Tax News: Provisional Measure 806/2017 - KPMG | BR
Share with your friends

Tax News: Provisional Measure 806/2017

Tax News: Provisional Measure 806/2017

Significant changes to the taxation applicable to Brazilian investment funds


Related content

Tax News: Provisional Measure 806/2017

Provisional Measure (“MP”) 806, published in a special edition of the Official Gazette on October 30, 2017, introduced significant changes to the taxation applicable to certain Brazilian closed investment funds – i.e., those in which investors are not allowed to redeem their quotas during the term of the investment, but only upon liquidation of the funds or through quota amortization.

Key Changes

A brief summary of the key changes introduced by MP 806 follows hereunder:

(i)  Closed Funds – “Come-cotas”

  • a - Income earned by quota holders in closed investment funds (i.e., funds set up as private condominiums) will, from now on, be subject to withholding income tax ("WHT") twice a year, in the months of May and November, based on regressive rates from 22.5% to 15% (according to the investment term), as per the "come-quotas" method. Such taxation shall be effective from June 1, 2018 onwards, regardless of the actual distribution of income to quota holders;
  • b - Income earned by quota holders in closed investment funds until May 31, 2018 shall be deemed paid or credited to quota holders, and, therefore, subject to WHT based on regressive rates from 22.5% to 15% (according to the investment term), on such date (i.e., on May 31, 2018), regardless of the effective distribution of such income. The taxable income shall correspond to the positive difference between the equity value of the quota on May 31, 2018 and its acquisition cost, already impacted by previous quota amortization.

(ii)  Private Equity Funds (FIPs) not qualified as investment entities – FIPs are currently exempt from corporate income tax purposes and only income distributions to quota holders may be subject to taxation. According to MP 806, FIPs not qualified as investment entities, i.e., equity funds, should, from now on, be subject to the tax rules applicable to Brazilian legal entities and the fund manager / administrator shall be responsible for compliance with the corresponding tax obligations. In addition to that, income and capital gains earned by FIPs, which have not been distributed to quota holders yet, shall be deemed to be distributed to them on January 2, 2018 and shall be subject to WHT at 15%, in case FIPs do not distribute such income until that date. Such retroactive effect of the rule, namely to reach profits / income generated before its effective date, is subject to debate, since it seemingly infringes constitutional tax principles.

  • a - The aforementioned taxation does not seem to be applicable to foreign investors holding less than 40% of the FIP quotas and that are not located in tax haven jurisdictions, since Article 3 of Law 11,312/2006 has not been revoked.

(iii)  Private Equity Funds (FIPs) qualified as investment entities – Income earned by FIPs as a result of the disposal of any of its investments shall be considered as distributed to quota holders, regardless of the rules established for in the FIP Regulation, and subject to WHT taxation. Such automatic taxation should only occur once the value of the gains / income (distributed or not) exceeds the paid-in capital of the FIP. Still, it is worth mentioning that such automatic taxation does not seem to be applicable to foreign investors since Article 3 of Law 11,312/2006 has not been modified nor revoked.

  • a - The definition of FIPs as investment entities and non-investment entities should follow the Instruction of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – "CVM"). CVM Instruction #579/2016 lists the following as the main criteria to qualify a FIP as an investment entity: (i) gather resources from multiple investors under the management of a qualified investment manager with full autonomy to decide when to perform an investment and where to invest; (ii) focus on the invested capital and its return to investors; (iii) evaluate its assets based on fair market value; and (iv) follow strict rules, provided in the fund's bylaws, regarding the divestment alternatives. It is important to note that such criteria are not exhaustive and are subject to the scrutiny and evaluation of the fund administrator.

The following categories of closed funds should not be affected by the new rules set forth in MP 806/2017: (i) Real Estate Investment Funds ("FIIs"); (ii) Credit Receivables Investment Funds ("FIDCs"), and funds holding quotas of FIDCs; (iii) Listed Equity Investment Funds ("FIAs") and funds holdings quotas of FIAs; (iv) funds held by non-resident investors; (v) closed funds which, according to the bylaws, should terminate until December 31, 2018; and (vi) financial institutions.

According to MP 806, it shall be effective as of January 1, 2018 onwards. However, it is important to point out that in order to be valid, the MP must be approved by the Congress and converted into Law until December 31, 2017.


The changes set forth by MP 806 are significant and investors / quota holders of closed investment funds should evaluate the practical effects of these changes. We emphasize that some changes are controversial, and may be subject to modifications by the Congress.

Click here to access the Portuguese version.

© 2019 KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. Todos os direitos reservados.

Connect with us


Want to do business with KPMG?


Request for proposal