Originally published in the May 12 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s House of Representatives is reviewing two law projects that exempt gains from sales of carbon credits from a number of federal taxes. The law projects also authorize the creation of funds to invest in Clean Development Mechanism projects, industrial projects that seek to mitigate greenhouse gas emissions.
Law Project 494 and Law Project 1,657, which will be reviewed and voted on together by the House of Representatives, both allow the exclusion of gains from sales of carbon credits from taxable income for purposes of the corporate income tax and the 9 percent social contribution on net income (CSL).
This tax treatment differs from that contained in Private Letter Ruling 59/2008, in which the Federal Revenue Department determined, based on current legislation, that sales of carbon credits are taxable.
Article 3 of Law Project 494 also exempts carbon credit sales from COFINS (the Contribution for the Financing of Social Security) and P.I.S. (the Program for Social Integration contribution).
Further, Law Project 494 authorizes the creation of funds to invest in Clean Development Mechanism projects that generate carbon credits (those projects are known as FIMDLs) (article 5). It delegates to Brazil’s Securities and Exchange Commission (CVM) the authority to issue further regulations on the constitution, operation, and management of FIMDLs (articles 6-9).
Income and capital gains earned by FIMDLs would be exempt from the financial transactions tax (IOF) and income tax (article 10, Law Project 494). A similar exemption from IOF and income tax applies to income and capital gains distributed by FIMDLs (article 11, Law Project 494).
Capital gains from the sale of shares in FIMDLs realized by individuals and companies, including exempt organizations, under the presumed income tax regime would be subject to withholding tax at the same rate as variable income investment funds (article 12, Law Project 494), currently 15 percent. Capital gains realized by foreign investors in FIMDLs would be exempt from taxation (article 12, paragraph 4, Law Project 494).
Article 13 of Law Project 494 also provides that the beneficial tax treatment for investments in FIMDLs would apply only if the relevant FIMDL complies with all legal requirements and regulations to be issued by the CVM. Failure to comply with those requirements and regulations would result in the reclassification of the FIMDL as an ordinary investment fund subject to taxation as high as 22.5 percent.
The law projects will be reviewed by the House Finance and Taxation, Environment and Sustainable Development, and Constitution and Justice commissions. Those commissions have conclusive powers, which means that after approval by all three commissions, the law projects will be forwarded directly to the Senate with no need for a vote by the full House.
David Roberto R. Soares da Silva