Private Equity Funds - FIP

2.1 General Aspects

The FIP is defined as closed-end fund allowed to invest in stocks, debentures, subscription bonds and other securities
issued by publicly or private-held corporations which are convertible in stock of these corporations, provided that the FIP
exercises a certain level of authority over the invested companies (in general, that would qualify as control).

Following the above restrictions, it would not be possible for the FIP to invest directly in real estate (as long such assets
are contributed into an entity), in other funds (such as FII) or in any companies other than corporations (such as Ltda., for
example).

FIP is subject to previous registration with the Brazilian Securities and Exchange Commission (CVM) and to the
regulations enacted by the CVM and tax legislation.

Quotaholders in the FIP may be individuals or legal entities that are resident or domiciled in Brazil or abroad. It is possible
for FIP to have a single quota holder, as long as it qualifies as a qualified investor (minimum investment of R$100,000);

Quotas may be traded on the secondary markets.

There is not a formal or minimum time requirement for incorporation of a FIP. Based on discussions held with other
specialists the time frame for creation and implementation of a FIP usually may vary between 3 to 6 months.

In the next table we outlined some requirements as provided for in Corporate Legislation, basically Brazilian CVM
requirements and tax directives applicable to FIPs.

Private Equity Funds - FIP

2.1 General Aspects
Subject

CVM

Tax Legislation

FIPs
Portfolio

90% of their net worth in stocks, corporate bonds,

warrants, and other convertible bonds and
convertible securities (convertible into companys
common stocks), issued by target companies
(publicly or privately held Brazilian businesses).

67% of FIPs portfolio is represented by

Brazilian stock (S.A.) and/or government bonds.
Follow CVMs regulation.

Forbidden
Investments

Derivative instruments, except the hedge ones;

Loan transactions, except the ones regulated by
CVM;
Its also forbidden to invest abroad, on acquisition of
real state, and on acquisition of stocks of its own
issue.

Tax legislation does not have any specific

comments on this matter.
As a general rule the tax legislation indicated
that the FIP must comply with CVMs
regulation.

Time limit to
regularize FIP
s portfolio
requirements

The FIPs bylaw must prescribe the term to

regularize the minimum investment of 90%. The
term can not exceed 2 months.
Exceeding 2 months the fund has another 10 days
to get to the 90% minimum requirement or cash out
the amounts that exceed the minimum from the last
capitalizations and return than to the investors.

Tax legislation does not have any specific

comments on this matter.
As a general rule the tax legislation indicated
that the FIP must comply with CVMs
regulation.

Penalties

Law #6.385/76 CVM can apply depending on the

violation: warning; fine; suspension or cancellation
of the CVM register; temporary ban on FIP
activities, among others.

In case FIP does not follow the dispositions

provided by law 11.312/06 and the CVM rules,
the regressive rates of 22,5% to 15% will apply
to investors results.

Private Equity Funds - FIP

2.2 Taxation / Foreign Investors

FIP level

As a general rule, income and net gains earned by FIP in cases of sale, liquidation, redemption, transfer or refinancing of
securities, financial investments and securities held in FIPs investment portfolio are exempt from Income Tax (IRPJ) and
Social Contribution (CSLL), as well as for PIS/ COFINS (taxes levied upon gross revenues).

Investors Level (see table in the slide 19)

Income received by foreign investors from FIP are generally subject to the Withholding Income Tax (IRRF) rate of 15%.
Same may applies to capital gains received by foreign investors in case of sale of the FIP shares.

Law 11,312/06 created a preferential tax regime for foreign investors in a FIP, reducing to zero the rate of the withholding of
income tax levied on earnings and income distributed by the FIP to its foreign investors following the provisions of Monetary
Council Ruling # 2,689 (portfolio investment), as well as on the capital gains arising from the sale of the FIP quota by
foreign investors, when sale is performed on the stock exchange. If not in stock exchange, a redemption of FIP quotas
would be preferable to a sale, as it would be treated as income distributed by the FIP, thus subject to 0% withholding
income tax.

Law 11,312/06 imposes three conditions that must be cumulatively met in order for the FIP to be entitled to this tax benefit:

(a) No single quotaholder may hold, individually or with related parties, more than 40% of the quotas in the FIP,
entitled, individually or with related parties, to more than 40% of the earnings, income and gains of the FIP;

or be

Private Equity Funds - FIP

2.2 Taxation / Foreign Investors (cont.)

(b)

The FIP may not hold, at any time, more than 5%, of its net worth in debt instruments of any nature, except for

convertible bonds or government issued bonds; and

(c) The tax benefit is not available to investors that are resident or domiciled in tax haven jurisdictions.

If the mentioned requirements are not met, income distributed by FIP will be subject to 15% withholding tax rate, if the FIP
observes the requirements and rules outlined by CVM and, 67% of FIPs portfolio is represented by Brazilian stock (SA)
and/or government bonds.

In case FIP does not follow the dispositions provided by law 11.312/06 and the CVM rules, the regressive rates of 22.5% to
15% rate will apply to investors fixed income funds distributed by the FIP (depending on the period of investment from
180 to 720 days)

IOF at zero rate on currency exchange for the FIP capitalization, and the remittance of dividends or interest in net equity to
foreign investors.

Dividends paid from SA companies or FIPs to non-residents are exempt of withholding income tax.

Private Equity Funds - FIP

2.2 Taxation / Foreign Investors (cont.)

If all CVM and tax legislation requirements listed in the slides 15 and 16 are met, taxation will be as follows:
Investor

Sale performed
on the stock
exchange (net
revenue)

Sale not performed

on the stock
exchange (capital
gain)

Income earned
by investors

Dividends

Interest on
Net Equity

Brazilian
Residents Individuals

15%

15%

15% (w/h)

0%

15% (w/h)

Brazilian
Residents Lucro
Real

34%

34%

34% [-15% (w/h)]

0%

34% [-15% (w/h)]

Brazilian
Residents Lucro
Presumido

34%

34%

34% [-15% (w/h)]

0%

34% [-15% (w/h)]

Non-Residents
(Special Regime
CMN n 2.689/00)

0%

15% (w/h)*

0%

0%

15% (w/h)

15% (w/h)

15% (w/h)

15% (w/h)

0%

15% (w/h)

Non-Residents

(*) Or 20% if investor is located in a tax haven. There is a potential change in the legislation providing 0% rate for capital gain
to non-residents under CMN #2.689 special regime. The exemption do not apply to non-residents in tax-haven.
5

Private Equity Funds - FIP Estrutura Atual

Holding
EUA
Brazil

Holding

Operational
Entity I

Operational
Entity II

Operational
Entity III ()

Private Equity Funds FIP Sugesto de Estrutura

Holding
EUA
Brazil

Text
FIP

Operational
Entity I

Operational
Entity II

Operational
Entity III
()

Private Equity Funds - FIP

Utilization of FIPs & Main Goals of the Reorganization

Reorganization
Goals

Comments

Allow for a More

Efficient Tax Exit
Strategy

Simplified Cash Flow

Structure & Reduction
Related Costs

Disposal of FIP quotas by

foreign investor is generally
subject to withholding
income tax at 15% rate (if
one shareholder holds 40%
or more quotas; otherwise
w/h is 0%). Redemption of
quotas may allow for 0%
rate. Sale of quotas in
stock exchange market will
allow for 0% rate also.

It is possible for the FIP to

sell shares and then
reinvest the proceeds from
the sale, without triggering
taxable capital gains.

Sale of portfolio shares will

not be taxed at FIP level.

There is no need to
repatriate the funds before
quotas are redeemed,
subject to the CVM 90%
asset test.
Possibility that entities pay
dividends directly to foreign
investor payment tax
exempt in Brazil (ex
dividendo FIP) - even in
case Group owns 100% of
FIP.

Flexibility to Bring in
New Partners
FIP may issue new quotas
or go public.
It is also possible to set up
a FIP with special classes
of quotas, limiting these
new quota holders rights.
The maximum 40%
interest shareholding shall
limit ability of one investor
to buy out other partner
that want to leave structure
(if the FIP distributions
benefits from 0% taxation).

Structure
Efficiency
8
8