Brazil introduces new tax-exempt funding mechanism for development banks

The Brazilian government has introduced a new funding mechanism for development banks such as BNDES.

Loans under the mechanism, called development credit letters (LCD), can be issued by development banks to finance infrastructure, industry and innovation projects, as well as initiatives aimed at micro, small and medium-sized enterprises.  

Congress gave approval for the mechanism earlier this year and it now goes into force after the publication of the government's authorization in the official gazette. 

The objective is to guarantee funds for long-term financing of the country's economic development, with tax benefits for investors, who will have a 15% tax break when they acquire this paper. 

Brazil already has funding mechanisms for the agriculture sector via LCA bonds and real estate with LCI bonds.

With the change, development banks like BNDES, Minas Gerais state bank BDMG, Espírito Santo’s BANDES and BRDE, focused on the country’s south, will be able to raise up to 10 billion reais (US$1.78bn) per year via issues of LCD.

"Currently, one of the main challenges for long-term projects is high interest rates. With funding like LCD, which has tax exemptions for investors, development banks can raise resources from investors with better conditions, giving financing at lower interest rates to companies and investors interested in long-term projects," Alberto Sogayar, a lawyer specialized in infrastructure contracts and partner at law firm Sogayar e Alcântara Advogados, told BNamericas. 

According to BNDES' calculations, with the new funding, the bank will be able to reduce the interest rates of its loans by up to 1% per year. 

“This brings predictability to business, as the investor will know on the auction date what interest rate they can contract in the future, depending on the bank’s regulations," said Natália Marcassa, CEO of local infrastructure association, MoveInfra, underlining that the new funding mechanism will likely attract more participants to tenders in the future.