Infrastructure Financing: New Options and Incentives for Financing in Brazil

New Law No. 14,801/2024 creates infrastructure debentures, changes rules for incentivized debentures and investment funds in the sector, including tax guidelines, and promotes incentives for raising funds through the issuance of debt securities abroad (bonds).

A country's economic development is directly tied to investment in sectors with the greatest impact on productivity, such as infrastructure, innovation, and technology. This advance is also influenced by government incentives, the reduction of interest rates on specific credit lines, and the diversity of financing available to the private sector.

With the goal of establishing an environment conducive to economic growth, Law No. 14,801, of January 9, 2024, as amended ("Law 14,801"), sanctioned on January 10, 2024, brings a series of innovations in fundraising instruments in the infrastructure sector. This rule introduced several important changes, highlighting the creation of "infrastructure debentures" and "incentivized bonds," as well as changes in the legal and tax regime of incentivized debentures and investment funds in the sector. Below, we detail the main changes introduced by Law 14,801:

Financing instruments specific to the infrastructure sector covered by the new Law.

I. Infrastructure debentures – new financing option created by Law 14,801

A. What are infrastructure debentures?

First, it is important to highlight that infrastructure debentures do not replace incentivized debentures, which have existed since the advent of Law No. 12,431, of June 24, 2011, as amended ("Law 12,431"), which we discuss below, with an emphasis on the innovations in the new law. On the contrary, they represent a new type of financing aimed at the infrastructure sector.

As established by Law 14,801, infrastructure debentures are debt securities which may be issued by special purpose companies, concessionaires, permittees, authorizers, or lessees, which take the form of a corporation and which are subject to public distribution. In addition, infrastructure debentures may be issued by direct or indirect parent companies of the entities mentioned above, if they are incorporated as a corporation, and if the funds raised by their issuance are intended for projects considered a priority, observing the limits and conditions established by the relevant federal authority.

The funds raised through the issuance of such debentures must be directed toward the implementation of investment projects in infrastructure, or intensive economic production in research, development, and innovation sectors, considered a priority according to the regulations established by the relevant federal authority.

To be classified as "infrastructure debentures" and to be able to benefit from the tax benefits described below, such securities must:

• Be issued between January 10, 2024 and December 31, 2030;
• Have a pre-fixed interest rate, linked to a price index or to the Reference Rate – TR (Taxa Referencial), provided that the total or partial agreement of a post-fixed interest rate is prohibited;
• Have a weighted average maturity exceeding four years;
• Include a provision prohibiting the issuer or their related parties from repurchasing the bonds within the first two years of issuance, and from early settlement through redemption or prepayment, except as regulated by the Brazilian National Monetary Council;
• Have a periodic income payment schedule, if applicable, with intervals of no less than 180 days;
• Provide evidence that the security is registered in a registration system duly authorized by the Central Bank of Brazil or the Brazilian Securities Commission, within their respective areas of competence; and
• Undergo a simplified procedure demonstrating a commitment to allocate the funds raised towards future payments or reimbursement of expenses, costs, or debts related to the investment projects.

B. Main characteristics of the new infrastructure debentures defined in Law 14,801

• Simplified framing rules: The relevant federal authority must regulate the criteria for classifying projects as priorities, in order to enable their holder or controller to issue infrastructure debentures. Despite this, Law 14,801—along with the discussions leading up to it—has already signaled a general rule: the waiver of the requirement for prior and formal ministerial approval for projects within priority sectors, to be detailed in future regulations. Moreover, a streamlined process may be introduced for securing prior approval for projects involving public services owned by subnational entities (States, Federal Districts, and Municipalities).

The criteria for classifying projects as priorities are (i) sectors with a high demand for investment in infrastructure; or (ii) projects with an inductive effect on local or regional economic development.

This regulation will be subject to biennial publication on the 31st day of the year preceding its intended period of enforcement. This periodic update mechanism aims for greater agility in identifying strategic sectors for the country, facilitating the analysis and inclusion of new areas or technological solutions, as well as endorsing projects and initiatives that yield noteworthy environmental or social benefits.

The first regulation is expected to be published within 30 days of the enactment of Law 14,801.

• Allocation of resources and deadline for reimbursement of expenses or debts that can be repaid: The funds raised through the new debentures must be earmarked for the forthcoming payments or reimbursement of expenses, costs, or debts associated with the investment projects. Any eligible expenses, costs, or debts for repayment should have arisen within a maximum period of 60 months from the closing date of the offering, subject to staggering during the transition period:

• Tax benefit for the issuer: The tax benefit structure outlined for new debentures is oriented towards the issuer, differing from the incentivized debenture model, whose tax incentive is oriented towards the debenture holder/investor. Under the framework for infrastructure debentures, the issuer can deduct an additional 30% of the interest paid to their holders from the Corporate Income Tax (Imposto de Renda da Pessoa Jurídica - IRPJ) and Social Contribution on Net Profits (Contribuição Social sobre o Lucro Líquido - CSLL).

As a general rule, income earned by investors through infrastructure debentures will be subject to regular income tax rates applicable to fixed income, ranging from 22.5% to 15%, depending on the investment duration (with exceptions for certain investment funds, both public and private).

• Exchange rate variation: Law 14,801 authorizes the issuance of infrastructure debentures with an exchange rate variation clause, subject to approval by the relevant federal authority. This provision aims to make the instrument more attractive to foreign investors.
• Prohibition on acquisition: Infrastructure debentures are restricted from being acquired by individuals affiliated with the issuer, including residents or domiciled individuals abroad.¹ However, these acquisitions of these debentures by an affiliated legal entity, residing or domiciled abroad, may be authorized through an act of the relevant federal authority. Such authorization would be subject to specific conditions tied to the issuance and placement of associated securities abroad, commonly referred to as "securitization for internalization of resources," aimed at securing foreign funding.

C. What are the next steps?

As outlined, several aspects of infrastructure debentures are contingent on regulations to be promulgated by the relevant federal authorities before they can be fully operational. This encompasses, for instance, the criteria delineating incentivized projects and the specification of priority sectors. According to Law 14,801, these regulations must be published within 30 days of the enactment of the law, and subsequently reissued every two years by the 31st day of the preceding year to the intended enforcement period. This recurring process is particularly focused on incorporating sectors necessitating investment for reasons of public order.

Furthermore, the issuance of infrastructure debentures featuring an exchange rate variation clause and the acquisition of these securities by an affiliated legal entity, residing, or domiciled abroad, require authorization through an act of the relevant federal authority. This approval is contingent upon specific conditions, and is intricately tied to the issuance and placement abroad of securities linked to these debentures.

II. Incentivized “bonds”

Debt securities issued abroad—commonly referred to as bonds—have long been a significant avenue for financing Brazilian companies, particularly those in sectors with a substantial portion of their revenues denominated by foreign currency.

While the issuance of bonds itself was not a novel concept under the new law, the noteworthy innovation lies in the development of tax incentives aimed at attracting foreign capital to investment projects in the infrastructure sector, as outlined in Article 2 of Law 12,431. In essence, just as Law 12,431 utilized the traditional instrument of debentures and introduced new mechanisms through incentivized debentures for infrastructure investment, Law 14,801 introduced the option of using incentivized bonds to finance the sector through debt securities abroad, complete with its own set of rules and requirements to be adhered to by the issuer and incorporated into funding documents.

Through the amendment of Article 1 of Law No. 9,481, dated August 13, 1997, Law 14,801 establishes a zero rate of Withholding Income Tax (“WIT”) (Imposto de Renda Retido na Fonte - IRRF) on interest derived from foreign loans obtained through the issuance of securities in the international market. This applies to special purpose companies, as well as to concessionaires, permittees, authorizers, or lessees incorporated in the form of a corporation, along with their controlling companies.

Exceptions to this rule exist, the first being applicable to beneficiaries residing or domiciled in countries with preferential taxation, as per Articles 24 and 24-A of Law No. 9,430, dated December 27, 1996 ("Law 9,430"). In such cases, a rate of 25% will apply. The second exception pertains to interest paid or credited by sources located in Brazil to individuals or legal entities related under the terms of Article 23 of Law 9,430, residing or domiciled abroad, even if not incorporated in countries with preferential taxation, at a rate of 30%

III. Innovations for Incentivized Debentures (Law 12,431)

The term incentivized debentures refers to debt securities issued by concessionaires, licensees, authorizers, or lessees, organized in the form of a corporation, in accordance with Law 12,431. These debentures are designed to secure funding for the implementation of priority projects in the fields of infrastructure or activities requiring intensive economic production in research, development, and innovation, as stipulated by regulations from the relevant federal authority. Additionally, the parent companies of these entities are eligible to issue incentivized debentures, provided they are incorporated.

To qualify as incentivized debentures and reap the tax benefits, these securities must:

• Be issued between the date of publication of Law 12,431 and December 31, 2030;
• Have a pre-fixed interest rate, linked to a price index or to the Reference Rate – TR (Taxa Referencial), provided that the total or partial agreement of a post-fixed interest rate is prohibited;
• Have a weighted average maturity exceeding four years;
• Include a provision prohibiting the issuer or their related parties from repurchasing the bonds within the first two years of issuance, and from early settlement through redemption or prepayment, except as regulated by the Brazilian National Monetary Council;
• Have a periodic income payment schedule, if applicable, with intervals of no less than 180 days;
• Provide evidence that the security is registered in a registration system duly authorized by the Central Bank of Brazil or the Brazilian Securities Commission, within their respective areas of competence; and
• Undergo a simplified procedure demonstrating a commitment to allocate the funds raised towards future payments or reimbursement of expenses, costs, or debts related to the investment projects.

A. What are the tax benefits of incentivized debentures?

One significant advantage associated with incentivized debentures is the exemption or reduction of income tax on the interest derived from such securities. The income generated by investors is subject to WIT, with the following rates exclusively applied at the source:

• 0% for individuals residing in Brazil.
• 15% for legal entities domiciled in Brazil, taxed based on real, presumed, or arbitrated profit, legal entities exempt from or opting for the Special Unified Regime for the Collection of Taxes and Contributions due by Micro and Small Enterprises (Simples Nacional).
• 0% for beneficiaries residing or domiciled abroad, except in a country that does not tax income or that taxes it at a maximum rate of lower than 20%.

This taxation regime extends to fixed income financial investments held by a financial institution, encompassing insurance, leasing, pension and capitalization companies, securities, securities and foreign exchange brokerage firms, and securities distribution entities.

Income subject to exclusive taxation at the source may be excluded from the calculation of actual profit. It's important to note that losses resulting from transactions with the assets mentioned in this Legal Update, when conducted by a legal entity taxed on the basis of actual profit, are not eligible for deduction in the calculation of actual profit.

B. What changes do Law 14,801/23 bring to incentivized debentures?

Law 14,801 introduced some significant changes to incentivized debentures, aiming to streamline the issuance of these securities. Some of the key differences are:

• Deadline for reimbursement of expenses or debts subject to reimbursement: Previously, it was stipulated that such expenses or debts must have been incurred within 24 months following the closing date of the public offering. With the enactment of Law 14,801, this period has been extended to 60 months, aligning with the transition period specified above for infrastructure debentures.
• Need for prior ministerial approval: Initially, all projects required prior approval from the relevant Ministries to be recognized as a priority, thus permitting the issuance of incentivized debentures.

With the enactment of Law 14,801, to facilitate fundraising for the infrastructure sector in the country, paragraph 9 of Article 2 of Law 12,431 was amended, incorporating simplified and more efficient procedures for new infrastructure debentures. These include (i) the exemption from prior ministerial approval for specific projects in priority sectors, subject to regulations to be established by the relevant federal authority; and (ii) the implementation of a simplified prior approval procedure through specific regulation by the competent ministry, particularly for sectors involving public services under the ownership of subnational entities, such as the sanitation sector.

Given the existing regulatory framework for incentivized debentures, encompassing decrees, ministerial ordinances, and specific instructions, as well as ongoing requests for framework adjustments, close monitoring of practical adoption becomes essential. This will help measure how innovations are implemented and whether differences emerge—either subtle or significant—across various sectors, or in the applicable requirements for incentivized and infrastructure debentures.

IV. Infrastructure financing and sustainable development

With the enactment of Law 14,801, both incentivized debentures and infrastructure debentures, dedicated exclusively to investment projects with significant environmental or social benefits, must adhere to a streamlined processing procedure. Projects offering substantial environmental or social benefits will receive priority analysis compared to those that do not.

Furthermore, such projects must undergo a specific external evaluation for this type of issuance. They are required to implement a monitoring method for the project stages, relying on self-declared data by the project holder and periodic reports submitted to the relevant sectoral ministries.

These measures exemplify the government's commitment to sustainable development, aligning with the growing global interest from impact investors and the expanding thematic bond markets. Moreover, they aim to provide heightened legal certainty and prevent the deceptive practice of "greenwashing" in these transactions.

V. Investment Funds

A. What are the types of investment funds covered by the amendments to Law No. 14,801?

The types of investment funds impacted by the changes brought about by Law No. 14,801, which play a major role in the infrastructure sector, are: (i) Infrastructure Equity Investment Funds (Fundo de Investimento em Participações em Infraestrutura) ("FIP-IE"); (ii) Investment Funds for Research, Development and Innovation-Intensive Economic Production (Fundo de Investimento em Participações na Produção Econômica Intensiva em Pesquisa, Desenvolvimento e Inovação) ("FIP-PD&I"); (iii) Infrastructure Incentive Investment Funds (Fundo Incentivado de Investimento em Infraestrutura) ("FI-Infra") and (iv) Infrastructure Credit Rights Investment Funds (Fundo de Investimento em Direitos Creditórios em Infraestrutura) ("FIDC-Infra").

B. What changes brought by Law 14,801 apply to such funds?

Law 14,801 introduced some significant changes to the funds highlighted above:

• Minimum limit for allocation to infrastructure assets: The amendment to Law 12,431 implemented by Law 14,801 redefines the allocation criteria for FI-Infra and FIDC-Infra. It stipulates that at least 85% of their reference value must be allocated to assets issued under Article 2 of Law 12,431 (no longer 85% of their equity). The reference value is now defined as the lowest value between the fund's net equity and the average net equity in the 180 days prior to the calculation.
• Expansion of the concept of "new projects" to FIP-IE and FIP-PD&I: Law 14,801 expands the concept of "new projects" to FIP-IE and FIP-PD&I. In addition to projects implemented as of May 30, 2007, and the expansion of existing projects, either implemented or in development (provided that investments and expansion results are segregated through the incorporation of a specific purpose), projects implemented by a special-purpose company already established by virtue of the execution of a concession, lease, or authorization agreement with a public entity may be considered. This provides greater flexibility to invest in ongoing projects without the need to set up a new SPV.
• Extension of deadlines: Deadlines have been significantly extended for FIP-IEs and FIP-PD&Is. The period to start the activity was increased from 180 days to 360 days, allowing for a more careful and strategic preparation for the start of operations. Additionally, the deadline for compliance with the minimum level of investment required by law extended from 12 months to 24. This extension provides funds with a more open and viable window to meet requirements, allowing for a more efficient management of the investment process.

C. What are the tax benefits of such funds?

The primary advantage of these funds (FIP-IE, FIP-PD&I, FI-Infra, and FIDC-Infra) is their explicit exclusion from the periodic taxation regime (“come-quotas”) established by Law No. 14,754/2023 (subject to specific requirements). Consequently, taxation occurs solely at the time of distribution to the quota holder and various scenarios of non-taxation may apply, contingent on the characteristics of the quota holder.

Conclusion: What to expect?

The incorporation of these legislative innovations not only addresses the demands of the current economic landscape, but envisions a more dynamic and resilient future for financing infrastructure, innovation, and technology projects, while aiming to actively draw increased foreign investment to the country.

With the advent of infrastructure debentures and incentivized bonds— both central figures in the new law—companies now benefit from a more diverse array of options to fund infrastructure investment projects. These options come with complementary mechanisms and a broader toolkit to attract foreign investments.

Each framework possesses distinct characteristics that make it more suitable in specific situations. For instance, infrastructure debentures shine when the investors are pension funds or investment funds which do not qualify for the tax incentive associated with incentivized debentures, as they are exempt from income tax. This underscores the importance of adopting a strategic approach in selecting the financial instrument that best aligns with each investor's requirements and tax profile.

The tax benefits delineated and reinforced by the new law underscore the country's dual commitment to expanding investments in infrastructure and drawing in private investments, both domestic and foreign, to fortify the sector.

¹ For the purposes of Law 14,801, "persons related to the issuer" shall be considered as follows: (i) individuals who are (a) direct or indirect controllers, shareholders holding more than 10% of voting shares, or administrators of the issuer; (b) spouses or partners of individuals mentioned in item "(a)" above; and (c) second-degree relatives, including by affinity, of individuals mentioned in item "(a)" above; (ii) legal entities that are its controllers, controlled, or affiliated entities, as defined by Law No. 6,404, dated December 15, 1976; and (iii) funds in which any of the individuals or legal entities mentioned in items "(i)" and "(ii)" above are investors holding more than 10% of their respective quotas.