Originally published in the May 30 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s official gazette of May 25 published Normative Instruction 742/2007, which describes the applicable tax treatment of loans of shares of stock, a transaction that is becoming frequent in Brazil’s stock markets.
Under the loan of shares of stock, the lender, through an authorized broker, lends the shares to a borrower, who in turn uses them for its own purposes (for example, to sell them in the market). During the time of the loan, the lender is entitled to receive all dividends, distributions, and other rights associated with the shares, in addition to a rent by the borrower. During the loan, however, the lender is not able to sell the shares until they are returned by the borrower.
Instruction 742/2007 clarifies the tax treatment of those transactions, particularly regarding tax basis, capital gains, and tax treatment of rental payments.
As for the rent earned by a lender, the instruction provides that taxation will follow the rules applicable to fixed-income investments. From the borrower’s side, the rent is considered as an expense. The instruction also provides for rules to calculate the rent when it is determined as a percentage of the value of the stock. For dividends and interest on equity paid out of the shares and reimbursed to lender, Instruction 742/07 considers that reimbursement as part of repayment of the loan, rather than earnings to the lender.
For a borrower, the instruction clarifies the basis to calculate capital gains on the sale of borrowed shares of stock, including deductions for rents paid to the lender. It also exempts the lender from capital gains tax if the return of the borrowed shares is made in shares rather than in cash. If the return of borrowed shares is made in cash, the lender must recognize capital gains according to the Instruction.
Instruction 742/07 also contains provisions dealing with its application to other securities and responsibility for tax withholdings.
David Roberto R. Soares da Silva