By Howard Borsden, Financial Advisor
RIO DE JANEIRO, BRAZIL – In recent years, the Brazilian government has used a bitter antidote to ease an inflation rate that has been for many years a burden to the country: high interest rates. With nominal interest rates estimated at 10.5 percent for 2012, Brazil is now the world champion in real interest rates. Such high interest rates in Brazil can be a trap for the assets of borrowers who fail to organize their finances.
However, high interest rates today also represent a great opportunity for investors who can benefit from it, provided that they use a proper financial planning strategy to invest through via financial instruments available in Brazil.
Whilst Brazilian bureaucracy evolves toward a more cohesive, flexible and efficient system of visa issuance to foreigners, those who still do not have the right to stay have restricted investment options that allow them to benefit from Brazil’s growth and so have to perhaps concentrate any asset allocation via non-Brazilian mutual funds focused towards Brazil, in whole or in part.
An example are BRIC investment funds, which aggregate in their portfolios, stocks and bonds not only from Brazilian institutions but also from the four major emerging economies, among them Brazil, Russia, India and China. Also the rare investment funds with UCITS III or IV approval with an emphasis directed towards Brazil, available in international investment platforms such as Friends Provident, Allianz, Credit Suisse, e.g. Hixance Focus Brazil fund that in the last thirty days yielded plus 4.32 percent, interestingly a euro denominated fund, showing the interest that investors have in Brazil.
However, the range of options expands once the investor acquires, or at least is in the process of acquiring, his/her Brazilian visa. Although it is poorly publicized among expatriates or even among Brazilians, CVM (Brazilian Securities Commission) in partnership with SUSEP (Brazilian Private Insurance Superintendence) and BM&FBovespa (Commodities, Derivatives, Stock & Shares Market of São Paulo) has established strong policies and regulations in order to protect investors’ capital in Brazil.
By adopting principles of corporate governance named Novo Mercado, Nível1 and Nível2 (which since 2000 define commitment to transparency and ethical behavior of companies towards investors) as well as control and supervision of Insurance Companies, Asset Managers, Investment Banks and Brokers providing full liquidity guarantees to the investor. This gives access to his or her assets even in case of insolvency of the financial institution used as a vehicle for the investment.
Once the necessary guarantees and regulations were firmly established in the Brazilian financial market, the risk that is not connected to the business was diminished, which resulted in investors for the first time experiencing the due sense of security to invest. Leading to the constancy of investment supply directly and indirectly to the Brazilian stock markets (which ultimately has rewarded investors since 2000 to early 2012, with the average annual yield of plus 12.7 percent) in spite of the global crisis (source BM&FBovespa).
There is a Brazilian expression that says “Não se deve ir com sede ao pote,” meaning you´d better not rush things. One of the biggest flaws that unaware investors make, most times in exchange for a slightly better liquidity, occurs when they purchase investments offered by their Brazilian bank, such as savings and investments in CDB, which yields pairs up with inflation whilst gains are restrained annually by Brazilian capital gain taxes.
Banks in Brazil offer a money back guarantee, limited to R$60,000. Such investments are constantly the source of frustration for loved ones at the time of the death of the holder of the investment as assets held directly within CDB, saving and investment accounts from banks are included in someone’s estate for the purposes of Brazilian Inheritance tax, which ultimately makes many families give up on an investment that is rightfully theirs.
In contrast to the mere banking solutions, more sophisticated investment solutions have been fully integrated into the Brazilian financial market. Brazilian Pension Plans, are essentially investment accounts designed to provide retirement income, stands out amongst such alternative approaches – as unlike similar plans based in other countries, they generally have a minimum grace period of twelve months. This means that after the first year the investment may be withdrawn in its entirety, in some cases without any penalty.
When investing in a Brazilian Pension Plan, investors have access to a certain number of funds, among which we highlight those managed by the Asset Managers with international recognition as BNP Paribas, Credit Suisse, Mapfre, The Principal Group, and others offering funds benefiting from Brazilian interest rates.
These have yielded plus 16.61 percent during the crisis of 2008 and plus 13.55 percent during the low markets in the European crisis of 2011, with an annual average yield of plus 14.05 percent. There are also wider managed funds which are composed of stocks and shares as well as bonds in the Brazilian or international markets.
A Brazilian Pension Plan also provides taxation flexibility through two different arrangements (Progressivo or Regressivo) and models (PGBL or VGBL). Capital gains tax may vary from ten percent to 35 percent making it necessary to plan properly in order to apply the most appropriate strategy, taking into account the investor’s tax situation and the period of investment.
Nevertheless in all respects, Capital gains tax is only payable when the investment is withdrawn, thus Brazilian Pension Plan investments presents an attractive alternative through tax deferral to the banks’ offerings. Brazilian Pension Plans are offered by Insurance companies, so the investor has a 100 percent money payback guarantee if the Insurance company becomes insolvent.
Moreover, because it is an Insurance company who is dealing with the assets, from a succession perspective, assets held in Brazilian Pension Plans are not included in someone’s estate, thus being free of Brazilian Inheritance tax.
In the case of death of the holder the capital is easily reversed to the appointed beneficiaries and when setting the Plan the investor can also add risk covers, ideal for those who wish to establish investments ensuring the welfare of their families.
If you are looking to invest taking advantages of Brazilian interest rates and growth and you are tax resident in Brazil, there are several reasons why a Brazilian Pension Plan can be the most advantageous and reasonable choice for you. However, if your stay in Brazil has not been regularized yet or if you prefer to keep your assets in a currency other than Real, than Brazilian focused funds through international investment platforms are also an option.
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