate the broadening, modernization and restructuring of the Brazilian industrial sector. Some of these capital goods also benefit from a reduction in IPI.

Businesses in the computer and automation industries can receive an ICMS rate reduction if they follow a basic productive process (PPB) in Brazil defined by the government.

The BNDES provides low-cost financing for investment projects, the acquisition of equipment and the export of goods and services. Moreover,the bank shores up the capital structure of private entities and allocates its non-refundable finances to projects which further Brazil’s social, cultural and technological development.

Capital goods acquired by companies engaged in agricultural activities may be integrally depreciated in the same fiscal year.

There are a number of corporate categories for which the income tax regulations provide special treatment, the most important of which are as follows.

  • Insurance companies are allowed to make a special deduction for the technical reserves required by law.
  • Real estate:In the case of installment sales, taxable income may be determined on a cash basis.
  • Leasing:Leasing companies are regulated by the Central Bank, and optional accounting and tax methods are applicable.
  • Agricultural enterprises:These enterprises may operate a deduction from their taxable income for certain specified investments in land improvements, plant and equipment.
  • Mutual and investment funds:Generally, investors may pool their funds in order to obtain investment diversity and proportional investment advice from the funds’ administrators.Tax is payable at source at varying rates