Investing from Brazil

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São Paulo Stock Exchange Building


Investing from Brazil provides information for investors domiciled in Brazil who wish to apply the Bogleheads® investment philosophy. There are a series of peculiarities you must be aware of. This article introduces some of them.

In particular, the choice from the investing options available are not entirely advantageous to the use of a Boglehead and a DIY approach. The costs of funds including ETFs and the range of funds available to Brazil tax domiciled residents are significant issues that should be carefully researched and understood before committing to any purchases. Please ask portfolio questions in the Bogleheads forum and contact a professional advisor before acting on them.

Considerations for investing from Brazil

Generally investing in an emerging market such as Brazil is somewhat different than investing in US, and here are some reasons:

Conservative investment culture

Despite lower yields in comparison to other investments, saving accounts remain the favorite option among Brazilians holding some money. According to a survey by the National Confederation of Store Managers (CNDL) and the Credit Protection Service (SPC Brazil), this is the case for 65% of people. In addition it is worth noting that only 20% of people actually manage to save. The survey went on to state that investments in private pension accounts totaled for 7% of mentions, while investment funds, bank deposit certificates and federal government bonds accounted for 5%, 4% and 4%, respectively.

The second most common form of saving among Brazilians is to leave money at home, reported by 25% of respondents

Brazilians’ high usage of savings accounts and the high share of assets under management (AUM) invested in fixed income products places it on the conservative end of the investment spectrum, especially when compared to other emerging markets.

Costs

Brazil's financial and equities markets association Anbima said fees at some major fixed income funds run by the country's five largest banks - Itau Unibanco SA ITUB4.SA, Banco do Brasil SA BBAS3.SA, Banco Bradesco BBDC4.SA, Santander Brasil SANB11.SA and state-owned Caixa Economica Federal - were in the two percent range.

Access to the markets

The regulations on investing for private individuals is not supportive in following a low cost passive index approach due to the lack of cheap platforms combined with the lack of low fee ETFs or mutual funds covering a range of diverse indices. This is clearly illustrated by the limited offering of iShares that is confined to a grand total of 5 ETFs covering the latin American market and the S&P 500 only. Until the regulations allow for the use of cheap non advisory platforms and access to diverse and competitive ETF products a Boglehead approach is difficult to achieve.

Inflation

The inflation rate[1] in Brazil currently is 3 - 3.5%. Last year (2019) the inflation rate was 6%. Inflation has been an historic problem for the Brazilian economy.

The high interest rates provided by banks for deposit accounts may encourage people to shy away from alternatives when combined with the lack of investment choices.

Taxation

Taxes payable by individuals include personal income tax, social security tax and gift and inheritance tax.[2]

Brazilian resident individuals are taxable on their worldwide earnings, as well as gains on the disposal of worldwide assets and rights.

Resident for tax purposes

An individual is resident in Brazil where:

  • Has a habitual residence in Brazil;
  • Works for a Brazilian government department or agency outside Brazil;
  • Enters Brazil under a permanent visa;
  • Enters Brazil under a temporary visa to work and remains in Brazil for more than 184 days within a 12-month period.

The personal income tax rate is effective at rates from 0% up to 27.5 percent in increments.

(The standard corporate rate is 15 percent, but other taxes, including a financial transactions tax, make the effective rate 34 percent).

Non resident for tax purposes

The following individuals are considered non-residents for Brazilian income tax purposes:

  • Brazilians living abroad, as of the date of departure (if the exit process has been filed).
  • Brazilians living abroad, after 12 months of departure (if the exit process has not been filed).
  • Foreign nationals holding temporary visas without an employment contract with a Brazilian entity, during their first 183 days of actual physical presence in Brazil (consecutive or not) within a 12-months period.

Payment of taxes

Resident taxpayers are subject to pay income tax in Brazil on their worldwide income, on a monthly cash basis.

Resident taxpayers are required to pay monthly income tax (a process called “Carnê-Leão”) on their income that was not subject to withholding tax by other local source. Generally, it means offshore income and rental income received from other individuals. This tax is also calculated based on a progressive tax table that has three rates: 0 percent, 7.5 percent, 15 percent, 22.5 percent and 27.5 percent. The payment has to be effected up to the last business day of the following month.

Fixed income

Bond funds are taxed from 15% to 22.5%, depending how long you keep them.

Equities

Stock funds are taxed at 15%.

(Note that day trading stock returns are taxed at 20%).

If you own stocks and sell less than R$20,000 per month you pay no tax on the appreciation.

Gains from sale of equities

Capital gains on the sale of stock sold on a Brazilian stock exchange are exempt from tax if the proceeds from the sale are less than R$20,000 on a monthly basis. If the proceeds from the sale exceed this amount, the capital gain is subject to a flat 15% tax rate. Capital losses from the sale of stock sold on a Brazilian stock exchange may be used to offset capital gains on a monthly basis. Any unused losses may be carried forward to future months and future years.

Capital gains from stock sold on a non Brazilian stock exchange are subject to a flat tax rate of 15% if the proceeds from the sale exceed R$35,000. Capital losses from such sales may not be used to offset capital gains.

The corresponding tax on all capital gains must be paid by the last day of the month following the month of the sale.

Dividends

Brazil follows a dividend exemption system. Amounts distributed to shareholders resident in Brazil or abroad (since the investment is registered at the Brazilian Central Bank (BCB)) are not subject to withholding tax. There is no dividend distribution, everything is always reinvested. Stock dividends pay no tax.

(Note that gains from the sale of stock or personal property outside of Brazil that was acquired prior to becoming a resident of Brazil is not taxable).

Tax losses carried forward

Tax losses can be carried forward to offset against future profits up to 30% of the real profits arising in each period (year). Losses that are offset may be carried forward indefinitely. There are restrictions on losses transferred as a result of a company merger or where there is a change in the control and activity of the loss generating company

Treaty and non treaty withholding rates

The overall rate of withholding tax at source used in the remittance of interest and royalties is 15%, except for Japan with a rate of 12.5%. There is no tax on the remittance of dividends. Any remittances to tax haven countries (blacklist) are subject to withholding tax at the rate of 25%.

Brazil has signed treaties to avoid double taxation with several countries including:

Argentina, Austria, Belgium, Canada, Chile, People's Republic of China, Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Italy, Israel, Japan, Luxembourg, Mexico, Netherlands, Norway, Peru, Philippines, Portugal, Slovakia, Spain, Sweden, South Africa, Venezuela, Trinidad and Tobago, Turkey, and Ukraine.

General deductions from income allowed in Brazil

General deductions allowable to taxpayers current in 2020.[3]

Resident taxpayers are entitled to claim dependents as a deduction.

Payments of alimony and child support by the taxpayer pursuant to a Brazilian court decision are deductible for tax purposes by the taxpayer and must be included in taxable income by the recipient.

Employee contributions to the social security system withheld from salary and wages by the employer on a monthly basis are deductible in determining the monthly tax assessment and on the annual tax return.

Amounts paid by the taxpayer to Brazilian domiciled private pension plans are deductible for purposes of the monthly tax calculation and on the annual income tax return, limited to 12 percent of gross income.

Un-reimbursed medical expenses incurred by the taxpayer on their own behalf or in respect of treatment received by a dependent are deductible on the annual income tax return.

Pension income from Brazilian government plans received by individuals 65 years of age or older is not taxable up to a prescribed limit. (The current limit is R$1,903.98 per month).

Education expenses for the taxpayer or their dependents are deductible up to a prescribed amount. (Currently the annual limit is R$3,561.50 per student).

Fund taxation

Income from open and closed end funds is taxable every 6 months (come-cota) at the rates of 15% or 20% depending upon the length of the fund life being classified as a long or short term investment fund. Income accrued since 1st January will become taxable but any realised or unrealised capital gains earned by the fund to date will become taxable on 31st May as if such gains were distributed to the fund investors.

Real estate funds, credit right funds and equity funds have been waived from periodical taxation and therefore income earned from these funds will only be taxable upon distribution to the fund investors.

Offshore fund location

But there´s a difference between tax treatment :

A) Investing through Personal Account: when you sell shares *stocks/ETFs or Mutual Funds", you pay capital gains - 15% of profit (but you are exempt for capital gains less than R$25,000/month).

B) Investing through tax haven company (Cayman Islands, British Virgin Islands): the investor can send the money back to their personal account in 3 ways:

  • Decrease of capital: tax on FX gains only.
  • Distributions: usually 27,5% on dividends.
  • Selling shares of company : 15% on capital gains.

Costs

Fixed income

Bond fund general costs are in the range of 0,7-3,5% per year.

Equities

Most stock funds costs 4% per year.

Single stock funds costs 1,5% per year. (The fund invests in only 1 stock and charges 1,5% per year). There are have some iShares ETFs with 0,69-0,79% cost. There is an index ETF called PIBB that costs 0,0059% per year, which is probably the cheapest fund in the world.

Investment options in Brazil

Cash

The more or less equivalent of cash is called "Poupança", a type of saving account that yield always ~0,5% per month. This return is obligatory by law. There is no tax on the returns.

Bonds

Tesouro Direto

In Brazil there is a product somewhat similar to Treasury Direct. In Brazil it is called "Tesouro Direto", and you can check the rates here: http://www.tesouro.fazenda.gov.br/tesou ... itulos.asp . The IPCA ones yielding ~5.8/6.5% are the exact equivalent of TIPS. They do have a cost of at least ~0,3% per year and are taxed 15%.

First fixed income ETF

Mirae Asset Global Investments has launched the Mirae Asset Renda Fixa Pré Fundo de Índice (FIXA11 BZ) on B3, Brazil’s main stock exchange located in Sao Paulo in 2018. This is the first Brazil based fixed income ETF. The fund tracks the S&P/B3 Fixed Income Index.

iShares

iShares has a number of bond funds available to domestic investors in Brazil. These funds are actively managed, are domiciled in Brazil and have certain restrictions for example for BlackRock Global Bond Income Master FIM IE:

  • Minimum Investment: R $ 1,000,000
  • Minimum Additional Investment: R $ 5,000
  • Minimum Stay Amount: R $ 500,000

The expense ratio is particularly low at 0.065%.

Stocks

Individual stock picking

The main Brazilian index Ibovespa (IBOV) contains only 69 stocks.[4]

In addition 85% of capitalization is made of only 75 stocks.

The small cap index (with the bottom 15%) has only 55 stocks in it. There are a few hundred micro cap stocks that trade very thinly, with less than 1 trade per month and 10-15% spreads.

Two "giga" stocks dominates 30% of the Ibov index - "Petrobras" and "Vale do Rio Doce".

Buying stocks

iShares

iShares has a presence in Brazil and have a small number of products available. These funds are for Latin america or the US equities exclusively. There are 5 ETFs and 8 other funds. All of these products are domiciled in Brazil:

iShares ETFs
  • BOVA11 iShares Ibovespa Fundo de Índice ER 0,30
  • SMAL11 iShares BM&FBOVESPA Small Cap Fundo de Índice ER 0,50
  • IVVB11 iShares S&P 500 FI em Cotas de Fundo de Índice ER 0,23
  • BRAX11 iShares IBrX-Índice Brasil (IBrX-100) Fundo de Índice ER 0,20
  • ECOO11 iShares Índice Carbono Eficiente (ICO2) Brasil Fundo de Índice ER 0,38
iShares funds
  • BLKSTYF BlackRock Style Advantage FIC de FIM IE ER 0,715
  • BLKSTYM BlackRock Style Advantage Master FIM IE ER 0,065
  • BLKDHIF BlackRock Dynamic High Income FIC de FIM IE ER 0,900
  • BLKGBIM BlackRock Global Bond Income Master FIM IE ER 0,065
  • BLKDHIM BlackRock Dynamic High Income Master FIM IE ER 0,065
  • BLKGBIF BlackRock Global Bond Income FIC de FIM IE ER 0,800
  • BLKGEDF BlackRock Global Event Driven FIC de FIM IE ER 0,900
  • BLKGEDM BlackRock Global Event Driven Master FIM IE ER 0,065

The latter iShare funds appear to be actively managed funds with diverse asset classes and relatively high expense ratios.

Vanguard

Vanguard have no presence in Brazil for retail investors.

Alternative strategies are required in order to access a globally diversified portfolio of equities.

Offshore investment location

Some Brazilians open an personal account in Interactive Brokers in order to access global equities.

Alternatively they can incorporate an BVI/Bahamas/Cayman´s company to invest in global markets. The main motivation to open an BVI company is to avoid the onerous "US Estate Tax" whereby investments in US situs assets over $60,000 are subject to a high estate tax. The offshore company has to be declared to the Central Bank using a CBE annual Declaration.

In addition there is the benefit of 0% of capital gains on selling stock shares of ETFs. However should the Brazilian investor decide to repatriate money from the offshore company back to Brazil they will have to pay 27.5% on the offshore company dividends (Brazilian tax), instead of paying 15% on capital gains.


REITS

REITS dividends pay no tax. Current yield (based only on dividends, not total return) on many funds are currently ~8,5% even after a 30% runup last year.

Commodities

Pension system

The Brazilian pension system is structured in three pillars:[5]

  • A public, mandatory, pay-as-you-go system known as general social security regime (RGPS);
  • The Pension Regimes for Government Workers (RPPS);
  • The Private Pension Regime (RPC) - Occupational and Individual plans.

The Brazilian pension system has been subject to a series of ongoing reforms undertaken since the late 1990s. The need for reforms stemmed primarily from an overgenerous pension system that placed heavy pressure on the governmental budget.

Public Pensions

In Brazil, the 1st pillar consists of two schemes. The so-called Regime Geral de Previdência Social (RGPS), the general regime of social security, covers the private-sector workforce. It is financed through payroll taxes (shared by the employer and the employee), revenues from sales taxes and federal transfers that cover shortfalls of the system.

Private-sector employees are entitled to retire with a full pension at age 65 for men and 60 for women if they have a contribution record of at least 15 years. Alternatively, it is possible to retire after having contributed to social security for 35 years for men and 30 years for women, irrespective of the retiree's age.

Public-sector employees are covered by multiple special pension regimes at different governmental levels pooled to the Regimes Próprios de Previdência Social (RPPS). Municipal, federal and state entities manage their own schemes for their employees, but are jointly coordinated by the Ministry of Pensions and Social Assistance. In general, these pension plans are financed on a pay-as-you-go basis with the employee paying a percentage of their salary. The percentage varies depending on the public entity.

Voluntary Pensions Plans

Complementary pensions have a long history in Brazil and the county has the oldest system in Latin America. Under the Regime de Previdência Complementar (RPC), both occupational and personal pensions are provided on a voluntary basis. Two pension vehicles exist that can be used to finance private pension benefits.

Tax treatment of contributions and benefits

In general, contributions to private pension plans are tax-deductible up to certain limits for both the employee and the employer. Pension benefits are taxed as ordinary income.

Investment regulation

Quantitative investment restrictions apply to pension assets as follows:

  • Low credit risk bonds are limited to 80%; this limit decreases with increasing credit risk
  • Listed stocks are limited to 50%
  • Private equity is limited to 20%
  • Real estate was limited to 10%, decreased to 8% in 2009
  • One single company must not exceed 20% of the company's capital, and only up to 5% of the pension fund assets may be invested in any one single company.

Notes


See also

References

External links