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The innovations brought by Provision Measure (MP) No. 651/14

By Marcelo Saciotto and Rodrigo Lara

Under the recently enacted Provisional Measure (local acronym MP) No. 651/14, certain transactions carried out in capital market are now tax exempt. Additionally, the MP also regulates securities lending, among other things.

As a result of the new rule, individuals buying shares from small and medium-sized companies (those with a market value of up to BRL 700 million and annual gross revenue of up to BRL 500 million) will not have to pay income tax on capital gain when they sell such shares. This makes capital market more attractive to smaller companies.

On the other hand, the MP determined that the securities lending – a transaction that used to be part of a widely used tax planning– is now to be taxed.

Generally, the transaction used to look like this: an individual would lend shares to an investment fund immediately prior to the distribution of interest on the shareholders’ equity (local acronym JCP) by the company. Because the payment of JCP was income tax-free for investment funds, the tax gain was then shared between the owner of the shares and the fund. After such transaction, the shares would be returned to their owner.

Starting in 2015, however, any JCP paid in connection with a loan of shares will be taxed at 15% (income tax). This tax will be paid by the investment fund and then the investment fund will pass on the amount to the owner of the shares net of such 15% tax.

This MP is of utmost importance to investors that used to engage in such transactions and deserves attention especially because of the tax burden involved

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