The infrastructure dilemma
The requirement for infrastructure investment in Brazil is pressing, especially in the country's transport sector. Massive geographical challenges have often led to major regional differences and - in some cases - the under-development of key assets such as the rail network. What's more, Brazil is to host the football World Cup in 2014 and the Olympic Games in 2016, both of which will require major investment in the country's infrastructure. It has been estimated that Rio de Janeiro alone needs USD36 billion of investment, just to prepare for these two events.
To help resolve the dilemma, the new government of President Dilma Rousseff is beginning to reverse traditional Brazilian opposition to private infrastructure investment and a number of public-private agreements are being developed. Also, a series of measures have been designed to attract foreign investment into the corporate bond market.
Incentives for foreign investments
Brazil offers a number of fiscal incentives for inward investment in private equity funds (Fundos de Investimento em Participações - FIPs), most of which apply to infrastructure investments. Two of the most significant aspects for overseas investors in FIPs are that income and capital gains received by the funds are usually not subject to taxation in Brazil, and that there is no withholding tax on disposal of FIP quotas for non-residents (as long as they are not located in a low tax jurisdiction and each investor has no more than 40 percent of participation in the fund).
And while a new Provisional Measure (517/2010) was enacted to grant specific tax incentives on infrastructure investments made by Brazilian individuals and entities, non-residents may benefit from a zero-rated withholding income tax on income received from investment funds with at least 85 percent of their equity invested in debentures issued by entities involved in infrastructure projects.
Furthermore, a special tax regime (Regime Especial de Incentivo para o Desenvolvimento da Infraestrutura - REIDI) was specifically created to stimulate investment in infrastructure. REIDI grants a suspension of the social contributions for entities involved in infrastructure projects in a number of sectors including transportation, ports, energy, sanitation, irrigation and the construction of ducts.
Continued growth, continued investment
The IMF recently stated that Brazil had recovered from the global crisis sooner and faster than most other economies, and endorsed the government's development strategy, with its emphasis on increasing investment, both public and private, especially in infrastructure projects.
Actually, Brazil had already registered a full year of strong growth in 2010: the economy grew at 7.5 percent, largely on the strength of domestic demand. And now with a range of investment incentives available, Brazil should be able to ensure that foreign investment plays an increasingly significant role in improving the country's infrastructure.