Brazil Gives Tax Exemption to Foreign Mortgage Investors

Brazil granted a tax exemption to foreigners who buy mortgage-backed securities or invest in funds that purchase them after sales of new debt supported by real estate loans fell almost 50 percent this year.

The tax break only applies if proceeds of the debt are used on “investment projects” and the bonds have an average maturity of at least four years, Pablo Fonseca Pereira dos Santos, deputy secretary of economic policy at the Ministry of Finance, said in an interview from Brasilia.

“The concept of investment is purposely very broad just to give market players flexibility,” Pereira dos Santos said. “A new building is for sure an investment, and so is a house expansion or a new factory.”

The tax incentives are designed to develop local debt markets and help raise about 1 trillion reais ($493 billion) for roads, factories and airports. Local long-term funding is provided mainly by the nation’s development bank, know as BNDES. The government is seeking to develop the real estate and construction industries to boost employment as economic growth slows.

Sales of Brazilian mortgage-backed securities, known as Certificados de Recebiveis Imobiliarios, or CRIs, dropped 48 percent this year through September to 5.5 billion reais, according to Anbima, Brazil’s capital-markets association. Outstanding debt jumped almost 51 percent as of Oct. 17, to 29.8 billion reais from 19.7 billion reais on Jan. 31, 2011, according to Cetip SA (CTIP3) - Mercados Organizados, Brazil’s biggest securities clearinghouse.

IOF Tax

The tax break applies as long as at least 67 percent of a real estate fund’s assets are CRIs in the first two years of the life of the fund, and they increase to 85 percent after that. Foreign fund investors are exempt from the nation’s income tax as well as the so-called IOF tax that affects exchange-rate transactions in Brazil.

Local retail investors are already exempt from taxes on any kind of CRI or real estate fund, including those not intended for investment projects.

Many CRIs won’t benefit from the tax exemption for foreigners because they are used for projects that are already completed and don’t qualify, according to Fernando Cruz, a director at Brazilian Finance and Real Estate Participacoes SA, the country’s biggest issuer of mortgage-backed securities.

Foreign investors are more likely to invest in real estate funds than individual CRIs because they typically seek more volume, said Michel Gutnik Steinberg, head of real estate at Brasil Plural SA Banco Multiplo. Investors can also rely on fund managers to assess risk rather than trying to examine individual bonds, Steinberg said in a phone interview from Sao Paulo.

Selling CRIs through real estate funds “is the easiest way to attract small investors,” including foreigners, Cruz said in a phone interview. “Investment funds open roads and I have no doubt it will help the market.”

To contact the reporters on this story: Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net; Blake Schmidt in Sao Paulo at bschmidt16@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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