Subsequently, in July 2017, the government announced a program in the amount of R$ 11.7 billion in credit facilities for financing and supporting infrastructure works and concessions in several states and municipalities. As in the previous program, investments in works in the sanitation, urban mobility, lighting, and solid waste management sectors will be considered priorities. Again, in August 2017, the government announced its intention to sell 14 airports (including Congonhas-São Paulo), 11 electric power companies (including the Eletrobrás system), 15 ports, two highways, and the Casa da Moeda, among other important assets.
The government's main objective in launching these programs is to overcome the economic crisis, which has lasted from 2014 and resulted in a reduction in Brazilian GDP of 3.8% in 2015 and 3.6% in 2016.[2] The expectation is to finance the works through funds made available by Caixa Econômica Federal and Banco do Brasil, amounts deposited by the FGTS, and, especially, through partnerships with the private sector. For this reason, the vehicles used by private investors to provide funds in these projects stand out, with the main one being the Infrastructure Investment Fund (FIP-IE).
FIP-IE was created in 2007 during the Lula government, at a time of significant incentives for the development of Brazil's infrastructure sector. Ten years later, in another movement to develop the sector, the FIP modality focused on infrastructure is gaining in importance, with new regulations by CVM and tax advantages.
FIP-IE
FIPs, vehicles used by investors to generate profits through the purchase of securities of corporations and limited liability companies, are generally regulated by CVM Instruction 578, of August 30, 2016 (ICVM 578). It is an investment in variable income organized in the form of a closed-end condominium, whose units can only be redeemed at the end of their duration or if their liquidation is resolved in a meeting of unitholders.[3]
One of the main requirements of ICVM 578 for an FIP to acquire a stake in a particular company is for the fund to effectively participate in the decision-making process of the invested company, with an influence on the definition of its strategic policy and its management, including via appointment of members of the board of directors.
The criteria for participation in the decision-making process of the invested company are not clearly delimited by law. It may occur in a number of ways, such as: (i) by holding shares that are part of the respective control block; (ii) by the execution of a shareholders' agreement; or (iii) by adopting a procedure that assures the fund effective influence in the definition of its strategic policy and management. There is, therefore, no definite rule on how the FIP should influence the decision-making process of a company. Confirmation of whether this requirement has been met is done on a case-by-case basis.
In addition to the general rules mentioned above, ICVM 578 reflected and regulated in detail the creation of the various specific categories of investment funds, such as FIP - Seed Capital, FIP - Emerging Companies, FIP - Multistrategy, and FIP-IE. Specifically in relation to FIP-IE, ICVM 578 did not innovate and replicated the articles set forth in the former CVM Instruction No. 460/2007 (repealed by ICVM 578) and reflected the provisions of Law No. 11,478/2007 (Law 11,478).
The FIP-IE (together with the FIP - Intensive Economic Production in Research) was instituted by Law 11,478 and has as its object, under the terms of the law, investment in Brazilian territory in new infrastructure projects. For the purposes envisaged therein, the law considers "new infrastructure projects” to be those implemented by companies specifically created for this purpose in the areas of (i) energy; (ii) transportation; (iii) water and sanitation; (iv) irrigation, and (v) other areas considered priorities by the Federal Executive Branch. Investments may also be made in the expansion of existing projects, implemented or in the process of being implemented, provided that the investments and the results of the expansion are segregated through the organization of a special purpose company.
The close relationship between this investment vehicle and the Investment Partnership Program created by the federal government is therefore evident.
As required by Law No. 11,478, the special purpose companies provided for therein must necessarily be organized as corporations, either publicly or privately-held. In addition, the law requires that at least 90% of the equity of the FIP-IE be invested in shares, warrants, debentures, whether convertible or non-convertible into shares, or other securities issued by special purpose companies that invest in the sectors mentioned above. Thus, a maximum of 10% of the portfolio can be allocated to other investment modalities, always observing the other limits set forth in ICVM 578.
FIP-IEs must have a minimum of five unitholders, each of which may not hold more than 40% of the units issued by the FIP-IE or earn an income of more than 40% of the fund's total income.
Similar to ICVM 578, Law No. 11,478 requires that the FIP-IE participate in the decision-making process of invested companies with effective influence in the definition of its strategic policies and management, notably through the appointment of members to the board of directors, the holding of shares that are part of the respective control block, the execution of a shareholders' agreement, the execution of an agreement of a different nature, or the adoption of a procedure that assures the fund effective influence in the definition of its strategic policy and management.
Pursuant to the same law, income earned from the redemption of FIP-IE units, including when arising from the liquidation of the fund, is subject to the application of withholding income tax at a 15% rate over the positive difference between the value of redemption and cost of acquisition of the units. In the case of the sale of FIP-IE units, the gains will be taxed: (i) at a zero (0%) rate, when earned by individuals in transactions carried out on the stock exchange or off the stock exchange; (ii) as a net gain, at a 15% rate, when earned by a legal entity in transactions carried out on or off the stock exchange; and (iii) at a zero (0%) rate, when paid to a beneficiary resident or domiciled abroad, whether an individual or group, that carries out financial transactions in Brazil in accordance with the rules and conditions established by the National Monetary Council, except in the case of a beneficiary resident or domiciled in a country with favored taxation, pursuant to article 24 of Law No. 9,430, of December 27, 1996. In the case of redemption or amortization of units by an individual, the income is exempt from withholding tax and the annual tax adjustment return for individuals.
As can be seen, through tax advantages, the federal government is aiming to stimulate investments in infrastructure projects by individuals (retail investors) and foreign investors (with the entry of capital into Brazil).
As of December 2017, only 21 FIP-IEs were registered with the CVM. The funds that publicly offered their units, however, constitute less than half of that number. Despite the low representativeness of the IFP-IEs found until then, an increase is expected in the activity of this type of investment vehicle in 2018, considering the relevant infrastructure assets recently placed into the federal government's privatization program. FIPs-IEs and infrastructure-sponsored debentures are therefore interesting alternatives for raising private funds for the implementation of government programs.
2. According to information from the World Bank, available at: http://databank.worldbank.org/data/reports.aspx?source=2&series=NY.GDP.MKTP.KD.ZG&country=BRA#. Accessed on: December 12, 2017.
