Emerging Markets Rates and Currencies Handbook
70 Citi | Emerging Markets Currencies Handbook 2021 Foreign Exchange Policy CMN Resolutions: • Resolution 3,568, of May 29, 2008: Makes provisions on the foreign exchange market, and makes other provisions. • Resolution 3,312, of August 31, 2005: Makes provisions on hedge operations made with financial institutions abroad or at foreign stock exchanges. Allows international hedging with financial institutions abroad, limited to currency pairs other than BRL, rates and commodities. • Resolution 3,844, of March 23, 2010: Makes provisions on foreign capital in Brazil and its registration with Banco Central do Brasil, and makes other provisions. • Resolution 4,373, of September 29, 2014: Makes provisions on non-resident investments in financial and capital markets in Brazil and related issues. BCB Circulars: • Circular 3,691, of December 16, 2013 regulates the Resolution 3,568, dated May 29, 2008, that makes provisions on the foreign exchange market and makes other provisions. • Circular 3,689, of December 16, 2013 regulates, in the scope of the Central Bank, the provisions on foreign capital in Brazil and on Brazilian capital abroad. • Circular 3,690, of December 16, 2013 Makes provisions on the classification of transactions in the foreign exchange market. FX: Full deliverable Spot and Forwards Although most of the FX deals are settled in up to 2 business days (spot — câmbio pronto), full-deliverable forward FX transactions are also permitted, up to a maximum tenor of 360 days (full-deliverable-forward — câmbio futuro, also known as “trava cambial”). Support documentation as proof of the lawfulness and the economic groundings of the underlying transactions is mandatory for all FX spot and full-deliverable-forward deals, except those up to US$3,000 or equivalent in other currencies. Also, for volumes greater than USD 10,000 a signed FX contract is required after the transaction is closed. As a first step on any FX transaction involving foreign investment or lending to Brazilian entities or individuals, both parties of the FX transaction must be registered at CADEMP (Central Bank’s file for local and foreign entities). With the above identification, the investment or lending transaction must be registered at the RDE (“Registro Declaratório Electrônico” — Electronic Declaratory Registry). Such registration is essential for further remittance of dividends, capital repatriation or reinvestment of profits and must be made before the investment’s inflow of funds. Foreign Direct Investment can be made through the purchase of participation from a third party or by capital injection. Basic documentation of all FX transactions is composed of: • Documents related to the underlying transaction; • Tax collection receipts, when applicable; and • FX contract signed by legal representatives from the client, the bank and the broker (when applicable). Contracts are divided in 2 different types. Both have a set of nature-codes (“naturezas”) that classify the nature of the activity underlying the FX: • Contract of Purchase — Bank buys foreign currency from the company and delivers the equivalent amount in Brazilian Reais (inflow of funds). • Contract of Sale — Bank sells foreign currency to the company upon receiving the equivalent amount in Brazilian Reais (remittance of funds). Tax on Financial Transactions for FX: IOF Tax • FX transactions, as a rule, are subject to the FX IOF tax at the time of settlement. Maximum rate of IOF is 25% and may be reduced or restored by a Decree. • Currently, foreign exchange transactions are taxed, in most cases, at the rate of 0.38%. Tax is applied to the notional currency amount in the FX transaction. There are, however, some varying rates of IOF, depending on the type of underlying FX exposure, specifically: Transaction FX Spot Foreign Currency loans with average maturity of less than 180 6% Import of services 0.38% Exports of goods and services 0% Foreign Direct Investment pursuant to Law 4131 (inflows and outflows) 0.38% Tax: Other Taxes All gains paid, credited, delivered, employed or submitted by a local party to another domiciled abroad are subject to withholding tax. The table below shows examples of taxation for the main foreign exchange transactions: Taxes Rate Interest on Foreign Loans and Financing IRRF (If related to exports) 0% IRRF (General Rule) 15% IRRF (Beneficiary resides in a Tax Haven jurisdiction) 25% Payment of royalties and technical/administrative services IRFF (Beneficiary is not a Tax Haven resident) 15% IRFF (beneficiary resides in a tax Haven jurisdiction) 25% Payment of services in general IRRF (There is no distinction between residents of Tax Havens or not) 25% Brazil
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