Law No. 13,800/2019, enacted in January, converted into law, with various modifications, Presidential Decree No. 851/18, published shortly after the fire at the National Museum in Rio de Janeiro. The purpose was to regulate endowments and other heritage or philanthropic funds. Among the changes promoted are simplification of the governance of the endowment funds and the expansion of the causes to be supported by them, with the express inclusion of human rights, public safety, and other causes of public interest.

Endowment funds are sets of private assets organized, managed, and administered by an independent organization with the purpose of providing a long-term funding for the supported institutions or the institutions holding the funds. As a general rule, only the net income of the endowment, discounting for inflation, but not its principal amount, may be applied to projects. These funds serve as a regular and stable source of funding for institutions whose purpose is to develop projects for education, science, technology, research and innovation, culture, health, environment, social assistance, sports, public safety, human rights, and other purposes in the public interest. For the time being, such institutions may be public or private non-profits.

Law No. 13,800 has brought in important advances in encouraging donations in Brazil by improving the corporate governance of endowment fund management organizations, therein providing for a separation of responsibilities among those who manage these funds and the institutions supported by them. The endowment fund manager must include in its bylaws, among other matters: (i) its name, which should include “endowment fund manager"; (ii) supported institutions (the change requires a qualified quorum); (iii) the obligation to set up a board of directors, audit committee, and investment committee (the latter for funds with equity exceeding R$ 5 million), as well as rules regarding the composition, operation, competencies, form of election or appointment of its members, and (iv) the form of approval of policies regarding management, investment, redemptions, and use of fund resources; (v) transparency and accountability mechanisms; and (vi) prohibition on the allocation of funds to a purpose other than that provided for in the bylaws and prohibition of granting guarantees to third parties over the assets that make up the fund.

The regulations also require endowment funds to (i) maintain accounting books and records in accordance with Brazil’s generally accepted accounting principles, with annual disclosure of the financial statements and management and use of resources on their websites; (ii) submit, every six months, information on investments and, annually, on the use of resources; (iii) adopt internal mechanisms and procedures for integrity, auditing, and incentives for reporting irregularities; and (iv) establish codes of ethics and conduct for managers and employees. Fund management organizations with shareholders' equity exceeding R$ 20 million must have their financial statements reviewed by independent auditors.

Law No. 13,800 also provides that the managing entity’s board of directors shall be composed of a maximum of seven members. It is the responsibility of the board to decide on changes to the bylaws, investment policy, management rules, and rules for the redemption and use of resources, as well as financial statements and provision of accounts of the fund management organization, among other matters.

The investment committee, to be appointed by the board of directors, is responsible for recommending to the board the investment policy and the rules for the recovery and use of funds, in addition to coordinating and supervising the actions of those responsible for managing funds, and to prepare an annual report on this management work. Another important advance of Law No. 13,800 for the professionalization of management of endowment funds is the authorization for management organizations to outsource the management of the fund to a legal entity registered with the Brazilian Securities and Exchange Commission (CVM), allowing the payment of a performance fee.

The audit committee must be composed of three members appointed by the board of directors, and members who sit on the board of directors in the three years prior may not be appointed. The members of the board of directors, audit committee, and investment committee may be compensated in accordance with the fund’s income.

The endowment funds’ managers will only be held liable for damages that they cause when they engage in (i) acts of management with willful misconduct or by virtue of gross error; or (ii) acts that violate law or statute.

Law No. 13,800 created the role of the executive organization, a non-profit institution or an international entity recognized and represented in Brazil, which may be engaged by the managing organization to assist and coordinate the supported institution in the development of projects and programs. The law regulates the relationship between the supported institution and the management organization, therein requiring the execution of a partnership instrument and the execution of programs, projects, and other purposes within the public interest, which must establish, respectively, (i) the cooperation link between them and the purpose of the public interest to be supported; and (ii) how the funds will be spent.

Endowment funds may receive grants under the following modalities: (i) permanent non-restricted, which refers to funds whose principal is incorporated into the fund's permanent assets and cannot be redeemed, but income may be used in general programs and projects; (ii) permanent restricted to a specific purpose, which defines resources whose principal is incorporated into the permanent assets of the fund and cannot be redeemed, but the income may be used in projects related to the purpose previously defined in the instrument of donation; and (iii) specific purpose, which includes resources allocated to previously established projects, the principal of which may be redeemed in accordance with the terms and conditions set forth in the donation instrument.

Provided that they are intended for cultural projects, the amounts relating to specific purpose restricted donations and specific purpose donations may be deducted from the tax due on the donor's income tax return at 100% or 80% of the donation made to individuals, subject to the global deduction limit of 6% of the tax due; and 100% or 40% for legal entities taxed on the basis of the real profit regime, subject to the limit of 4% of the tax due, depending on the classification in the Rouanet Law.

Presidential Decree No. 851 originally extended the deductibility of donations to other causes, such as human rights, public safety, and other causes in the public interest. However, these provisions of Law No. 13,800 were subject to a presidential veto due to concerns about the relinquishment of government revenues. By limiting the deductibility of income tax only to donations for cultural projects, the law has missed an excellent opportunity to encourage donations to other social causes and thus to make endowment funds a useful tool for the third sector in general. These presidential vetoes will still be evaluated by representatives and senators within 30 days as of February 2, 2019.

Discussions on the enactment of the law were also an opportunity to address, at the national or state level, another recurring problem in the third sector: the application of the Tax on Transfers Causa Mortis and Donation of Any Goods or Rights (ITCMD) in donations to social causes. In the specific case of the state of São Paulo, the ITCMD is the responsibility of the grantee, incurred at the rate of 4% (the maximum established by the Federal Senate is 8%) over the amount donated. Entities whose social objective is to promote human rights, culture, or the environment have an exemption from this tax. Pursuant to the terms of article 4, item IV, of Decree No. 46,655/02, the ITCMD does not affect the transfer of assets and rights to the equity of educational and social assistance institutions that enjoy immunity only in relation to assets linked to essential purposes, which do not include assets for use as a source of income (as would be the case of endowment funds).

Considering that the ITCMD would be applicable to donations to funds and, in most cases, to donations from funds to supported institutions, a concern with double taxation of funds intended for social causes arises.

According to a study by a researcher with FGV, Rafael Oliva, and the report Sustentabilidade econômica das organizações da sociedade civil – Desafios do ambiente jurídico brasileiro atual ["Economic Sustainability of Civic Society Organizations - Challenges in the Current Brazilian Legal Environment”], FGV Direito SP, the funds raised with ITCMD, including inheritances and donations, correspond to 1% of net current revenue of the state of São Paulo, and only 1% of the total collected (therefore, 0.0168% of the net current revenue of the State of São Paulo) refers to donations to legal entities, including civil society organizations, which demonstrates the financial viability of this tax relinquishment.

Regulation of endowment funds through Law No. 13,800 provides greater legal certainty for donors and managers of social projects, as well as improved transparency and corporate governance for the third sector. However, limitations on tax deductibility stemming from the presidential veto cast doubt on the success of endowment funds as a tool for developing a culture of donations in Brazil.