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October 10, 2019
Brazil enacts law to strengthen the legal framework for investment funds
On 20 September 2019, Brazil enacted Law 13,874 (the Law), known as the Economic Freedom Right Act. The Law amended the Brazilian Civil Code to strengthen the legal framework for investment funds, which are regulated by the Brazilian Capital Market regulator (CVM), and bolster investment by foreign investors into Brazil. Before the passage of the Law, the body of applicable law was not unified, requiring application of both the Civil Code and other legislative sources to questions raised about the legal status of Brazilian investment funds. This uncertainty resulted in increased costs and litigation for investment fund managers.
As an example, a previous court decision defined a distressed asset investment fund as a “bank,” raising concerns in the industry about the potential regulatory and tax impacts if this definition was sustained. However, under the Law, investment funds are now treated as a “condominium” by definition, which in essence is defined as a collective investment vehicle that facilitates ownership of a pool of assets by its investors.
Amendments under the Law that are relevant to investment managers include:
Investment managers should analyze the impact of the legislation (including, e.g., consideration of entity classification for US tax purposes) and, in consultation with Brazilian investment fund administrators, consider implementing the changes set out in the Law to their existing investment fund structures.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Assessoria Empresarial Ltda, São Paulo
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United States), International Tax and Transaction Services
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific