The Brazilian government has published a series of measures that significantly modify the treatment of foreign investors.

By means of Normative Instruction no.161 of December 23, 1999, the Secretariat of the Internal Revenue Service (SRF) following the provisions of art.17, section 2 of Provisional Measure no.1990-26 of December 14, 1999, determined that, from January 1, 2000,”tax haven” investors will be subject to the same taxation treatment as Brazilian investors, thus, they will no longer profit from the exemption and benefits normally granted to foreign investors.

In accordance with the legal definition, “tax havens” are those countries that do not tax income, or that tax at a rate of less than 20 percent. SRF Normative Instruction no.161, increases from 21 to 35 the number of countries considered “tax havens.”(1)
Provisional Measure 1990 of October,1999, later republished as Provisional Measure no.1991 of January 13, 2000, also changed the rules for investors from non-tax haven countries. Foreign investments that are made by way of the stock (or commodity) exchange are now exempt from income tax.

Foreign investors may now invest directly in Brazilian equities. Previously, foreign investors were able to invest in Brazilian stock exchanges only through investment funds. With this Measure, the government expects to attract large international companies which prefer to invest directly.

The National Monetary Counsel (CMN) defined the general procedures for entry of foreign investments into Brazil, effective from March 31, 2000. CMN resolution no. 2689 of January 26, 2000, revokes the current annexes I, II (which regulate companies and foreign investment funds) and modifies annexes IV and VI of Resolution 1289 of March 20,1987, as well as conversion and privatization funds.

Under the new regulation, foreign investors must appoint a representative in Brazil who, in turn must register with the Central Bank and provide information for taxation purposes. The new rules will permit investors more flexibility to convert fixed income into flexible income instruments. Currently, no conversion is permitted.

The resolution will not completely unify the entrance of foreign investment into financial and capital markets regimes. Annex III, which permits foreign investment in investment stock portfolios, will not be revoked. Annex V, which treats investment ADRs (American Depositary Receipts), will also be unchanged, as well as the so-called “CC-5 accounts,” accounts within the country held by non-residents and that work as a vehicle for resource entry into and exit from Brazil.

With the flexibility and benefits brought by the new regulation, market analysts expect the flow of foreign investments to increase.

(l) – Thus, at present, the following countries do not benefit from the exemptions and benefits granted to foreign investors: Andorra, Anguilla, Antigua, Dutch Antiles, Bahamas, Barbados, Barbuda, Bermuda, Cyprus, Costa Rica, Djibouti, Gibraltar, Granada, Cayman Islands, Cook Islands, Madeira Islands, Man Islands, Channel Islands (Jersey, Guernsey and Alderney), Marshal Islands, Mauritius Islands, Turks and Caicos Islands, British Virgin Islands, Labuan, Liberia, Liechtenstein, Malta, Monserrat, Nevis, Saint Kits, Panama, Saint Vicent, Seychelles, Tonga and Vanuatu.