Written by Roberto Vianna do R. Barros
Recent changes to Brazil’s notoriously complex tax laws now make sustainable investing in Brazil a more appealing prospect – for both International Debt Capital Markets and the international law firms working with them.
The Brazilian government has created new tax incentives for debt transactions, making it more beneficial to structure deals in International Capital Markets that were previously limited to local capital markets. What’s more, where bond issues have previously been limited to frequent issuers and large Brazilian companies, these new tax incentives make it possible to structure deals that are more accessible to:
• Concessionaires of public services (private companies with government authorisation to provide public services).
• Special Purpose Companies (SPCs) that are developing infrastructure projects in Brazil.
This change opens significant opportunities to a broader audience, including investment banks that cover Latin America, the international law firms that support them, and companies delivering sustainability and other projects in Brazil, allowing all parties to benefit while contributing to Brazil’s sustainable development goals.
Incentivised Infrastructure Bonds
Changes related to Infrastructure Bonds will be of particular interest to all these groups, where new tax incentives are favourable for investors and issuers alike.
When Infrastructure Bonds are issued for projects that qualify as ‘priority projects’ with the Brazilian government, there isn’t the usual Withholding Tax (WHT) on interest payments made by Brazilian resident bond issuers to non-resident bondholders. This decreases the cost by 15% for the investor and issuer, where gross-up provisions would apply (an additional amount added to an interest payment to cover income taxes the recipient owes).
These incentives make Brazilian Infrastructure Bonds a viable option to finance qualifying projects in both the international and local markets. So it’s important that international investors are aware of this opportunity, as well as Brazilian companies with projects that might qualify, such as sanitation infrastructure projects, clean energy, or environmentally friendly transport hubs.
“When Infrastructure Bonds are issued for projects that qualify as ‘priority projects’ with the Brazilian government, there isn’t the usual Withholding Tax on interest payments. It’s a big incentive and it’s important that international investors are aware of this – as well as Brazilian companies with projects that might qualify.”
Roberto Vianna do R. Barros, Partner Banking & Finance, Vieira Rezende
Brazil is one of the ten largest economies in the world, with a very different profile to other countries in the region. Brazil is politically stable with strong democratic institutions, as demonstrated by the transition of power following the last election. Inflation is under control and interest rates are going down.
The major components of the Brazilian economy are sound. This creates a macro economic climate that is in good shape for sustainable investments, with a government that is keen to foster sustainability projects and encourage international investment in this area.
In addition, there’s a bottleneck of infrastructure projects in Brazil. The fundamentals are solid but there are still gaps. With a lot to do and insufficient finance available in local markets, the liquidity of international markets is needed to finance these projects. And significant tax incentives are in place to attract investment, presenting real opportunities for international investors.
Infrastructure Bonds aren’t the only option for those interested in environmental, social and governance (ESG) investing in Brazil:
• Projects with environmental benefits, such as biodiversity conservation, can be funded by Green Bonds. Like Infrastructure Bonds, these projects must also be approved by the government as priority projects if they want to benefit from tax incentives. The difference is that additional third-party verification is required to qualify as a Green Bond.
• The proceeds raised from Social Bonds must be used to fund projects with a positive social impact. This might include vaccine research for endemic diseases such as Covid and the mosquito born Zika virus, for example.
• Projects that contribute to Brazil’s sustainable development can be funded by Sustainability Bonds. To qualify, projects must deliver on both green and social objectives. This instrument allows investors to meaningfully align their asset allocation and sustainability goals.
Green hydrogen
With the extensive use of hydropower, Brazil’s energy matrix is already very green. And while there’s still room for investment in solar and wind energy, the next generation of renewable energy investment lies in green hydrogen.
Brazil has the potential to become one of the world’s largest exporters of green hydrogen and this presents huge opportunities for investors.
Sustainable agriculture and reforestation
Sustainable agriculture and reforestation are fundamental to Brazil reaching greenhouse gas emissions targets by 2030. With an energy matrix that is already green, reforestation of degraded areas is needed to reach these targets. This reforestation needs to happen in tandem with a reduction in activities causing emissions, such as the burning of tropical forests for cattle farming and soy production.
Investment is needed to make progress in this area, such as funding viable alternatives to cattle farming and planting projects to re-establish forest cover.
Research and development projects
Research & development (R&D) projects can also be classified as priority projects to qualify for tax incentives. These include scientific research, such as medical research or technology development in general.
The Brazilian government is highly supportive of R&D that will help Brazil keep pace with technological advancements in other BRICS countries – Russia and India in particular, where Brazil is lagging behind.
Navigating the complexities
Having a Brazilian law firm on side will help investors, and the international law firms they work with, to navigate the complexities and make the most of the opportunities that Brazil presents.
While investing in priority projects removes the challenges of complex Brazilian tax law, making it simple for investors, a local firm will help all parties navigate the process:
1. Evaluation and selection – submitting priority project application to the relevant Brazilian ministry and addressing any gaps, queries or hurdles.
2. Financing – structuring the best possible security package and finance agreement for the deal, while securing a package that does not negatively impact the project going forward.
3. Management of proceeds and impact reporting – ensuring all financial and impact reporting is accurate and compliant to retain priority project status.
4. Legal issues – if there is a problem, agreements must be enforced in a Brazilian court. This can be bureaucratic and time consuming and is one of the challenges of doing business in Brazil. Working with a local law firm offers specialist support should it be needed.
The new Bond structure and changes in tax law are very recent – there is no precedent. Having a partner experienced in the local market to represent you through the process, and in the event of any issues or challenges, provides reassurance and protection. So investors and their partners make the most of the opportunities presented by sustainable investing in Brazil, while streamlining the process and mitigating risks.
“Huge opportunities lie in sustainable investment in Brazil. But Brazil is not for amateurs. Experienced and knowledgeable legal support is needed to navigate the complexities and reap maximum rewards.”
Roberto Vianna do R. Barros, Partner Banking & Finance, Vieira Rezende
VR want to raise awareness that Infrastructure Bonds and other ESG investments are a viable option in Brazil. This reflects how we work with all our clients. Our role as a law firm is about more than doing the legal work.
We identify potential opportunities, adding value by bringing projects to the table that might be beneficial. We highlight where opportunities might lie in the market and act as a trusted advisor on these projects.
