Economic Information


Tax Incentives Available in the State of Espírito Santo State

Until recently, corporate taxpayers could exercise Collectable Income Tax options, investing part of their taxes due in this regional fund, which generated part of the Fund’s resources. Through this tax option, corporate taxpayers became investors in the fund. FUNRES, in turn, invests these resources into the subscription of debentures convertible into shares, issued by companies which have projects approved by GERES - The Executive Group for Espírito Santo Economic Recovery. The features of such debentures are regulated by law.

Procurement operations issuing debentures on the private financial market have been widely used in Brazil in recent years. In general, the costs and terms of such resources are supported by long term maturation projects. Companies established in ES State could deduct up to 5% of their due ICMS (Value-Added Sales Tax) and up to 25% of their IR (Income Tax) in favor of FUNRES, receiving investment certificates that allow them to buy Fund Shares through auctions that are periodically carried out through a regional Stock Exchange.

FUNRES uses its resources in projects considered important for the development of the State economy, financing up to 49% of the project’s total investment. These debentures become an important resource to make private investments feasible in the State. For the year 2001, GERES approved a maximum of US$ 3 million to be invested per project.

Companies that choose to exercise their options for the BANDES/GERES System, can direct up to 70% of their tax contribution to invest in projects of their own Corporation, provided that the entrepreneurial group is located in ES State and is a joint-stock company.

How it works:
Companies that want to invest in the State, expand or modernize existing plants, can apply to have FUNRES subscribe to debentures that are convertible into shares in the company. It is not required that such companies have contributed into the fund through the Collectible Income Tax options. It is available to non-contributors, indiscriminately.

The value of FUNRES’s participation is defined according to the criteria established by GERES (Resolution "N" no. 601/91), and can reach up to 49% of the project’s total investment.

Once BANDES’s Board and the GERES collegiate approves the project, the company formalizes the operation through the Public or Private Registration of the Issuance of Debentures Convertible into Shares. The debentures carry a cost of 4%/year + TJLP (the benchmark Long Term Interest Rate) and a total term of a maximum of 8 (eight) years and a minimum of 5 (five) years, capitalized from the beginning and with a grace period to be defined according to the features of the project.

Therefore, the subscription of the debentures by FUNRES is at most 49% of the total value of the investment defined by the project. However, in the table of uses and funds of the project, the fund has participated, generally, with 1/3 of the total investment, in values up to R$5.625 Million. Complementary resources, when required, have been made available in the form of financing through lines of credit offered by BANDES.

Also, the use of FUNRES resources in conjunction with the FUNDAP resources is possible, with no restriction percentage-wise. The resources from FUNDAP are considered as coming from the project owners themselves.

With the installation of the project, recognized by the Enterprise Installation Certificate - CEI, issued by GERES, the company has available one year to carry out the conversion of the debentures into shares.

The paid-in shares in the FUNRES portfolio are periodically taken to a special auction, promoted by BANDES and conducted by the Stock Exchange. In these auctions, the currency used in exchange of the shares offered is the FUNRES Deposit Certificates (Registered Quotas).

It is a requirement that companies applying for the FUNRES Program must be established as "Sociedade Anônima" (public company).

Beneficiaries of this Fund are commercial companies located in ES involved in international trade, importing through the State’s ports or airport. Since its creation in 1970, companies taking part in the program had a combined turnover of US$ 14 Billion, with 80% of this amount occurring from 1994 through 2000.

How it works:
Every import operation requires, at Customs clearance, the payment of the following taxes:
* II - Import Duty (varies from 0 to 15%)
* PIS/COFINS - Contribution to the Social Integration Program (PIS) / Social Contribution for the Financing of the Social Security (9.25%)
* IPI - Federal Excise Tax (varies from 0 to 15%)
* ICMS - State Value Added Tax (17% in ES, 18% in the States of RJ, SP and MG)

The taxes are cumulative, i. e., they are applied on top of each other, starting with the II applied on the CIF cost. In this manner, the ICMS - as its is the last one calculated - is the largest cost on an import operation. It represents 17% of everything. The ICMS and the PIS/COFINS actually become a credit in the importing company’s tax ledger, and as such it can be compensated through a tax credit operation from taxes due on the company’s other transactions, but depending on what is done with the imported item, this 17% goes entirely into your cost column.

With FUNDAP, Custom’s clearance is made without payment of the ICMS tax. A FUNDAP company is exonerated from paying the ICMS tax. The tax will be applied only, and whenever, the goods are sold, as all ICMS taxes are. But FUNDAP has the added benefit of allowing payment of the ICMS to occur 60 days after such sales, instead of the usual 30.

If the imported goods will be sold outside the State, the applied ICMS rate is 12%. When the importer sells the goods outside the State, it can obtain a FUNDAP financing of 8% of the total invoice amount, to be paid in 20 years, after a 5 year grace period, with an interest of 1% per year. The only requirement is that the importer invests 7% of the financing amount in a project approved by BANDES within ES State, by buying shares in such enterprises.
(In practice, the loans never mature, because every few months BANDES promotes a public auction of the individual debts at a huge discount - at least 80% - so that each importer has a chance to arrest its debt, thereby wiping clean its financing limit for new operations.)

The FUNDAP fund has provided grounds for specialized companies to provide importing services to out-of-state companies. Very often such services are provided free of charge, since the FUNDAP headquartered in ES is compensated by the financing from BANDES.

Companies that purchase raw material on a regular basis can set up its own FUNDAP company in ES and keep the benefits, or, hire a FUNDAP company to do it for them.
Some items are not allowed however, because they are not in the State’s interest, mostly due to existing strong companies already set up here (this includes, coal, iron ore, bulk granite and marble, logs, pulp, unfinished steel).

Beneficiaries of this Fund are commercial companies located in ES involved in international trade, importing through the State’s ports or airport. Since its creation in 1970, companies taking part in the program had a combined turnover of US$ 14 Billion, with 80% of this amount occurring from 1994 through 2000.

As explained above (FUNDAP I), an importing company in the FUNDAP System, must apply a portion of the financing it obtains into a project approved by BANDES. Any company interested in investing in the Sate of Espírito Santo can apply to be the destination of such investments.

How it works:
A company interested in investing in the State and in obtaining FUNDAP funds, must submit a complete and detailed business plan within the models of BANDES, which includes complete technical, commercial and financial description, with complete financial projections, return on investment, etc. There are companies specialized in this locate here that can put this together for you.

Once approved, you are free to contact importing FUNDAP companies and attract them to choose your project to invest in. They will actually buy shares in your company.

Although there is no limit as to how much you can capture from the importing FUNDAP companies, BANDES prefers that FUNDAP funds make up no more than 1/3 of a project’s sources. NB: FUNDAP money from an importing company is considered as your own source in the make up of the project’s funding (which usually requires at least 1/3 of own-source funding).

The taxes are cumulative, i. e., they are applied on top of each other, starting with the II.

This fund was established only a few years ago, with the objective of attracting new investments of interest to the State, or expand existing ones, thereby creating jobs and taxes in the State. Expansion projects must involve an increase in capacity of at least 40%.

How it works:
A company interested in investing in the State or in expanding its existing facilities by at least 40% capacity can apply for the benefits. Once approved, it can obtain the following benefits:

* Deferment of payment of the ICMS tax due in the acquisition of machines and equipment as assets, until such machine or equipment is disincorporated;
* Deferment of payment of the ICMS tax due in the importation of raw materials, destined exclusively for the importer’s use, until the final product is sold after industrialization;
* Presumed credit in inter-state sales of up to 70% of the ICMS tax due monthly;
* Reduction of the basis of calculation in intra-state sales of up to 70% of the ICMS tax due monthly.

These benefits can be cumulative and concessions can be up to 12 years.

REPETRO - Regime Aduaneiro Especial de Exportação e Importação de Bens - Special Customs regime for Export and Import of Goods
Applicable to research activities and working of petroleum and natural gas beds, better-known as the "Petroleum Law", this regime promotes the breaking of Petrobras’ operational monopoly, allowing participation of new companies in petroleum and natural gas exploration in the country.
Preparation of the Brazilian government for the world trend which foresees the removal of productive activities from the state in order to give impetus to growth in our oil and gas sector, seeking thus to reduce the volume of imports.
However, to make this industry more attractive to new investors, mainly because the majority of our reserves are located in a difficult-to-access area, it has become necessary to create incentive mechanisms which exonerate research and bed-working activities.
Through certain customs practices, REPETRO concedes relevant fiscal benefits to goods import/export operations and merchandise destined for this industry:
- Tax rebate of 100% of ICMS for operations with products destined for petroleum and natural gas research activity (over 250,000 items listed on Internal Revenue Statute (SRF) Nº 4/2001);
- Other benefits for the petroleum sector are under analysis, such as imports other than items listed on REPETRO, e.g. onshore activities, and
- Fostering of the goods and raw-materials productive chain for the sector, including the preparation of ES-based companies.

SUDENE - Superintendência de Desenvolvimento do Nordeste - Northeast Development Superintendancy
This is a Federal Government autarchy, linked to the Planning and Budget Ministry through the Regional Policy Secretary, with the purpose of developing the area in which it acts.
SUDENE resources are obtained from the federal budget and other federal and international resources through finance and agreements with public and private international institutions.
The north of ES was included in SUDENE’s area of activity by Law Nº. 9.690, of 15th June 1998, with the purpose of developing the region.
The Incentives System offered by the Federal Government and administered by SUDENE are:

A) FINOR - Fundo de Investimento do Nordeste - Northeast Investment Fund:
FINOR resources originate from instalments of Company Income Tax throughout the country, whether national or foreign, who instead of paying the total of this tax opt to invest part of it in this fund.
Companies in the country which deduct 18% of Income Tax for FINOR, base don real profit, can participate in the fund as quota holders, with legal rights over their assets.
FINOR resources also apply to subscriptions made by the Federal Government, any returns and results of investment of these resources and others to which the Law applies.
Special FINOR incentives:

* 50% reduction of Income Tax for new enterprises until 2008 and 25% until 2013
* 25% reduction of Income Tax for existing enterprises until 2008 and 12.5% until 2013
* Reinvestment of 20% of Income Tax until 2008 and 10% until 2013

FINOR is operated by Banco do Nordeste (Northeast Bank), upon which it is incumbent to effect liberation orders, underwrite company shares or debentures, issue book-entry quotas in favour of investors, administrate the investment portfolio and promote auctions of these securities on the stock exchange.

B) FNE - Fundo Constitucional de Financiamento do Nordeste - Northeast Constitutional Finance Fund
Seeks to increase impementation, expansion, modernisation and relocation of enterprises in the industrial, commercial and services sector, by way of financing of some items, prioritising projects which contribute to the densification of the region’s productive chains.
It is a permanent source of medium and long-term finance for the farming and livestock, mineral, industrial sectors including tourism and agro-industry.
FNE’s lines of credit, operadted by Banco do Nordeste, are principally aimed at mini and small producers, small and medium-size companies and their cooperatives and associations.
Area of influence: 28 municipalities situated up to the line of the Rio Doce, in the Northern region of the state.

Incentives - until December 2013

* São Gabriel da Palha; Vila Valério; Jaguaré; Mantenópolis; Barra de São Francisco; Vila Pavão; Água Doce do Norte; Nova Venécia; São Mateus; Conceição da Barra ; Ponto Belo ; Montanha; Mucurici; Pedro Canário; Boa Esperança; Pinheiros; Ecoporanga; Baixo Guandu; Colatina; Linhares; Marilândia ; Rio Bananal; São Domingos do Norte; Pancas; Sooretama; Alto Rio Novo; Águia Branca; Governador Lindemberg.