Government studies exempting foreign investors in private bonds from income tax, says agency

The government is considering exempting foreigners who invest in private bonds from paying income tax on their capital gains, the Economy Ministry told Reuters on Wednesday, in an effort to reduce financing costs for local companies in through an increase in the interest rate.

According to the ministry, the initiative aims to “increase the access of Brazilian companies to foreign capital”, aligning the tax treatment given to these debt instruments with the same already applied to variable income instruments.

Currently, foreign investors pay a 15% tax on capital gains on securities issued by companies, but are exempt from the tax for investments in the Brazilian stock market and public debt. Brazilians pay a 15% to 22.5% Income Tax rate on corporate bond returns, depending on the redemption period.

Two ministry officials, who spoke on condition of anonymity as the change is still under review, said an interim measure to that effect was being designed as part of a mini capital market reform, which was confirmed by two other sources. of the folder. The MP would have to be approved by Congress for the exemption to become permanent.

By opening the door to more foreign investment in the Brazilian capital market, the government hopes to attract dollars and strengthen the real, which would help alleviate double-digit inflation.

The real has already appreciated more than 7% against the dollar this year, driven by a cash inflow of just over US$ 10 billion (R$ 51.6 billion).

In 2006, Brazil exempted foreigners from income tax on their investments in public bonds, helping the government to extend the term of its sovereign debt, an investment that also increased the inflow of financial resources into the country.

Initial studies by the IRS show little impact on collecting a similar exemption on private bonds, one source said, given the country’s limited foreign ownership of corporate debt.

A second source said the tax change would apply to local debt issued by non-financial companies, a market worth about 1 trillion reais, according to Central Bank data, with about 2.7% of that total currently in the hands of foreign investors. .