Brazil’s Chamber passes bill creating infrastructure debentures

RIO DE JANEIRO, BRAZIL – The Chamber of Deputies on Wednesday, July 7, passed Bill 2646/20 authored by deputy João Maia (PL-RN) and other legislators, which creates infrastructure debentures to be issued by utilities providers.

The bill to be forwarded to the Senate also changes rules for investment funds in the sector.

Debentures are bearer bonds issued by companies with commitments to pay interest after a certain period, negotiable in the market.

The substitute was agreed to by the bill’s rapporteur, deputy Arnaldo Jardim (Cidadania-SP). According to the draft, infrastructure debentures may be issued by concessionaires, permit holders and licensees to operate public services. The funds must be used in investment projects or intensive economic production in research, development and innovation in this area.

The debentures must be issued by December 31, 2030 and comply with rules to be included in the laws on investment funds in the sector. Jardim removed the list of areas in which funds may be invested from the draft, delegating the definitions to regulations.

These bonds may contain exchange rate variation clauses and be issued by direct or indirect parent companies of concessionaires.

The draft refers to a subsequent regulation to define the criteria for classifying projects in the sectors it considers priorities. This regulation may also stipulate other criteria to encourage initiatives that result in relevant environmental or social benefits, such as priority processing and monitoring of projects through self-declaration by the project owner.

“This bill emerged from debates in the special committee on the PPP [public-private partnership] regulatory framework, for which I was the rapporteur, and comes at a time when we need to urgently invest in infrastructure, which Brazil was lacking,” Jardim said.

According to the bill’s first proposer, deputy João Maia, the draft is the result of lengthy work with the involvement of several specialists.

“We intend to offer Brazil a modern, fair and efficient legislation on the subject. The international indicator that measures the country’s infrastructure stock in relation to the GDP is 36.2%, while in other BRICS countries it is much higher,” he said, citing India (58%) and South Africa (87%).

Taxation

As for the tax on the income earned by investors, buyers of debentures, the rule for fixed income will be applicable. Currently, these investments are progressively levied depending upon their maturity – rates are highest for short maturities: 22.5% up to 180 days; 20% from 181 to 360 days; 17.5% from 361 to 720 days; and 15% from 721 days onward.

Instead of guaranteeing exemption from income tax to foreign investors, the rapporteur chose to apply a 15% tax rate. But if investors are residents of a tax haven country, the tax will be the same as for residents in Brazil.

If the buyer is a legal entity, the tax will be considered an anticipation of the due tax in each calculation period of corporate income tax (IRPJ); and final in the case of an individual or a micro or small company registered under the Simples Nacional (optional taxation regime unifying all taxes).

However, this taxation system does not apply to banks and other financial institutions, which will have to incorporate the profits to their gross revenue, including those obtained through funds that bought these debentures.

Closed-ended condominium

When the debentures are bought by investment funds in closed-end condominiums, income tax will be 10%. Among these types of funds, the bill cites Infrastructure Equity Investment Funds (FIP-IE) and Investment in Participation in Intensive Economic Production in Research, Development, and Innovation (FIP- PD&I).