By Tatiana Giovanelli de Almeida Souza / Evelin Spinosa

The recently published Provisional Measure 806, in the extraordinary edition of the Official Gazette of the Union of November 30, 2017, changes the taxation and tax deferral rules applicable to closed-end investment funds, namely, those that do not allow the redemption of shares during their term.

The main changes include:

• Taxation at source of income accumulated on 31.05.2018: application of the infamous “come cotas”, already currently applied to open investment funds, with the withholding of income tax at source (“IRRF”) on the difference between the equity value of the share on May 31, 2018 and the respective acquisition cost, adjusted for the amortizations that occurred or the value of the share on the date of the last incidence of the tax. 
• Semiannual IRRF on future income: As of 01.01.2018, IRRF will be levied on income/gains earned, at regressive rates of 22.5% for short-term funds and 15% for long-term funds, on the last business day of May and November of each year.
• IRRF on the occasion of corporate reorganization: As of 01.01.2018, the fund administrator must withhold income tax at source in the event of spin-off, incorporation, merger or transformation of an investment fund.
• They were excluded from the above quota system.: Equity Investment Funds (FIPs) qualified as investment entities, (FIPs), Real Estate Investment Funds (FII), Credit Rights Investment Funds (FIDC), Investment Funds in Shares of Credit Rights Investment Funds (FIC-FIDC), Equity Investment Funds (FIA) and Investment Funds in Shares of Equity Investment Funds (FIC-FIA), funds constituted only by non-resident investors, and investment funds in shares ending up to 12/31/2018.
• Taxation of FIPs not qualified as investment entities in the same manner applicable to legal entities (FIPs qualified as investment entities – which have a qualified manager with discretion in the representation and decision-making with the invested entities – remain subject to IRRF at 15% only at the time of redemption, without being subject to the come quotas). Income not distributed until 02.01.2018 is subject to IRRF on that date at the rate of 15%. According to the aforementioned Provisional Measure, the administrator must withhold the tax by reducing the number of quotas for each contributor in an amount corresponding to the tax.
• Maintenance of tax benefits applicable to foreign investors who hold shares in FIPs.

In this sense, we have already identified the possibility of legal challenge regarding the rates applied in the withholding due to express violation of the aforementioned rule to the constitutional precepts of equality, by imposing unfavorable conditions on individuals in comparison to legal entities, as well as the contribution capacity and tax legality by burdening income without any liquidity due to the absence of redemption/sale/etc., and which, at the time of taxation, do not represent income or an increase in assets for the fund's shareholders.