With a backlog of infrastructure projects in Brazil, new tax changes are part of an effort to increase incentives and security for foreign investors.

What are Brazilian Infrastructure Bonds and how do they work?

Brazilian infrastructure bonds are debt securities issued by companies to finance infrastructure projects within Brazil. These bonds are specifically designed to attract private investment into key sectors such as transportation, energy, telecommunications, and sanitation, for projects considered to be a priority by the Federal Government.

Investors purchase these bonds to provide capital for the development and improvement of infrastructure, and in return they receive periodic interest payments. These bonds offer the dual benefit of supporting Brazil’s infrastructure growth while providing investors with attractive returns, especially under recent tax incentive reforms that enhance their return on investment.

What are the recent tax incentive reforms to BrazilianInfrastructure Bonds?

Recent legislative changes in Brazil have introduced significant tax incentives for foreign investors purchasing Brazilian infrastructure bonds. Foreign investors are now exempt from paying withholding tax (WHT) on interest income derived from infrastructure bonds that are issued in the international market, which previously stood at 15%.

This exemption is designed to enhance the attractiveness of Brazilian infrastructure bonds by improving their return, fostering increased foreign investment in critical infrastructure sectors. These changes underscore Brazil's commitment to creating a more favourable climate for global investors and increase the opportunities for foreign banks and law firms to engage with Brazilian counterparts in facilitating these investments.

Who should these tax incentive reforms be of interest to?

These legislative changes are particularly relevant for:

·     International investors looking to diversify their portfolios with emerging market assets.

·     Global banks seeking investment opportunities for their clients.

·     International law firms that specialise in cross-border transactions.

·     Brazilian companies with projects that might qualify.

Foreign institutional investors, including pension funds, hedge funds, and asset managers, should be keenly interested in these tax incentives, as they significantly enhance the yield of Brazilian infrastructure bonds.

Additionally, international law firms who support these entities will benefit from the insights offered by a Brazilian partner in understanding the new regulatory landscape, enabling them to better assist their clients in capitalising on these opportunities.

How do these tax incentives compare to those offered by other emerging markets?

The tax incentives for Brazilian infrastructure bonds are particularly competitive compared to those offered by other emerging markets. Brazil's exemption of WHT on interest income for foreign investors enhances the net returns on these bonds.

In contrast, many other emerging markets impose higher WHT or offer more limited tax benefits on similar investments. This attractive tax environment positions Brazil as a favourable destination for international capital, particularly for investors seeking higher yields and diversification in their portfolios.

Additionally, Brazil's targeted incentives specifically for infrastructure development make it an appealing proposition for investors focused on sustainable and impact investments, further distinguishing it from other emerging market opportunities.

What role do Brazilian law firms play in facilitating these investments for foreign investors?

Brazilian law firms play a crucial role in facilitating investments in infrastructure bonds for foreign investors by providing expert legal guidance and ensuring compliance with local regulations. They assist in navigating the complex legal landscape, including the structuring and negotiation of bond agreements, tax planning to maximise incentives, and due diligence on infrastructure projects.

These firms also help investors understand and mitigate potential risks, manage cross-border transactions, and maintain ongoing regulatory compliance. By leveraging their local expertise and connections, Brazilian law firms enable foreign investors to seamlessly and efficiently invest in Brazil's infrastructure sector, thereby maximising the benefits of the recent tax incentives.

What steps should foreign investors take to start investing in Brazilian infrastructure bonds?

To start investing in Brazilian infrastructure bonds, foreign investors should follow a series of strategic steps. Investors should conduct thorough due diligence on potential infrastructure projects to assess their viability and associated risks.

 Investors should also develop a tax strategy to fully leverage the recent tax incentives. They may also wish to engage with a Brazilian law firm experienced in cross-border investments to navigate the local environment.

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How Vieira Rezende can help

Brazil can be a complex country to do business in. A local firm with a multidisciplinary team, such as Vieira Rezende, will help all parties to navigate the process – whether their interest lies in sustainable investment, blended finance, or infrastructure bonds. The Vieira Rezende team offers support from the evaluation and selection of suitable projects and structuring the best possible finance package for a deal, to reporting, management of proceeds, and handling any legal issues.

About Roberto Vianna do R. Barros

Roberto is a Partner in Banking & Finance at Vieira Rezende. He has extensive experience in corporate, capital markets, project finance, and banking, representing investment and commercial banks, as well as Brazilian and international companies.

Roberto is a member of the blended finance group of the Financial Innovation Laboratory (Brazil) alongside BSEC and other regulatory bodies. The group recently finalised a paper on how to improve blended finance markets in Brazil.

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