DLA Piper | 4 August 2022
Brazil’s FIAGRO promotes agribusiness: key points about this new form of investment
by Renato Lopes da Rocha
With favorable climate conditions, extensive arable land, and advanced methods of cultivation, Brazil is one of largest food producers in the world.
According to data from the Center for Advanced Studies in Applied Economics (CEPEA), in 2021 Brazil’s agribusiness sector accounted for 27.4 percent of the country’s GDP – the highest rate since 2004.
Now, to reduce agricultural dependency on public subsidies and forge closer ties between the financial and capital markets and the agribusiness sector, Brazil has created an alternative form of investment via Federal Law n° 14,130/2021: Investment Funds in Agro-industrial Production Chains, popularly nicknamed FIAGRO.
What is FIAGRO?
As the Brazilian government notes, “FIAGRO is built on the model of popular real estate investment funds.” It will allow investors “to have agro bonds in their portfolio, similar to what happens today in real estate funds, opening the possibility for small, medium and large investors to operate in the sector, democratizing investment.”
FIAGROs subsidize interest rates for agriculture production by encouraging private investors, insurers, lenders, fintechs and others to structure loans, collateral, investments and tax plans in Brazil’s agricultural sector.
By creating the FIAGRO structure, the Brazilian government is aiming to move financing of agricultural production from public subsidies into private hands. The goal is to encourage broad investment in agriculture. FIAGRO was created to:
• reduce dependence on public subsidies - transitioning to a financing model based on private credit rather than public coffers
• offer a safe and flexible instrument of investment to forge ties between the financial and capital markets and the agribusiness sector, with the goal of increasing the amount of credit and resources flowing to agrobusiness, including to small producers
• attract both domestic and foreign investments to Brazilian agribusiness and
• mitigate the barriers that foreign investors face so they can participate in the land market– in Brazil.
One of the most notable aspects of FIAGRO is that it lifts previous restrictions on land acquisition. Brazilian legislation does not allow aliens to acquire rural lands. FIAGRO, however allows foreign investors to participate in the land market without having property or domain over rural lands. Foreign investors instead may participate indirectly in the land market in Brazil: a fund seeks to become fully authorized to purchase rural properties regularized before agrarian records and the real estate registry, and non-Brazilians may then invest in the fund via fund quotas.
FIAGRO will also foster an agribusiness bond market, as has already happened in the real estate market through the creation of real estate investment funds.
Some features of FIAGRO
Federal Law n° 14,130/2021 will allow investment, via FIAGRO, in:
• rural properties
• participation in entities that are part of an agro-industrial production chain
• financial assets, bonds or securities issued by individuals or entities that are part of an agro-industrial production chain
• agribusiness credit rights and securitization bonds issued backed by agribusiness credit rights
• real estate credit rights related to rural properties and securitization bonds backed by these credit rights and
• quotas of investment funds that applied more than 50 percent of their equity in the assets mentioned above.
FIAGRO is authorized to lease or transfer rural properties that it will acquire. The law also permits different categories of FIAGRO, depending on the nature of the investments.
FIAGRO quotas can be paid with goods and rights.
FIAGRO shall be managed by an institution authorized by the Comissão de Valores Mobiliários (CVM, Brazil’s Securities and Exchange Commission). This institution, exclusively, a multi-purpose bank with an investment portfolio or real estate credit portfolio, an investment bank, real estate credit company, brokerage company, securities distributor company, or other legally equivalent entities.
A fund´s equity shall be constituted by assets and goods acquired, in a fiduciary capacity, by the managing institution.
A FIAGRO that will have its quotas negotiated at a stock exchange market will observe the following regulations established by CVM:
• FIAGROs that will invest in credit rights (FIAGRO-FIDC) – Normative Instruction CVM n° 356/2001
• FIAGROs that will invest in real estate assets (FIAGRO-FII) – Normative Instruction CVM n° 472/2008
• FIAGROs that will invest in corporate participation (FIAGRO-FIP) – Normative Instruction CVM n° 578/2016.
The tax regime
The tax regime for FIAGROs is highly similar to those for real estate investment funds.
Income and capital gains obtained by a FIAGRO are exempt from tax on financial operations and corporate income tax. When such earnings are distributed by a FIAGRO, however, they are subject to withholding income tax at the rate of 20 percent.
It is worth mentioning that income and capital gains obtained in fixed or variable financial investments are subject to withholding income tax, with a regressive levy of rates according to the maturity of the investment, as described in the following table:
22.5% Investments with a deadline up to 180 days
20% Investments with deadline as of 181 days up to 360 days
17.5% Investments with deadline as of 361 days up to 720 days
15% Investments with deadline superior to 720 days
However, in order to preserve the rationale behind the creation of FIAGRO, withholding income tax shall not be levied over the remuneration arising from Agribusiness Certificates of Deposit, Agribusiness Warrants, Certificates of Agrobusiness Credit Rights, Agribusiness Credit Bills, Agribusiness Credit Receivable Certificates and Rural Product Notes.
There is a specific exemption of individual income tax (withheld and annual income tax return) regarding earnings distributed by a FIAGRO if its quotas are negotiated before over-the-counter markets and it is compounded by at least 50 quota holders. Nevertheless, the exemption shall not be applied regarding individual quota holders who holds more than 10 percent of a fund quota or whose quotas guarantee the equivalent of 10 percent or more of the income earned by the fund.
Capital gains derived from buyback quotas shall be subject to withholding income tax at the rate of 20 percent. Divestment of fund quotas shall be taxed as capital gains obtained in variable financial investments.