Investment Funds (FIP) vs. HOLDINGS – What is the best investment structure?

Currently, Brazilian legislation provides different investment vehicles for the private equity sector. The most common vehicles are the Investment FundsFundo de Investimento em Participações or “FIP”) and holding companiescorporations or limited liability companies). When deciding which vehicle to use one should consider the type and size of the proposed investment.
With regards to the FIP, Brazilian legislation allows it to be funded through public offeringsprovided that certain conditions are met) or through private subscription by one single investor or a small group of investors, whether resident in Brazil or abroad.  In the last semester of 2016, the Brazilian Securities and Exchange CommissionComissão de Valores Mobiliário or “CVM”), published Normative Resolution CVM No. 578, providing flexible rules for investments in start-ups and small and medium sized companies in Brazil, as well as, expanding investment alternatives to be performed by the FIP.
The FIP may also bring fiscal benefits, whether with regards to the tax deferment of the capital gain by a resident in Brazil, or of zero tax rate withholding taxImposto de Renda Retido na Fonte or “IRRF”) over capital gain earned by foreign investors, provided certain requirements are met.
Despite the above, it is worth noting that structuring and maintaining the FIP have high costs, which includes the payment of management fees, fees to CVM, stock exchange and/or CETIPsecurities depository, trading and settlement), in addition to the obligation to hire independent auditors to audit the annual financial statements of the FIP. The estimated cost for the maintenance of the FIPconsidering only fees, accounting and audits) is approximately 2.5% per year of the net worth of the FIP.
On the other hand, a holding company may either be a limited liability company or a corporation, engaged in the purpose of participating in other companies. Differently from the FIP, there is no restriction regarding the type of investoronly qualified and professional investors can invest in FIPs) or, the type and size of the invested company. Furthermore, the holding company,i) if a limited liability company, generally, only has the costs related to registration of its corporate acts with the competent commercial register; orii) if a corporation, generally, has the registration costs and costs of publications of its corporate acts.
The main role of advisors and lawyers is to analyze the specific transaction with regards to type and size of the intended investment, and based on that, determine which vehicle would be more appropriate.
Candido Martins’ team is at your disposal for any further clarifications.