New ESG sectors eligible for market funding with tax incentives

On April 25, 2023, the Executive Branch published Decree No. 11,498 (“New Decree”), changing Decree No. 8,874, of October 11, 2016, which regulates the fundraising, with tax incentives, through securities issued as per Law No. 12,431, of June 24, 2011.

The last amendment to Decree 8,874 occurred in 2020, aiming to stimulate investments in infrastructure projects with important environmental and social benefits, as analyzed in our Client Alert published in June, 2020.

The New Decree includes the following sectors in the priority category:

• education;
• healthcare;
• public security and prison system;
• urban parks and conservation facilities;
• cultural and sports facilities; and
• social housing and urban renewal (“New Sectors”).

The New Sectors refer to the ESG agenda (especially environmental and social aspects), and join the areas of logistics and transport, urban mobility, energy, telecommunications, broadcasting, basic sanitation and irrigation, which were already listed as priority sectors.

Additionally, the Ministry of Treasury can now define the maximum annual amount, for one or more sectors, for the issuance of the securities referred to in Article 2 of Law 12,431, which have tax benefits for investors, including a zero rate on the income tax earned by individuals.

MAIN CHANGES AND DIFFERENCES FROM THE PREVIOUS DECREE

The New Sectors are also part of the definition related to fostering environmental or social benefits.

Since 2020, this definition allows the adoption, by the ministry in charge, of a simplified procedure for the priority project approval. However, this simplification has not been regulated until the date of this material and, considering the New Sectors, considering the ESG agenda, a new regulation is expected for such purpose.

Unlike the provisions thus far provided in Decree 8,874 for priority projects, the New Decree establishes that, for projects developed in the New Sectors, the amount raised through the issuance of securities, as referred to in Article 2 of Law 12,431, is limited to the capital expenditure outlined for the project, excluding financial expenses. In addition, the tax benefit provided for in said article of Law 12,431 will only apply to debentures and receivables certificates related to the New Sectors that are issued from January 1, 2024. The issuance of quotas by receivables investment funds were not considered in such new time limit established in Decree 8,874.

REGULATION

The Ministries responsible for the New Sectors shall issue new regulation to address the requirements for the approval of the project as a priority and its process for monitoring and implementation, including the adoption of a simplified procedure for the approval of sectors with relevant social and environmental benefits.

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Click here to access the full text of Decree 8,874, including its amendments by the New Decree.

Our Capital Markets, Infrastructure and Project Finance, and Tax teams are available to provide any further clarifications related to transaction structuring, regulation, and fundraising.