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Brazilian SEC decision admits distribution of dividends by Real Estate Investment Funds conditioned upon assessment of accounting profit

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In December 2021, a decision issued by the Brazilian Securities and Exchange Commission (“CVM”) regarding the distribution of dividends by Real Estate Investment Funds (“FIIs”) caused a stir in the market.

Law no. 8.668/1993, which addressed FIIs specifically, establishes that the funds must distribute, at least, 95% of their profits biannually, assessed according to a cash basis.

However, as with corporations, under the terms of CVM Instruction 516/2011, FIIs are subject to the preparation of financial statements observing the accrual basis.

Starting with such premises, through Official Notice/CVM/SIN/SNC/no. 01/2014, CVM understood that expenses incurred on the accrual basis, unless effectively paid (without cash realization), could only be included in values distributed by the trust when effectively paid.

In other words, for the purpose of distribution of dividends, the starting point of a real estate investment fund should be the accounting profit assessed on the accrual basis in a certain period (profit or loss) and make an adjustment, reflecting the revenues and expenses recorded, but not yet received or paid – in the same period. The result of such an operation became known as “funds from operation” (FFO).

However, at the end of December 2021, CVM examined the case of FII MRXF11 and understood that the distribution of dividends would only be possible if the accounting profit had been assessed.

Thus, in the absence of the accounting profit, the distribution of earnings would be seen as a refund of capital to shareholders, representing a share amortization event.

Such a decision could affect other FIIs and, particularly, the investor, who is used to receiving income from real estate funds on a monthly basis, currently exempt from income tax.

Furthermore, past distributions carried out, if deemed by the Brazilian Federal Revenue Service as share amortization, may generate a tax liability to investors, since the dividends received without taxation so far would be given a new characterization subject to taxation of 20%.

On an explanatory note, CVM commented on the possibility of the MXFR11 fund distributing dividends to shareholders in amounts higher than the accounting profit. For this purpose, SEC affirmed it was possible, stressing that the amount exceeding the accounting profit should be treated as share amortization or capital refund.

Written by Camila Cabral, Senior Tax Consultant at Drummond Advisors