A study on the real estate equity trusts of developers in the greater São Paulo area

Abstract

Responding to the so-called “ENCOL effect”, the Brazilian federal government created in 2004 (through the Law # 10,931) the Real Estate Equity Trusts (“Patrimônio de Afetação”) and the Special Taxation Regime (STR) based on presumed income. The equity segregation under such trusts, at the developer’s option, aims at providing security to the purchase of real estate units under construction. It does so by demanding greater transparency in the information provided to the purchasers of such units as well as by requiring developers to maintain a complete and individual set of financial accounting information on each project and to deliver statements signed by accredited professionals on the work’s progress and the correspondence between the agreed terms and the earmarked resources. The STR is a way of encouraging developers to adhere to the segregation of their projects by establishing a single 7% rate on the business’ invoicing, which includes several taxes. This paper analyzes whether the STR brings advantages that would make developers want to adhere to the segregation regime. Hence, an exploratory research was carried out on the basis of the financial statements of 30 developers in the Greater São Paulo Area, comparing the STR with the presumed income and with the real income. The results show that the STR, when compared with the presumed income, would be advantageous with a rate of around 6,5%. The STR, when compared with the real income, is advantageous, on average, to 53% of the sampled companies, but there was no majority in all three years of the study period. A 50 basis point decline in the STR tax rate, however, would render the option more attractive in both situations.

Key words: real estate equity trusts, building enterprise, developers, taxation.