Market Profiles

FII Market Entry Requirements for Brazil

RBC IS operates a segregated account structure in this market.

Please refer to 'Market Account Opening Requirements' for information on the market requirements. Clients are requested to refer to the requirements for information purposes only.

For further information or support around accessing this market, please contact your RBC IS representative.

The merger between the BM&FBOVESPA and CETIP took effect on 3 July 2017. Brasil Bolsa Balcão (B3) is the name of the new entity created as a result.

B3 Listed Segment acts as the central counterparty (CCP) of its stock exchange markets. Its structure is composed by the B3 Depository Services, the Central Counterparty (CCP) for equities, equity derivatives and corporate bonds; and B3 Futures & Commodities Segment, the CCP for derivatives referenced on interest rates, Forex, equities and commodities, government bonds (spot and forward transactions), as well as for interbank Forex spot transactions.

B3 OTC Segment is the clearing and settlement entity for the remaining corporate debt and other fixed income securities.

Sistema Especial de Liquidação e de Custódia (SELIC) is an electronic processing system which registers transactions in Brazilian federal bonds and bills issued by the National Treasury and BACEN (the Central Bank). SELIC is operated by BACEN. BACEN also operates Sistema de Transferência de Reservas (STR), a real-time funds transfer system, which is a key component of the Sistema de Pagamentos Brasiliero (SPB) payment system. FEBRABAN (Brazilian Federation of Banks Association) operates CIP, a clearing house for interbank payments.

Trades on B3 Listed Segment are executed on the PUMA Trading System, a platform developed in partnership with CME Group. BM&FBOVESPA´s member brokerage firms are allowed to have access to the trading floor and execute customers' orders. The PUMA Trading System reproduces on screen the trading environment, permitting trades to be executed and confirmed on-line. 

Currently B3 Listed Segment has a five listing segments scheme. Companies which adopt higher standards of corporate governance than those laid down in Brazilian laws are traded within a separate segment called NOVO MERCADO. Thus, B3 BM&FBOVESPA’s segments is composed of 5 on-exchange segments (B3 – Bovespa Mais, Bovespa Mais Nível 2, Novo Mercado, Nível 2 and Nível 1 )

The listing segment BOVESPA Mais  Level 2 was created on 1 December 2014 and offers new features in the admission for trading of preferred shares.

Debentures are mainly traded OTC through CetipNet (electronic trading and settlement system managed by B3 OTC Segment) or through B3 PUMA Trading System.

B3 introduced since 1 August 2012 new procedures that ensure trades executed by the same investor will not cause a delay in the market which may cause artificial market conditions. Orders are settled as any order transaction. However, if there is any evidence of systematic and intentional self-trading, orders are always forwarded to BM&FBOVESPA Market Supervision (BSM) and to the Brazilian Securities and Exchange Commission (CVM) in order to guarantee the appropriate measures are taken.

B3 - Listed Segment (Equities Segment)

1) Electronic Trading system- Order cancellations phase - 9.30am – 9.45am

- Pre-opening fixing 9.45am - 10.00am

- Continuous trading session 10.00am - 4.55pm

- Closing call for all cash market securities, including odd lots 4.55pm -5.00pm

- Closing call for all options series and ETFs. 4.55pm – 5.15pm

- Closing call for Equity Index options 4.50pm – 5.15pm

2) After-market Session

- Order cancellation phase 5.25pm – 5.30pm

- Trading session 5.30pm – 6.00pm

 
3) Equity options exercise

- On pre-expiration dates: 10.00am – 4.00pm exercise of the holder position.

- On expiration dates: 10.00am – 1.00pm – exercise for the holder position in the expiring series.

 
4) Index options exercise

- On pre-expiration dates: 10.00am – 1.00pm – exercise of the holder position.

- On expiration dates: Automatic exercise of the expired series which fit the following situations:

* Call option - settlement index higher than the exercise price - After 5.00pm;

* Put option - settlement index lower than the exercise price - After 5.00pm.

5) Over-the-Counter

– Order cancellations phase 9.30am – 9.45am

- Pre-opening fixing: 9.45am - 10.00am

- Continuous trading session: 10.00am - 4.55pm

- Closing call 4.55pm – 5.00pm

For specific trading hours, please refer to B3 BM&FBOVESPA Segment’s website (http://www.b3.com.br/en_us/solutions/platforms/puma-trading-system/for-members-and-traders/trading-hours/equities/).

ISIN (International Securities Identification Numbering): Yes

Other: N/A

National Monetary Council (CMN): the main regulatory body of the Brazilian financial market, responsible for overseeing monetary, credit and foreign exchange policies as well as the operation of the financial system.

Comissão de Valores Mobiliários (CVM): responsible for regulating and developing the securities market (exchanges, clearing houses and OTC market) and registering companies and new issues. CVM also ensures compliance with securities laws, protects all securities holders against fraudulent issues and illegal actions performed by company managers, and regulates foreign investments through the Annex I to III and V mechanisms. Resolution 4,373, which regulates foreign investment in the Brazilian market, replaced the Annex IV mechanism.

Banco Central do Brasil (BACEN): responsible for implementing credit and monetary policies set by CMN resolutions, managing exchange transactions and exchange control, regulating the fixed income market, banks and financial institutions, conducting open market operations and control of foreign investments.

Internal Revenue Service (Receita Federal): the federal tax system is administrated by the Federal Tax Department, which falls under the responsibility of the Ministry of Finance.

Foreign investors typically enter the market through the legislation called Resolution 4,373. Under this resolution, foreign investors may invest freely in equities, fixed income and derivatives which are traded at the exchange or organised OTC market and registered in the depository recognised by CVM. Resolution 4,373 only governs portfolio investment at the Brazilian financial and capital markets there is the federal law 4131 which governs foreign direct investment.

In the Brazilian market all securities are held in the depository in a book entry form. The only exception would be shares of unlisted companies, which are held in the books of the company, but international investors under Resolution 4,373 are not allowed to purchase unlisted securities unless acquired through a regulated investment fund FIP.

Fixed income instruments are held in dematerialised registered form at their respective depositories.

For equities, the minimum price variation unit is BRL 0.01.

BRL

Government and Corporate Bonds are negotiated on an over-the-counter (OTC) basis through SELIC (Government Bonds) or B3 OTC Segment (Corporate Bonds).

Trading hours: 
SELIC: Monday to Friday: 06:30 to 18:30 
CETIP: Monday to Friday: 08:30 to 17:30 

Book-Entry: Securities are usually held in book-entry form at B3 Listed Segment. Registration in the investor's name is automatic on settlement. Shareholder records are maintained by the company.

Brazil - Trade life cycle diagram Equities

The local custodians can accept or reject the delivery or receipt of the securities directed to them until 20:30 Brazil time on the T+1 and only on an exceptional basis, upon request to B3 , the local custodians can perform this process on T+2 from 07:00 until 09:30 Brazil time. In addition, B3 reinforced and strongly recommended the clients to instruct at the earliest time possible to ensure prompt pre-matching and avoid clogs around the cut-off time.

On T+2 the settlement flow will be:

On T+2, the settlement between the local broker/clearing agent and the custodian occurs as follows:

The buyer makes payment to their broker and the seller receives funds from their broker through the Electronic Funds Transfer (TED). This payment is credited same-day to the customer’s account. In order to minimize risk, shares remain blocked in the B3’s settlement account until financial settlement is complete. Attempting to deliver securities before the blocking is lifted will result in a failed trade.

B3 operates an SFI-DVP model 3 for B3 Listed Segment. B3 delivers the securities to the buyer simultaneously with the payment to the seller, achieving simultaneous, final and irrevocable delivery versus payment. The finality and irrevocability of the payments made in central bank money are the pre-conditions for achieving true DVP.

Settlement is considered complete once the broker/clearing agent – B3 financial settlement is confirmed.

Trade life cycle diagram: Fixed Income - Government (SELIC) and Corporate Bonds (B3 OTC Segment – former CETIP)

Brazil - Trade life cycle diagram Fixed Income

Short selling is permitted in the market only for securities included in the securities lending program offered by B3 Listed Segment. Regulation forbids the acquisition of shares in public offers to investors who are involved in short sales in the same equity on the pricing date and /or 5 days prior to the Public Offer. 

Fails that are not caused by a third party’s fail and are not requested to be characterised as operational nature will be considered naked short selling fails. Fails with request for operational failure characterisation not approved by B3 will be considered a naked short selling.

B3 will apply a naked short selling penalty to these transactions as per the below:

Minimum Fee

• TD+2 – penalty of 0.5 per cent limited to BRL 50,000.00
• TD+3 – penalty of 0.5 per cent limited to BRL 50,000.00 - if trade is still failing.

These penalties will be charged on T+2 and on T+3 settlement window, respectively.

The amounts associated with the fine will be entered into the multilateral net balance of the relevant clearing member.

Additional Fine

The percentage rates of the additional fine applicable to any asset delivery failure are presented on the following table:

The percentage rates of the additional fines applicable to T+3 delivery failures will be raised from 4.5 percent to 9.5 percent if the investor who failed to comply with the relevant obligation also incurred in a nonoperational delivery failure in the six months preceding, even if under different full trading participants.

Accordingly, as per B3 Listed Segment Clearinghouse Operating Procedures Manual, the following situations and rules apply:

1. The failures occurring on T+2 which are not characterized as operational and are rectified on T+3 through the purchase of assets on T+1 via the same full trading participant or settlement participant will be subject to a 1 percent fine on T+2 (where 0.5 percent relates to the application of the minimum fine and 0.5 percent to the application of the additional fine);
2. The failures occurring on T+3 which are not characterized as operational, whereby the investor bought the assets on T+1 through another full trading participant or settlement participant, will be subject to a fine of 1 percent on T+2 (where 0.5 percent relates to the application of the minimum fine and 0.5 percent to the application of the additional fine) and of 0.5 percent on T+3; and
3. The delivery failure of assets deriving from a sale transaction executed on the trade date preceding the first day of trading of a follow-on offering and rectified on T+3 through the delivery of the assets acquired in the concerned follow-on. In this case, the clearinghouse will apply a 5 percent fine to the amount of the delivery failure, where 0.5 percent relates to the minimum fine applied on T+3 and the remainder to the additional fine applied on T+6.

If there is no request for operational failure characterization, penalties will be applied on T+6.

If the request for operational failure characterization is made but not approved, penalties will be applied on T+11.

Equities

Given the current settlement arrangements and the deadlines and cutoff times established, only next day turnarounds are possible. Same day turnaround trades can only be done if the investor is executing both the purchase and sale transactions through the same local broker. 

Fixed Income (Government and Corporate Bonds)

Same day turnarounds are possible provided that the purchase settles before the sale, given that both SELIC and B3 OTC Segment only allow a sale transaction to be registered if the underlying position is available.

There were four different clearing houses that coexisted under the administration of the former BM&FBOVESPA since the merger of BM&F (Commodities and Futures Exchange) and BOVESPA (Equities Exchange) in 2008. They were: (I) BM&FBOVESPA Central Securities Depository - equities and corporate bonds, (II) BMD - futures, commodities and derivatives, and (III) BMC - foreign exchange.

B3’s Post Trade Integration (IPN) was a project that consisted in the unification of system, procedures, functions and internal policies of these four clearing houses with the intention of simplifying the current structure under B3 BM&FBOVESPA Segment administration. The project intended to develop streamlined and consistent clearing procedures for all securities cleared through its platform, benefiting investors and market participants. A new risk system was also a part of the project and, according to B3 it offers a better risk measurement and a unified view of all collateral deposited by an investor among other advantages.

The first phase of IPN, the migration of Derivatives Clearinghouse to the new platform was concluded in August 2014 and the second phase, which moved the equities and corporate bonds clearinghouse to the new platform, was concluded in August 2017.

B3 - Equities Depository Listed  Segment

The B3 Listed Segment Depository Services is the clearinghouse and depository for all trades executed on B3 under the Equities Segment, which includes equities, options and other fixed income instruments.

Equities are held at B3 Listed Segment in dematerialized form in segregated accounts at the final beneficial owner level.

The depository service’s participants have full access to the B3 Network. This Network allows the custodians to verify in real time all movements in the depository service such as deposits, withdrawals, transfers, payments etc. The beneficial owners may check their position directly through the Internet.

The use of automated systems has given the B3 a number of advantages such as: real time access to account balances, transparency, efficiency, safety and confidentiality of information, guaranteed by firewalls against hackers together with several layers of passwords.

Banks, brokers and dealers participate in the system as clearing members, which are separated into two categories: self-clearing members and full clearing members. The former only settle trades conducted by them on their own behalf or on behalf of their clients. The full clearing members settle operations conducted by other brokers and special investors, such as mutual funds, pension funds, insurance companies, etc. To settle its financial positions, it is mandatory for the non-bank participant to use the services of an institution holding a reserve account, in accordance to a contract agreed upon the parties beforehand. BM&FBOVESPA Segment has two processing centers located in Sao Paulo (the secondary center operates in hot standby). Operations are registered in the trading environments’ systems (PUMA), and B3 is informed on a real-time basis.

B3 operates an SFI-DVP model 3 for equities (B3 Listed Segment). B3 delivers the securities to the buyer simultaneously with the payment to the seller, achieving simultaneous, final and irrevocable delivery versus payment. The finality and irrevocability of the payments made in central bank money are the pre-conditions for achieving true DVP.

Settlement is considered complete once the broker/clearing agent – B3 financial settlement is confirmed.

B3 – OTC Segment (Fixed Income)

B3 OTC Segment (former CETIP) is the Brazilian depository for corporate bonds (certificates of banking deposit (CDB), receipts of banking deposit (RDB), inter-financial deposits (DI), bills of exchange (LC), bills of mortgage (LH), debentures and commercial papers, among others), state and municipal government securities and securities that represent National Treasury's special responsibilities related to FCVS (Salary Variation Compensation Fund), Agricultural Activity Guarantee Program (PROAGRO) and  Agricultural Debt Securities (TDA), among others.

B3 OTC Segment holds private securities, and some special securities issued by the National Treasury in custody. All assets are held in dematerialized form by electronic book-entry. The system automatically handles the payments of interest, dividends, redemptions, etc., for each type of asset. There are three main custody functions: new issue registration, cash events, and positions updating. Please note that for credit instruments the underlying of the physical certificates supporting these assets are held at the issuer’s custodian, also a participant of the financial system. At B3 OTC Segment, although it is allowed securities to be held in one single account opened under the name of the direct participant – local custodian, which is completely segregated from the account that holds proprietary securities of the direct participant, securities are registered and settled in the name of the final beneficiary at the depository level. The only exception is for mutual funds, local pension funds and insurance companies, which are required to maintain segregated accounts at B3 OTC system.

All settlements are processed by simultaneous, irrevocable and final DVP (Delivery Versus Payment), offering buyers and sellers’ protection against counterpart defaults.

B3 OTC Segment is a credit risk free entity, only exposing its participants to low operational risk. It is not a CCP (central counterparty). It does not guarantee the settlement of transactions processed by its systems.

Buyers are not exposed to counterpart risk due to DVP. Sellers’ exposure is to market risk only and for only very short periods of time, depending on the settlement modality.

Settlement is on T+0. Multilateral netting is normally used in case of primary market operations (B3 OTC Segment does not act as central counterparty). Bilateral netting and real-time gross settlement are used widely, for derivatives operations and for securities traded in the secondary market respectively. DVP is always observed and final settlement occurs in settlement accounts held at the BCB.

Sistema Especial de Liquidação e Custódia (SELIC) – Government Bonds

BCB maintains a system known as Sistema Especial de Liquidação e Custódia (SELIC), the depository and clearing system for government bonds issued by the Central Bank or the Brazilian National Treasury. Therefore, SELIC is not a separate entity but rather the name of the book entry system maintained by the BCB and operated jointly with ANBIMA. Since April 2002, a DVP model 1 settlement system is used for outright and repo transactions with these securities. The system has two operational centers – principal and secondary –, located in Rio de Janeiro.

All securities in SELIC are dematerialized and transferred by book entries. Settlement of the financial legs of each operation is processed by means of the STR, to which SELIC is linked. These settlements occur all day long, simultaneously, and operation by operation (previously, settlement occurred at the end of day with multilateral netting of obligations), with all data checked through double key-entry before any operation is completed.

The settlement cycle for government bonds is T+0 or T+1. All settlements are performed on-line and in a real-time basis.

BIS is an international organisation, which fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability. The Committee on Payments and Market Infrastructures (CPMI) uses three common structural approaches, or models, to categorise the links between delivery and payment in a securities settlement system.

B3 Listed Segment (Equities)

B3 Listed Segment  operates an SFI-DVP model 3 for equities. B3 delivers the securities to the buyer simultaneously with the payment to the seller, achieving simultaneous, final and irrevocable delivery versus payment. The finality and irrevocability of the payments made in central bank money are the pre-conditions for achieving true DVP.

B3 OTC Segment

Settlement is on T+0. Multilateral netting is normally used in case of primary market operations (B3 OTC Segment does not act as central counterparty). Bilateral netting and real-time gross settlement are used as well, for derivatives operations and for securities traded in the secondary market respectively. DVP is always observed and final settlement occurs in settlement accounts held at the BCB.

The settlement cycle in T+0 occurs as follows:

1. The seller and buyer input the trade in B3 CETIP system.
2. The B3 OTC segment system checks the availability of securities in the seller’s account. If there are securities available, the system blocks the securities until receipt of funds from the buyer is received. Otherwise the trading will receive a pending status.
3. The buyer receives the financial report and must pay the settlement account through TED (STR system). While the payment is not received the trade is deemed a pending status.
4. The notification requirements defined above (under points 1-3) shall also apply to any natural

Pending transactions are unwound at day´s end.

RTGS - 30 minutes maximum due to a timer that starts ticking the moment the trade is matched and that allows the seller to unilaterally cancel the trade if the buyer has not yet paid.

Settlement Modes

• Multilateral: Issuer risk operations (and those retaining income tax).
• Bilateral: rebates of insurance premiums paid and redemption of swap and currency forward contracts, and events relative to credit derivatives.
• Real Time Gross Settlement (via STR or at the settling bank): all operations subject to registration at the CETIP, except for the issuer risk operations with automatic return, including the settlement of premiums, anticipations and intermediation of swap and currency forward contracts (and of the CETIP costs).
• Models 1 (Gross) and 2 (Multilateral) of delivery versus payment (DVP1 and DVP2).

Settlement Terms

• D0, in real time.

SELIC - Special System for Settlement and Custody

The settlement cycle for government bonds is T+0 or T+1. All settlements are performed on-line and in a real-time basis:

1. The seller and buyer input the trade into the SELIC system.
2. The SELIC system checks the availability of securities in the seller’s account. If there are securities available, the system blocks the securities until receipt of funds from the buyer is received. Otherwise the trading will be deemed as “pending”.
3. The buyer receives the financial report and must pay the SELIC settlement account through the Brazilian Payment System. In case the payment is not received by SELIC the trade receives a pending status.
4. After the receipt of funds from the buyer is confirmed, SELIC releases the funds to the seller at the same time that it releases the securities to the buyer.

Settlement Modes

• Real Time Gross Settlement (RTGS).
• Model 1 for delivery versus payment (DVP1).

Settlement Terms

• D0, in real time.

Book-Entry: Brazil is a final beneficiary country, which means that the assets are registered under the name of the final investor.

Registration is performed automatically upon trade registration at the exchange for equities and upon settlement for fixed income securities.

Equities are registered by the depository, B3, in the name of the final investor. Same rules apply for fixed income instruments held at SELIC.

Unlike the equity and government bond markets, private fixed income instrument positions at B3, OTC Segment, are held in one single account opened under the name of the direct participant (local custodian), however securities are registered and settled in the name of the final investor at the depository level. The registration of assets at the final investor level is possible as settlement through this depository is linked to the Brazilian tax ID and this code is attached to the specific security throughout the lifecycle of the investment.

Physical: are rare. However, new shares can be issued in physical form and remain under the custody of a local depository or of the company itself until they are traded. Once traded, the shares in physical form are blocked and the company issues a deposit certificate for the benefit of the buyer. The shares are then deposited in B3, BM&FBOVESPA Segment, in the book entry form in the name of the final beneficial owner.

Usually large local banks and the depository provide this service.

The registration takes place automatically upon settlement.

Share holdings may be required to be disclosed by the beneficial owner, particularly when holdings reach or exceed prescribed disclosure limits. Investors must ensure that they comply in full by reporting such holdings to the appropriate organisations for this market, within the timeframe required. If you have any questions regarding this issue we encourage you to consult your legal counsel. 

Failure to comply with reporting requirements may lead to penalties and/or other sanctions.

Whenever an investor's holdings of a specific company reach 5% of any type of the company's shares, and when, by increase or decrease, it crosses the limit in multiples of five per cent, such investor must send a declaration to the Investor Relations department of the issuing company with the following information:

• Name, qualification and Tax ID number of the investor.
• Objective of the participation on the company, including a declaration that the purchases made by the shareholder do not have the objective of changing the controlling group of the company or its administrative structure, if that is the case.
• Quantity of shares, subscription bonus as well as subscription rights of shares or call options on that issuing company, broken down by type of share, that are held directly or indirectly by the investor.
• Quantity of convertible debentures issued by the company held directly or indirectly by the investor, indicating the quantity of shares that may result from the possible conversion broken down by type of share.
• Indication of any agreement or contract regulating the exercise of voting rights or the buy and sale of securities issued by the company.

Once the threshold on any of the counts below is reached, the total position aggregating both counts must be disclosed. The instruments encompassed in each count are the following:

• Equities, options, convertible debentures, derivatives linked to equities with physical settlement and any other means to hold shares of the company, directly or indirectly, are counted together for the purposes of the threshold abovementioned;
• Derivatives linked to equities with financial settlement.

In all cases, the amount of positive exposure to shares cannot be offset by negative exposure to the same shares.

The counting above does not include Certificado de Operações Estruturadas (COE), Certificates of Structured Transactions, ETFs or any financial derivatives that have less than 20 per cent of their return linked to company shares

The declaration must also be published in the media if the objective of the investor when acquiring the shares is to change the control or administrative structure of the company.

This requirement applies to all companies listed on the Exchange. Final investors are responsible for monitoring their ownership limits and for complying with the reporting requirement. Investors are required to send the declaration to the company directly. It is the responsibility of company to then forward on the information to the CVM, stock exchange and organised OTC market entities. The issuer must also maintain a list identifying all beneficial owners.

For B3 Listed Segment, in case the investor fails to deliver securities on T+2 at 11:00, B3 will search for a securities lending transaction, at the BTB system, which matches the failed transaction. If securities are available, the failing seller will enter into a compulsory borrow and trade will settle. If there are no securities lending offers available, the transaction will fail and a penalty fee may be applied* to the failing broker. In case the securities are not delivered before or at 10:50 on T+3, the B3 will again search for an offer at the BTB program. If again there are no offers that match the failed transaction a penalty fee may be applied and B3 will issue a buy-in, which should be executed by the local broker no later than T+5. The deadline for the broker to confirm the buy-in order execution to B3 is T+6; if B3 does not receive the confirmation from the broker on or before T+6, it will be considered that the buy-in was not executed and the transaction will be reversed. The broker that executed the failing sale must also pay any cost related to the buy-in transaction including loss due to price discrepancies and brokerage fees. This cost may also be passed to the final investor.

The buy-in settlement cycle follows the same rules as the regular equities settlement cycle and all costs involved in the buy-in execution must be paid by the broker that failed to deliver the securities. The costs are automatically included by B3 in the financial amount to be paid by the broker at the financial settlement window.

Moreover, the broker that failed to deliver the securities is responsible for paying: the difference between the buy-in price and the original trade price, in the case the value of the shares has increased; or the difference between the original trade price and the buy-in price, in the case the value of the shares has decreased.

For securities lending transaction at the BTB, if the borrower has not returned the securities by 19:15 (Brazil time) on the day following the fail date (fail date +1), B3 will automatically issue a buy-in on fail date +2. Once B3 issues the buy-in, it will follow the regular process, (i.e. the lender, through its broker, has until fail date +4 to execute or cancel the buy-in and until fail date +5 to confirm the buy-in execution). If no action is taken, B3 will automatically reverse the trade on fail date +6.

B3 penalty policy treats the penalties for two different situations:

1. Fail to deliver assets (securities) on spot market
2. Delays in multilateral payment of the financial net amount

According to the policy, there is a distinction between three different types of fails: third party failures, operational failures, and naked short selling failures.  Please see the below table for additional clarification on each of these fails.

Securities Lending was authorized in Brazil by the BCB through Resolution 2,268 dated 10 April 1996. This resolution established that entities that render share settlement, registration, and custody services are eligible to maintain a securities lending program. In 2005, the National Monetary Council revoked Resolution 2,268, replacing it with Resolution 3278.

In order to consolidate the regulation regarding Securities Lending Programs in Brazil, aligning them with the Resolution 3278 released in 2005 by the National Monetary Council, and focusing on the increase of the liquidity of the fixed income instruments in the Brazilian capital markets, this Resolution was amended by Resolution 3539, released in 2008.

Securities lending programs are subject to the approval of the CVM and are currently limited to shares issued by publicly held companies. CVM Instruction 249 establishes the regulations and procedures for securities lending programs.

In the Brazilian Market this program is for equities through the Banco de Títulos da BM&FBOVESPA – BTB lending program, the only authorized provider in the market.

Equities lending program

The securities lending program at B3 Listed Segment called Banco de Títulos (BTB). There are no restrictions as to who can participate in the program, however investors are required to appoint an agent (broker – if borrowing or custodian / broker, if lending) to register their transactions in the system.

The securities to be lent must be deposited in fungible custody with the depository in charge of the lending program and free of any burden or lien restricting their circulation. Additionally, the final beneficial owner must previously authorize securities lending transactions in writing.

The loan operation itself consists of the transfer of the title deed to securities from the portfolio of the investor in order to meet the temporary needs of a borrower, who needs securities to back up their trading activities, or to make up for the lack of certain securities in the settlement of selling operations carried out beforehand.

Any B3 Listed Segment Depository Agent (institutions that hold major custody accounts) may put shares out for loan from their own portfolios, or from the portfolios of investors who have given their permission to lend. The borrowers act by way of Brokerage Houses under the responsibility of a Clearing Agent.

The electronic system to access BTB is available on the B3 Listed Segment Services Network. There, borrowers and lenders consult the offers available and register the securities lending operations corresponding to the offers that meet their needs. Loan contracts previously formalized between borrowers and lenders are also accepted.

The borrower must deposit a guarantee margin with B3 by way of the respective Clearing Agent. The amount of the margin is equal to the updated value of the securities plus a percentage defined by B3. This percentage is set considering the liquidity and the volatility of the securities comprising the loan. The amount of the margin is monitored daily and recomposed, if necessary, according to the form and timeframes established by B3. Traded securities are only released once the borrower has deposited the necessary guarantees with the B3 and the operation has been authorized in BTB.

Fees and costs are usually debited from the borrower and credited to the lender on the first day following the end of the loan operation, although periodical fee debits/credits are also possible. The cost to the borrower includes the registration fee and the emoluments for B3.

The lender is entitled to deduct the lender’s fee from applicable income tax. The basis for calculation of the costs and exchange fees is obtained by multiplying the number of securities on loan by the average market price confirmed on the working day immediately prior to the registration date for the loan operation. Fees are expressed in annual terms, with capitalization made up of working days (252).

Eligible Assets

Assets eligible for securities lending operations on BTB include shares issued by public corporations that are admitted for trading on B3 Listed - Equity Segment. The assets must be deposited with the Listed B3 Fungible Custody Service and be free of liens or encumbrances that impede their circulation.

Advantages

The possibility of borrowing securities adds operational efficiency and flexibility to the market, especially in arbitrage operations. The borrower may use the securities in operations including:

• Cash sales
• Settlement of operations previously carried out on the cash market
• Guarantee of operations on future settlement markets
• Coverage for the launch of call options

The lender, in turn, keeps papers in circulation that would otherwise be immobilized in his portfolio, providing extra remuneration, generally not forecasted in cash flow calculations. Investors who are not interested in selling their shares in the short-term frequently use the Securities Lending Program. By lending stocks, the investor may maximize the return of his portfolio through the tax received from this transaction. Besides the loan tax, the lender (not the borrower) receives eventual dividends granted by the issuing company during the securities lending period.

Guarantee Fund

B3’s Guarantee Fund, which covers B3 Listed Segment, provides exchange members with compensation for losses caused by officers, employees or agents of the brokerage members or licensees who have received orders from investors to execute a trade on their behalf or for related custodian services.

Additionally, B3 has a Settlement Fund to guarantee the settlement of transaction performed by the equities transaction division which is segregated from the stock exchange. The purpose of this fund is to cover payment failures during the settlement process when B3 acts as a CCP.

In order to participate in the exchange, brokerage firms and clearing agents must purchase seats and pledge their seats on the exchange as an initial guarantee.

The Guarantee Fund provides compensation to exchange members for losses caused by officers, employees or agents of the brokerage members or licensees who have received orders from investors to execute a trade on their behalf or for related custodian services. The fund covers the following cases:

• Failure to carry out or inaccuracy in carrying out orders
• Inadequate use of money or securities, including in transactions or loans, of purchased or sold shares on the Stock Exchange (margin account)
• Delivery of illegitimate securities or those which circulation has been forbidden
• Lack of authenticity of an endorsement on a security or illegitimacy of the power of attorney or document required for the transfer of securities

The fund also covers the following:

• Operating errors in the settlement of transactions and in the management of the custody of securities
• Officers, employees or agents of the brokerage firms representing the counterpart of the transaction

Settlement Fund as of August 2019: BRL 665 Million

Guarantee Fund as of August 2019: BRL 1.272 Million

B3 OTC Segment does not accept liability for reconciliation errors with the registrar and/or issuer, theft of securities, any loss caused by the depository due to errors, omissions or fraud that cause direct damages or losses to participants. There is no Guarantee Fund.

SELIC does not assume liability for reconciliation errors with the registrar and/or issuer, theft of securities, and any loss caused by SELIC due to errors and omissions. There is no Guarantee Fund.

Brazil is a full member of the Financial Action Task Force on Money Laundering (FATF), and is not on FATF’s blacklist. However, the FATF has found some weaknesses in the anti-money laundering system and has requested Brazil to fulfil its membership commitment by enacting counter terrorist financing legislation that adequately addresses serious deficiencies identified in its third mutual evaluation report adopted in June 2010. During its plenary meeting in June 2016, the FATF highlighted Brazil’s considerable progress since February 2016 in addressing the serious deficiencies identified in its mutual evaluation reports and has decided not to consider the next steps in the follow-up process. However, FATF points out that there still remain a number of shortcomings in the Brazilian counter-terrorist financing regime which must be addressed in order to reach a satisfactory level of compliance with the ATF standards.

According to FATF, the current secrecy provisions of the banking law pose a significant potential obstacle to the effectiveness of the system. These secrecy provisions apply to all banking information and may only be lifted through judicial authorisation. Law enforcement authorities are able, therefore, to obtain such financial information in conjunction with properly authorised investigations. The system for reporting suspicious transactions is affected by the secrecy provisions, however. Some portions of the report necessarily fall under secrecy restrictions and may not therefore be accessed by the Council for Financial Activities Control (COAF). Additionally, the information in this report that is covered by banking secrecy may not be provided to a foreign jurisdiction unless requested by a formal letter rogatory [a letter rogatory is a formal request from a court in one country to ‘the appropriate judicial authorities’ in another country requesting compulsion of testimony or documentary or other evidence or effect service of process]. The Brazilian authorities recognise these potential problems and have proposed modifications to legislation that would maintain the protection of bank secrecy while permitting COAF to obtain access to such information.

Brazil also signed and ratified the UN Convention Against Illicit Traffic in Narcotics Drugs and Psychotropic Substances of 1988. Due to its geographical location, near some of the major narcotics producing areas of South America, Brazil is an obvious target for money laundering. In order to respond to this threat, Brazil developed and implemented a comprehensive anti-money laundering programme. Its efforts in this area are based on Law No. 9613 of 3 March 1998. The legislation defines the offence of money laundering, lays out the principal preventive measures such as customer identification, record keeping, and suspicious transaction reporting, and, creates the Financial Intelligence Unit (FIU). It also ensures that confiscation and provisional measures, as well as international co-operation in these areas, also apply to money laundering.

During its plenary meeting in June 2016, the FATF highlighted Brazil’s considerable progress since February 2016 in addressing the serious deficiencies identified in its mutual evaluation reports and has decided not to consider the next steps in the follow-up process. However, FATF points out that there still remains a number of shortcomings in the Brazilian counter-terrorist financing regime which must be addressed in order to reach a satisfactory level of compliance with the FATF standards.

Some of the provisions included in the CVM instruction 463 for anti-money laundering include:
- All transactions on securities must be kept for the minimum of five years, after the account closure, in order to allow the validation of those financial amounts vis-a-vis the capital and financial structures of the investors, or in case of an ongoing investigation by the CVM for an undetermined period of time.
- Transactions with the same party or on behalf of the same party; transactions with the purpose of generating profits or losses without economic fundamental; transactions by individuals or entities from countries or territories that are non-cooperative as defined by the COAF; transactions with a level of complexity not aligned with the nature of the underlying investors must be paid special attention.
- Transactions by non-resident investors, especially those constituted through a trust scheme, transactions by private bank clients and by politically exposed people must be paid particular attention.
- CVM must be informed within 24 hours of identification of any transaction suspected of being related to money laundering or terrorism financing or some other crimes.

Circular 3461 issued BACEN (24 July 2009)
Circular 3461 provided additional procedures to be conducted by the local financial institutions to improve the anti-money laundering measures.
According to the official letter, all authorised financial institutions are required to periodically collect and update investors’ information in their internal registration systems, including the average monthly revenue of the previous 12 months. The information must include all the authorised representatives and the company's ownership structure up to the individual level, which may be considered as the final beneficiaries. For an investment fund, the documentation must include information of the fund administrator. Any internal information related to the registration must be promptly disclosed to the Brazilian regulators upon request.

The financial institutions can only establish and maintain relationships with investors where they have fulfilled the registration requirements as prescribed in the official letter. They will also be responsible for verifying all investors' records and checking the consistency of records at least on an annual basis. The investors considered as Politically Exposed Persons (PEPs) must be treated with special attention.

Amendments to AML Regulation

CVM Instruction No.533 of 16 October 2014 amended regulation on Anti Money Laundering Procedures stipulated by CVM Instruction No.301/99. The changes align CVM regulations with the recommendations provided by Financial Action Task Force (FATF) on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT). Accordingly:

- A business relationship between an investor (local and foreign) and institutions authorised by and under CVM surveillance can only be initiated after all the requirements of the registration process and the Know Your Client (KYC) policies have been met by the related parties.
- Customers are required to sign a statement about the purpose and nature of business relationship with the institution.

Furthermore, CVM published Circular No. 5/2015/SIN/CVM, a guidance on AML/CFT, aimed at clarifying the minimum requirements to be fulfilled by market player. The guide provides specific orientation to the different market players, including: portfolio managers, credit risk agencies, capital market consultants, and foreign investors’ legal representatives and custodians. Besides, it clarifies that CVM must also be informed of suspicious activities, instead of only the Central Bank, as current practice.

BACEN Measures for AML / CFT

In November 2014, the BACEN introduced new measures on AML/CFT to be complied by the payment systems in Brazil. The circular No. 3727 makes amendments to circular No. 3680 issued on 4 November 2013 as a standard for payment institutions to prevent AML/CFT. The main additions made to the previous circular are:

Payment Institutions must:
- Put in place the controls and procedures to confirm the required identification. In this regard the payment institutions are also allowed to challenge the information provided by any private or public database;
- Implement risk management systems to identify and assess the risks to prevent money laundering and combating the financing of terrorism;
- Promote mitigation measures in line with the risks identified.

Know-Your-Client (KYC) Requirements

The Central Bank has defined rules applicable to procedures that must be adopted by financial institutions in the prevention and combat of money laundering and terrorism financing, as a response to the recommendations of the Financial Action Task Force (FATF). The main measures include:
a) enactment of Circular No. 3,583, which sets forth that (a) financial institutions shall not initiate any relationship with clients, or proceed with existing relationships, if it is not possible to fully identify such clients, and (b) anti-money laundering procedures are also applicable to agencies and subsidiaries of Brazilian financial institutions located abroad,
b) enactment of Circular No. 3,584, establishing that the institutions authorized to operate in the Brazilian foreign exchange market with financial institutions located abroad must verify if the other party is physically present in the country where it was organized and licensed or is object of effective supervision, and
c) Enactment of Letter 17 Circular No. 3,542, which increases the list of examples of transactions and situations which may characterize evidence of occurrence of money laundering, tending to improve the communication between financial institutions and the Council of Control of Financial Activities (Conselho de Controle de Atividades Financeiras, or “COAF”).
Suspected activities or transactions must be reported to the Brazilian financial intelligence unit, Conselho de Controle de Atividades Financeiras (COAF), in a manner yet to be detailed by the Central Bank. Suspected activities include, among others:
a) actual or proposed issuance or recharge of one or more stored value cards totalling BRL 100 thousand in a given calendar month;
b) actual or proposed cash transactions exceeding BRL 100,000;
c) Suspected transactions above R$10 thousand (i.e., those involving suspicious parties or values, or without economic reasons, etc.);
d) transactions apparently intended to sidestep identification mechanisms or controls;
e) Actions suspected of financing terrorist activity.

Further, the financial institution must designate to the Central Bank an officer who will be in charge of reports to COAF as well as of compliance with the measures set out in Circular 3,461.

The Central Bank may mete out the following penalties on non-compliant financial institutions and on their senior management, depending on the severity of the offense: (a) warning; (b) fine; (c) temporary prohibition from holding a senior management office in financial institutions; and (d) cancellation of authorisation or license to operate.
The high level requirements for verification of customer identification information include full name, type and date of constitution, address, documents containing the same information required for individuals who qualify and authorise the representatives to use the account, number of inscription on the Cadastro Nacional de Pessoa Jurídica ('CNPJ')
etc. Names of legal entities are verified against the Register of Certification (there are also other detailed requirements).

Relevant details can be found via the following links:

• https://www.bcb.gov.br/en/financialstability/supervision
• https://www.bcb.gov.br/en/financialstability/moneylaundering
• http://receita.economia.gov.br/sobre/acoes-e-programas/combate-a-ilicitos/lavagem-de-dinheiro/money-laundering
• http://www.cvm.gov.br/subportal_ingles/menu/investors/regulation.html

This is an FII market. Please contact your RBC Investor Services' Client Manager before making portfolio investments.

Market Access

In order to be granted access under the “Portfolio Investment” structure, a non-resident investor is required to do the following:

• Fill out a Portfolio Application Form with their identification and provide CRS information, duly signed by authorized persons for registration purpose;
• Appoint a local representative in the local market; and
• Appoint a tax representative, who may be the same or different from the local representative.

Registration with the CVM

When requesting registration with the CVM, the local Representative will send the information contained in the PAF via electronic means to the CVM. The CVM will then issue its approval or voice its concerns. Registration can be done for the holder of a collective account (Omnibus), under which final investors will later register as participants, for the final investor as a participant (passenger) on an existing collective account or for a proprietary account.

CVM codes assigned to the new investors upon approval have to be used for all transactions in the Brazilian Market.

Registration with the Brazilian IRS (Receita Federal) (Tax ID / CNPJ and CPF)

According to Normative Instruction 251 issued by the Brazilian Tax Authority, non-resident investors under Resolution 4373 must obtain their tax ID number through their local representatives in Brazil. The legal name required to obtain the CNPJ or CPF number will be the name of the non-resident investor as registered in Brazil, followed by the name of the local representative in Brazil.

The issuance of the CNPJ or the CPF can be requested by the local custodian via CVM, as part of the account opening process and based on the account opening documents required for these investors. This is possible because the CVMs foreign investor registrations is fully integrated with the RFB system.

Additionally, from 29 December 2016 onwards, the Brazilian Tax Authority, through the Normative Instruction RFB nº 1680/2016, required local financial institutions to identify the tax residency of the account holders and report relevant information to the RFB. Under this regulation, non-resident investors are required to complete and provide valid Common Reporting Standard (CRS) documentation.

CRS aims to enhance tax information reporting for individuals and entities and establishes a standardized global system for local tax authorities to exchange financial account information provided to them by the financial institutions.

Expansion of the disclosure requirements to issue the CNPJ for entities

In an effort to improve controls in the Brazilian financial and capital markets and to prevent corruption and money laundering practices, on 28 December 2018, the Brazilian Tax Authority published in the Official Gazette Instrução Normativa RFB nº 1,863 (IN 1,863), revoking  Instrução Normativa RFB nº 1,634, (IN 1,634) as amended, which regulates the issuance of the CNPJ. Essentially the new IN 1,863 has the same requirements as the IN 1,634; however, it postponed the re-registration exercise related to the CNPJ to 26 June 2019, in addition to simplifying the registration requirements for some types of non-resident investors and clarifying some topics of the previous regulation.  

The requirements introduced by these instructions impacted the account opening process for non-resident investors in the market, which is managed by the legal representative along with CVM. Therefore, investors may be required to disclose the relevant individuals at the end of the ownership chain and present additional documents when opening accounts or updating its registration in the Brazilian market.   

Reporting to local authorities:

Although not impacting investors directly, a relevant change established by the CVM 560/15 refers to the information to be reported on a monthly and bi-annual basis by the local legal representative to the CVM. CVM now demands a higher level of detail of investments, which requires an effort from legal representatives in the sense of providing more useful information.

That information will be shared with the BCB removing the need to send a separate report, as it is currently done.

The reporting requirements are in line with the CVM’s request to improve non-resident investors’ registration and controls, bringing more transparency as to what information is reported to the CVM and improving the protection to clients investing in the Brazilian market.

Alternatively to investments in the Brazilian financial and securities markets, supported by Resolution 4373, Foreign Direct Investment in Brazilian companies (equity) can be done through a different structure, and must be registered with BACEN in its Declaratory Records system Electronics Foreign Capital, Foreign Direct Investment Module (RDE-IED) as provided for in Law 4131.

Brazil has proceeded to join The Hague Apostille Convention abolishing the legalisation requirement for foreign public documents. The agreement came into effect on 14 August 2016 and as a result, investors in the Brazilian market from jurisdictions that have not objected Brazil access to the Convention are no longer required to consularise their documents upon submission.

Non-resident investors face certain sector and industry investment restrictions. The exchanges and registrar agents hired by the companies are responsible for monitoring foreign ownership limits. When the exchange is aware that a specific trade will place a non-resident investor over the limits, the exchange will immediately notify the brokerage house representing the non-resident investor purchasing the securities. When the exchange is not aware, the company will notify the exchange when it updates its shareholders’ records. In either event, the transaction is unwound.

One of the most significant restrictions on international investment in Brazil is in the financial institutions sector. Article 192 of the Brazilian constitution establishes that a supplementary law should be passed to regulate the conditions for the participation of international investment in financial institutions.

Article 52 of the Temporary Constitutional Provisions Act provides that, until the conditions mentioned in Article 192 have been established, those individuals or legal entities resident or domiciled abroad cannot increase their percentage participation in the capital of a financial institution headquartered in Brazil.

This means that international investments in the capital of financial institutions headquartered in Brazil are, in principle, limited to the respective percentage interest held at the time the Constitution went into effect (5 October 1988). There is a general exception to this rule, which stipulates that international investment in Brazilian financial institutions can be increased if it is in the Brazilian government’s interest.

The Presidential Decree issued on 9 December 1996 authorizes the international investment in non-voting shares of Brazilian financial institutions.

The following aggregate sector limits apply to non-resident investors regardless of the investment vehicle through which they access the Brazilian market:

• Cable TV service companies: 49 per cent of common stock and 100 per cent of non-voting preferred stock.
• Financial institutions: please see comments on prior paragraphs on this item.
• Highway Cargo Transportation: Non-resident investors are allowed to hold highway cargo transportation companies with some restrictions
• Transportation of Valuables: Not allowed
• Lottery Services: Not allowed.
• Newspapers, Radio and TV Broadcasting Companies: Not allowed
• Mineral Exploration: Prior authorization is required from the Ministry of Mines and Energy as well as a document approving the by-laws of the enterprise and amendments thereto.
• Oil Prospecting, refining and other activities: Not allowed.
• Electricity and hydroelectric power: Prior authorization is required from the Brazilian Union
• Agriculture and forestry: Authorization is required from the Ministry of Agriculture.
• Insurance: Prior authorization is required from the Private Insurance Superintendence.
• Nuclear Mineral-Related Activities: Not allowed.

The regulation that governs how funds are brought into the country by foreign investors is Resolution 4373. This regulation states that funds entering Brazil can only be used to settle securities transactions in the Brazilian Financial and Capital markets and must be used at least once in the Brazilian Market before repatriation. Additionally, funding in local currency is required on SD prior to the settlement of the transaction as foreign investors are not allowed to overdraw their cash accounts.

The local custodian is responsible for updating the RDE on a monthly basis by sending Omnibus Account portfolios - duly market to market - to the BCB.
Since July 2000, the exchange rate has floated freely. Repatriation is possible at any time. Third party foreign exchange is also permitted.

The regulations for international investments require international investment through this vehicle to be registered with the Brazilian Central Bank (BCB). For this purpose, each omnibus account is assigned aRegistro Declaratório Eletrônico (RDE) by BCB, under which the local representative registers all currency inflows and outflows using a specific ID code for each type of transaction (cash inflow, cash outflow or dividend repatriation). 

The local representative must keep evidence that the funds are being used in accordance with the provisions of the Portfolio Investment mechanism. Registration of foreign exchange activity takes place automatically upon settlement of an inflow or outflow foreign exchange transaction by an authorised foreign exchange dealer in Brazil, meaning that the RDEs are automatically updated by inflow or outflow foreign exchange transactions. In addition, the RDEs are updated from time to time (usually monthly) by the local representative and custodian based on the mark-to-market of the total portfolio registered under an Omnibus Account.

IOF Tax (Imposto sobre Operaçðes Financeiras) 

IOF Tax (Imposto sobre Operaçðes Financeiras) 

The Imposto sobre Operações de Crédito, Câmbio e Seguro, ou relativas a Títulos ou Valores Mobiliários (IOF) is a tax due on securities, foreign exchange, insurance and credit transactions. The methodology and tax rates vary depending on each case and the applicable modalities for non-resident investors are:

• IOF tax on Securities: tax applicable on short-term fixed income securities trading and investment fund redemption
• IOF tax on Depositary Receipt (DR) issuance: tax applicable on every DR issuance
• IOF tax on Foreign Exchange (FX): tax applicable on every FX transaction

Unlikely other tax rates defined by Brazilian laws, the IOF tax rate can be amended by an act of the Brazilian Minister of Finance, and can be effective immediately, in case this is defined on the act. In other words, as general rule, while any changes in the Brazilian tax rules must be approved by Brazilian National Congress, the IOF tax rates can be changed in a simpler way, with the Minister of Finance’s discretion, subject to the limits established in the law.

IOF Tax on Securities

In order to avoid short-term trading and encourage longer term holding of fixed income securities, IOF tax is applied on the earnings whenever the sale/maturity of bonds and redemption of fixed income fund shares occur within 30 calendar days of the purchase or initial investment.

Clients should note that the IOF tax on securities is no longer applicable for Debentures, Financial Notes, CRIs (Real Estate Receivable Certificates), CRAs, CDCAs and LCAs (Agribusiness Receivables Certificates) as well as to some type of investment funds as  equity investment funds, investment funds that invest in shares of small and medium-size companies tradable at the exchange, private equity funds, emerging companies investment funds and Exchange Traded Funds (ETFs) linked to equities or fixed income instruments.

Sliding Scale

IOF tax on securities (short term IOF tax) is assessed at either a rate of one per cent over the sale amount, or a sliding scale ranging from 96 per cent to zero per cent rate applied to the earnings for a holding period of up to 30 calendar days, as outlined below, whichever is lower:

In general terms, the IOF tax on securities withholding is processed by:

1. The fund administrator, when the IOF tax collection is due to investment fund redemption;
2. The non-resident investor’s tax representative in Brazil, for other securities.

IOF tax on Depositary Receipt (DR) issuance

The IOF tax on depositary receipt (DR) issuances is assessed on a zero per cent tax rate on the value of every DR issuance related to Brazilian equities calculated using the closing price of the previous day of the underlying equities of the DR being issued.

IOF tax on Foreign Exchange (FX)

The IOF tax on foreign exchange (FX) transactions is assessed on every FX inflow agreement booked in Brazil. Its calculation methodology consists of a percentage applied to the value of the FX and the FX bank is responsible for withholding the tax amount. Currently the IOF tax rate is zero per cent for all FX related to investment in Brazilian securities under Resolution 4373.

FXs booked exclusively in relation to other payments like taxes, service fees or other expenses, are subject to IOF tax at a rate of 0.38 per cent.

As per Resolution 4373, the following situations require a simultaneous FX to be executed:

• Depository receipts (DR) cancellations into local shares: it is required when a non-resident investor is migrating from investment under the DR Program to Securities Portfolio Investment triggering IOF tax at a rate of zero per cent;
• Change of investment modality in Brazil from Direct Investment (as defined by Law 4131) to Securities Portfolio Investment (as defined by Resolution 4373) triggering IOF tax at a rate of 0.38 per cent.

Resolution 2,689 was replaced by a new set of rules enacted by Resolution 4,373 in March 2015.


Law 12,431/11

Law 12,431 rules the tax reduction for certain securities issued by non-financial companies, as long as the proceeds from the issuance are used in investments related to capital expenditure (CAPEX) projects, including the ones related to research, development and innovation. Law 12,431/11 encompasses the following securities as subject to tax exemption for non-resident investors not based in low tax jurisdictions:

1. Corporate Bonds

Law 12,431/11 states that non-resident investors not based in low tax jurisdiction are subject to zero per cent on income tax applicable on gains obtained with corporate bonds acquired from 01 January 2011 onwards as long as the bonds are: (i) sold by means of a public distribution, (ii) issued by non-financial institutions; and (iii) regulated by the CVM or by the National Monetary Council. In addition the bonds must follow the below conditions in order to allow investors to be eligible to such tax reduction:

• Pay pre-fixed rates linked to a pricing index or a reference rate known as TR in the local market;
• Average term of at least 4 years;
• Cannot be repurchased by the issuer before 2 years of issuance or cannot be settled partially or fully before the maturity date;
• Cannot have a commitment from the buyer to sell such securities back to the issuer;
• Minimum income distribution period of 180 days;
• Confirmation that the security has been negotiated in regulated markets;
• Confirmation by the issuer of the allocation of the funds raised in projects related to investments, research, development and innovation.

The rate of 0 per cent on income tax on the gain is also applicable for non-resident investors that acquire quotas of funds constituted exclusively for non-resident investors that have at least 98 per cent of its portfolio in the private bonds with the conditions specified above.

Law 12,715 altered Law 12,431/11, adding Real Estate Receivable (“CRIs”) that follow special conditions similar to the conditions above for private bonds.

1. Debentures issued by Special Purpose Companies

Foreign investors not based in low tax jurisdictions benefit from the 0 per cent rate on income tax, when acquiring debentures (long term bonds) issued by Special Purpose Companies constituted for investments in the infrastructure, research and development or innovation sector.

The tax benefit is applicable for non-resident investors not based in low tax jurisdictions investing in the securities directly and when acquiring quotas of local investment funds that invest at least 85 per cent of its portfolio in such debentures.

Decree 8,874/16 establishes that investment projects in the following sectors are considered priorities:

• Logistics and transportation
• Urban Mobility
• Energy
• Telecommunication
• Broadcasting
• Basic Sanitation
• Irrigation

Those debentures have to be submitted to the approval of the Ministry that overlooks that specific sector of the project in order to receive the benefit. In case investment projects in research, development and innovation areas are not related to infrastructure projects, the Ministry of Science, Technology and Innovation will be responsible for the approval.

The Brazilian Securities Commission is responsible for defining how the information about the priority projects is published on the debentures offering Prospectus. In addition to that, CVM makes the list of the offers related to such debentures available on their website. The debentures subject to this tax benefit will be the ones issued between the date of publication of the Decree 8,874/16, between 10 November 2011 and the 31 December 2030.

Please note that investors continue to require two accounts in the market. 
Please find below the correct account designation for each security:

From local investor’s stand point there are two ways to clear funds in the Brazilian market:

1. Through a system named COMPE, managed by Banco do Brasil, that clear funds in an overnight batch (next day good funds). All checks and documents of credit (DOC) are cleared through COMPE and there is no limit of value to use COMPE. The participant in COMPE must deposit cash collateral to guarantee all payments that exceed BRL 5,000.00. Two clearing sessions are carried out every business day. In each session, a single, nationwide multilateral net settlement position for each participant is computed. Based on the date in which the document is deposited in the collecting bank, the COMPE inter-bank settlement is processed, by means of STR, in the bank reserve accounts held at the Central Bank of Brazil, on T+1.
2. The second way to clear funds is through Sistema de Transferência de Reservas – STR (RTGS fund transfer system, similar to Fed Wire). The payment instruction for STR is named Transferência Eletrônica de Disponíveis – TED (Electronic Funds Transfer). All funds that clear through STR are same day good funds. According to an agreement between local banks in Brazil, pure cash transfers over BRL 500.00 should only be affected through STR.

The launch of the Sistema de Transferência de Reservas - STR (Reserve Transfer System), with this system, operated by the Central Bank, Brazil entered in the group of countries whose inter-bank funds transfers can be settled irrevocably and unconditionally, i.e. with finality, on a real-time basis. This fact by itself provides settlement risk reduction for inter-bank operations and consequently systemic risk reduction, that is, reduction of the risk that the bankruptcy of one bank causes the bankruptcy of other banks, namely domino effect. In the scope of the reform, there was another important change, as the completion of funds transfer between reserve accounts nowadays depends on the existence of sufficient balance in the account of the sending participant. 

In Brazil, foreign investors are not allowed to go overdrawn with their accounts.

Market practice in Brazil is that corporate actions are generally announced on or after ex-date. Record date is usually one business day prior to ex-date.

Entitlements are based on traded position; however, the exchanges will pay based on what is actually settled. The stock exchange guarantees the buyer the receipt of entitlements in the event of pending trades if the exchange recognizes the trade. It is important to note that, companies can pay dividends directly, through an agent, or through the depository where the shares are held. Most companies pay through the depositories in a lump sum payment. The depository, in turn, calculates shareholder entitlements.

Dividend payment frequency varies from asset to asset. Usually they are paid on an annual or semi-annual basis.

Interest payment frequency varies from asset to asset. Usually they are paid on an annual or semi-annual basis.

Varies by issue

Corporate actions are regulated by Law No. 6,404/76, amended by Law 9,457/97, which is known as the Corporation Law. These laws establish the rules that listed companies must follow for corporate actions.

Annual General Meetings (AGMs) must be held at least once a year in the four months after the end of the fiscal year (December 31). During the meetings, the shareholders decide upon any corporate action and related details including: the record date, ex-date, split ratio, the date the event will take place, whether the new shares will rank pari passu or pro-rata, as well as whether differences will be rounded up or down.

The meeting announcements provide the address, agenda, date and time of the meeting. If the shareholders have to vote on a revision of the company's by-laws, the announcement must provide the proposal and the by-law topics, which will be modified.

Companies are required by law to announce the meeting date at least three times before the meeting. Additionally, the first announcement must be a minimum of eight days in advance. In the event that the meeting is cancelled, a second meeting is scheduled and the announcement must be made at least five days prior to the meeting. Some general meeting announcements may schedule dates for the first and second meetings, in the event that the first meeting does not take place. Market practice in Brazil is that corporate actions are generally announced on or after ex date. Record date is usually one business day prior to ex-date.

Entitlements are based on traded position, however the exchanges will pay based on what is actually settled. The stock exchanges guarantee the buyer the receipt of entitlements in the event of pending trades if the exchange recognises the trade. The local custodian usually initiates claims upon request after the reconciliation process has been completed.

Equities, rights and entitlements are protected based on traded positions. For fixed income, however, once trades are done in the majority of the times OTC, rights and entitlements are protected on settled positions.

Annual General Meetings (AGM) must be held at least once a year, between January and April. The date of the AGM is decided by the company and must be announced at least three times in the press, eight days prior to the meeting.

Voting

In an effort to facilitate the participation of shareholders in general meetings in Brazil and to improve corporate governance instruments in the Brazilian market, on 07 March 2015, the CVM (Brazilian Securities and Exchange Commission) released instruction CVM 561/15, amending instructions CVM 480/09 and CVM 481/09, among other items, regulating remote voting in the Brazilian market.

The new instruction standardizes the electronic remote voting form that should be used by the companies for general shareholder meetings and any meetings that include election of board members. The remote voting offering is mandatory for all listed company from 2018 onwards.

Therefore, shareholders have five options of voting:

• Physical attendance: Voting by being present at the shareholders meeting. Currently this is already an option, and will continue to be possible even with the implementation of the new regulation.
• Proxy voting: The beneficial owner’s legal representative, appointed through a POA, must physically attend the meeting. This is also an option currently available in the market, and will continue to be possible even with the implementation of the new regulation.
• Remote voting: Filling of the electronic remote voting forms by shareholders, who should deliver it before the meeting takes place in one of the three possibilities listed below:
  • Directly to the companies, through processes that should be established by each of them;
  • To the local custodian, in the case of the shares being kept by the shareholder on a central depositary (B3); or
  • To the bookkeeping agent, in the case of shares kept by the shareholder directly in the books of the company.

Regulation is silent about split and partial voting. However, since Brazil is a final beneficiary country, it is expected that all votes for the same investor be cast the same way.

Votes placed through remote voting are consolidated under the investor’s tax ID (CNPJ or CPF). This means that the voting instructions, via remote voting, are maximized and voting intention is valid for all accounts under the investor’s Tax ID. Therefore, no split or partial voting will be allowed.

On 20 December 2017, CVM published Instruction CVM 594 (ICVM 594), which modifies Instruction CVM 481 (ICVM 481), which regulates, among other items, remote voting at shareholders’ meetings. The new regulation is already effective and defines the following procedures:

• Mandatory offer of remote voting facilities whenever an EGM takes place on the same date of the AGM

As previously proposed in the public hearing, CVM clarified that offering remote voting is mandatory for all the extraordinary general meetings (EGMs) performed on the same day of annual general meetings (AGMs), in order to standardize and have a more effective process, avoiding different treatment between the shareholders that send votes physically or via physical representation and remotely.

• Permission to resubmit the voting card within 20 days before the meeting day in order to include candidates for the board of directors and fiscal council

CVM’s intention is to increase the voting card’s flexibility and allow companies to modify as necessary, within the pre-defined timeframe. CVM had previously proposed to reduce the timeframe of 30 to 15 days prior to the meeting to resubmit the voting card, however after the public hearing, it was defined that the companies can resubmit the voting card in order to include candidates within 20 days before the meeting. 

• Permission to include candidates for the board of directors and fiscal council within 25 days before the meeting day

CVM defined the deadline to include candidates for board of directors and fiscal council at 25 days before the meeting day, both for AGMs and EGMs, against the previously established deadline of 45 days before the AGM meeting day and 35 days before the EGM meeting day. This reduction to a 25 day window will increase flexibility and standardize the timeframe for different types of meetings.

• Voting card content improvement

CVM changed the voting card template as per the below:

• Inclusion of a matter questioning whether investors wish to automatically distribute votes in equal percentages among approved candidates in cases where cumulative voting is adopted, clarifying the market practice to distribute votes equally whenever the case.
• Inclusion of a question that allows the shareholder to request a separate election for a member of the board of directors, even in cases where there are no candidates indicated by non-controlling shareholders.
• Inclusion of the option “abstain” in all matters, reinforcing the regulator’s position that blank votes (no action) are considered abstention.

• Mandatory disclosure of the final voting map in analytical format after the meeting

In order to provide confirmation of votes accepted in the meeting, CVM defined that companies must disclose on meeting date a brief voting map, which must consolidate the total votes processed physically and those processed remotely, identifying how many approvals, rejections and abstentions each matter received and how many votes each candidate has received.

In addition, CVM defined that companies must disclose this final voting map within 7 business days after the meeting is held. The final voting map must consolidate, per shareholder, the votes processed physically and remotely, identify each shareholder using the first 5 digits of their Brazilian Tax ID (CNPJ for institutional investors and CPF for individual investors), inform the votes per matter and the shareholder position.

The legislation requires that B3 and CVM are notified of the results of the meeting within 24 hours. The meeting’s minutes must be published in the press, which is usually done 30 days after the meeting.

On request, subject to availability

Until 2016, the only possibility for investors to participate in local annual and extraordinary general meetings was physical attendance via legal representation.  According to the legislation, the representative must be a lawyer appointed through a Power of Attorney (POA) by the final investor to allow proper registration at the local Notary Publics. Additionally, the POA must be renewed at least annually. The POA must contain the client name in the same manner as it is registered in the CVM and the POA must be renewed annually. According to the regulations, the representative must be a lawyer. If the POA is provided in a foreign language (other than Portuguese), a local sworn translation is required before the POA can be properly registered with the local Notary Public. Some companies also require a statement of holdings issued by the local custodian, while other companies require this statement to be issued by the CSD.

Aiming to facilitate the participation of shareholders in general meetings in Brazil and to improve corporate governance instruments in the Brazilian market, on 07 March 2015, the CVM (Brazilian Securities and Exchange Commission) released instruction CVM 561/15, which regulates remote voting for certain types of meetings and eliminates the need for physical attendance or POAs.

As offering proxy or remote voting is the companies’ decision based on legal requirements, To guarantee that votes are accepted at meetings that do not support remote voting facilities, it is recommended to investors ensure that a valid POA is in place in order to avoid any constraints.

Under Bill 13/2011, which was passed by the Congress, shareholders will be able to vote remotely in their company's general meetings. CVM instruction 561/15, published in March 2015, amends certain aspects of Instruction 481, and defines the terms and conditions of remote voting in Brazil. Shareholders are able to vote remotely, in addition to physical attendance and proxy voting. Remote voting takes place by the shareholder's submitting the vote bulleting to:

- the company directly, in accordance with the procedures established by such company;

- the Local Custodian, for shares held on a Central Depository; or

- the bookkeeping agent, for shares held by the shareholder directly in the books of the company.

Implementation of electronic forms will take place in two phases, according to the below:

- 1 January 2017 - companies that have at least one type of security, on the date of the publication of CVM 561/15, as part of the Ibovespa or IBrX 100 indexes; In this regards, the CVM also published a list of companies in January 2017, that must provide a remote voting service to their shareholders, in meeting starting from 2017.

- 1 January 2018 – other listed companies;

- Implementation before the above mentioned dates is optional.

The exemption (0 per cent) for income tax on dividend payments is applicable for dividends recognized in 1996 and onwards.

Interest over capital is also distributed by local companies according to the corporate profit before tax. As a result, the amounts related to these events are all subject to tax at the shareholder level. The tax rate varies depending on the domicile of the investor: 15% for investors in non-tax haven countries and 25% for investors based in tax haven countries.

Please note that in both payments tax is withheld at source by the paying agent, which is the company itself.

According to Normative Instruction 1297, issued in October 2012 by the Receita Federal do Brasil (RFB), the Brazilian Internal Revenue Service, a requirement in the Brazilian tax report (DIRF Report) related to foreign tax payers identification was requested. As per the Instruction, the Brazilian entities are required to populate, for all applicable cases, the Número de Identificação Fiscal (NIF), a taxpayer identification number in its country of origin or jurisdiction for tax purposes – for all transactions in which there was reportable income or tax withheld. This request impacts all foreign investors, including investors not based in low tax jurisdictions.

Capital gains taxes and taxes on interest payments for fixed income instruments such as government bonds, corporate bonds and shares of investment funds vary according to the country of domicile and timeframe that the investor holds the instrument in its portfolio. 

Investors based in tax haven countries that hold the instrument for up to 180 calendar days, are subject to a 22.5% tax rate. Investors that hold the instrument from 181 to 360 calendar days are subject to a 20% tax rate. If the instrument is held for 361 to 720 calendar days, the investor is subject to a 17.5% tax rate. Finally, investors holding the instrument for more than 720 calendar days are subject to a 15% tax rate. 

Foreign investors accessing the market under Resolution 4,373 are required to obtain a taxpayer identification number, known locally as CNPJ.

Generally CGT only applies to Tax Haven Foreign Investors*. However, 15% CGT is applied to transactions with Private Bonds for Non-Tax Haven investors. In addition, IOF Tax is applied on a sliding scale on Fixed Income investments held for less than 30 days.

The progressive scale below applies to gains obtained by non-tax haven investors in off-exchange equities transactions, such as dissensions and sale of securities that are no longer tradable in the organized market as a result of cancelation or suspension process.

• 15 percent applied to gains up to and including BRL 5,000,000.00;
• 17.5 percent applied to gains between BRL 5,000,000.01 and BRL 10,000,000.00;
• 20 percent applied to gains between BRL 10,000,000.01 and BRL 30,000,000.00;
• 22.5 percent applied to gains that exceed BRL 30,000,000.00

Also, the scale above is applicable to non-tax haven investors negotiation in the secondary market off exchange, at OTC, for investment funds – closed end funds

CGT rate may vary depending on the type of securities transacted and on whether the non-resident investor is domiciled in a tax haven country or not.

Equity Market 
All Jurisdictions – Except low tax jurisdictions:

• Income Tax on Capital Gains - Exempt
• Withholding tax on sales – Exempt
• Income Tax on cash dividends – Exempt
• Income tax on Interest on Equity – 15% (Over the gross value approved by the issuer).

Low tax jurisdictions:

• Income Tax on Capital Gains – 15% (On net gains)
• Withholding tax on sales – 0,005% (over the value of sale) - must be withheld by the broker over the securities sale or settlement
• Income Tax on cash dividends – Exempt
• Income tax on Interest on Equity – 25% (Over the gross value approved by the issuer)

Derivatives Market 
All Jurisdictions – Except low tax jurisdictions:

• All Derivatives (Future and Option) – Except SWAPS - Income Tax on Capital Gains – Exempt
• SWAPS - Income Tax on Capital Gains – 10% (over the monthly positive results of the sum of the daily settlement of the account).

Low tax jurisdictions:
All Derivatives – Except SWAPS

• Income Tax on Capital Gains of a regular transactions  in stock exchange – 15%
• Withholding tax on sales of a regular transactions  in stock exchange - 0,005% - must be withheld by the broker over the securities sale or settlement
• Income Tax on Capital Gains of day trade transactions  in stock exchange – 20%
• Withholding tax on sales of a day trade transactions  in stock exchange - 1% - must be withheld by the broker over the securities sale or settlement
•  
• SWAPS - Income Tax on Capital Gains – 15% (when held for more than 720 days), 17.5%(when held for more than 360 days and lessthan 720 days), 20% (when held for more than 180 days and less than 360 days), 22.5% (when held for less than 180 days.

Fixed Income Market 
All Jurisdictions – Except low tax jurisdictions:

• Federal Government Bonds - Income Tax on net Incomes - Exempt
• Corporate Bonds - Income Tax on Capital gains – 15% - Investment in agribusiness bonds (CDA, WA, CDCAs LCA,CRAs and CPRs) and real estate bonds (LHS, CRIs and LCI) are subject to 0 per cent rate for individuals

Low tax jurisdictions:

• Federal Government Bonds - Income Tax on Capital Gains - 15% (when held for more than 720 days), 17.5%(when held for more than 360 days and less than 720 days), 20% (when held for more than 180 days and less than 360 days), 22.5% (when held for less than 180 days).
• Corporate Bonds - Income Tax on Capital Gains - 15% (when held for more than 720 days), 17.5%(when held for more than 360 days and less than 720 days), 20% (when held for more than 180 days and less than 360 days), 22.5% (when held for less than 180 days) - Investment in agribusiness bonds (CDA, WA, CDCAs LCA and CRAs) and real estate bonds (LHs, CRIs and LCI) are subject to 0 per cent rate for individuals. In addition, With respect to corporate bonds issued under special conditions (Law 12431), if the conditions of article 2 of Law 12.431 are met and the investment is made by individuals: 0 per cent

To avoid misinterpretations of which countries and jurisdictions are considered tax havens, Brazilian Tax Authority released Normative Instruction 1037/2010, amended by Normative Instruction 1658/2016 and Normative Instruction 1773/17, listing all tax havens countries:

Interest on capital payments are subject to a withholding tax rate of 15% for non-tax haven investors and 25% for tax haven investors.

Not applicable

Federal law 11.312 sets forth that income of foreign investors deriving from Venture Capital Funds (“VCF”) and Private Equity Funds ("PEF") is subject to withholding tax at a 0% rate provided that the following conditions are met:

IOF – redemption of government bonds and quotas of investment funds (except for listed and private equity funds)
In order to encourage longer term holding of certain fixed income instruments, an IOF tax is imposed such instrument is sold or is redeemed within 30 days of purchase. The sale of quotas of exchange-traded funds linked to fixed income instruments is subject to 0% short-term IOF tax. 

New Presidential Decree 7487/11 has reinstated the short term investments IOF tax sliding scale (for redemptions within 30 days) on all fixed income instruments with the following exceptions: debentures, financial notes, CRIs (Real Estate Receivable Certificates), CRAs, CDCAs and LCAs (Agribusiness Receivables Certificates). Private bonds, such as Banks CDs, acquired from May 25, 2011 onwards are again subject to the short term investments IOF tax sliding scale.

The rates vary according to the regressive table below, considering the percentage of the capital gain based on the number of days between the investment date and the redemption date:

The existing tax rate is zero for variable income instruments , although this is subject to change as may be decided by the Ministry of Finance from time to time.

Sistema Especial de Liquidação e Custódia (SELIC)

SELIC charges the local custodian a monthly fee for each account opened in their system regardless of whether it is a Standard account or Collateral account (for Equities segment or Collateral account for Futures & Commodities segment).

This fee is calculated based on the average value of the portfolio of each one of the accounts, considering only the business days of the month and the final balance of each day.

The fee structure is as follows:

A minimum fee of BRL 100.00 is applied for each account even if with the calculation from the table above results in a lower value.

SELIC also charges a fee of BRL 1.00 per transaction fee and BRL 10.00 per inactive account (i.e. accounts with no balance and without transactions during the month. These costs are absorbed by the local custodian and they are not transferred to the clients.

The CVM charges each omnibus account holder an annual out-of-pocket fee referred to as a "CVM Fee”.

This levy is calculated based on the value of the portfolio of the omnibus account, as of 31 December of the previous year, and is charged on an annual basis.

CVM Fee

Calculated based on the value of the portfolio of the omnibus/proprietary account as of 31 December of the previous year.

For accounts established after 31 December of the previous year, the minimum fee of the sliding scale will apply.

Charged on an annual basis

Brazil Holiday Calendar

• B3 http://www.b3.com.br/pt_br/
• Comissão de Valores Mobiliários cvm.gov.br
• Banco Central do Brasil bcb.gov.br
• Ministry of Finance fazenda.gov.br