Investing In... 2021 Comparisons

Last Updated January 20, 2021

Law and Practice

Authors



Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados provides services to clients in different legal areas in a co-ordinated and integrated manner, working in multidisciplinary teams where necessary. This work dynamic enhances the firm’s understanding of each client’s business and allows the firm to deliver tailor-made solutions to clients, thereby making Mattos Filho a valuable partner. Mattos Filho is a leader in more than 20 different practice areas and works continuously to ensure that all these practices are benchmarks for the market. The firm represents domestic and foreign companies, financial institutions, investors, multilateral agencies, private clients and family offices, investment funds, pension funds, insurers and reinsurers, and non-profit organisations.

Brazil has a civil law system. Accordingly, and unlike the common law systems where court decisions are a principal source of law, the Brazilian legal system is based upon codified law and not upon judicial precedents. This means that, with the exception of certain appellate decisions that have general applicability, judicial decisions in Brazil are not binding precedents that must be followed by subsequent courts.

The foundation of the Brazilian legal system is the Federal Constitution enacted in 1988, which establishes the independence of the legislative, judicial and executive branches, and sets out the country’s fundamentals, objectives and principles, among other provisions. 

Brazil’s government structure comprises a federal government, 26 states, one federal district (the country’s capital, Brasília) and municipalities. All members of the Federative Republic may issue laws within the limits established for each legislative authority and subject to the Federal Constitution.

The form of government adopted is presidential, and the president of the republic is the head of the executive branch. The legislative branch is represented at the federal level by the National Congress, composed of two different chambers: the Senate and the House of Representatives. All members of the House of Representatives and Senate are elected directly by the people.

The highest bodies of the judicial branch are the Federal Supreme Court and the Supreme Court of Justice. The Federal Supreme Court holds the final responsibility to guarantee that the Federal Constitution is observed.

General Rules and Definitions

In addition to the general rules established by the Federal Constitution and certain laws, foreign direct investment (FDI) in Brazil is regulated by the National Monetary Council (CMN), the Central Bank of Brazil (BACEN) and the Brazilian Securities Commission (CVM).

Under the relevant laws and regulations, “foreign capital” consists of any goods, machinery or equipment that enters Brazil to generate goods and services, as well as any capital owned by non-residents that is brought into the country to be used in economic activities. 

Registration with Federal Authorities

All foreign capital remitted to Brazil as investments or loans must be registered with BACEN. In addition, non-residents that own assets located in Brazil must register them with the Individual or Legal Entity Taxpayers’ Register (respectively, Cadastro Nacional de Pessoa Física or CPF and Cadastro Nacional de Pessoa Jurídica or CNPJ) of the Brazilian Federal Revenue Secretariat (Brazilian FRS). 

Sectors Subject to Particular Rules and/or Additional Scrutiny

The sectors that are subject to particular rules and additional scrutiny are described in 8.1 Other Regimes.

Current Political and Business/Economic Overview

During 2020, municipal elections were held in Brazil. The polls were held on 15 November, and for cities that met the electoral criteria and where none of the candidates received an absolute majority of the votes, a second round of voting was held on 29 November.

According to many political analysts, the results showed a different pattern in the votes of the population when compared to the previous election, being more pragmatic and supportive of experienced politicians. 

Although municipal elections are not a precise way to predict the behaviour of voters in the next national elections, political analysts do highlight that the results showed a shift towards the centre-right of the political spectrum. This comes as a new scenario given that in the last presidential elections, held in 2018, the political scenario was polarised into extreme right versus left and extreme-left ideologies.

As to the business and economic environment, as in many other countries, the COVID-19 pandemic has exposed the country to unparalleled health and economic challenges. However, the crisis has been ameliorated by emergency measures adopted by the federal government, consisting of financial aid to a substantial part of the population. Although a contraction of 4.5% of Brazil’s GDP is expected for 2020, in 2021, the government predicts a GDP growth of 3.2%.

Recent Developments

Brazilian legislation previously imposed restrictions on foreign capital in certain key economic sectors. Most of these restrictions, however, have been eliminated in recent years, broadening opportunities for foreign investment in Brazil. The main sectors in which such restrictions are still in place are described in 8.1 Other Regimes

As to recent developments in the Brazilian legal framework, see below for a summary of measures adopted to eliminate restrictions to FDI or to expand the possibility of investing in different markets and create business opportunities that may also benefit FDI. 

Aviation

Pursuant to Law No 13,842/2019, FDIs are allowed, without limitation, in Brazilian air companies, such as airlines and air taxis, provided they are incorporated under Brazilian law, with headquarters and administration in Brazil. This new law represents the elimination of previous restrictions and is expected to attract significant FDI to Brazil’s air transportation sector.

Legal framework for sanitation

Law No 14,026/2020 of 15 July 2020 provides a new legal framework for sanitation in Brazil, and introduces rules that will positively impact the socioeconomic development of a very significant number of municipalities. Among other provisions, the new legal framework allows privatisation of state-owned companies and the establishment of new concessions and public-private partnerships.

Legal framework for natural gas

The new legal framework for the natural gas market was approved by the House of Representatives in July 2020, and is currently awaiting approval by the Senate. If the new legislation is passed, it will alter the granting regime to allow companies in the sector to act on authorisation given by the National Agency of Petroleum, Natural Gas and Biofuels or ANP, thus eliminating the need for concessions. This change is likely to increase legal certainty and greatly facilitate investment in the sector. 

General Considerations

Since the opening of the Brazilian economy to international investment in the mid-1990s, M&A have become a common way for non-residents to establish businesses in Brazil.

M&A transactions in Brazil are not much different from those conducted in other major jurisdictions. Typically, non-resident investors (NRI) do business in the country through a Brazilian entity formed by the NRI. 

The type of agreements, legal protections and documentation required for each M&A deal may vary depending not only on the characteristics of each transaction, but also on the corporate type of the target entity (eg, public or private company) and the nature of the investment (eg, controlling or minority investment). 

Furthermore, the definition of any structure to be employed should also consider the relevant tax impacts and/or potential efficiencies. Refer to 9 Tax for further details in this regard.

Types of Investments for NRI

There are two major types of investments that NRI may carry out in Brazil: 

  • under the regime regulated by Law No 4,131/1962, commonly known as “Direct Investment”, which rules direct investments in (a) companies incorporated in Brazil or (b) through incorporation of a branch of a foreign company, which requires authorisation from the federal government and is a rather complex and time-consuming process, and thus not generally recommended; or 
  • investments in the Brazilian financial and capital markets (“Portfolio Investment”), which are regulated by Rule No 4,373/2014, enacted by the Brazilian National Monetary Council.

Direct Investments made by NRI must be registered with the Central Bank of Brazil, while Portfolio Investments must be registered with both the Central Bank of Brazil and the Brazilian Securities and Exchange Commission. 

For Direct Investments, the most common corporate types adopted in Brazil are sociedade limitada (Limitada) and sociedade por ações (SA), as further detailed in 4.1 Corporate Governance Framework.

NRIs registered under the mechanisms provided by Rule No 4,373/2014 are authorised to invest in the local financial and capital markets. In general, NRIs making a Portfolio Investment may have access to the same investment opportunities in the financial and capital markets that are available to Brazilian residents. 

In addition to investments in shares of publicly traded corporations, the most common investment structures used by NRIs under this regime involve private equity funds, credit rights investment funds, and funds of funds (ie, funds that invest in shares of other funds). Provided that certain requirements are met, NRIs may also carry out transactions with public debt securities, derivatives (futures, swaps, options, commodities), real state receivable certificates, etc. 

Alternative Investment Structures

Consortiums

Law No 6,404/1976 (“Corporations Law”) contemplates a type of association called "consortium" in which two or more Brazilian or foreign companies associate for the sole purpose of undertaking a specific activity. A consortium agreement contains the rules regulating the consortium, including the liability of its partners. A consortium does not have corporate personality by nature, but is deemed a separate entity for tax purposes.

Joint ventures

Under Brazilian law, a joint venture does not have corporate personality per se. Typically, parties associating under a joint venture agreement use one of the various types of corporate entities available under Brazilian law as a vehicle. Limitadas and SAs are commonly the preferred types of entity for joint venture vehicles in Brazil.

M&A deals solely involving closely held companies are only subject to the provisions of the Corporations Law (excluding those provisions exclusively applicable to publicly-held companies), and the Brazilian Civil Code if they are Limitadas. In addition to the CVM Regulations, transactions that involve public companies are also governed by the applicable listing rules.

Depending on the industry of the Brazilian entity targeted in the M&A transaction, the change in its shareholding structure may be subject to prior approval or post-closing communication to the Brazilian government agency overseeing the sector. As to merger control review in Brazil, refer to 6 Antitrust/Competition for further information.

Several types of corporate entities may be established in Brazil. The following are the most common.

Sociedade Limitada

More commonly known as a “Limitada”, this includes features common to both partnerships and corporations, and is generally similar to a private limited liability company in the UK and other types of European limited liability companies. A Limitada is relatively simple and inexpensive to organise and its disclosure requirements are less stringent than those applicable to an SA.

In addition, corporate decision-making in a Limitada can be rather less bureaucratic and, as such, corporate decisions can be made more easily and quickly in a Limitada. Because the law applicable to a Limitada is not as extensive and detailed as the law regulating SAs, a Limitada may provide more freedom to investors, including custom-made provisions in the company’s by-laws allowing the creation of different management bodies, disproportionate distributions of profits, and simpler procedures for convening company meetings and passing resolutions.

An important aspect of the Limitada is that the main resolutions of the owners, such as amendments to the company’s articles of association, or decisions concerning acquisitions, mergers, dissolutions, and the cessation of any liquidation, must be taken by owners holding at least 75% of the company’s total capital, as opposed to an SA, in which such resolutions are taken by owners holding at least 50%, plus one share, of the company’s capital. 

Additionally, there are certain matters in a Limitada that may require the unanimous approval of the owners (such as the transformation of the Limitada’s corporate structure and the election of managers if the corporate capital is not fully paid up). 

There is no minimum capital requirement in a Limitada and the capital is divided into quotas. As a rule, the partners’ liability is limited to the paid-in capital, as long as it has been fully paid. In cases where the capital has not been fully paid, the partners are unlimitedly and jointly liable. The law also allows one individual or entity to be the sole quota-holder.

Sociedade por Ações

Normally referred to as an “SA”, this is broadly like a corporation organised under state law in the United States and a public limited company in the UK. In an SA, capital can be raised through a public offering of shares and other securities, such as debentures. 

The SAs can be privately or publicly held, but, if there is public capital involved, the companies must also respect the regulations and other provisions of the CVM. 

The management of an SA tends to be more bureaucratic, time-consuming and expensive (eg, all minutes, by-laws and financial statements must be published in the Official Gazette and local newspapers), involving several bodies.

An SA may be listed or unlisted, and the duties of the management, access to capital markets and how they are overseen will differ based on this choice.

An SA should have at least two shareholders who subscribe all shares comprising the capital stock; shareholders may be resident or non-resident individuals or entities. Shareholders are liable up to the amount of their capital holdings.

The capital of an SA is divided into shares, each representing a fraction of the capital and a bundle of rights. There may be different classes of shares, each class providing different rights, advantages and/or restrictions. As a rule, to control the company, it is enough to own 50% plus one share of the voting shares.

Duties and Obligations of Shareholders and Officers

In general terms, all shareholders must exercise the right to vote in the company’s interest. The right to vote will be deemed abusive if it is exercised with the intent to cause damage to the company or to other shareholders, or if it is used to obtain an advantage for the relevant shareholder or for a third party to which neither is entitled, and which results or may result in damage to the company or to other shareholders.

The controlling shareholder must use its controlling power to enable the company to accomplish its purpose and perform its social role. The controlling shareholder also has duties and responsibilities towards other shareholders, those who work for the company and the community in which it operates. This is a general standard that usually guides judicial precedents while analysing the conduct of controlling shareholders that act in an abusive manner.

Officers and directors of Brazilian companies are responsible to conduct the corporate business, and may be held responsible for the breach of their duties. The Brazilian Civil Code and the Corporations Law establish specific fiduciary duties applicable to the officers and directors of Brazilian companies, as follows:

  • duty of diligence;
  • duty to pursue the company’s interest;
  • duty of loyalty;
  • duty not to act in conflict of interest; and
  • duty to inform.

Essential Rights of Shareholders

Any shareholder of an SA is entitled to the following essential rights: 

  • to participate in the profit sharing of the company;
  • to participate in the distribution of assets of the company, in case of liquidation; 
  • to supervise the management of the company;
  • preference in the subscription of new shares, founder’s shares and debentures convertible into shares and subscription bonuses issued by the company; and
  • withdrawal from the company in the cases set forth by law.

Other Legal Protective Rights for Minority Shareholders

Furthermore, minority shareholders may have the following rights: 

  • to convene shareholders’ meetings; 
  • subject to a higher quorum of two thirds of the voting capital of the company, to approve amendments to the by-laws; 
  • certain matters subject to majority or unanimous approval requirements; 
  • to require the adoption of the multiple voting system for the election of members of the board of directors; 
  • in publicly held corporations, to elect and dismiss one member of the board of directors via separate election; 
  • to require the installation of the audit committee of the company; 
  • to request certificates of the notes in certain corporate books;
  • to file damage claims against any member of management of the corporation; and 
  • to request the judicial liquidation of the corporation, where the directors/officers or the majority of the shareholders do not, or refuse to, carry it out in certain events.

Minority shareholders holding voting shares are entitled to tag along in the sale of control of publicly held corporations. The de-listing of a publicly held corporation is subject to (i) the carrying out of a de-listing tender offer to all shareholders at a fair value, and (ii) shareholders representing at least two thirds of the corporation’s free float shares formally accepting the tender offer or expressly agreeing to de-list the company.

Refer to 7 Foreign Investment/National Security for the disclosure obligations relating to the registration of foreign capital in Brazil. 

The Brazilian financial and capital markets system is composed of regulatory bodies, such as CMN, and supervisory bodies, such as BACEN and CVM, which supervise, regulate and inspect publicly held corporations, financial institutions and stock exchanges, among other entities. The listing process is mainly regulated by CVM and by the Brazilian Stock Exchange (B3).

Regarding access to capital markets, as one of the primary sources of funding and financing of businesses in Brazil, it offers several medium and long-term financing instruments, such as debentures, promissory notes, receivables investment funds (FIDCs), real estate receivables certificates (CRIs), and agribusiness receivables certificates (CRAs). 

It also offers financing with undetermined terms, such as operations involving the issuance of shares by companies. Additionally, foreign loans are a frequent source of medium and long-term financing. 

Moreover, long-term infrastructure financing performed through capital markets transactions has been gaining relevance over the past few years, considering the consolidation of the use of instruments such as infrastructure debentures, created by Law No 12,431/2011.

The main rules for debt securities offerings in the capital markets are the following:

  • the Corporations Law, which contains rules on the organisation of local companies and the issuance of debentures;
  • Law No 6,385/1976, regarding the local capital markets;
  • CVM Instruction No 358, regulating the restrictions on the trading of securities;
  • CVM Instruction No 400, applicable to public offerings of securities in the local market; and
  • CVM Instruction No 476, regulating the automatic registration of restricted public offerings.

Regarding the listing of debt securities on any exchange for a public offering, it is mandatory for the company to be registered with the CVM, and also to register the offer with the CVM. For restricted public offerings, it is not necessary to register the offer with the CVM, as it is already granted automatic registration.

Concerning foreign investments, the main applicable laws are:

  • Law No 4,131/1962, which regulates foreign direct investments in Brazil;
  • CMN Rule No 4,373/2014; and
  • CVM Instruction No 560.

All foreign capital remitted to Brazil as investments or loans, in foreign currency or in assets, must be registered with BACEN.

To qualify for indirect investments, non-resident investors must engage a financial institution to act as legal representative, appoint a tax representative, and execute a custody agreement with a local institution, in addition to registering with the CVM, which is also required. 

Direct investments in Brazil, on the other hand, must be registered with BACEN and the Brazilian FRS. The target company must be registered with BACEN and the Brazilian FRS as well.

The nature of a foreign investor investing in Brazil (eg, an investment fund, a public company, etc) will not change the criteria or proceedings involved in the regulatory review of such investment by local authorities. 

The two major types of investments that NRIs may carry out in Brazil are detailed in 3.1 Transaction Structures. In addition, due to the flexibility provided by investment funds in Brazil, NRIs usually prefer to carry out Portfolio Investments in Brazil by means of local investments funds. In this case, the local investment funds are subject to registration with the CVM.

Overview

Brazil has a merger control regime enforced by the Administrative Council for Economic Defence (CADE), composed of two bodies: 

  • CADE’s General Superintendence, responsible for deciding simpler cases; and
  • CADE’s Tribunal, responsible for deciding cases in which the General Superintendence has recommended the blocking or imposition of remedies, and whenever the General Superintendence’s clearance is appealed.

The Brazilian regime is “pre-merger”, so all transactions subject to mandatory notification should be cleared by CADE before closing. 

The Brazilian regime does not have specific provisions for FDI and covers a broad range of transactions, including FDI.

Filing Thresholds

The Brazilian regime is applicable to transactions that meet the following cumulative thresholds: 

  • the transaction has actual or potential effects in Brazil; 
  • the transaction is defined as a “concentration”; and
  • one of the economic groups involved registered gross revenues of BRL750million (either buyer or seller) and the other group registered BRL75 million (either buyer or seller) in the last fiscal year before the transaction.

Effects in Brazil

The “effects in Brazil” threshold is met when the transaction takes place in Brazil, or when it takes place abroad, but the target has or will have direct presence (local subsidiary, distributor or representative) and/or indirect presence (exports) in Brazil. 

Concentration

The definition of “concentration” is quite broad and encompasses: 

  • a merger of two or more previously independent firms;
  • acquisitions of sole or joint control of a company or parts of a business (eg, assets);
  • acquisitions of certain minority shareholdings; and 
  • joint ventures, consortiums and “collaborative agreements”. 

Revenues

For calculating revenues, the parties should consider “economic group”:

  • general rule:
    1. the company involved in the transaction;
    2. entities under common control; and
    3. entities over which any of the entities under common control hold, directly or indirectly, an interest of 20% or more; and
  • investment funds:
    1. the fund involved in the transaction;
    2. the investor’s economic group (or group of investors bound by an agreement) holding, directly or indirectly, 50% or more of the shares of the fund; and
    3. the portfolio companies controlled by the fund or in which such fund holds, either directly or indirectly, an interest of 20% or more.

Exemptions

  • Minority shareholding acquisitions by sole controller;
  • joint ventures, consortiums and “collaborative agreements” created for the purposes of a tender process launched by the Brazilian authorities;
  • stock exchange transactions (voting rights attached to the shares are suspended until clearance); and
  • derogation: CADE’s Tribunal may authorise the completion of a transaction before clearance.

Procedures

Fast-track proceeding

Fast-track is applicable to simpler cases, resulting in no or insignificant horizontal overlaps (combined market share <20%) or vertical relationships (below 30% of market share in upstream and downstream markets).

CADE’s General Superintendence has up to 30 calendar days from the filing to issue a clearance decision or apply the regular proceeding for further review.

Regular proceeding

Applicable to cases not eligible for the fast-track proceeding, which require a longer analysis.

Timing

CADE has up to 240 days, from the filing, to issue a final decision. The deadline may be extended once for 90 days.

The parties must wait an additional 15 calendar days in transactions cleared by CADE’s General Superintendence, as third parties may appeal the decision or CADE’s Commissioners may ask for a further review by CADE’s Tribunal.

To optimise time and resources, CADE usually does not cover all the steps but approves transactions whenever it has enough information to reach a decision. CADE assesses the competitive aspects of all transactions, as per the framework below:     

  • definition of relevant markets;
  • assessment of the parties’ market shares:
    1. safe harbours in horizontal mergers: market share below 20% or the variation of the HHI is below 100 points or the total HHI is below 1,500 points; and
    2. safe harbour in vertical mergers: 30% market share in both downstream and upstream markets; 
  • assessment of the parties’ market power and ability to exert it; and
  • CADE's assessment of the parties’ ability to unilaterally or collectively alter market conditions (raising prices, restricting output, discriminating against competitors), considering entry and rivalry conditions and other relevant aspects.
  • efficiencies produced by the transaction must:
    1. be quantifiable;
    2. be specifically related to the transaction;
    3. be able to improve consumer welfare; and
    4. offset the negative effects produced by the transaction.

CADE may impose remedies or negotiate them with the parties whenever it considers that the transaction significantly restricts competition and that restriction is not offset by efficiencies. 

Remedies may be structural or behavioural and comprise any tool to neutralise the negative effects of a transaction.

CADE usually prefers structural remedies, mainly in horizontal mergers, but it is open to exploring options depending on the deal.

CADE’s Guidelines state that remedies should: 

  • be proportional to the restriction to competition;
  • address the negative effects of a transaction in a timely manner;
  • be feasible in terms of costs and ease of implementation; and
  • be easy to monitor by CADE.

Examples of structural remedies: 

  • sale of corporate control, equity interests or assets; and
  • transfer of intellectual property rights, including, among others, patents and trade marks.

Examples of behavioural remedies: 

  • obligation of non-discriminatory behaviour; and
  • obligation to supply access to key infrastructure for competitors.

Penalties for Failure to Notify (“Gun Jumping”)

Parties may not close a transaction subject to mandatory filing and must remain independent until the final clearance, which prevents:

  • exchanging competitively sensitive information and business secrets, except to the extent strictly necessary to negotiate the envisaged transaction;
  • exercising any type of influence on the other party and its businesses;
  • transferring any assets or rights to the other party;
  • integrating operations; and
  • more broadly, anticipating the implementation of the envisaged transaction.

Failure to comply with this standstill obligation exposes the parties to fines ranging from BRL60,000 to BRL60 million. The methodology for the calculation of gun-jumping fines is mostly based on transaction value and the size of the groups involved. 

The parties are also exposed to potential investigation into their behaviour prior to obtaining CADE’s approval, and CADE may seek judicial remedies to have acts implemented in violation of the standstill obligation declared null and void.

Post-closing Notification

Brazilian competition law authorises CADE to request parties to submit a transaction for a post-closing review within one year after closing, where CADE’s prior approval or notification is not required.

This tool is not used often by CADE and seems to be restricted to cases in which CADE identifies potential competitive concerns that deserve a closer look.

Foreign Investment National Regime Applicable to FDI

Foreign investment registration

Brazil does not currently maintain a standalone mechanism for reviewing foreign investments for national security considerations. However, Brazil uses the registration with BACEN and the Brazilian FRS to provide Brazilian market authorities with control over currency entering and leaving the country, which enables the remittance of profits to non-Brazilian investors, whether as dividends or due to divestments. There are no restrictions on the repatriation of funds or remittance of profits in terms of the amount of capital and the length of time that funds remain in Brazil. 

General overview of the process

All foreign capital invested in Brazil must be registered with BACEN in a uniform way. At first, all the companies and investors must be registered in the Non-Resident Declaratory Register (Cadastro Declaratório de Não Residente or CDNR), which serves as a registry of information about non-resident individuals and companies in the country. 

The second step is the registration of the actual capital, which may be with reference to foreign or national currency. The registration is made through a self-responsive electronic system named SISBACEN – RDEIED/ROF, which covers three different units: 

  • FDI;
  • Financial Transactions Registration (ROF); and
  • Capital and Financial Markets (Portfolio).

Currently, there are two forms to register: “automatic” or “declaratory”. 

Automatic registration occurs when related to: 

  • inflow of foreign currency;
  • conversion into foreign direct investment;
  • transfers between modalities of the FDI register;
  • international conference of shares or stocks; and
  • remittances abroad of profits and dividends, interest on own capital and return on capital.

In the declaratory registration, the Brazilian entity receiving the investment (either through a subscription of securities or the extension of credit) is responsible for such registration. It tends to be a simple and fast process.

Furthermore, companies headquartered in Brazil that receive FDI must always keep their financial and economic information updated. For companies that receive FDI and have a net value of less than BRL250 million, the update must be annual. For companies that present a net value above BRL250 million, the update must happen four times a year.

If the mandatory registration is not correctly done, BACEN may prevent investors from undertaking financial transfers under the protection of the registry until the irregularities are corrected. Besides, BACEN may apply penalties if there is any kind of omission, delay, discrepancy or false information, including warnings and a fine of up to BRL250,000.

There are also disclosure requirements that apply to FDI with respect to the ultimate beneficial owner (UBO). In summary, when applying for a CNPJ, any prospective NRI must provide information regarding its respective legal representative in Brazil and also with respect to its controlling shareholding structure until it reaches an individual (natural person) that is deemed to qualify as its UBO, pursuant to the applicable legislation. 

It may not be necessary to disclose information up to the controlling individual level if the NRI is controlled by any of the entities listed in paragraph 3 of Article 8 of Brazilian FRS Instruction No 1,863/2018, as these are exempt from disclosing the respective UBO (exempt entities).

Refer to 1.2 Regulatory Framework for FDI and 7.1 Applicable Regulator and Process Overview, as Brazil does not have a standalone national security review regime. The legislation in force does not specify any other criteria, considerations and analyses for joint ventures or partnerships, acquisitions by foreign governments or non-controlling minority investments.

Refer to 1.2 Regulatory Framework for FDI and 7.1 Applicable Regulator and Process Overview, as Brazil does not have a standalone national security review regime.

Some sectors are subject to FDI prohibitions or restrictions. These sectors and their respective legislation are discussed under 8.1 Other Regimes.

Regimes of Prohibitions and Restrictions to FDI in Brazil

Prohibitions

Nuclear energy

The Federal Constitution prohibits all types of private investments – including national ones – in the development of activities involving nuclear energy. In this sense, the prohibitions also apply to FDI. 

Postal services

The services related to post offices and telegraphs are also a monopoly of the federal government. As a result, FDI is also prohibited in this sector. 

Restrictions

Broadcasting and media

The Federal Constitution also provides that foreign investment in broadcasting and media companies is limited. The foreign capital in this sector is limited to 30%, ie, at least 70% must come from Brazilian individuals or companies. 

Mining

The mining sector is also subject to restrictions. Mineral resources are owned by the federal government, but companies incorporated in Brazil may obtain permission to operate in the mining area. Certain limitations may apply to mineral exploration in frontier areas, however (Law No 6,634/1979 and Decree No 85,064/1980).

Financial institutions

Pursuant to Article 192 of the Federal Constitution, foreign ownership interests in Brazilian financial institutions must satisfy requirements to be established by law. Since no specific law has been enacted in this regard, any ownership stake in a financial institution is in principle prohibited for individuals or entities residing or domiciled abroad on the grounds of Article 52 of the Transitional Constitutional Provisions (Ato das Disposições Constitucionais Transitórias or ADCT).

Nonetheless, Article 52 contemplates an exception to the prohibition of ownership by foreign investors of stakes in financial institutions when such ownership serves the Brazilian national interest. A decree signed by the president of Brazil is required in such a case. 

In this regard, Decree No 10,029/2019 (of 26 September 2019) currently allows BACEN to authorise and acknowledge as Brazilian national interest: (i) the implementation of new bank branches belonging to financial institutions domiciled abroad; and (ii) the increase of equity interests held in national financial institutions by foreign individual investors or companies. 

Rural property

Some restrictions apply to foreign companies and individuals in relation to ownership and lease of rural properties in Brazil, although no restrictions apply to the creation of other interests over rural land. 

There is an ongoing discussion both in the courts and at the executive branch on whether such restrictions also apply to Brazilian companies where the majority share capital is held by foreign persons or companies that are controlled by foreign persons.

As to rural properties located in the border strip (faixa de fronteira), the area within 150 km of the Brazilian national border is deemed a national security area. 

The legislation on foreign capital in connection with rural estates located in the border strip is stricter than the laws on rural land in general and certain actions require the National Defence Council’s prior consent, including transactions that, directly or indirectly, result in the acquisition of rural real estate, possession, domain or any other right in the border strip by a foreign entity or individual. Such consent is also required for the investment of a foreign entity or individual in any manner in a company that owns, possesses or has any right in relation to rural real estate located in the border strip.

The exceptions to such rule are the following: (i) the constitution of guarantees on real properties in favour of national or foreign legal entities; and (ii) receiving title of rural properties upon foreclosure of real guarantees, title transfer by debtor/owner in payment of the debt or by any other form. 

Corporate Taxation

Legal entities incorporated in Brazil are subject to the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profits (CSLL), calculated according to the actual profit method (APM) or to the presumed profit method (PPM).

The APM represents the entity's accounting net profits after certain adjustments, and the PPM requires the profits to be calculated over a certain predetermined percentage of gross revenues, according to the business activity.

IRPJ is levied at a rate of 15%, plus a surplus rate of 10% for taxable income exceeding BRL20,000 per month. CSLL is levied at the general rate of 9%. 

The contribution to the Social Integration Programme (PIS) and the Contribution to Social Security Financing (COFINS) are levied on monthly revenues calculated according to the cumulative or non-cumulative regime. The non-cumulative regime allows the appropriation of tax credits on some costs and expenses determined by law.

PIS and COFINS are levied at a rate of 3.65% of the gross revenues under the cumulative regime, and 9.25% of the overall revenue under the non-cumulative regime. 

Taxes on Manufacturing, Sales and Services

Excise tax (IPI) is a federal tax levied on manufactured goods. The applicable rate may vary according to the product.

The State Value-Added Tax (ICMS) is a state tax levied on transactions relating to the circulation of goods, and interstate and intercity transportation and communication services. The average tax rate for ICMS is 18%. 

Services Tax (ISS) is a municipal tax levied on specific services provided by law, at rates varying from 2% to 5%. 

Permanent Establishment

Brazilian tax law does not provide a domestic definition of a permanent establishment (PE), although domestic law provides for certain situations in which a foreign company is deemed to have a taxable presence in Brazil, regardless of its incorporation as a legal entity.

Dividends

Dividends are exempt from withholding income tax (WHT), regardless of the residence or domicile of the beneficiary. Thus, remittances of dividends to individuals or legal entities resident or domiciled abroad are not subject to WHT. The Tax on Foreign Exchange Transactions (IOF/FX) is currently levied at a 0% rate.

Interest

Interest remitted to foreign investors is subject to WHT at a general 15% rate. If the non-resident investor is domiciled in a jurisdiction deemed as a favourable tax jurisdiction (FTJ), the applicable rate is 25%. The IOF/FX depends on the nature and term of the underlying transaction.

Interest on Net Equity

Brazilian law also provides for a hybrid instrument referred to as “juros sobre capital próprio” (JCP), which is subject to WHT at a 15% rate. IOF/FX is levied at a 0% rate.

Double Tax Treaties

Brazil currently has 33 double-tax treaties (DTTs) in force that may reduce the applicable WHT rates.

As for dividends, due to the current WHT exemption, the existing conventional reductions do not result in a more beneficial treatment when Brazil is the source country. The average reduction with respect to dividends is 15%, but some DTTs stipulate a limit of 10% (12.5% in the case of the DTT with Japan), provided some minimum participation criteria are observed.

With respect to interest, the average source taxation is limited to 15% in the DTTs, except in the case of Japan, where it is 12.5%. Most DTTs have some specific provisions, such as the exemption on interest paid to the government or government agencies of the other country, and the specific limitation of WHT to 10% on the interest of long-term loans for capital goods financing in some DTTs.

Some DTTs contain limitation of benefits (LOB) clauses. Treaty-shopping related discussions are addressed in 9.5 Anti-evasion Regimes.

Acquisition Structures That Could Step Up Asset Basis

A step-up in the assets’ cost basis could be achieved upon a share deal followed by the merger of the acquiring company into the target, or vice versa. 

In addition, goodwill resulting from the share acquisition can be amortised for tax purposes over a minimum period of five years, also upon a merger between the acquiring company and the target.

The step-up of assets value and the amortisation of goodwill are highly controversial issues in Brazil, and the tax authorities adopt a very restrictive approach. 

Earnings Stripping

When designing structures that may shift taxable income, taxpayers should be mindful of rules imposing limitations on outbound payments, especially transfer pricing (TP) rules and thin capitalisation rules, which limit the deduction of expenses on transactions seeking to erode the tax basis of Brazilian entities through outbound payments.

Thin capitalisation rules impose limitations on the deductibility of interest paid to related parties, as follows: (i) interest paid to a related party abroad shall be deductible as long as the total amount of the debt does not exceed twice the equity participation by such foreign related party in the net equity of the Brazilian legal entity; and (ii) interest paid to individuals or legal entities resident or domiciled in an FTJ or in a privileged tax regime jurisdiction shall not exceed 30% of the net equity of the Brazilian entity.

TP rules are addressed in 9.5 Anti-evasion Regimes.

Net Operating Losses

Net operating losses can be registered by an entity that adopts the APM where the tax deductions are greater than the taxable revenues in the calendar year (NOLs). NOLs can be carried forward in the following years, to shelter future income, subject to certain limits, the most important being the limitation to only 30% of the taxable income to be offset.

Capital Gains – FDI

Capital gains derived by a foreign investor in connection with Brazilian assets are subject to tax according to the same rules applicable to Brazilian resident individuals. WHT is levied at progressive rates ranging from 15% to 22.5%. Except in relation to the DTT signed with Japan (see 9.2 Withholding Taxes on Dividends, Interest, Etc), capital gains realised by residents of a tax treaty partner jurisdiction are taxable in Brazil and are not subject to rates lower than domestic rates.

Capital Gains – Tax Exemptions

Capital gains derived by a foreign investor arising in connection with transactions carried out in the Brazilian Exchange are tax exempt.

Also, income distributed by private equity funds (FIPs) or capital gains in connection with the sale of FIP quotas by non-resident investors are subject to WHT at a 0% rate.

Offshore Indirect Transfers

Offshore indirect transfers carried out, for instance, by means of an interposition of an offshore entity do not fall under the scope of the domestic provision imposing tax on capital gains derived by a foreign person.

However, the tax authorities regard this kind of strategy as abusive tax planning and have sought the application of a look-through approach, disregarding the interposed entity.

Anti-avoidance Provisions

There is no legislation providing for any specific anti-avoidance rule (SAAR), nor any general anti-avoidance rule (GAAR) in Brazil.

The National Tax Code authorises the authorities to disregard legal transactions intended to disguise or change the nature of a taxable event, but such provision is contingent to further regulation. Nevertheless, the tax authorities rely on such provision to disregard tax planning transactions, including treaty-shopping structures.

TP Rules

Brazilian TP rules are applicable to cross-border transactions between related parties, or to payments made to a beneficiary located in a jurisdiction deemed as a low-tax jurisdiction and/or a privileged tax-regime jurisdiction. Such rules may also apply to transactions between the target and its subsidiaries residing outside Brazil.

Brazilian TP rules diverge from the OECD TP guidelines by establishing fixed margins, irrespective of actual risks and functions carried out between related parties.

Thin Capitalisation

Refer to 9.3 Tax Mitigation Strategies.

Anti-hybrid

There are no anti-hybrid mismatch rules in Brazil such as the ones adopted by other jurisdictions.

The basic rules that regulate labour and employment relations in Brazil are contemplated by the Federal Constitution and the Labour and Employment Code (Consolidação das Leis do Trabalho). These rules are supplemented by federal and social security statutes, court decisions, collective bargaining agreements and employers' policies and practices. 

All employers and employees are represented by a labour union. There is only one labour union for employers (union of employers) and one labour union for employees (union of employees) in a given economic sector and geographic territory (union class). 

All labour unions are required by law to have a collective bargaining agreement. The collective bargaining agreement must cover all participants of the applicable union class. The parties are free to negotiate any subject provided the terms and conditions are not below the minimum employment standards established by the Federal Constitution.

The employer may bargain directly with the union of employees, in which negotiation, the collective bargaining agreement will affect only that employer and its employees. Employers and employees are not required to pay union dues.

The employment legislation provides several rights and benefits to employees, including: 

  • minimum wage (since February 2020: BRL1,045 per month); 
  • limited working hours (eight hours per day and 44 hours per week) – certain employees are exempt; 
  • resting periods (working schedule above six hours per day: break for a rest and meal of at least one hour; minimum rest of 11 hours between working days; minimum weekly paid rest of 24 hours); 
  • holiday (30 calendar days per year); 
  • 13th salary (one extra monthly salary per year); 
  • severance fund (8% of the employee's salary – in case of termination without cause, penalty of 40% over the deposits made during the employment relationship); and
  • leave periods (eg, paternity leave – five days; maternity leave – 120 days; mourning leave – two days; sick leave; etc). 

Additional rights and benefits may arise from the type of work executed by the employee (eg, allowance for hazardous conditions at the workplace); collective bargaining agreements; employer's policies (eg, meal vouchers, lodging, education, profit sharing, stock option plans, private pension plan, etc). 

In the event of an acquisition, change-of-control or other investment transaction, legally, the employer must maintain the rights of employees at the same level. No specific statutory right is triggered in favour of an employee in such cases, however, and the contractual treatment will vary for each transaction and target company.

Labour and employment law provide that business transfers or reorganisations (eg, change in control, share/stock purchases, transfer of assets, spin-offs, etc) cannot affect employment contracts and the terms and conditions of employment. 

In this regard, the employer must maintain the rights of employees at the same level. Furthermore, whether in a transfer of assets or change in control (labour succession), the new employer (successor) becomes liable for all labour and employment obligations of the former employer (succeeded). 

The employee does not, however, have a mandatory right to transfer employment with an acquired business (transfer is subject to the terms and conditions of the transaction). 

Although uncommon, it is important to review and confirm if the relevant collective bargaining agreement provides additional requirements to complete an acquisition or other investment transaction (eg, previous consultancy with the labour union).

FDI and Intellectual Property

Intellectual property rights are mainly ruled in Brazil by Law No 9,279/1996 (Industrial Property Law), Law 9,609/1998 (Software Law) and Law No 9,610/1998 (Copyright Law). The protection of patent, trade marks and industrial design in Brazil essentially depends on their registration before the National Institute of Industrial Property (INPI). 

Foreign companies may be compensated by the licensing of IP assets, if the licensing contracts are also registered before the INPI. In addition, tax laws impose certain restrictions on the remittance of royalties abroad for the licensing of protected IP assets between companies of the same economic group. Local subsidiaries paying royalties to foreign entities may also be subject to limitation on the deductibility of such expenses in accordance with applicable tax laws. 

There are no sector-specific regulations involving the protection of IP rights. However, within the legal framework involving IP, there are laws aimed at fostering R&D projects and partnership with public entities, such as PDPs (Partnership for the Development of Products).

Brazilian Legislation on Intellectual Property

According to the Criminal and Civil Codes, the Industrial Property Law, the Copyright Law and all other specific legislation, the unauthorised use of protected intellectual property rights may be considered a crime or a civil infringement. As a signatory of international treaties and considering its extensive and specialised legislation, Brazil ensures strong legal protection for copyrights, trade marks, patents, industrial designs, software and domain names.

Nevertheless, challenges can be faced in the process of IP protection. Examples are:

  • certain restrictions to the registration of trade marks (smells, sounds, trade dresses and colours, for example, are not registrable);
  • compulsory licensing of patents is foreseen in law (admitted in cases such as abuse of patent rights or abuse of economic power).

In addition, Brazil is working to decrease the backlog in the process of granting patents: in 2019, the average time was seven years – an improvement when compared to the 11 years taken by the INPI in 2017.

The Brazilian Data Protection Law

The Brazilian Data Protection Law (LGPD – Law No 13.709/2018) was enacted in August 2018 and came into force in September 2020.  

The LGPD is applicable to processing activities that occur within Brazilian territory and outside Brazil, if: 

  • personal data is collected in Brazil;  
  • the data relates to individuals located in Brazilian territory; or  
  • the goal is to offer products and/or services to Brazilians or foreign individuals in Brazil.

The Brazilian National Data Protection Authority (ANPD) is the main regulator in the Brazilian data protection landscape and it is responsible for the enforcement of the LGPD.  The  ANPD may apply administrative sanctions to data processing agents in the case of non-compliance with the LGPD. These penalties will be enforceable as of August 2021 and include fines of up to 2% of the company or group income up to a maximum of BRL50 million per violation, the mandatory public disclosure of the violation, the blocking and elimination of personal data, and even the suspension of the non-compliant party’s activities.  

There are no other significant issues at present.

Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados

Alameda Joaquim Eugênio de Lima 447
SP 01403-001

+55 11 3147 7600

+55 11 3147 7770

mattosfilho@mattosfilho.com.br www.mattosfilho.com.br
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Law and Practice in Brazil

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Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados provides services to clients in different legal areas in a co-ordinated and integrated manner, working in multidisciplinary teams where necessary. This work dynamic enhances the firm’s understanding of each client’s business and allows the firm to deliver tailor-made solutions to clients, thereby making Mattos Filho a valuable partner. Mattos Filho is a leader in more than 20 different practice areas and works continuously to ensure that all these practices are benchmarks for the market. The firm represents domestic and foreign companies, financial institutions, investors, multilateral agencies, private clients and family offices, investment funds, pension funds, insurers and reinsurers, and non-profit organisations.