Raphael Zono, Renan Valverde Granja and Paula Lumi Sonoki

Created and regulated by Law No. 14,130, of March 29 of this year, the Investment Fund in Agroindustrial Production Chains (Fiagro) emerges to help develop the agribusiness sector. Its enactment amended Law No. 8,668/93, which provides for the creation and tax regime of Real Estate Investment Funds (FII).

"The new type of fund allows domestic and foreign investors to invest in the sector through investments in agribusiness assets (such as credit or securitization securities issued by companies in agro-industrial production chains) or purchase of properties, which can then be leased or sold to producers." reporting by Janary Júnior, published on the website of the Brazilian House of Representatives.

The high indebtedness of the federal government, fiscal restrictions, and socioeconomic issues suggest an increasing shortage of public resources for the agribusiness sector in the coming years. These difficulties make room for private investors to make a strategic contribution to Brazil's productive sector through instruments such as the new fund.

Fiagro allows investments directly related to agribusiness financing, to be organized in the form of a condominium of a special nature intended for the investment, alone or jointly, in:[1]

  • rural real estate;
  • participation in companies that conduct activities that are part of the agro-industrial production chain;
  • financial assets, securities, or paper issued by individuals and legal entities that are part of the agro-industrial production chain;
  • agribusiness credit rights and securitization securities issued backed by agribusiness credit rights, including Agribusiness Receivables Certificates (CRAs) and units of Investment Funds in Credit Rights (FIDCs) – standardized and non-standard – that invest more than 50% of their equity in agribusiness credit rights;
  • real estate credit rights related to rural real estate and securitization securities issued with backing in these credit rights, including CRAs and quotas of FIDCs – standardized and non-standard – that invest more than 50% of their assets in real estate credit rights; and
  • investment fund shares that invest more than 50% of their equity to the above assets.

 

Overriding of presidential vetoes

 

When enacted, Bill No. 5191/20, proposed by Federal Deputy Arnaldo Jardim (Cidadania/SP) to create the new fund, it lost its main tax characteristics, considered one of the biggest attractions for Fiagro investors. Vetoes done by the Brazilian President and proposed by the Ministry of Economy, based on the claim of the Federal Revenue Service that the law would generate loss of revenue, eliminated tax benefits that sought, above all, to equate Fiagro to the FII.

The vetoes, however, did not resist the pressures of the Parliamentary Agricultural Front (FPA) and were overridden by the Brazilian Congress on June 1, 2021.

 

Collection of and exemption from the IR

 

With the overriding of the veto, it was established that rural producers can pay off the real estate asset in Fiagro in return for the receipt of units. In the event of disposal or redemption of units, the income tax (IR) will be proportional to the amount of the units sold, which brings about greater immediate liquidity. The mechanism aims to favor the capitalization of members of the Brazilian agribusiness chain, including family groups.

Another benefit reincorporated after the overriding of presidential vetoes was the exemption from IR for income distributed by Fiagro – remuneration produced by Agricultural Deposit Certificate (CDA), Agricultural Warrant (WA), Agribusiness Credit Rights Certificate (CDCA), Agribusiness Letter of Credit (LCA), and CRA.[2] Individual investors are entitled to this benefit when:[3]

  • the fund has more than 50 individual unitholders; and
  • no individual unitholder owns more than 10% of the shares issued by Fiagro or the right to obtain more than 10% of the fund's income.

By providing for non-application of IR at the source for income and gains obtained from fixed income or variable income financial investments, fiagro is truly equated with FII. There are, however, some differences between the two funds.

While the FII makes investments in the real estate sector, such as investments in assets specifically related to the real estate market without having to buy a property, Fiagro is intended for investments related to the agribusiness sector in various ways, as in the assets already mentioned – rural real estate, participations in companies that conduct activities that are part of the agro-industrial production chain, real estate credit rights related to rural real estate, securities or paper issued by individuals and legal entities that are part of the agro-industrial production chain, among others.

The expectation is that the new fund will stimulate the entry of rural producers, national and international, into the financial market, creating important alternatives for rural credit.

For Congressman Arnaldo Jardim, rural credit is an indispensable tool to keep Brazilian agriculture among the most productive in the world. "We believe that the Fiagro has the potential to boost the Brazilian land market, giving it greater transparency and liquidity, making the price of land formed by market forces in a more fluid and transparent way, which would benefit current landowners in the event of a need to sell their properties", opined the deputy.

With the creation of the fund, investors gain a safe and flexible option, which will bring the agribusiness capital market closer together and encourage other innovations.

The law establishes that it is up to the Brazilian Securities and Exchange Commission (CVM) to authorize, discipline, and supervise the creation, operation, and administration of Fiagro, and, because it is real estate,[4] future discussions and instructions on the new fund should be expected.

 

[1] See Article 20-A of Law No. 8,668/93, as amended by Law No. 14,130/21

[2] See Article 3 of Law No. 11,033/04, as amended by Law No. 14,130/21.

[3] See Article 3, sole paragraph, of Law No. 11,033/04, as amended by Law No. 14,130/21.

[4] See Article 3 of Law No. 11,033, as amended by Law No. 14,130.