Brazil’s New Tax Rules for Infrastructure Investments

Below we list some key tax legislative changes that are relevant to new investments in infrastructure projects and that are already in force or have been announced by the government and are under discussion in the National Congress:

1) Law 14,801/2024 - New Infrastructure Debentures and Changes to the Legislation of Infrastructure Equity Investment Funds (FIP-IE) and the Old Regime of Infrastructure Debentures and Financial Loans

New Infrastructure Debentures

The “New Infrastructure Debentures” grant a tax benefit to the issuer that may reduce the IRPJ and CSLL tax base by an additional 30% of the interest paid to the debenture holders.

As a general rule, the income of the debenture holders of the New Infrastructure Debentures will be regularly taxed as fixed income. (However, there are exceptions for some investment funds, public and private.)

The tax benefit system is different from that in the old regime of Infrastructure Debentures (governed by Law 12,431/11), whose tax incentive is the grant of a tax exemption to the debenture holder (without any additional advantage to the issuer).

So companies now have two complementary mechanisms for financing infrastructure investment projects: New Infrastructure Debentures (with benefits for the issuer) and the old regime of Infrastructure Debentures governed by Law 12,431/11.

Each one has advantages and disadvantages depending on the specific case. For example:

• New Infrastructure Debentures are more suitable when the investors are pension funds or investment funds that do not benefit from the tax incentive of the old regime of Infrastructure Debentures as they are not subject to income tax.
• New Infrastructure Debentures can be issued with an exchange rate variation clause, subject to authorization by the Federal Executive Branch.

Infrastructure Offshore Bonds

This provides for a zero rate of Withholding Income Tax (WHT) on interest arising from foreign loans contracted by issuing bonds on the international market to raise funds for the implementation of priority infrastructure projects pursuant to article 2 of Law 12.431/11. The zero rate of WHT will not apply if the investor is resident in a jurisdiction with favored taxation or a privileged tax regime or if the interest is paid to a creditor who is a related party of the debtor.

Changes to the Legislation on Infrastructure Investment Funds (FIP-IE):

Law N. 14,801/2024 also amends Law No. 11,478/08, which regulates Infrastructure Equity Investment Funds (FIP-IE). Changes include:

• Including other areas considered to be a priority by the Federal Executive Branch that can be the object of investment;
• Extending the maximum period for FIP-IEs to start their activities and meet the minimum level of investment in infrastructure; and
• Providing that existing projects can be "expanded" without segregating them into a new Special Purpose Entity.

Changes to the “Old Infrastructure Debentures” (Governed by Law 12,431/11)

Currently, Law N. 12,431/11 allows for the reimbursement of expenses, costs or debts that have occurred within 24 months of the closing of the public offering. The new legislation extends this period to up to 60 months, provided certain conditions are met.

[Read More: check out more details of the changes made by Law N. 14,801/2024]

2) Law N. 14,789/2023: New Rules for Investment Subsidies and Interest on Equity (JCP)

Subsidies for Investments

Law 14.789/2023 significantly changed the effects of ICMS tax incentives on corporate income taxes (IRPJ and CSLL). In the new model, the effect on IRPJ/CSLL is replaced by a "tax credit," to be calculated using a specific methodology, which can be used to offset federal taxes (or reimbursement in cash).

Interest on Net Equity (JCP)

There are a number of changes that affect the calculation of the maximum amount of JCP that can be distributed and considered deductible.

3) Bill of Law: Accelerated Depreciation for New Machinery, Equipment, Apparatus and Instruments Acquired Between January 1, 2024, and December 31, 2024

The federal government has presented a bill providing for the possibility of "accelerated depreciation" for tax purposes of up to two years for machinery.

The effect of accelerated depreciation occurs directly in the calculation of taxes, without affecting depreciation for accounting purposes, which continues to follow the useful life of the asset.

4) Impacts on Public Service Concessions and Public-Private Partnerships (PPP) of the Tax Reform of Taxes on Consumption (Constitutional Amendment 132)

Change in Tax Burden and Economic and Financial Balancing of Contracts

The Consumption Tax Reform approved last year significantly changed the relative composition of prices. Although the transition begins in 2026, the main issues will be regulated (by means of complementary law) in 2024 and will thus make possible to identify and measure the main impacts for current and future projects.

For concession and PPP projects currently being structured, it is recommendable that contracts include the procedure for reviewing the tax assumptions of the project, including a period to identify the main impacts, the scenarios in which “injunctive” measures of rebalancing may be implemented, and the formalization by means of a contractual amendment, so as to minimize impacts and ensure the stability of the projects until the new tax regime is duly established.

In the same sense, for ongoing concession and PPP projects, the impacts of the tax reform will have to be assessed once the regulations are enacted, in light of both art. 9, paragraph 3, of Law No. 8,987/1995, pursuant to which the creation, change or extinction of any taxes or legal charges after the bid proposal (except for income taxes) trigger a contractual revision whenever there is proven impact, and the risk allocation section of the contract.

Change/Elimination of CAPEX Incentives in Contracts

Another relevant point in the tax reform for concessionaires is the possible elimination of tax incentives that provide for the exemption of indirect taxes on CAPEX through suspension (e.g., REIDI for PIS/COFINS) and deferral/exemption (e.g., ICMS).

Depending on the tax policy option adopted, the current suspension/deferral/exemption mechanisms can be replaced by other forms of relief, such as:

• Immediate reimbursement (in a current account) of the amount of IBS/CBS levied on the purchase of equipment/services linked to the concession or
• The creation of special regimes similar to REIDI for IBS/CBS for public service concessionaires.

So public service concessions and PPPs may have the existence of current incentives taken into account in their CAPEX and OPEX costs (linked to the concession) – in some cases due to an express determination of the bidding notice. Therefore, the concrete impact of upcoming regulation of the National Congress – based on a comprehensive assessment – will determine the need of contractual revision.

5) Income Tax Reform (to Be Presented by the Government in 2024)

The government has promised to submit a bill to Congress within 90 days (from December 20, 2023) on income tax reform for both individuals and companies. It appears that dividends received by individuals will be taxed , but it is unclear whether dividends received by companies will also be taxed.

Other countries that have made recent income tax reforms have not taxed dividends received by legal entities. In Brazil, the tax reform discussions (and the latest bills presented) suggest that the government will include taxation of dividends received by legal entities and a mechanism will be implemented to avoid "cascading" taxation. For example, the dividends might be taxed by withholding IRRF and allowing a sub-holding company to use the IRRF levied on dividends received to write off the IRRF levied on dividends distributed to the holding company.

However, even with the mitigating element of cascading taxation, the income tax reform tends to increase taxation on profits compared to the scenario that currently exists for the infrastructure sector (exempt dividends + non-taxation of private equity investment funds).