Emerging Markets Rates and Currencies Handbook

For example, as a first step for FX transactions involving foreign investment or lending to Brazilian entities or individuals, both parties of the FX transaction must be registered at SDE-CDNR (Bacen’s file for local and foreign entities). In such cases, with the above identification, the investment or lending transaction can aslo require a register at the “Sistema de Prestação de Informações de Capital Estrangeiro de Investimento Estrangeiro Direto” – SCE-IED and “Sistema de Prestação de Informações de Capital Estrangeiro – Crédito Externo” – SCE-Crédito, respectively. In the case of foreign investments to Brazilian entities or individuals, the SCE-IED register is mandatory periodically (quarterly or annually) if the aggregate amount of the foreign investment is greater than BRL 300 million or BRL 100 million, respectively. Such register is also required for FX Transactions in an amount greater than USD 100,000 or the equivalent in other currencies. Such registration is essential for further remittance of dividends, capital repatriation or reinvestment of profits and must be made before the investment’s inflow of funds. Foreign investments can normally be made through the direct purchase of participation from a third party or by a direct capital injection. In the case of lending to Brazilian entities or individuals, the SCE-Crédito register is mandatory for FX Transactions in an amount greater than USD 100,000 or the equivalent in other currencies. If requested by the FX Bank, basic documentation of all FX transactions, is composed of: • Documents related to the underlying transaction; • Tax collection receipts, when applicable; and • Registers before the Bacen, when applicable. Contracts are divided in 2 different types. Both have a set of nature-codes (“naturezas”) that classify the nature of the activity underlying the FX transaction, and consequently its regulatory requirements and Tax treatment: • Contract of Purchase — Bank buys foreign currency from the company and delivers the equivalent amount in Brazilian Reais (inflow of funds). • Contract of Sale — Bank sells foreign currency to the company upon receiving the equivalent amount in Brazilian Reais (remittance of funds). Tax on Financial Transactions for FX: IOF Tax • FX transactions, as a rule, are subject to the FX IOF tax at the time of settlement. Maximum rate of IOF is 25% and may be reduced or restored by a Decree. • Currently, foreign exchange transactions are taxed, in most cases, at the rate of 0.38%. Tax is applied to the notional currency amount in the FX transaction. There are, however, some varying rates of IOF, depending on the type of underlying FX exposure, specifically: Transaction: Foreign Currency loans, regardless of its average weighted maturity, as of March, 2022, Rate: 0%, Transaction: Import of services, Rate: 0.38%, Transaction: Exports of goods and services, Rate: 0%, Transaction: Foreign Direct Investment pursuant to Law 4131 (inflows and outflows), Rate: 0.38%. Other Taxes: All gains paid, credited, delivered, employed or submitted by a local party to another domiciled abroad are subjected to withholding tax. The table below shows examples of taxation for the main foreign exchange transactions: Interest on Foreign Loans and Financing: Taxes: IRRF (If related to exports), Rate: 0% Taxes: IRRF (General Rule), Rate: 15%. Taxes: IRRF (Beneficiary resides in a Tax Haven jurisdiction), Rate: 25%. Payment of royalties and technical / administrative services: Taxes: IRFF (Beneficiary is not a Tax Haven resident), Rate: 15%. Taxes: IRFF (beneficiary resides in a tax Haven jurisdiction), Rate: 25%. Payment of services in general: Taxes: IRRF (There is no distinction between residents of Tax Havens or not), Rate: 25%. Additional Comments Non-Deliverables (Derivatives) : NDFs, FX Options, Interest Rate Swaps, Interest Rate Options and XCCY Swaps • Transactions are executed under a local bilateral Master Agreement (local ISDA equivalent). • All transactions must be registered at B3 or any other clearing house duly approved by Bacen/Brazil Securities and Exchange Commission (CVM). • On-shore derivatives must be considered as a