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Companies that provide certain types of IT goods or services to the Brazilian market are granted tax benefits under Federal Law 8,248/91 when they prove they invest a minimum of 5% of their annual revenue in R&D activities.

The Brazilian government regularly publishes a list of the eligible goods and services, which includes electronic components, semiconductors, digital devices and software. Domestic production is mandatory.

In some cases, the tax benefits provided by Law 8,248/91 (also known as “Lei de Informática” – the IT Act) can mean a reduction of as much as 95% of the Excise Tax (Imposto sobre Produtos Industrializados – IPI).

More recently, the Brazilian Congress passed Federal Law 13,674/2018, which introduced certain changes to the IT Act, in order to allow that a portion of 2.7% of the overall 5.0% R&D investment required be made via Investment Funds – Fundos de Investimento em Participações (FIPs) that invest in technology companies.

A FIP is a closed-end fund that is intended for the acquisition of shares, securities and any other bonds or notes that are convertible into shares of either publicly-traded or closely-held companies.

On November 13, the Brazilian government issued Ordinance 5,894, which establishes certain conditions for R&D investments through FIPs so that companies can benefit from the tax breaks provided by the IT Act. The conditions required include, among others:

• The FIP must be registered with the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM)
• The FIP’s investments must last for a maximum period of 6 years.
• The FIP must qualify as an “investment entity” for the purposes of CVM Ordinance 579/16.
• The FIP must invest solely in technology companies, and this must be specified in the FIP’s bylaws.
• For the purposes of the IT Act, “technology companies” means companies incorporated in Brazil that can develop innovative goods, processes, business models or services to which communications and information technologies contribute the highest portion of the added value. Yearly revenues must be capped at BRL 16 million and the technology-based companies cannot pay out more than 25% of profits during the capitalization period.
• The FIP’s shares cannot be traded on the secondary market;
• The FIP’s management must ensure that its investment activities are restricted to the purposes described in the portfolio

This measure is extremely helpful for the entire innovation ecosystem, especially because it could encourage investments in startups.