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Brazil Plans Tax Exemption for Infrastructure-Related ABS Funds

Brazil plans to provide tax breaks for asset-backed funds that focus on infrastructure projects as part of an effort to develop local capital markets.

A rule to be published before the end of the year will exempt the so-called FIDC funds from income tax for retail and foreign investors, and provide a 10-percentage-point discount on the tax for local institutional investors, said Ernesto Lozardo, adviser to the presidency of the Brazilian development bank BNDES, in an interview yesterday in Sao Paulo.

“We want to put all the instruments available for the capital markets to get help financing the infrastructure needs in Brazil”, Lozardo said, adding that the new tax breaks will mimic those designed for buyers of local corporate bonds sold to finance infrastructure projects.

The tax incentives are designed to help Brazil develop local debt markets to help finance 1 trillion reais ($493 billion) in projects for roads, factories and airports. Currently local long-term funding is only provided by the development bank.

The asset-backed funds would help achieve the goal because many foreign institutional investors would prefer to use such instruments, because they reduce credit risk attached to the projects, Lozardo said.

Infrastructure-linked local bonds give foreign and local retail investors tax exemptions as long as they have a duration longer than four years. A debenture fund has the same incentive only if 67 percent of the fund assets are related to approved projects.

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