Brazil Private Equity Hopes to Dodge New Tax

Brazilian private equity funds, known as FIPs, are lobbying the government for an exclusion to the recently increased IOF tax. Brazil last week hiked the charge to 6% from 4% to try and contain FX appreciation from heavy cash inflows. However, the ABVCAP local private equity and venture capital association argues that its members should not be subject to the tax, due to the long-term nature of their investments. Ken Wainer, managing principal at VBI Real Estate, says FIPs have to pay the 6% tax upon receipt of foreign funds. This is a heavy burden, he adds, since payment is required before any gains can be realized. A New York-based banker who invests in Brazil says the tax increase will cause a “small slowdown” by foreign LPs investing in PE in the short term. An ABVCAP spokesman says he does not expect any change until after the upcoming elections. If a foreign investor were to invest directly in a Brazilian company without going through an FIP structure they would not be subject to the IOF tax. However, they would get hit by a capital gains tax that can range from 15%-34%, explains Christiano Chagas, partner in Mayer Brown’s Sao Paulo office.