Brazilian Depository Receipts

by Levy & Salomão Advogados

Since September 26, 1996, Brazilian investors have had a new mechanism for the investment of funds abroad. Securities Deposit Certificates, also known as Brazilian Depositary Receipts (BDRs), were created by Resolution 2.318 of the National Monetary Council.

BDRs are certificates representing foreign securities deposits of publicly-traded or similar companies with a Brazilian depository institution authorized to operate by the Central Bank of Brazil. The securities remain in their country of origin under the custody of an institution authorized by the local equivalent of the Brazilian Securities Commission (CVM) to provide custody services. Before issuing the BDRs, the Brazilian depository institution must obtain specific authorization from the CVM.

The Brazilian funds invested abroad in BDRs under Resolution 2.318/96 are subject to registration with the Central Bank of Brazil. Registration is obtained by the Brazilian depository institution, which is also responsible for keeping the registration updated.

Resolution 2.318 establishes that remittances abroad for purchasing securities may not exceed the sale price of the BDRs on the Brazilian domestic market. In the event that the investor decides to dispose of the securities abroad, the relevant BDRs are canceled and the proceeds have to return to Brazil within a maximum of five days. Transfering these proceeds abroad to other forms of investment is forbidden.

The return of the funds has not been subject to IOF tax since the Ministry of Finance eliminated a tax rate on foreign exchange in securities and instruments abroad with Ordinance 241 on October 31, 1996. Other tax aspects concern the legal relationship between the Brazilian financial institution issuing the BDRs and the investor. A contractual deposit relationship exists in which the investor, and not the financial institution, is the owner of the underlying securities issued by the foreign publicly-traded companies.

The tax consequence is that an individual holding such an investment receives dividends and capital gains derived from the BDRs directly from the foreign country. The individual then becomes subject to a monthly tax payment, as stated in Article 115 of the Income Tax Regulations approved by Decree 1.041, of January 11, 1994 (the so-called “carnê-leão”). If the investor is a legal entity, the investor has to include the investment result in BDRs when determining the taxable profit for purposes of corporate income tax and the social contribution on profits.

The law firm of Levy & Salomão Advogados is located in Sao Paulo, Brazil. Its practice areas include international banking, contracts, taxes, litigation and corporations.