In recent days, it was reported that construction industry leaders met with Finance Minister Fernando Haddad. During the meeting, the minister allegedly stated that the federal government is still considering exempting Real Estate Investment Funds (FIIs) from taxation.

The proposal to tax these funds recently surfaced as part of the tax reform. However, contrary to the expectations of sector leaders, the government did not include a specific exemption for FIIs. If taxation is implemented, the rate will be applied gradually starting in 2027 and will reach its full extent by 2029.

“The government, when publishing Complementary Law No. 214/21, vetoed the rules that allowed investment funds in general, FIIs, and Fiagros to be excluded from the concept of taxpayers for these taxes,” explains Matheus Bertolo Piconez, a tax partner at Veirano Advogados.

“It is likely that, absent any change or reversal of the vetoes, FIIs will be taxed under IBS (Goods and Services Tax) and CBS (Contribution on Goods and Services) on their real estate activity revenues,” he adds.

Although the income tax exemption for individual shareholders was maintained, taxation on rental revenues could reduce fund profitability.

“The veto will affect operations such as property leasing, which could harm fund profitability,” explains Piconez. “This change alters FII taxation, which was previously exempt at both the fund level and on dividend distributions, provided legal requirements were met,” he highlights.

Read: Brazilian Real Estate Investiment Funds to Have Optional Taxation Following Tax Reform Changes. Here´s what you need to know

Piconez points out that Brick-and-Mortar Funds, which derive revenues from leasing and real estate transactions, will be the most affected.

The National Congress has a period of 30 calendar days to deliberate on the veto in a joint session, as stipulated in Article 66, §4 of the Federal Constitution. Overriding the veto requires an absolute majority of votes from deputies and senators, counted separately.