BRAZILIAN GOVERNMENT ANNOUNCES MEASURES TO STIMULATE THE BRAZILIAN CAPITAL MARKET

Brazilian Finance Minister, Guido Mantega, announced on June 17th a measure bundle to stimulate the Brazilian Capital Market, which includes, (i) tax exemption of Income Tax (IR) on capital gains derived from share negotiation of small and medium-sized companies; (ii) the regulation of fixed-income Exchange Traded Funds (ETFs); and (iii) the extension of tax exemption for debentures related to infrastructure projects. Such measures are estimated to be enacted in about 45 days, according to the Finance Minister.

The tax exemption of Income Tax on capital gains, which currently has a rate of 15%, is related to small and medium-sized companies, i.e., companies which has a market value lower than BRL 700 million or that have gross revenue verified in the last fiscal year before its IPO lower than BRL 500 million. 
In Brazilian Capital Market, there are only 11 publicly-held companies in such baseline and the purpose of such measure is to increase the number of companies going public.

Nevertheless, according to the President of the Stock Exchange BM&FBovespa, Mr. Edemir Pinto, there are around 15 thousand companies with the possibility of going public and enjoy such benefits. However, such companies should also invest in strong corporate governance, since the benefits shall be applied only to companies that join the Bovespa Mais (“Bovespa Plus”) or Novo Mercado (“New Market”), which are the listing levels with the highest requirements related to corporate governance. 

The referred tax exemption is estimated to be effective until 2.023 (but may be extended) and is valid for individuals who invest either directly or through capital funds. Alongside, Brazilian Securities Exchange Commission (CVM) undertook to also reduce transaction costs and simplify registration and maintenance procedures related to such companies.

Furthermore, the Finance Minister also indicated for the regulation of fixed-income Exchange Traded Funds (ETFs), with a Tax rate reduction according to the term of investment: Tax rate of 25% (up to 180 days), 20% (up to 720 days), and 15% (for more than 720 days). Additionally, the Income Tax advance (a.k.a “come cotas”) shall be cut out for the ETFs.

Moreover, the Finance Minister also announced the extension of the tax exemption on Income Tax for incentives-based debentures, issued in order to raise funds by companies that are investing in infrastructure projects, until December 31st 2020. On top of that, the government included in such fiscal incentive projects related to Education, Health, Water and Environmental resources. The Tax exemption shall be applied to infrastructure projects of an average term of 4 years.

Adittionaly, the Brazilian government pronounced the creation of a working group composed of representatives of the Federal Branch and the Stock Exchange (BM&FBovespa) to discuss and present, in about 90 days, a proposal to simplify and facilitate the collection of Income Tax on shares transactions, as well as other measures with the purpose to simplify transactions on the stock exchange and to create new ways of funding applications for smaller companies.

Besides, it is important to point out that other public authorities have also been taking additional measures, like CVM for instance, related to the simplification and “debureaucratization” of the Brazilian Capital Markets. Among them are the exemption for publicly-held companies to publish in newspaper of mandatory notices related to public offering, material fact or announcements, as well as the publication of its Financial Statements and Shareholders Meeting Minutes, which were substituted for the mandatory publication through CVM’s specific system, the Stock Exchange (BM&F Bovespa) and the Company’s website. 

Notwithstanding the fact that such measures are a very important step to improve and stimulate the Brazilian Capital Market, there is yet a cultural and educational problem related to the unfamiliarity of such transactions, which may be overcome with a consistent dissemination of economic and financial education. Otherwise, the small investor / common citizen will remain outside the Capital Market.

text by Sergio Ricardo Fogolin and André Franchini Giusti