Project Finance 2019 Comparisons

Last Updated November 22, 2018

Law and Practice

Authors



Tauil & Chequer Advogados in association with Mayer Brown is a full-service firm that offers legal advice to national and international corporate clients, financial institutions and government entities, and is active in major deals in Brazil and Latin America, in a wide range of industries and sectors. Through a well-established arrangement with Mayer Brown LLP, the firm provides a one-stop shop service for project finance transactions, with offices in the business centres of Rio de Janeiro, São Paulo and Brasilia. The Banking and Finance team is formed of three partners, one senior counsel and 14 associates, and regularly assists clients in developing innovative financial structures that drive infrastructure investment. The team can address the specialised needs of lenders and developers in financing public infrastructure projects, including acquisition finance, project finance and debt capital markets.

Project finance has been the preferred form of financing for infrastructure projects in Brazil. The Brazilian project finance market has remained active through recent economic and market fluctuations.

Over the last couple of decades, the vast majority of infrastructure projects have been funded by the government-owned Brazilian Development Bank (BNDES) through project finance transactions. The largest development bank in the Americas, BNDES has played a key role in Brazil’s economic development by lending more than BRL500 billion in the past ten years.

BNDES is a wholesale bank, with no branches and limited capillarity. As a result, it operates to a significant degree through a network of accredited financial institutions, with most Brazilian banks offering BNDES products (on-lending operations or bank guarantees).

At the end of 2017, in reaction to unprecedented questions over its scope in the Brazilian market, BNDES started to re-evaluate its long-standing role as one of the sole providers of funding for infrastructure projects in Brazil.

The main change promoted by BNDES was the way that its interest rate is formulated. BNDES created the new market-based rate (TLP) that will replace the long-term corporate lending rate (TJLP) as a benchmark for loans granted by the bank. By adopting this measure, BNDES is trying to reduce subsidised lending, apply stricter criteria for financing and achieve a steep increase in the benchmark interest rate it has long used.

By stepping aside, BNDES is seeking to open the space for private capital to help stimulate investment, which is seen as key to paving the way for sustainable growth in the long term, and project developers will have to look for alternate sources for new projects. This is proving to be a new phase for Brazil’s long-term credit market.

The question that remains is how to create institutional and market conditions capable of attracting private capital.

Brazil has a large local institutional investors’ base, and the local debt capital markets and private sector banks have the potential (and demand) to fund long-term infrastructure projects. In addition, several sources of external debt financing are available to fund projects in Brazil. But in order for such institutions to enter the long-term market and assume BNDES’s former role, certain challenges will have to be overcome and the Brazilian lending market itself must become much more sophisticated.

  • Project developers may be willing to accept higher levels of risk in exchange for higher expected returns on their equity, but lenders typically have a lower tolerance for risk. The Brazilian government will be forced to implement clear and more stable regulations, efficient bidding and awarding procedures, ensuring solid rule of law and the absence of political interference in the infrastructure sector. Improved contract arrangements would be an important step forward. In particular, only those risks that the private sector can actually control should be allocated to it.
  • Currency risk has been a critical feature for foreign investments. Furthermore, hedging contracts are usually limited to short-term transactions. The Brazilian government must develop mechanisms to mitigate such risk.
  • Tax incentives have always been a key issue for infrastructure financing. A wide variety of tax incentives must be implemented to stimulate the private financing market.
  • Multilateral institutions need to expand their current offering of loans and guarantees in the Brazilian market, including local currency lending and liquidity backstopping to mitigate exchange devaluation risk.

The new approach of BNDES presents challenges for future infrastructure projects in Brazil. But the hope is that the changes will encourage a deeper and more competitive project finance market.

Infrastructure projects in Brazil have been funded almost exclusively by BNDES through project finance transactions. BNDES has access to below-market funding resources, which allow it to offer subsidised loans.

BNDES provides loans either directly or indirectly through a network of accredited financial intermediaries, including the largest banks in Brazil. Most commercial banks in Brazil operate and on-lend BNDES credit lines or provide bank guarantees for BNDES. Commercial banks have also focused on bridge loans and/or other short-term loans, and after the recent changes promoted by BNDES are showing growing interest in funding long-term infrastructure projects.

Other state-owned banks, Caixa Econômica Federal and Banco do Brasil, regional development banks, such as Northeast Development Bank (BNB) and Banco Regional de Desenvolvimento do Extremo Sul (BRDE), multilateral institutions, export credit agencies and institutional investors are also active in Brazil’s project finance market.

In an effort to boost private funding in strategic projects, the Brazilian government created an income tax break for long-term bond issuances through the so-called 'debênture de infraestrutura' in 2011. Law 12,431 establishes a set of tax and regulatory incentives for domestic and foreign investments in infrastructure projects.

Primary sponsors of infrastructure projects in Brazil have generally been domestic construction companies, foreign international infrastructure companies, service and equipment providers and private equity funds.

Public-private partnerships (PPP) were introduced into Brazilian federal legislation in 2004 through Federal Law 11,079/04 (the PPP Law) in order to enable the federal government and authorities from different levels to overcome infrastructure gaps countrywide. Formerly, infrastructure projects were implemented through public concession, regulated by Federal Law 8,987/95 and Federal Law 9,074/95, applicable to the provision of public services.

The PPP Law sets forth general provisions for public-private partnerships and created two additional forms of concession: sponsored concession and administrative concession, both designated public-private partnerships. Sponsored concession is the concession of public services or public works, as provided by Law 8,987/95, with a financial contribution from the grantor authority to the private party (concessionaire) in addition to tariffs charged to the final users. Administrative concession involves the supply of services of which the government is either the direct or indirect user. Since there is no service provided to the final user, administrative concession does not encompass tariff revenues, but only a financial contribution from the grantor authority.

Due to the compensation paid by the grantor authority, public-private partnerships are suitable for projects that are not financially sustained by the project's own revenues alone, expanding the horizons of concessions’ usage and making them attractive to private investors.

Despite the large usage of public-private partnerships, the PPP Law sets forth restrictions related to the project value, contract term and object. PPP is allowed only for projects with a contract value of at least BRL10 million, a minimum term of five years and a maximum term of 35 years. 

In the context of the financial crisis that has been impacting Brazil in recent years, the country needs fresh infrastructure investments in order to overcome its recession. Public-private partnerships and concessions are therefore playing a relevant role. One of the measures adopted by the Brazilian government to increase and strengthen the role of the private sector in infrastructure projects is the creation of the Brazilian investment partnership programme (programa de parcerias de investimentos, or PPI), introduced by means of Law 13,334/16. The PPI’s purposes include increasing investment opportunities, creating jobs and stimulating technological and industrial development in line with the country's social and economic development goals, in order to put Brazil back on the development track.

To this end, the PPI has created a centralised monitoring mechanism, facilitating the transparency and planning of infrastructure projects. With the aim of attracting more investors (specifically foreign players), the PPI has also implemented innovations in the bidding process, such as the following:

  • auction notices will be published in Portuguese and English;
  • the period between issuing the auction notice and the submission of bids will be in excess of 100 days, to allow a larger number of investors to prepare to bid;
  • concessions will only be granted to projects with demonstrated environmental feasibility (a preliminary environmental licence will be compulsory or the competent body will issue guidelines for its acquisition); and
  • the long-term financing model will be modified in order to avoid the need for bridge loans.

It is clear that the Brazilian government is aware that public-private partnerships and infrastructure projects have to help the country to recover its economy and definitively lift it out of the recession, and it is adopting different measures to promote public-private partnerships and the infrastructure sector.

BNDES’s financial support instruments are regulated and consolidated in the operating policies (OPs), updated regularly. The OPs consist of general and specific guidelines. The general guidelines apply to most supported operations. Financing in Brazil is not provided on a limited recourse basis, which means that it is usual for lenders to require a parent, bank guarantee or contingent equity and/or some form of completion guarantees from the sponsors, at least until the completion of the project.

The overall regulatory system with respect to infrastructure in Brazil is based on the constitution and several Brazilian laws and regulations, including the Concessions and PPP Laws. Each infrastructure sector (ie, energy, roads, rail, ports, airports, water) is regulated by specific laws. Public services in Brazil can only be undertaken by private parties using concessions, contracted through public auction. Exemptions are only accepted in specific situations (ie, authorisations). Each infrastructure sector has its own regulatory authority.

Some of the topics and issues which would need to be considered in arriving at the optimal structure and risk allocation for projects in Brazil include: delays caused by failure to obtain authorisations, licences and permissions from public authorities; compliance issues; labour liabilities; civil, tax, pension liabilities; civil, administrative and criminal liability for environment damages; changes to the service specifications imposed by public authorities; operational restrictions caused by decision or omission of the public entities; creation or extinction of project tariffs; and changes in tax legislation that impact costs of works, operation and maintenance. 

Under Brazilian law, guarantees may be personal guarantees or in rem guarantees ('security' under common law). Under a personal guarantee, all the assets of a guarantor secure the relevant obligation, while under an in rem guarantee certain specific assets are segregated to secure an obligation.

Personal Guarantees

Generally, there are two types of personal guarantees: surety (fiança) and the so-called 'aval'. Under a surety, an individual or a legal entity undertakes to perform/repay an obligation if the obligor fails to do so. Aval is a specific guarantee used to secure debt instruments. Personal guarantees are always formalised in writing.

In addition, agreements establishing personal guarantees may be governed by foreign law.

In Rem Guarantees

In rem guarantees vary depending on which type of asset is being granted to secure an obligation. Under Brazilian law, assets can be divided into movable assets (eg, shares and equipment) and immovable assets (eg, land and buildings). Certain assets, such as aircraft and ships, although considered to be movable assets, are subject to the requirements applicable to immovable assets (such as registration requirements).

The two most usual types of in rem guarantees are pledges (penhor), which relate to movable assets and credit rights, and mortgages (hipoteca), which relate to immovable assets. In the case of in rem guarantees, each asset given as security must be duly individualised in the relevant agreement.

Mortgages over real estate located in Brazil must be governed by Brazilian law. Pledge agreements must be governed by the laws of the country of the person/entity in possession of the assets. Accordingly, if the pledged assets are in the possession of a Brazilian company, the relevant agreement must be governed by Brazilian law.

Other Guarantees

Law 10,406 of 10 January 2002 (the Brazilian Civil Code) provides for another form of guarantee in respect of movable assets which are not fungible (fiduciary property). Under this type of guarantee, the ownership of the asset and the indirect possession are transferred to the creditor, while the direct possession remains with the guarantor, which is liable for duties of bailee in relation to it.

Creation of Security

As the creation of a security interest (in rem guarantee) is a very formal procedure under Brazilian law, its validity and enforceability in Brazil depend on the following conditions:

  • the obligation giving rise to the guarantee and, if such obligation is related to or part of a more complex transaction, the transaction as a whole must be considered legal, valid and binding under the relevant applicable laws;
  • the security agreement must contain the applicable contractual elements (see below); and
  • the parties to the security agreement must perform all required formal acts.

It is essential to ensure that the obligation giving rise to the guarantee and the transaction as a whole be legal, validly binding and enforceable because if such obligation, the transaction as a whole or elements thereof are rendered invalid, then the security agreement may be rendered invalid and/or unenforceable, as the case may be.

The Brazilian Civil Code establishes that the existence of the following elements is necessary in order for a transaction (negócio jurídico) which includes security agreements to be considered valid and enforceable under Brazilian law: capacity of the parties; possible, legal, determined (or capable of being determined) object; and form established (or not prevented) under the law. These are clarified as follows:

  • Capacity relates to the power and authority of a given party to enter into a transaction. The parties to the security agreement must be properly represented and duly authorised and empowered to enter into the transaction and create a security interest over a certain asset.
  • As regards the object, Brazilian law prevents parties from entering into agreements in which the object is not a possible one or is considered to be illicit under Brazilian law. For instance, two private parties may not agree on the sale of an asset which belongs to the state (not possible), or the exploitation of a casino in Brazil (illicit). 
  • Security agreements must follow a form established or not forbidden under Brazilian law. It must be ensured that a security agreement be in proper legal form and capable of being enforced in Brazil.

In addition, in order to formally create the security interest, for it to be valid against third parties and to ensure priority in case of bankruptcy, the security agreements must be registered with the appropriate Brazilian public registries, ie, the appropriate registry of deeds and documents in Brazil (for movable assets, other than planes, trains and ships) or with the appropriate real estate registry (for real estate, inter alia). Other registrations may be required depending on the type of assets being granted as security, such as shares, aircraft, quotas of companies, etc.

Furthermore, the security agreement would be drafted in order to include the other formal requirements set forth in Brazilian law, such as the detailed description of the assets being pledged and the main financial terms and conditions of the obligation being secured, including: the principal amount of the debt; the repayment dates; and the applicable interest rate.

In addition to the aspects relating to the creation of a security interest over the asset, the economic benefit generated or a commercial justification for the granting of such security interest by a given guarantor will have to be analysed. Although this aspect would not generally affect the validity or enforceability of the security agreement, the non-existence of an economic benefit for the guarantor may give rise to the filing of claims by interested third parties, such as minority shareholders, if the guarantor is a legal entity, or other creditors of the guarantor, as explained below.

As a general rule, under Brazilian law each asset given as security must be duly individualised in the relevant security agreement. In this sense, the floating charge concept is not generally accepted in our jurisdiction.

Notwithstanding the above, there are mechanisms recognised by the Brazilian regulation that can be used in order to achieve the effect of a floating charge. For example, if a company intends to grant as collateral all its future receivables derived from commercial agreements or new equipment, it is possible to establish in the security agreement periodic amendments related to the section that individualises the assets (commercial agreements, equipment, etc), thereby adding new assets acquired since the last amendment.

As an exception to the general rule, the Brazilian Corporation Law (Law 6,404/76) expressly authorises the creation of a floating charge by Brazilian companies in connection with the issuance of debentures. In this case, a floating charge ensures the debenture holders a general privilege over the assets of the company, although such charge does not prevent the negation of the assets by the company. If the debentures guaranteed with a floating charge are issued abroad, a previous authorisation from the central bank of Brazil is required.

The registries in Brazil will charge a fee to perform the registration of security agreements or any amendments to them. The amount to be charged by the registries will depend on the location in which the security agreement must be registered (for instance, mortgages must be registered in the place where the real estate asset is located) and the amount being secured.

There will also be a cost related to the translation of the security agreements into Portuguese (which will be charged by the certified translator based on the number of pages to be translated), as well as a cost related to the notarisation of the signatures.

In the case of in rem guarantees, each asset given as security must be duly individualised in the relevant agreement.

There are no further restrictions beyond those mentioned in 2.1 Assets Typically Available as Collateral to Lenders, above.

Before entering into the relevant security agreement, lenders usually carry out due diligence on the company and on the assets that are being granted as security. This due diligence comprises the search of the appropriate registry of deeds and documents (or with the appropriate real estate registry, as the case may be) for liens.

The release of guarantees depends on the type of assets that were granted as security and the form of the original security agreement. As a general rule, a simple release letter executed by the creditor/lender should suffice, with subsequent registration of such letter with the registry in which the original security agreement was filed.

A secured lender can enforce its collateral in the event of partial or total default. The conditions for enforcement of collateral are defined in the agreement. Usually alternatives to an extrajudicial negotiation between the creditor and the debtor are exhausted before the creditor enforces its collateral.

Under the Brazilian Code of Civil Procedure, a creditor may make use of a general collection lawsuit to enforce collateral and/or guarantees whenever their claims are based on an instrument for a certain, liquid and payable obligation. This instrument may be judicial (eg, a final court decision in a lawsuit) or extrajudicial. The Brazilian Code of Civil Procedure expressly acknowledges as enforceable instruments, for instance: bills of exchange, promissory notes, invoices, bonds, contracts guaranteed by a mortgage, pledge, antichresis or other security interest, as well as any private document executed by the debtor and by two witnesses which provides a certain, liquid and payable obligation.

A creditor which has a fiduciary guarantee shall use either judicial or out-of-court actions to receive the assigned credits and exercise other rights granted to it under the loan for the sale of the real estate. In this case, it is important to note that Law 9,514/1997 provides the methods and out-of-court procedures for this specific type of guarantee as the following:

  • if the debt is due and totally or partially unpaid, the ownership of the real estate is established in favour of the creditor;
  • at the request of the creditor, the debtor shall be summoned by the officer of the competent real estate registry to satisfy the pending obligations within a period of 15 days, as well as those that expire up to the date of payment, including conventional interest, penalties and other contractual charges, legal charges, including taxes, condominium contributions attributable to the property, and collection and summons charges;
  • once the ownership has been considered on its behalf, the fiduciary, within 30 days as of the date of registration, will promote a public auction for the sale of the real estate;
  • after the transfer of the fiduciary property into the fiduciary creditor's equity, and until the date of the second auction, the debtor is assured the pre-emptive right to acquire the property at a price corresponding to the amount of the debt, together with the charges and expenses, if any, including costs and emoluments; and the creditor will deliver to the debtor the remaining amount, if any.

It is important to note that if the real estate is sold, the creditor will discharge the debtor of any remaining amount.

In a company shares pledge, enforcement of the claim requires the filing of a lawsuit to execute the claim and the guarantee previously granted (by means of the adjudication of the grantor or the sale of the asset given as collateral to a third party). In this case, the proceeds of the sale apply in the satisfaction of the debt.

The effective adjudication or sale in court of the company shares must comply with the agreement of shareholders or partners of the issuing company, as well as the provisions of the Brazilian Code of Civil Procedure, which requires that other shareholders have the pre-emptive right to acquire the equity interest in question and, failing this, protects the company's interest in acquiring its own shares or quotas or liquidating them.

If the proceeds obtained by the sale or liquidation of the equity interest are higher than the amount of the debt, the remaining amount must be returned to the debtor. On the other hand, the debtor will remain responsible for the payment of the amount charged by the creditor, which means that the enforcement lawsuit will continue.

It is important to note that there are limited circumstances in which lender may keep the collateral as payment, in particular:

  • when, after the default, debtor and creditor settle on the delivery of the asset as payment of the debt; and
  • in an executory proceeding, if no bids are placed at the auctions.

Also, the pledging creditor may proceed with the extrajudicial sale if this is contractually permitted or has been previously and irreversibly authorised, by proxy, by the debtor.

The same procedure will occur in a mortgage enforcement scenario.

Lastly, under the Brazilian Code of Civil Procedure, it should be noted that in a judicial procedure, the unsuccessful party may pay the winner’s legal fees, which will be set by the judge at between 10% and 20% of the amount at stake in the lawsuit.

Brazilian law recognises the autonomy of parties in their choice of the law applicable to an international contract. Under the Brazilian Code of Civil Procedure, Brazilian courts do not have jurisdiction to preside over actions when, in an international agreement, the parties agree on an exclusive foreign jurisdiction, and this argument is raised by the defendant in the defence.

Also, Article 9 of the Law of Introduction to the Norms of Brazilian Law provides that the law of the country in which the obligations are established shall apply in order to qualify and govern such obligations.

By the same token, Law 9,307/1996 (the Arbitration Act) promotes the autonomy of parties, whether in domestic or international contracts, to choose the applicable law in the arbitration agreement. According to the Arbitration Act, parties may even determine the general principles of law or customs to be applied in their relationship. It is important to note, however, that such choice of law or general principles shall not undermine public order.

The clear right of parties to choose the law applicable to a contract represents Brazilian law's alignment with the law in force in several countries. This has positive consequences for international legal and commercial relationships.

Lastly, it is important to note that, as a practical matter, Brazilian courts do not easily apply foreign laws in judicial proceedings. The practice is, rather, more commonly seen in arbitration proceedings in respect of the presentation of legal opinions regarding the interpretation of material law.

A foreign decision is only enforceable in Brazil after the ratification or the granting of exequatur to the rogatory letters, or the recognition of a foreign judgment by the Brazilian Superior Court of Justice, unless otherwise provided by law or treaty. The ratification or the exequatur or the recognition of a foreign judgment by the Brazilian Superior Court of Justice is strictly limited to the analysis of formal requirements. Issues relating to the merits of the case shall not be reviewed by the Brazilian Superior Court of Justice.

Hence, Article 17 of the Law of Introduction to the Norms of Brazilian Law provides a limit that must be observed by the Brazilian Superior Court of Justice: “The laws, acts and judgments of another country, as well as any declarations of will, will not be effective in Brazil when they offend national sovereignty, public order and morality.”

In addition, it is important to note that, as set forth in Article 963 of the Brazilian Civil Procedure Law, the following are indispensable requirements for the ratification of a decision:

  • that it be rendered by an authority with jurisdiction;
  • that it be preceded by suitable service of process, even if there is default;
  • that it be effective in the country where it was rendered;
  • that it does not violate a Brazilian res judicata decision;
  • that it is accompanied by an official translation, unless its waiver is provided for in a treaty; and
  • that it does not contain an express violation of public policy.

Furthermore, it is important to note that only the Brazilian judicial authority is competent to hear actions relating to real estate situated in Brazil (as set forth in Article 23, Item I of the Brazilian Code of Civil Procedure and Article 12, first paragraph of the Law of Introduction to the Norms of Brazilian Law). However, any decision of a foreign judge relating to real estate located in Brazil, despite its incompetence to do so, in no way implies offence to the authority of the Brazilian judicial branch, or any harm to national sovereignty.

Finally, Article 15 of the Law of Introduction to the Norms of Brazilian Law and Article 5 of Resolution 9 of the Brazilian Superior Court of Justice state that for any foreign decision to be enforceable:

  • the final decision must have been rendered by a competent judge;
  • the parties must have been summoned or have been legally verified in default;
  • the decision must have become final and have the necessary formalities for enforcement at the place where it was issued; and
  • the decision must be translated by a sworn translator and authenticated by the Brazilian consul.

It should be noted that the decision must in any case be notarised, but if its legalisation takes place in any of the signatory countries of the Hague Convention (allowing for the mutual recognition of Brazilian documents abroad and foreign documents in Brazil), such decision does not need to be consularised – the apostille is enough to accomplish the necessary formality.

Under the Arbitration Act (Law 9,306/1996), a foreign arbitral award shall be recognised or enforced in Brazil in accordance with international treaties effective in domestic law, in particular the New York Convention. Such a decision must be confirmed by the Brazilian Superior Court of Justice.

The recognition or execution of a foreign arbitral award can be denied by the Brazilian Superior Court of Justice when the defendant proves that:

  • the parties to the arbitration agreement were unable/incapable of entering into it;
  • the arbitration agreement was not valid according to the law under which the parties submitted it, or, in the absence of indication, by virtue of the law of the country where the arbitration award was issued;
  • the defendant has not been notified of the appointment of the arbitrator or of the arbitration procedure, or the principle of adversary proceedings has been violated, making the due legal process impossible;
  • the arbitration award was issued outside the limits of the arbitration agreement, and it was not possible to separate the excess part from that submitted to arbitration;
  • the institution of the arbitration is not in accordance with the arbitration commitment or arbitration clause; and
  • the arbitral award has not yet become binding on the parties, has been annulled, or has been suspended by a judicial entity of the country in which the award was rendered.

The recognition of a foreign arbitral award will also be denied if the Brazilian Superior Court of Justice finds that:

  • according to Brazilian law, the subject matter of the litigation may not be resolved by arbitration (eg, unavailable rights); and
  • the decision offends national public policy.

It is for the Brazilian Judicial Authority, to the exclusion of all others, to hear cases related to real estate located in Brazil. In the case of a mortgage (a temporary, conditional pledge of property to a creditor as security for repayment of a loan) given in a foreign loan, the foreign lender is necessarily tied to Brazilian jurisdiction in order to enforce its collateral.

Attention should be paid to the fact that a lawsuit filed before a foreign court does not operate lis pendens, and that the filing of such a suit does not prevent Brazilian courts from hearing the same action or those related to it, unless there are provisions to the contrary in international treaties and bilateral agreements in effect in Brazil.

Lastly, enforcement might generally be impacted by insolvency, bankruptcy, liquidation and other laws of general application relating to or affecting the rights of creditors under a loan or security agreement.

Under the current foreign exchange regulation in force in Brazil, individuals or legal entities resident in Brazil are allowed to enter into loan agreements with foreign lenders (individuals or legal entities, related or unrelated, financial institutions or not) whereby the Brazilian resident agrees to borrow a certain amount of money from the foreign lender, and the foreign lender agrees to lend this amount of money to the Brazilian resident. In addition, most of the terms and conditions of the loan agreements (such as fees, commissions, interest rate, default rate, security, covenants, events of default, collateral, etc) may be freely negotiated between the parties.

Under Brazilian regulations, the granting of guarantees by Brazilian companies in favour of foreign companies/lenders does not require any special approval by the Brazilian regulatory authorities. However, to enable the remittance of amounts abroad (ie, conversion into foreign currency of any amount of BRL realised upon enforcement of a security), certain approvals may be required.

If Brazilian companies enter into loan agreements with foreign lenders as borrowers, then the main financial terms relating to the loans must be registered with the central bank of Brazil under the module of registry of financial transactions (módulo de registro de operações financeiras, or ROF) of the central bank of Brazil's data system, and the funds must inflow into Brazil. This registration with the central bank of Brazil allows borrowers to make payments of principal, interest, cost, fees, expenses and commissions in relation to the loan.

Registration in the ROF shall be completed by the Brazilian borrower prior to disbursement of the loan, since this is a requirement for purposes of closing currency exchange contracts in connection with the inflow of funds into Brazil. After the inflow of funds, a schedule of payments related to the transaction must also be registered in the ROF. The registration of the financial transaction and of the relevant schedule of payments are necessary in order to enable the Brazilian borrower to remit abroad the funds related to payments under the loan agreements (eg, principal, interest, fees and commissions).

In addition, other registrations may be required depending on the type of investment in Brazil (eg, direct investment in Brazilian companies, investments in the Brazilian financial and capital markets)

As a general rule, foreign capital duly registered with the central bank of Brazil may be repatriated to its country of origin at any time without preliminary authorisation.

It is permissible for a project company to maintain offshore foreign currency accounts. Under the Brazilian foreign exchange regulations, Brazilian residents are allowed to maintain offshore accounts, provided that, if the assets and rights located abroad are of a value equal to or greater than USD100,000 (or its equivalent in other currencies), the holder must disclose such investments to the central bank of Brazil (declaração de capitais brasileiros no exterior) on an annual basis, in addition to the disclosure to the federal revenue authorities of any assets, rights and income earned abroad.

As a general rule, financing or project agreements do not need to be registered or filed with any government authority in order for them to be valid or enforceable. 

It is notable, however, that specific concession agreements signed with certain public authorities may require the concessionaire to seek the prior approval of the granting authority for certain kinds of financing or project documents, and that such approval shall be obtained not as a condition for the validity or enforceability of the document, but to avoid penalties at the concession level.

Foreign agreements between parties (ie, financing agreements signed with foreign lenders and governed by non-Brazilian law) will be valid regardless of any registration in Brazil. In order to be admissible in evidence and enforceable in the Brazilian courts, however, some formalities are required:

  • the signatures of the parties to an agreement signed outside Brazil must be notarised by a notary public licensed as such under the law of the place of signing, and the relevant apostille certificate in accordance with Hague Convention of 5 October 1961 must be obtained;
  • an agreement signed in any foreign language must be translated into Portuguese by a certified translator (tradutor público juramentado); and
  • the foreign agreement and its certified translation must be registered with the appropriate registry of deeds and documents (degistro de títulos e documentos).

For security agreements governed by Brazilian law, it is notable that the registration of the agreement with the appropriate registry of deeds and documents (registro de títulos e documentos) is a condition for the creation of the security and is necessary to ensure the validity of the agreement against third parties and to ensure priority over the asset/right subject to the security in the case of bankruptcy of the debtor.

The ownership of land per se does not require any specific licence, but the exploration of natural resources does require different types of authorisations or concessions from public authorities.

Certain uses of water resources are subject to authorisation from official agencies: the national water agency (agência nacional de águas, or ANA) for federal waters and state agencies for state waters, as outlined in Federal Law 9,433/97, Federal Decree 24,643/34 and specific state laws.

In relation to mineral resources, according to the Federal Constitution of Brazil mineral reserves are segregated from the surface area and belong to the federal government. Therefore, the federal government is competent to legislate on mineral resources, deposits, mines and rules for the commercial exploration of such resources in Brazilian territory.

Research and exploration of mining resources may only be carried out by Brazilian nationals or legal entities incorporated, headquartered and managed in Brazil. In other words, a foreign company would not be able to research, exploit and/or explore Brazilian mineral reserves directly from abroad. However, Brazilian law no longer differentiates a company headquartered in Brazil by the nationality of its shareholders. Companies with shareholders who are Brazilian nationals or legal entities are to be treated on an equal basis to those whose shares are held by foreigners. There are, then, no restrictions whatsoever regarding the holding of the capital stock of Brazilian companies acting in mineral research and exploration by foreign individuals or legal entities. A Brazilian company whose capital stock is 100% held by foreign entities or individuals could act in the research and exploration of minerals without any restrictions.

The ownership and use of rural lands by foreign investors is subject to some restrictions, which may impact the implementation of rural infrastructure projects by companies controlled by foreign entities. Federal Law 5,709/1971 imposes certain limitations on the acquisition of rural properties by foreigners. Pursuant to Article 1, §1, such limitations are also applicable to Brazilian companies whose shareholders, individuals or legal entities, residing or established abroad, hold the majority of the capital stock.

The Brazilian Constitution of 1988 eliminated the differences between legal entities with domestic capital and legal entities with foreign capital, so that a company organised in Brazil with head office and principal place of business in Brazil is deemed a Brazilian company, regardless of the nationality of its shareholders. Opinion AGU/LA-04/94, issued by the Federal General Attorney, supported such an understanding, and therefore no limitations were imposed by Law 5,709/1971. A couple of years later, another opinion (Opinion AGU GQ-181/1997) was issued by the Federal General Attorney, which confirmed that the above-mentioned restriction on foreign companies was not supported by the Brazilian Constitution of 1988. Notwithstanding this, on 23 August 2010, the Federal General Attorney issued Opinion LA-01, which approved Opinion AGU 01/08, changing the prior consolidated position again and setting forth that Law 5,709/1971 should be applicable to Brazilian companies controlled by foreigners. In addition, Opinion LA-01 stated that the concept of 'majority of corporate capital' must be interpreted according to the broader concept of 'corporate control' set forth in the Brazilian Corporation Law.

In summary, Opinion LA-01 considered that the restrictions on acquisition of rural lands by Brazilian companies controlled by foreign entities, set forth by Law 5,709/1971 and its regulation (Decree 74,965/1974), are still valid. It determined that Brazilian companies controlled by foreigners (either natural or legal) are restricted from:

  • acquiring rural properties, except in the case of a legitimate succession;
  • leasing a rural property; and
  • acquiring rural properties by means of a merger or acquisition of companies that results in control by a foreign entity.

Accordingly, INCRA Normative Instruction 76, dated 23 August 2013, regulated the acquisition and lease of rural lands by foreigners in accordance with Opinion LA-01.

In this context, Brazilian companies controlled by foreign entities are now subject to the following restrictions:

  • the acquisition or leasing of rural properties by foreign legal entities or by Brazilian legal entities controlled by foreign legal entities, in excess of 100 indefinite exploitation modes, in continuous or discontinuous areas, is subject to prior authorisation by the Brazilian Congress;
  • regardless of the size of each individual property, the sum of the rural areas owned or leased to foreign individuals, foreign legal entities or Brazilian legal entities controlled by foreign legal entities cannot exceed 25% of the total surface of the municipality where such areas are located;
  • the sum of the rural areas owned or leased to foreign individuals, foreign legal entities or Brazilian legal entities controlled by foreign legal entities of the same nationality cannot exceed 10% of the total surface area of the municipality where such areas are located; and
  • foreign legal entities or Brazilian legal entities controlled by foreign legal entities may only acquire or lease rural properties destined to the development of agricultural, cattle raising, forestry, industrial, touristic or colonisation activities, in accordance with their corporate purposes, upon approval of the relevant project by the ministry of agrarian development, and after consultation of the federal entity responsible for such activities.

Brazilian law does not recognise the concept of a security trust. It does, however, recognise the concept of an agency relationship, by means of which a collateral agent may hold the benefit of the security on behalf of and for the benefit of the lender.

Formal collateral agents are normally used in Brazil, or alternatively all lenders are formally included as secured parties and security holders in Brazilian law security agreements. The rules for enforcement (ie, appointment of a leader among the creditors or the appointment of common advisers and the joint discussion of enforcement strategies) are regulated in intercreditor agreements.

The creation of a security (in rem guarantee) over a certain asset or right gives priority to the holder of such security and protection against potential claims or enforcement actions from other creditors in general that may affect the asset or right subject to the existing lien.

Legal priority and subordination are expressly recognised in the sense that security may be granted in different degrees to different creditors. This is true in the case of the pledge (penhor) and the mortgage (hipoteca). In accordance with Brazilian law, the first creditor to be granted a pledge or mortgage over a certain asset or right will be considered a first-priority creditor holding a first-degree security. Creditors that receive security over the same asset or right after the perfection of the first-degree security (subject to any negative pledge provisions that may be contractually agreed upon by the holder of the first-degree security and the security provider) will be considered as second-priority, third-priority  creditors holding second-degree, third-degree  security, etc.

Upon the release of most senior degrees of security, other security over the same asset or right will be automatically elevated to the immediately preceding degree (ie, on release of the first-degree pledge, the second-degree pledge will automatically be considered as a first-degree security).

The enforcement of security over an asset or right subject to different degrees of security depends on the holder of the first-degree security. If the first-priority creditor decides to enforce the security, the holders of subordinated degrees will only keep security over any remaining portion of the assets/rights after the enforcement and satisfaction of the senior debt or any amounts resulting from the enforcement and collection process that are in excess of the total amount of the outstanding senior debt.

The priority and degree of any pledge or mortgage will survive the insolvency or liquidation of the borrower.

In the case of fiduciary security in which different degrees are not allowed by law, exclusive priority will be given to the holder of security created first. If multiple creditors are granted the same fiduciary security at the same time (ie, in the case of syndicated loans), each will have the same priority over the security, pari passu. The terms, conditions and rules for the maintenance and eventual enforcement of the security, the use of proceeds resulting from enforcement and collection and any kind of priority or subordination may be contractually agreed by creditors. In this case, contractual subordination will be valid among the creditors only, and before courts all of the creditors will be in pari passu conditions.

In general terms, public concessions or the right to render and explore a public service are only granted to companies incorporated in Brazil.

Although the participation of foreign companies in public auctions and bidding processes is allowed (and very common, especially in the case of foreign companies participating in consortia with other local or foreign companies), in practical terms the bidding announcements and specific rules of the different public agencies normally demand the incorporation of a local company organised in accordance with the laws of Brazil (a special purpose vehicle, or SPV) as a condition for the execution of the concession agreement or granting of the relevant permission or authorisation. In the case of PPP projects in accordance with Law 11,079/2004, the incorporation of the local SPV is mandatory.

Corporate entities incorporated and existing in accordance with the laws of Brazil are essentially regulated by the Brazilian Civil Code and by the Brazilian Corporation Law. There are several types of corporate entities guided by these laws, and the most widely used in Brazil are:

  • the limited liability company (sociedade limitada, or 'limitada'), regulated by the Brazilian Civil Code; and
  • the joint-stock corporation or corporations (sociedade anônima, or SA), regulated by the Corporation Law.

Project companies are normally incorporated as corporations (SAs), both because this is the type normally required by the bidding rules or regulations issued by the public agencies from the different infrastructure sectors, and due to the fact that SAs can have more professional management (ie, board of directors, board of offices, etc) and are allowed to issue securities in the market, an advantage in the process of raising funding for the implementation of a project.

As set forth in Article 48 of the Brazilian Bankruptcy Law (BBL), a judicial reorganisation proceeding may be requested by any debtor who, at the time of the petition, has been doing business regularly for over two years and meets all of the following requirements:

  • the debtor shall not be bankrupt, and if he or she has been, the resulting liabilities have been declared extinguished by final and conclusive decision;
  • he or she shall not have obtained a concession of judicial reorganisation within the last five years;
  • he or she shall not have obtained, within the last five years, a concession of judicial reorganisation based on the special plan for microenterprises and small companies; and
  • he or she shall not have been convicted of any of the crimes provided in the BBL, or have as an officer or controlling partner any person convicted of such a crime.

With the filing of the judicial reorganisation petition (as set forth in Article 51 of the BBL) it is mandatory to include:

  • a statement of the material causes of the debtor’s equity condition and the reasons for the economic and financial crisis;
  • accounting statements for the last three years and those drawn up especially to support the petition, prepared in strict compliance with applicable corporation law and consisting of:
    1. the balance sheet;
    2. an accrued income statement;
    3. an income statement as from the last financial year; and
    4. a management report on cashflow and projection thereof;
  • a full nominal list of creditors, including those under an affirmative covenant or covenant to give, stating the address, kind, rating and updated amount of the claim, and specifying its origin, the system for the respective maturity dates and the accounting records on each pending payment;
  • a full list of employees, stating the respective functions, salaries, indemnities and other amounts to which they are entitled, with the corresponding accrual months, and specifying amounts pending payment;
  • a certificate of regular standing of the debtor at the public company registry, updated articles of incorporation and minutes of appointment of current officers;
  • a list of private assets of the debtor’s controlling partners and officers;
  • updated statements of the debtor’s bank accounts and of any financial investments of any kind, including those in investment funds or on stock exchanges, issued by the respective financial institutions;
  • certificates of the protest officers in the judicial district of the debtor’s domicile or headquarters and branches; and
  • a list, signed by the debtor, of all legal actions to which he or she is party, including labour-related suits, with an estimate of the respective amounts claimed.

If the above conditions and the documentation required are in accordance with the BBL, the judge shall authorise the processing of the judicial reorganisation proceeding and, by the same act, shall appoint the judicial administrator and order an immediate stay of actions and executions filed against the debtor for a 180-day period (stay period), among others.

The debtor has 60 days, counted from the above processing decision, to file its judicial reorganisation plan. The following, among others, are means of judicial reorganisation:

  • granting of special terms and conditions for the payment of obligations fallen or falling due; and
  • change in corporate control, etc.

During the judicial reorganisation proceeding, the debtor may continue to conduct its corporate activities, under the supervision of the judicial administrator, but the debtor cannot dispose of or restrict any items or rights of their permanent assets without judicial authorisation.

It is important to note that the BBL orders the publication (in the official gazette and in a widely circulated newspaper) of the processing decision, the debtor’s list of creditors, the judicial administrator's list of creditors, and the judicial reorganisation plan itself, in order to reach the collectivity of creditors.

If any creditor files a motion against the plan, a general meeting of creditors will take place. During such a general meeting of creditors, the creditors can negotiate with the debtor and the debtor can make amendments to the reorganisation plan.

If the reorganisation plan is approved, the judge may order the judicial reorganisation of the debtor. The judicial reorganisation plan entails novation of pre-petition claims. On the other hand, if the reorganisation plan is rejected, the judge orders liquidation.

Out-of-court reorganisation is also possible, whereby a debtor that meets the above requirements of judicial reorganisation may propose and negotiate an out-of-court reorganisation plan with creditors. The debtor may file for court ratification of the out-of-court reorganisation plan, attaching its reasons and a document stating terms and conditions, signed by the creditors.

The debtor may further file for ratification of an out-of-court reorganisation plan that binds all creditors encompassed therein, provided it is signed by creditors representing over three fifths of all claims of each kind encompassed therein. In this case, in addition to the documents provided for the regular out-of-court reorganisation, the debtor must attach:

  • a statement of the debtor’s equity position;
  • accounting statements for the last financial year and those drawn up especially to support the petition; and
  • documents evidencing the powers of the subscribers to renew or compromise, a full nominal list of creditors, stating their addresses, the kind, rating and updated amount of the claim, and specifying its origin, the system of the respective maturity dates and the accounting records of each pending transaction.

After receipt of the petition for ratification of the out-of-court reorganisation plan, the judge shall order the publication of a notice in the official press and in a widely circulated newspaper, or in the localities of the debtor’s headquarters and branches, calling all creditors of the debtor to file their oppositions to the out-of-court reorganisation plan. Creditors shall have 30 days from publication of the notice to challenge the out-of-court reorganisation plan.

This kind of reorganisation does not apply to holders of tax or labour-related claims or occupational accident claims, or to those whose credits are not submitted to the effects of the judicial reorganisation proceeding (creditors holding the position of fiduciary owner of real or personal property, financial lessor, owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause, including under real estate developments, or an owner under a sale agreement with title retention, whose claim shall not be subject to the effects of the judicial reorganisation, and the ownership rights over the item and the agreement terms shall prevail with due regard for the respective law).

The out-of-court reorganisation plan shall not contemplate accelerated payment of debts or unfavourable treatment of creditors not subject to the out-of-court reorganisation plan, and the debtor shall not file for ratification of an out-of-court reorganisation plan if a petition for a judicial reorganisation proceeding is pending or if he or she has obtained judicial reorganisation or ratification of another out of-court reorganisation plan within the last two years.

Finally, it is important to note that the petition for ratification of the out-of-court reorganisation plan shall not entail the suspension of rights, actions or executions, or the impossibility of the petition for decree of liquidation by creditors not subject to the out-of-court reorganisation plan (as set forth in Article 161, paragraph 4 of the BBL).

Under Article 49 of the BBL, all claims existing on the date of the filing are subject to the effects of a judicial reorganisation proceeding, even if not yet due. A lender’s right to enforce its loan and/or any security during the stay period is suspended.

In the case of a creditor holding the position of fiduciary owner of real or personal property, financial lessor, owner or committed seller of real estate whose respective agreements include an irrevocability or irreversibility clause (including under real estate developments), or of an owner under a sale agreement with title retention, said owner's claim shall not be subject to the effects of the judicial reorganisation, and the ownership rights over the item and the agreement terms shall prevail, with due regard for the respective law. However, during the stay period, it shall not be permitted to sell or remove from the debtor’s establishment any capital goods essential to the debtor’s business.

It is important to note that upon the disposal in the reorganisation plan of an asset in rem guarantee, suppression or replacement of the guarantee shall only be permitted with the express approval of the creditor holding the respective guarantee (set forth in Article 50, paragraph 1 of the BBL). This is also true if the reorganisation plan entails novation of pre-petition claims, binding the debtor and all the creditors subject to the reorganisation plan number, without prejudice to the guarantees and with due regard for the provisions of Article 50, paragraph 1 of the BBL.

In a liquidation case, upon declaration of the liquidation ongoing lawsuits against the debtor are suspended. Creditors may not initiate new claims and may not continue pending lawsuits.

After the decree of liquidation, only the judicial administrator may represent the debtor. The judicial administrator may not negotiate with the creditors to reduce outstanding debt or the order of payments.

Lastly, any assets of the debtor that were given as collateral under a fiduciary assignment are not considered part of the liquidation estate (that is, the creditor may enforce the collateral normally).

The judicial reorganisation proceeding does not provide an order of payment. The only kind of claim for which the BBL provides an express rule is the labour-related claim, as provided in Article 54 of the BBL: “the judicial reorganisation plan shall not provide for a term of more than one year for payment of labour-related claims or occupational accident claims fallen due by the date of the judicial reorganisation petition.”

Regarding the liquidation proceeding, the BBL provides the following order (Articles 84 and 83, in this order):

  • Post-petition claims shall be paid with precedence over those mentioned in Article 83, in the order set forth below:
    1. fees payable to the judicial administrator and his or her assistants, and labour-related claims or occupational accident claims referring to services rendered after the decree of the liquidation;
    2. sums provided to the bankrupt estate by the creditors;
    3. expenses with schedules, management, asset realisation and distribution of the proceeds, as well as court costs of the bankruptcy proceedings;
    4. court costs with respect to actions and executions in which the bankrupt estate is defeated; and
    5. obligations resulting from valid juristic acts performed during the judicial reorganisation pursuant to Article 67 of the BBL, or after the decree of bankruptcy, and taxes relating to generating facts occurring after the decree of bankruptcy, with due regard for the order established in Article 83 of the BBL.
  • After these, other creditors will be paid in the following order:
    1. labour-related claims, limited to 150 minimum wages per creditor, and occupational accident claims;
    2. claims with in rem guarantees to the limit of the value of the encumbered asset;
    3. tax claims, independently of their nature and length of constitution, except for tax fines;
    4. special privileged claims;
    5. general privileged claims;
    6. unsecured claims;
    7. contractual penalties and fines for breach of criminal or administrative law, including tax-related fines; and
    8. subordinate claims.

If the borrower, security provider or guarantor were to become insolvent, the main risk for lenders is that the claims existing on the date of the petition become subject to judicial reorganisation. If this happens, the lender’s right to enforce its loan and/or any security is suspended during the stay period, and it will receive its credit within the collective insolvency proceedings.

Furthermore, all debts will be converted into BRL at the exchange rate applicable on the date of the decision to declare the bankruptcy of the debtor, and in the case of insufficiency of the collateral, the outstanding amounts will be deemed unsecured claims.

The BBL does not apply to government-owned entities, mixed-capital companies, public or private financial institutions, credit unions, consortia, complementary pension fund entities, healthcare plan companies, insurance companies, special-savings companies and other organisations held by law to be equivalent to these (in Article 2 of the BBL).

Law 6,024/1974 provides financial institutions with the option of extrajudicial liquidation proceedings. Law 9,656/1998 provides healthcare plan companies with the same option. Insurance companies are regulated by SUSEP (the regulatory agency) and this entity has the prerogative to decree and carry out the liquidation of an insurance company (Decree-law 73/1966).

In general terms, there are no specific restrictions, controls, fees and/or taxes on insurance policies over project assets, and such insurance is regulated by the same general rules regulating the insurance industry in the country.

Notwithstanding this, there are certain restrictions regarding contracting insurance policies from foreign insurance companies. Complementary Law 126 of 2007 and CNSP Resolution 197 of 2008 ('Resolution 197') of the national council of private insurance list the situations where individuals or legal entities in Brazil are allowed to contract insurance policies from foreign insurance companies. Among the allowed options are coverage of foreign risks, and risk coverage for which there is no local alternative (Resolution 197, Part I of Article 6).

The absence of coverage in Brazil, according to Resolution 197, is evidenced by the refusal to cover the risk, obtained through consultations with the Brazilian insurance companies operating in the insurance sector appropriate to the risk, or by a negative letter issued by a union or trade association of insurance companies.

SUSEP’s Circular 392/2009 of the superintendent of private insurance superintendency, among other things, sets forth the operational procedure to be followed to provide evidence of absence of local coverage by Brazilian insurers. According to this Circular, SUSEP may at any time require the insured party, or the insurance broker who contracted a foreign insurance policy, to present the following documents:

  • copies of identical enquiries made with at least ten insurance companies in Brazil operating in the insurance sector in which the risk falls;
  • a copy of the responses of insurers denying coverage and explaining their position; and
  • a copy of a consultation with the foreign insurer under the same terms made to the Brazilian insurance companies, with its respective acceptance.

If there are not ten insurers in Brazil operating in the specific insurance sector, all local insurers operating in that insurance sector should have been consulted.

Payments under insurance contracts covering project assets may be paid to foreign creditors both in the case that such creditors are directly included as additional beneficiaries of the insurance, and in the case of enforcement of security over credit rights under insurance contracts.

The remittance of funds from Brazilian insurance companies to foreign creditors must follow the Brazilian central bank's requirements for any remittance of funds from the country, including the economic grounds of such remittance in order to evidence the legality of the transaction.

Payments of principal are not subject to withholding taxation in Brazil. Interest and any other income treated by Brazilian law as similar to interest payable by a Brazilian borrower to a non-resident lender in respect of loans are currently subject to withholding income tax (imposto de renda na fonte, or IRRF) at a rate of 15% or 25% (when the beneficiary is domiciled in a favourable tax jurisdiction) or at a lower rate if this is provided for in any applicable tax treaty between Brazil and the country of the beneficiary.

Pursuant to Section 24 of Law 9,430 (enacted on 27 December 1996), as amended by Law 11,727 (enacted on 23 June 2008), the definition of favourable tax jurisdictions includes countries and locations that do not impose any tax on income, that impose such tax at a maximum rate of less than 20%, or that have laws restricting disclosure of the owners of securities or not allowing for the identification of the beneficial owner of income attributed to non-residents. The list of favourable tax jurisdictions is set forth by Normative Instruction 1,037, enacted on 7 June 2010.

Normative Instruction 1,037 also provides a list of the so-called privileged tax regimes. Even though a loan from a person benefiting from a privileged tax regime does not trigger the application of the IRRF, it does subject the transaction to transfer-pricing rules, thin-capitalisation and other cross-border interest deductibility rules.  

Pursuant to Decree 6,306 of 14 December 2007, the conversion of foreign currency into BRL and the conversion of BRL into foreign currency are subject to the IOF/exchange tax. Currently, the IOF/exchange tax rate is 0.38% for most transfers of foreign currency into BRL. According to Decree 6,306, the settlement of exchange transactions in connection with loans obtained by Brazilian companies, for both inflow and outflow of proceeds to and from Brazil, including foreign loans with an average term exceeding 180 days, are subject to IOF/exchange tax at a 0% rate. The rate is 6% on the inflow of funds to Brazil in connection with foreign loans with an average term not exceeding 180 days (foreign loans with an average term of more than 180 days which are partially or fully settled before this term are subject to IOF/exchange tax at the mentioned 6% rate, plus penalties and interest). The Brazilian government may increase the current IOF/exchange tax rate at any time, up to a maximum rate of 25%. Any such new rate would only apply to future foreign exchange transactions.

The amount of interest payable under loan agreements may be limited to the interest rate established by Decree 22,626/1933 (the Usury Law). The application of the Usury Law is fairly controversial within the Brazilian courts, but the prevailing interpretation of the Usury Law adopted by the Brazilian courts is the one that establishes that loan agreements entered by and between non-financial entities are subject to a limit of a 1% in interest per month (ie, 12% in interest per year), plus monetary adjustment of the principal amount due.

In addition, loans obtained by Brazilian companies from related parties resident overseas are subject to transfer pricing rules that limit the amount of the interest expense. Such rules also apply to international transactions carried out with individuals or companies, whether related or not, located in favourable tax jurisdictions and benefiting from privileged tax regimes.

Brazilian transfer pricing rules diverge from the OECD transfer pricing guidelines. Instead of adopting the arm’s-length principle, the transfer pricing methods are driven by pre-determined profit margins. Brazil has developed an objective method based on predetermined profit margins that allows the taxpayer to mathematically determine and prove its pricing benchmark without having to go through a search for comparables.

Project agreements (construction, operation and maintenance, supply, take off, etc) are usually governed by Brazilian laws, as such documents regulate the rendering of services in Brazil, payments in the country and in local currency. There are exceptions, for example when one of the contracting parties is located abroad or if the scope of the agreement involves any kind of importation of goods or services.

Financing agreements signed by and between Brazilian borrowers and Brazilian creditors are governed by Brazilian law. Financing agreements signed by and between Brazilian borrowers (ie, the concessionaire and/or project company) and foreign creditors are usually governed by foreign laws (typically, US or English law or the laws of the place of incorporation of the foreign lender). Any payment guarantees (corporate guarantees from sponsors, for example) associated with international loan agreements may also be governed by non-Brazilian law, typically the same governing law of the loan agreement or the laws of the place of incorporation of the guarantee provider.

Security documents shall be governed by Brazilian law since the assets and/or rights subject to the security are located in Brazil and/or the security provider (ie, the project company) is incorporated in Brazil. 

As mentioned above, mortgages over real estate located in Brazil must be governed by Brazilian law. Pledge agreements must be governed by the laws of the country of the person/entity in possession of the assets. Accordingly, if the pledged assets are in possession of the project company (a Brazilian company), the relevant agreement must be governed by Brazilian law.

As mentioned in 9.1 Law Typically Governing Project Agreements, above, in Brazil it is typical to have all main project documents and financing agreements governed by Brazilian law. Since local financial institutions are still the main players in project finance transactions (including BNDES and private banks), most of the financing transactions closed in the country over the last years have been purely domestic.

In the case of the participation of foreign lenders, international suppliers or construction companies, it is legally possible to have the main financing documents and project documents governed by non-Brazilian law.

Unlike other jurisdictions (especially European countries), Brazil has not yet implemented any particular measure or policy to boost Islamic finance transactions in the country. Despite that, there is an increasing interest in the Brazilian market for Islamic related products, especially Shari'a-compliant assets. We have, in the past, seen Shari'a-compliant transactions related to the financing of sugar and ethanol production and the funding of cattle-farming; nowadays, Shari'a-compliant investment funds are in the spotlight and are being structured by major Brazilian banks and investment houses.

There is no specific regulation in Brazil related to Islamic finance. As such, the regulatory and tax treatment of transactions involving Islamic financing must be analysed on a case-by-case basis and must observe the rules and restrictions for general financing transactions.

Brazilian banking regulation does not specifically regulate the activities that can be performed or the licences that can be requested by Islamic banks; the requirements for Islamic banks to operate in Brazil are the same requirements for any other foreign entity.

As noted in 10.2 Regulatory and Tax Framework, above, there is no specific regulation in Brazil related to Islamic finance or any specific provisions connected to Shari'a-compliant products and transactions.

Tauil & Chequer Advogados Associado a Mayer Brown LLP

Av. Juscelino Kubitschek, 1455
5º, 6º e 7º andares Vila Nova Conceição
04543-011
São Paulo
Brasil

+55 11 2504 4210

+55 11 2504 4211

tauilchequer@mayerbrown.com www.tauilchequer.com.br
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Tauil & Chequer Advogados in association with Mayer Brown is a full-service firm that offers legal advice to national and international corporate clients, financial institutions and government entities, and is active in major deals in Brazil and Latin America, in a wide range of industries and sectors. Through a well-established arrangement with Mayer Brown LLP, the firm provides a one-stop shop service for project finance transactions, with offices in the business centres of Rio de Janeiro, São Paulo and Brasilia. The Banking and Finance team is formed of three partners, one senior counsel and 14 associates, and regularly assists clients in developing innovative financial structures that drive infrastructure investment. The team can address the specialised needs of lenders and developers in financing public infrastructure projects, including acquisition finance, project finance and debt capital markets.

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