The National Monetary Council (CMN), with the publication of CMN Resolution No. 5,111, of December 21, 2023 (“Resolution”), regulated the concept of Investment Entity and qualified the definition of Credit Rights, for the purposes of applying more beneficial tax rules as well as the non-incidence of the so called come-cotas (mandatory withholding of income tax on investments) for private equity investment funds. These important concepts presented by the Resolution fill important gaps in Law No. 14,754, of December 12, 2023 (“Law No. 14,754”), and create opportunities for reviewing the framework of currently existing investment structures with the concepts introduced by the new regulations.
When addressing the concept of Investment Entity, the Resolution was based on the definition and characteristics presented in the Technical Pronouncement CPC 36 (R3), of December 2012. Despite bearing a certain similarity with the provisions contained in the aforementioned Pronouncement, the resolution of the National Monetary Council went further by bringing more objective criteria and classifying as Investment Entities Brazilian investment funds that have a professional management structure, are represented by agents or service providers with discretion over the investment and disinvestment decision-making process, and with the purpose of obtaining return through appreciation of invested capital, income or both.
Another innovation brought by the new Resolution was the list of examples of the investment funds that are not classified as Investment Entities due to certain characteristics. Under the terms of the Resolution, all funds that have the following items automatically cease to enjoy being Investment Entities: (i) have an investment committee or other deliberative management body in which majority quotaholders (individuals) or the people indicated by them make decisions and send orders to the manager regarding the composition of the portfolio; (ii) control legal entities that have been controlled, directly or indirectly, by their majority quotaholders (individuals) in the 5 years prior to the investment by the fund; (iii) the majority quotaholders (individual) are managers of companies invested in by the fund; and (iv) the majority quotaholders (individuals) may determine or veto investment or divestment decisions.
Regarding the definition of Credit Rights, the Resolution presented the same exhaustive list brought in article 2, item XII, of Normative Annex II of CVM Resolution nº 175, of December 23, 2022. The concept presented by the National Monetary Council established that the Credit Rights cover: (i) rights and securities representing credit; (ii) securities representing credit; (iii) receivables certificates and other securities representing securitization operations that are not backed by non-standard credit rights; and (iv) by similarity, quotas of investment funds in credit rights that comply with the provisions of article 4 of the Resolution.
Although the Resolution followed the same parameters presented by the Securities and Exchange Commission, the new rules innovated by excluding certain assets from the concept of Credit Rights, so that they are not covered by the concept of Credit Rights (i) public securities issues by the Federal, State, Municipal and Federal District government; (ii) securities issued or co-obligated by financial institutions; (iii) committed operations backed by the assets referred to in items (i) and (ii) above; (iv) classes of quotas of investment funds that invest predominantly in the assets referred to in items (i) to (iii) above; (v) non-convertible or non-profit-sharing debentures subject to public distribution; and (vi) commercial notes subject to public distribution.
Notwithstanding the provisions above, the Resolution presented certain exceptions in which the assets listed in items (v) and (vi) above may be classified as Credit Rights, that is, when, at the time of their acquisition, any of the rules provided for in the items I or II of paragraph 2 of article 4 of the Resolution are observed.
Still, from the perspective of the concept of Credit Rights brought by the Resolution and its implications for investment funds in credit rights, it is important to emphasize that the deadlines stipulated in such Law are up and running. Given this new regulatory scenario, it is essential that managers and administrators of investment funds in credit rights review the assets that make up the respective portfolios of the funds that are under their administration and/or management, as applicable, to verify whether the assets fit into the qualifications presented by the Resolution and meet the provisions of article 19 of Law No. 14,754.
Given all of the above, it is possible to conclude that certain legislative gaps were effectively addressed with the coming into force of the Resolution. However, it is important to highlight that the wording presented in the Resolution to define the concepts of Investment Entity and Credit Rights does not have a high level of detail, which can lead to the construction of different interpretations regarding the scope of terms used to classify and define these concepts.
Furthermore, the provisions of the Resolution may (and most likely will) be subject to analysis and interpretation by regulatory bodies and by the Brazilian Federal Revenue Service itself, which may construct more comprehensive interpretations and, eventually, exclude portfolios and investment funds that are structured based on more restrictive interpretations.
Finally, as these are very recent regulations that will still be subject to discussion and interpretation, we understand that investment funds that want to take advantage of the more beneficial tax rules introduced by Law No. 14,754 must build increasingly solid investment theses. Furthermore, the administrators and managers of these funds must align their respective portfolios and any new investment thesis with the new concepts presented by the Resolution to prevent interpretations in a different sense from what will be constructed for the benefit of the operation structure, which would serve as a basis to lose the benefits brought by Law No. 14,754.