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[Overseas Updates_BRAZIL] “Infrastructure Debentures” for Long-Term Financing of Projects in Brazil

2013.04.29

The enactment of Federal Law No. 12.431/11 and Executive Order No. 7.603/11 temporarily enabled the issuance of infrastructure debentures in Brazil starting from November 2011.  The law mainly grants personal and corporate income tax benefits in connection with income from infrastructure debentures that had been issued in compliance with the requirements of the law.  In Brazil, a rise in investment through the infrastructure debentures is optimistically anticipated as a new means of financing with attractive tax benefits is being introduced to the country.  An overview of the requirements of issuance under the law and the characteristics of the Brazilian infrastructure debentures is presented below. 
 
 
1. Issuer and Time Limit 
 
An infrastructure debenture may be issued by a special purpose company (the "SPC") incorporated to implement infrastructure investment projects and projects of intensive economic production in research, development and innovation.  The tax benefits, however, will only apply to those debentures issued by December 31, 2015. 
 
 
2. Means of Issuance  
 
A. Requirements for Issuance 
 
An SPC may issue infrastructure debentures only if it invests on "Priority Projects," which must satisfy the following conditions: 
 
(i) investment must be made on infrastructure projects and projects of intensive economic production in research, development     and innovation; 
 
(ii) the project must be approved by appropriate Ministries; and 
 
(iii) the project must serve the purpose of installing, maintaining, repairing or modernizing logistics and transportation system, urban mobility, energy, telecommunication, broadcasting, basic sanitary system or irrigation facility. 
 
The government may impose a fine on the SPC and its investors in the amount equivalent to 20% of the total value of the debenture issued if any of the debentures are issued without satisfying the conditions above.  
 
B. Necessary Documents for Issuance   
 
(i) SPC's certificate of registration with the Commercial Registries and articles of association; 
(ii) SPC's federal taxpayer registration number (CNPJ); 
 
(iii) list of legal entities holding interests in the SPC, their respective federal taxpayer registration numbers, power of attorney for the managers of each entity; 
 
(iv) Joint Debt Clearance Certificate or Joint Liability Certificate with Clearance Effects with respect to federal tax or unpaid assessable federal tax; and 
 
(v) other documents requested by relevant Ministries. 
 
C. Ministries' Approval 
 
The Ministry announces an ordinance declaring a project as a "priority project," which may issue infrastructure debentures.  The ordinance must state the minimum requirements for the project to qualify as a priority project and the means of implementing the project. 
 
 
3. Characteristics 
 
Duly issued infrastructure debentures satisfying all of the abovementioned conditions will have the following characteristics: 
 
A. the debentures must have an average weighted term to maturity of more than four years (CMN Resolution No. 3.947, of January 27, 2011); 
 
B. the debentures must pay interest at a rate fixed in advance liked to a price index or reference rate. Post-fixed rates are prohibited; 
 
C. the debentures may not be repurchased by the issuer within the first two years following the issuance date, and early redemption is prohibited; 
 
D. purchaser may not resell the debentures; 
 
E. payment interval of returns from the debentures must be at least 180 days; 
 
F. if the debentures are traded in a securities market, there must be proof of such transaction; and 
 
G. a simplified report on allocating funds on the project (including the subject of research, development and innovation) must be prepared. 
 
 
4. Possibility of Public Offering 
 
Infrastructure debentures may be publically offered pursuant to Brazil Securities Commission (CVM) Rule 400/03 or publically offered with restricted placement efforts pursuant to CVM Rule 476/09. In the case of public offerings of infrastructure debentures pursuant to CVM Rule 400/03, the simplified report mentioned in 3.G. above should mainly focus on explaining (or proving) how the funds obtained through public offering will be allocated to the priority project and such report must be provided at the time of commencing the offering. In the case of public offerings pursuant to CVM Rule 476/09, the report can be provided on the announcement of termination of public offering and disclosures. 
 
 
5. Tax Benefits 
 
Income from infrastructure debentures received by individuals are exempted and those income received by legal entities is subject to a reduced corporate income tax at 15% rate (ordinarily 34%), which is withheld at source. 
 
(contributed by MHM Sociedade de Advogados)

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