Doing Business Latin America |
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Brazil |
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(Latin America/Caribbean)
Firm
Demarest Advogados
Contributors
Paulo Rocha |
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| Country Overview | Political Structure Brazil has about 208.5 million inhabitants, representing one-third of the population of Latin America. Approximately 84% live in urban areas along the Atlantic Coast, although the expansion of agribusiness and industrial activity into the interior of the country has led to the population expanding further and further away from the coast. The economic forecast for Brazil at the end of 2024, according to Deloitte, indicates modest GDP growth, projected at between 1.9% and 2.2%, driven mainly by domestic consumption and a stronger labor market. Inflation is expected to remain within the targets set by the Brazilian Central Bank, while the Selic rate is expected to be further reduced in order to stimulate the economy. However, public debt is a growing concern, with projections indicating that the government's gross debt could reach 77.3 % of the GDP by the end of 2024. These factors suggest a stable economic environment, but with significant fiscal challenges that need to be managed to ensure long-term sustainability. Brazil's largest states in terms of GDP are São Paulo, Rio de Janeiro and Minas Gerais, all located in the southeast region, with a combined population of around 83.37 million. The city of São Paulo contributes approximately 32.1 % of Brazil's GDP. B3 S/A (“BRAZIL, BOLSA, BALCÃO”), located in São Paulo, is one of the largest infrastructure companies in the global financial market and the largest stock exchange in South America, trading a large part of Brazilian production. In 2023, B3 recorded an Average Daily Turnover of BRL 24.3 billion, representing a significant variation compared to 2022. The combined GDP of Mercosur, including Argentina, Brazil, Paraguay, Uruguay and Bolivia, is around USD 5.195 trillion in Purchasing Power Parity ("PPP") terms and approximately USD 2.638 trillion in nominal terms. This places Mercosur in 5th position, just behind the United States, China, Japan and Germany; considering Brazil alone, we are the 10th largest economy in the world. Its four members have been modernizing and opening up their national economies. In 1996, Mercosur signed agreements with Chile and Bolivia, in force from October and February 1997, respectively, for the development of free trade between the countries. Mercosur also signed free trade agreements with Israel in 2007 and Egypt in 2010. The Mercosur agenda, however, goes far beyond economic and trade issues, covering also education, employment, the environment, consumer protection and culture. Brazil is divided into 26 states and a Federal District (within which Brasilia is located). This table shows the 5 regions, their populations and the percentage of the population living in urban areas:
The largest city in Brazil and South America is São Paulo, with more than 12 million inhabitants. This number increases to about 20 million when it includes urban centers - the metropolitan region - around São Paulo, known as Greater Sao Paulo. Another 14 cities, including Rio de Janeiro, have a population of over 1 million. The Political System A new constitution was introduced in October 1988. It provided a presidential type of government with three independent powers: The Executive, the Legislative and the Judiciary. A national referendum held in 1993 confirmed the presidential system as the preferred regime and the republic as the preferred form of government. After more than 10 years of military dictatorship, Brazil adopted multiparty democracy in 1979. However, the Armed Forces maintained control over the Executive Branch until 1985, when the first civilian president was elected through an indirect vote by an electoral college. Direct 4-year elections for governors and mayors were readopted in 1982, and for the Presidency of the Republic in 1988. Brazilian democracy is open to various forms of political participation. In addition to voting, there is participation from political players such as sectoral associations, unions, social movements and non-governmental organizations. There are also several mechanisms for direct participation by citizens in decision-making processes and in the exercise of control of power, for example, popular consultations and referendums, impeachment processes of the Executive Branch, and forums and public hearings involving the general voting public and companies. The Executive Branch
The Executive Branch also occasionally takes over the legislative functions of the Legislative Branch, adopting provisional measures (“MPs”) in urgent cases. MPs have the force of law, but they need to be approved by the National Congress within 60 days of its publication. Congress may extend the validity of MPs only once, for another 60 days. If this is not done, the MP will no longer produce effects. Congress may, by resolution, delegate the power to legislate to the President. The resolution can determine that Congress must examine the topic of the proposed law. The Vice President assists the President, when requested, and performs other functions assigned to the position through complementary laws. The Vice-President will replace the president if he or she is incapacitated, impeached or leaves office. The President appoints and dismisses Ministers of State. They have two general functions: First, to run their ministries, and second, to advise the head of government on the policies of their department. However, the responsibility for these policies lies with the president. They remain subordinate to the president, who is solely responsible - after consulting his ministers - for the federal administration. The Executive exercises direct and indirect administration. The direct administration includes the Ministers of State and their respective administrations, secretariats, chambers and committees, as well as the administration of the President. Indirect administration comprises government administrative organizations, state-owned enterprises and state-owned companies with private investors, federal foundations and federal regulatory agencies. The Legislative Branch
Before any bill becomes law, it needs to be approved by both chambers and receive presidential sanction. Each house has committees that analyze and report their conclusions on the specific matters that are submitted to them. The House of Representatives has 20 permanent committees, while the Senate has 12. In addition, temporary committees, such as the Parliamentary Committees of Inquiry, can be set up to investigate certain issues. Both states and municipalities have legislative powers. The Senate also has the mandate to approve the appointment by the president of the Supreme and Superior Courts, directors of regulatory agencies, the president of the Central Bank and other government officials, as defined in specific legislation. The Judiciary Branch Within the scope of the STF are the special courts. These are the highest courts of appeal for non-constitutional issues:
Below these special courts are the Federal Regional Courts and the State Courts. These hear appeals against decisions taken by both the lower Federal Courts and the lower State Courts (which are generally the first instance courts). The Federal Court can judge cases in which the Union or any of its companies or governmental entities are a party. State Courts judge cases involving individuals or legal entities not linked to the Union, or to state or municipal entities or authorities. Finally, there are the Courts of First Instance for Labor matters; the Regional Courts of Labor Appeals (which deal only with labor issues); the Public Electoral Courts and the Regional Electoral Courts (organization, supervision and summary of elections) and the Lower Military Courts (military crimes). All these courts are part of the federal judicial system. At the base of the court hierarchy are:
The Judiciary Branch is fiercely independent in its role of enforcing the law, providing fair and equal justice and protecting the individual rights of citizens. Political Divisions
Each has its own constitution, governor and state legislature. The Federal District, located on the border of the State of Goiás, in the Center-West region, also has its own governor and legislature. The governor exercises the executive powers of each state. The governor and the vice-governor are elected by direct vote for four-year mandates. Secretaries of State assist the governor in the exercise of his duties. Their number and powers vary from state to state, but according to state laws and the State Constitution, they all govern the state. The Legislative Assembly, composed of state deputies - also elected by direct vote - exercises legislative power. The number of deputies for each State Assembly is proportional to its population. The organization of the State Judiciary is the responsibility of each state, and is carried out by the highest court of the state, the State Court of Justice. The State Court of Justice is subject to both the Federal Supreme Court ("STF") and the Superior Court of Justice ("STJ"). Municipalities Municipalities are created by state law and are subject to the requirements of federal law regarding minimum population size, public revenue and consent of the population. The mayor governs the municipality, with the help of municipal secretaries or departmental directors. The Council is the municipality's legislative body. It can legislate on certain local matters authorized by the Federal Constitution. The State Court has competence over the municipalities. The Legal System Brazil is a civil law country, and its legal system is based on laws issued by the National Congress, State Assemblies and Municipal Chambers according to the procedures provided for in its constitution or organic law, as the case may be. The courts base their decisions on this promulgated law. If, however, a case does not fall under a specific rule or law, the Law of Introduction to the Rules of Brazilian Law establishes that the courts can base their decisions on case law, general principles of law, analogy, custom and usage. The Federal Constitution The Federal Constitution is divided into different titles covering:
Each state has its own constitution and each municipality has its own organic law, which must be in accordance with the principles and rules established in the Federal Constitution. There is a hierarchy in the application of laws in the Brazilian legal system based on legal criteria such as (i) temporality, (ii) jurisdiction, (iii) specificity, among others. These criteria are used to prevent conflicts between laws or misuse of current legislation. Recent Political and Economic History The Republic alternated between democratic and not-so-democratic periods, but at no time was there an outright rebellion or significant internal war. Over the last half century, Brazil has lived a varied political life. After the military regime, which ruled from 1964 to 1985, there was a period of 'transition', instigated and governed by the military government, which led Brazil to full democracy through the approval of the current Federal Constitution in 1988, thus laying the foundations for a Democratic Republic that respects the due process, checks and balances, the independence of Congress and the Judiciary, free press and social and civil rights. Since the reinstatement of direct elections to choose the President of the Republic, there have been seven presidential elections, with alternation of power between political parties and the proper functioning of democratic institutions, including the impeachment of two presidents. Current Scenario The autonomy of the Central Bank, approved in 2021, is also a significant milestone in ensuring the institution's role in price stability, as regulator of the system, and guaranteeing that monetary decisions are made based on technical criteria, regardless of political cycles. Over the last three decades, a framework change has also taken place to allow the private sector to take an increasing part in the provision of public services and infrastructure. In-depth regulatory reforms were implemented, allowing for the privatization of state-owned companies and the participation of the private sector in the provision of services and the construction and operation of infrastructure. To this end, laws were passed that sought to guarantee legal certainty for delegation contracts, which established new regulatory frameworks providing guidelines for private participation in different sectors, and 112 independent regulatory agencies were created with the power to issue new regulations and supervise partnership contracts. Public service concessions in infrastructure sectors have come to represent a fundamental strategy for the country's development and modernization. The General Concession Law, in force since 1995, was a decisive step towards reforming the state and fostering private sector participation in the management of essential services. This legal framework has enabled significant advances in sectors such as transport, telecommunications, energy and sanitation. Concessions are carried out through competitive tenders, ensuring that capable companies take over the operation of services, with a commitment to invest and improve quality, always under the supervision of the granting authority. The model has been crucial in attracting investment, optimizing resources and guaranteeing the provision of efficient and sustainable public services for the population. In 2017, Brazil enacted the Labor Reform, which represented a substantial change to the Consolidation of Labor Laws ("CLT") in Brazil. With the aim of modernizing labor relations and stimulating the economy, the reform introduced intermittent work, made working hours more flexible, and changed rules on holidays, pay and collective bargaining. Two important milestones for improving the business environment were approved in 2019. The first was the Regulatory Agencies Law, which improved the institutional framework for federal regulatory agencies in Brazil, providing for the management, organization, decision-making process and social control of these entities, and fostering greater functional, decision-making, administrative and financial autonomy. The law also amends several previous pieces of legislation relating to regulatory agencies, with the aim of improving transparency, governance and the stability of directors, as well as reinforcing the absence of hierarchical subordination in relation to the executive branch. The second milestone was the Economic Freedom Act, which established rules to protect free enterprise and the free exercise of economic activities. It also defines rules on the actions of the state as a normative and regulatory agent, ensuring economic freedom, good faith and respect for contracts and property. The law also amends various existing laws and repeals others, aimed at guaranteeing a freer and less bureaucratic market environment, fostering the country's economic development and growth. It is important to emphasize that these two laws instituted regulatory impact analysis as mandatory for all federal regulators, and must be part of the process for drafting new rules. The measure with the greatest capacity to impact the business environment in Brazil is the tax reform. An important part of it was approved in 2023 and aims to simplify the tax system, unifying taxes on consumption and creating a more transparent system. The main change is the introduction of the Value Added Tax ("VAT"), which will replace five existing taxes (PIS, Cofins, IPI, ICMS and ISS) with two new ones: the Contribution on Goods and Services ("CBS") and the Tax on Goods and Services ("IBS"). In addition, a Federal Excise Tax will be created on specific products such as alcoholic drinks and cigarettes. The reform provides for a transition period until 2033, when it will be fully implemented, and includes measures such as a tax ‘cashback’ for low-income families and a basic food basket with tax exemption for essential items. International Treaties According to the Federal Constitution, the president has the power to sign international treaties. He or she may also delegate these powers to appointed plenipotentiaries. With the exception of less formal treaties, known as executive agreements, all other forms of treaty, after signed by the Executive representative, must go to Congress for approval. Once a treaty has been approved - by Legislative Decree - the Executive will decide whether to ratify it. If the President decides to ratify, he or she will sign the instrument of ratification and exchange it with that of the other signatory (for bilateral treaties) or forward it to the depositary mentioned in the treaty. The treaty must then be approved in Brazil by Presidential Decree and published in the Federal Official Gazette. There have always been discussions in Brazil about whether international treaties are binding on domestic legislation. The STF has decided that the treaties incorporated into the Brazilian legal system have the same force as ordinary laws. Therefore, if a treaty conflicts with a domestic law on the same subject, the most recent one will prevail. The exception is in tax matters: The National Tax Code expressly states that treaties override ordinary laws. In addition, human rights treaties may have the same status as a constitutional amendment, depending on the approval quorum of Congress. Brazil has revised its foreign trade policy and now focuses on negotiating new free trade and preferential agreements. The Free Trade Agreement between the South Common Market ("Mercosur") and the European Union ("EU") appears to be a priority for Brazil. This trade agreement could intensify already dense economic relations with the EU - Brazil ranks sixth as the EU's main investor (excluding offshore companies) and is the third destination for EU investment actions worldwide5. In June 2019, the agreement was politically announced and now awaits approval and ratification by the member countries of both blocs. There are other advances in Mercosur trade negotiations, such as the joint declaration signed in June 2018 with the Pacific Alliance(6), which signaled the shared intention to increase trade relations between the two blocs. Another important achievement was the launch of negotiations with the Republic of Korea in May 2018, with Canada in March 2018, and ongoing negotiations with the EFTA countries (Iceland, Liechtenstein, Norway and Switzerland). It is also worth mentioning the recent analysis of a possible economic partnership agreement with(7) Japan. Mercosur is also expanding its preferential trade agreement with India and conducting trade negotiations with Lebanon and Tunisia. In addition, Brazil isn’t currently negotiating the expansion of the Economic Complementation Agreement No. 53 ("ACE No. 53") (with Mexico). Furthermore, official sources indicate that there are dialogues with a view to opening trade negotiations with other partners, such as Singapore and New Zealand. As part of the Brazilian government's broader plan to improve the business environment, align its public policies with the best international practices and strengthen its position on the global economic stage to attract foreign investors, Brazil has already signed up to 120 of the Organization’s almost 250 instruments. The country’s collaboration with the OECD began in the 90s and gradually deepened. In 2007, Brazil and other emerging economies became the organization's “Key Partners”. Currently, Brazil participates in numerous OECD committees and working groups, including as a member of the Inclusive Framework on Base Erosion and Profit Shifting ("BEPS") and as a member of the Global Forum on Exchange of Information and Transparency for Tax Purposes. Currently, Brazil has signed up to at least 108 of the Organization’s almost 250 instruments. |
| Companies | FORMS OF BUSINESS ORGANIZATIONS In general terms, the limited-liability company offers a number of practical advantages and is recommended if the partners desire simplicity and flexibility in the corporate structure, including lower maintenance costs and the inapplicability of some legal formalities that are mandatory for the corporations. A limited liability company is usually suitable for wholly-owned subsidiaries or restricted joint ventures. A new rule introduced by Law No. 14,195, enacted on August 26, 2021 (“Law No. 14,195”), allows limited-liability companies to issue commercial notes. However, in the event that the partners wish for the company to issue debentures or other securities in the future, in order to become a publicly held company, or to admit other groups of investors, then the adoption of a corporation structure is preferable. A corporation structure is also preferable for ventures with a larger number or different groups of shareholders. There are two categories of public registries of legal entities in Brazil: civil registries of legal entities and boards of trade. Both have state jurisdiction. A business entity, such as the limited liability company and the corporation, must be registered with the board of trade of the state where the company’s head office is located, as well as with the board of trade of any other state where the company opens a branch. Simple partnerships, associations and foundations are registered at civil registries of legal entities. Corporate documents, such as amendments to articles of associations or bylaws, as applicable, as well as certain minutes of partner meetings, must be filed with the respective registry of the company. What is more, according to the Brazilian legislation, all entities enrolled with the Brazilian Federal Revenue Office (“Receita Federal”) will have 30 days, calculated from the date of issuance of their federal taxpayer identification number (“CNPJ”) to provide the Federal Revenue Office with documents that identify their ultimate beneficial owner(s) holding “significant influence” or deemed an “affiliated entity”. Presumed “significant influence” means that the ultimate beneficial owner holds more than 20% of the capital stock of a certain entity, either directly or indirectly, and holds predominant control over corporate deliberations, as well as the power to elect the majority of the entity’s managers, even without controlling it. A legal entity can be deemed an “affiliated entity” in the event that:
Limited-Liability Company A Brazilian limited-liability company can have one or more partners, who can be legal entities or individuals, Brazilian or foreign. Single-member limited-liability companies were introduced in Brazil in 2019. After the implementation of Law No. 14,195, all individual limited-liability companies ("EIRELI") in Brazil were automatically converted into single-member limited-liability companies ("SLU"), without requiring any changes to the respective articles of association of such companies. Consequently, the "EIRELI" corporate type has been discontinued. If the partners are not Brazilian residents, they must have an attorney-in-fact in Brazil with powers to represent them in general corporate matters and to receive services of process on their behalf. According to Brazilian laws, the company’s assets are not linked to the partners’ net worth. The partners will only be held liable if they abuse their powers or violate the law or the articles of association. In the event that the company’s assets are not sufficient to bear the company’s obligations, and the capital stock has not been fully paid in, the partners (if more than one) will be jointly liable up to the amount of capital stock. If the subscribed capital stock has been fully paid in by the partners, the partners will be solely liable up to the amount of their respective interest in the capital stock. A Brazilian limited-liability company is organized through articles of association, which is a written agreement between or among the partners, and that must be drafted in accordance with the Brazilian Civil Code. Such an agreement must contain a clear statement of the partners’ intentions regarding the company, such as the company’s purposes, capital stock, administrators, authority of the administrators, etc. On June 10, 2020, the Department of Business Registration and Integration (“DREI”) issued Normative Instruction No. 81/2020 (“IN No. 81/2020”), which changed the requirement for limited-liability companies to state its corporate purpose in its corporate, although this requirement is expressly provided for in the Brazilian Civil Code. Pursuant to IN No. 81/2020, the provision of the corporate purpose in the company’s corporate name is optional, but if applied, must correspond to the activity carried out by the respective company. On June 02, 2021, the DREI issued Normative Instruction No. 55/2021 (“IN No. 55/2021”), which allowed companies to state, in their corporate names, the CNPJ. Legal Aspects of Doing Business in Brazil 177 After its incorporation, the limited-liability company must obtain other standard licenses, such as the Municipal Tax ID, the State Tax ID (if applicable) and the Operating License. Depending on the company’s activities, other licenses can be required, such as registrations with governmental agencies (for example, the Brazilian National Health Regulatory Agency "ANVISA"). In case the company carries out import and/or export activities, such a company must obtain a license issued by the Foreign Trade Department, called RADAR. Due to recent legislative changes introduced through Law No. 14,451, of September 21, 2022, which amended Law No. 6,404 of December 15, 1976 (“Brazilian Corporations Law”), amendments to articles of association now require the approval of the simple majority of the capital stock. Law No. 14,451 also introduced other important changes regarding the quorum for deliberating on the merger, amalgamation, dissolution, and termination of the status of liquidation of limited-liability companies, changing the quorum from 75% to the simple majority of the capital stock. Limited liability companies must adopt an accounting system, which consists of regular bookkeeping of commercial and financial information related to their activities. DREI Normative Instruction No. 82, of February 19, 2021, provided for the possibility of keeping corporate books of corporations and limited liability companies in digital form. The corporate books must be signed with any digital certificate issued by an entity accredited by the Brazilian Public Key Infrastructure – ICP-Brazil, or through any other means of certifying the authorship and integrity of digital documents, pursuant to paragraph 2 of art. 10 of Provisional Measure No. 2,200-2, of August 24, 2001, and to Law No. 14,063, of September 23, 2020. All foreign individuals that hold equity in Brazilian companies must be registered with the National Register of Legal Entities to obtain a CNPJ if they are a legal entity, or an individual taxpayer identification number ("CPF") if they are an individual. The capital stock of a limited-liability company is divided into quotas, which can be assigned and transferred. The number and ownership of quotas must be identified in the company’s articles of association. Nevertheless, the capital stock must be consistent with the company’s initial operational needs. In the event that more is needed, the partners can increase the company’s capital stock at any time, provided that the existing capital stock has been already paid in, by amending the articles of association. The partners can pay in the capital stock with cash, credits or assets, and there is no legal time frame set forth by the law for payment thereof. Services cannot be rendered in lieu of paying in capital stock. Capital increases will only be allowed after full payment of the previously subscribed amount. Regarding such partners’ meetings, Law 14,030/2020, enacted on July 20, 2020, allows the partners to participate and vote remotely in the meetings by means of a digital platform, provided that the necessary regulatory requirements established in the Law are observed. A limited liability company may be managed by one or more persons — partners or not —, Brazilian citizens or foreigners, provided that they are residents of Brazil. The manager will be in charge of the company’s management and representation. The publication of Law No. 14,451 introduced changes to the quorum for approval of the appointment of non-partner officers. Due to the legislative change, the appointment of non-partner officers now depends on the approval of:
It is worth highlighting that, although partners are allowed to elect officers that reside abroad, it is recommended that the individual to be appointed as officer of a limited-liability company or a corporation be duly enrolled with the Federal Revenue Office and with the CPF, so that such individual can obtain a digital certificate after having been appointed, given that several responsibilities within the role of an officer require such enrollments. The articles of association may establish different levels of control for the company and determine which matters depend on the partners’ prior authorization, in addition to the matters already provided by the law. Generally, the managers of the company are not liable for acts performed within the regular course of business. However, when they: (i) engage in negligent or wrongful conducts (abuse or misuse of corporate powers), although within the level of their duties or powers; or (ii) act in violation of the Law or the Articles of Association, they will be held personally liable under civil law for the losses they have caused. The restrictions imposed on management powers, as set out in the articles of association duly filed with the competent registry, are also imposed on third parties negotiating with the company. For this reason, if the current articles of association impose clear limits on the manager’s powers, the third party contracting with the company must observe the rules in this corporate document for the business to be effective. A modification introduced by a law enacted in 2007 has established that the abovementioned rules (previously applicable only to corporations) related to the booking and preparation of financial statements, as well as independent audits, are also applicable to limited-liability companies, or to a group of companies under common control, provided that, in the previous financial year, they held assets in an amount greater than BRL 240,000,000.00 or annual gross revenue greater than BRL 300,000,000.00. As a result, it is the understanding of certain Boards of Trade that limited-liability companies (or any other corporate type) that meet such requirements have the obligation to publish their financial statements in the newspaper. Corporations A corporation’s equity interest is represented by shares, which can be of different types, according to the advantages, rights, and restrictions attributable to the shareholders. The two (2) major types of shares are common and preferred. Corporations are also allowed to issue debentures. Publicly held corporations must be registered with, and subject to, the supervision of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM). Corporations can also be privately held. Only publicly held corporations can issue depositary receipts (“DRs”), which are certificates representing shares in the corporation. DRs are traded on foreign markets, enabling the company to raise funds outside of Brazil. Brazilian corporations are organized through their bylaws, which are written documents that must abide by the Corporations Law. Such bylaws must be approved in the inaugural general meeting and can be amended in a special general meeting. To validly exist, a corporation must file with the board of trade the minutes of the inaugural shareholders’ meeting and the approved bylaws, a complete list of all the subscribers of the capital stock, and the bank receipt for the initial ten percent (10%) payment (if the capital is paid in cash). As an exception, in accordance with Law 4,595 of 1964, as amended, where the corporation is a financial institution, the percentage of the initial payment must be equal to or greater than fifty percent (50%) of the subscribed capital stock. As a rule, after submitting the relevant documents to the Board of Trade, filing usually occurs within five (5) days, unless the Board of Trade requires changes in the documents or requests additional information. Corporations must adopt an accounting system that consists of standard bookkeeping of commercial and financial information related to their activities, in addition to a (i) ledger of nominative shares; (ii) ledger of nominative share transfers; (iii) ledger of minutes from the general meeting of shareholders; (iv) ledger of shareholder attendance; (v) ledger of minutes from executive board meetings; and (vii) ledger of opinions and minutes from the oversight council’s meetings. Pursuant to Law No. 14,195, for closely held corporations, the ledgers mentioned in items “i” to “iv” above can be replaced by mechanized or electronic records. Unless otherwise provided for by law or bylaws, shareholder decisions require a simple majority of votes, without abstentions being taken into consideration. Regarding such shareholders’ meetings, Law 14,030/2020, enacted on July 20, 2020, allows shareholders to participate and vote remotely in such meetings through a digital platform, provided that the necessary regulatory requirements established in the Law are complied with. As a rule, each common share held by a shareholder grants the right to a single vote at a shareholders’ general meeting. However, Law No. 14,195 included plural voting in the Brazilian Corporations Law for closed corporations, which includes the possibility of granting the right to ten votes for a single common share. This mechanism was previously prohibited by the Brazilian Corporations Law. The creation of a class of common shares that have plural voting rights depends on a favorable vote by shareholders representing at least half of the voting capital stock; or, at least half of the non-voting preferred shares or those with restricted voting rights, if issued. The company’s bylaws, however, may require a larger quorum in order to grant plural voting rights. The board of directors is a collective decision-making body that consists of at least three members, appointed at the shareholders’ general meeting. If the members of the board of directors are not residents of Brazil, they must appoint a representative who is a Brazilian resident to receive services of process in legal proceedings, according to Brazilian Corporations Law. The corporations can be managed by one officer, since Supplementary Law No. 182 enacted on June 01, 2021 (“CL No. 182”) amended the Brazilian Corporations Law, which provided for a minimum of two officers to act in the management of corporations. The officers represent the corporation and carry out all acts necessary for its normal operation. Further, pursuant to Law No. 14,195, persons resident outside Brazil can also be appointed as officers and are subject to the same considerations established as regards the nationality of managers in limited-liability companies, although they must appoint an attorney-in-fact to receive services of process in Brazil. Formerly, only members of the board of directors were allowed to be non-residents in Brazil. Generally, officers and directors are only personally liable for their acts when they involve an abuse of power, excess of mandate, or violation of the law. Corporations also have an oversight council whose basic function, when installed, is to oversee the acts of management. Most of the corporate documents of a corporation, such as its bylaws, minutes of shareholder’s meetings and board of officers’ meetings, annual reports, balance sheets, and other financial statements must be published in a widely read newspaper where the company’s headquarters is located. The information must be provided in a summary format along with simultaneous publishing of full copies of documents on the same newspaper page on the Internet. Such webpage must provide digital certification of the authenticity of the documents, kept on a separate page issued by an accredited certification authority under the Brazilian Public Key Infrastructure. Pursuant to CL No. 182, closely held companies with annual gross revenue of up to seventy-eight million reais (BRL78,000,000.00) can freely establish the distribution of dividends, subject to the mandatory dividends provided for in article 202 of the Brazilian Corporations Law and the rights of preferred shareholders, as well as in accordance with the provisions of the bylaws and the shareholders’ agreement. Especially for closely held companies with annual gross revenues of up to seventy-eight million reais (BRL 78,000,000.00), under the terms of Article 294, item III of the Brazilian Corporations Law, it is possible for the mandatory publications to be made only electronically, provided they are made using a digital certificate on (i) the Balance Sheet Center of the Public Digital Bookkeeping System ("SPED"); and (ii) on the company’s own website. While there are no legal sanctions for private companies that do not publish their financial statements, it can still create obstacles or hindrances to their regular business activities. For instance, companies may face difficulties participating in bidding processes, obtaining loans, or financing, or signing contracts with clients or suppliers who require financial statements as a prerequisite for contracting. Other Legal Entities IN No. DREI 81/2020 established that the board of trade can register the corporate acts of any entities duly signed electronically with any digital certificate issued by an entity accredited by the Brazilian Public Key Infrastructure ("ICP-Brasil"), or any other means of proof of authorship and integrity of documents in electronic form, pursuant to paragraph 2 of Article 10 of Provisional Measure No. 2,200-2 of August 24, 2001. |
| Taxes | BUSINESS OPERATION TAXES
It is important to highlight that at the end of 2023, Brazil approved the Brazilian Tax Reform on consumption when the final wording of Constitutional Amendment No. 132/2023 (“EC 132/2023”) was enacted. We will comment on the consumption tax reform on a specific topic(8). Federal Taxes Basically, there are two methods of calculating the taxable profit:
Companies with total annual gross revenue in excess of BRL 78 million and others required by law must calculate real profits based on quarterly or annual balance sheets. They are not allowed to calculate this tax based on presumed profits. There is a third method, the Arbitrated profit basis, which can be applied by the tax authorities, at their discretion, in certain limited circumstances. Therefore, the taxpayer does not select this method by choice. For example, when proper records of revenues and costs/expenses are not maintained, the Arbitrated method is applied. If taxation is based on a quarterly balance sheet, payment of taxes will be definitive, and all rules for calculating annual profits will apply to such quarterly profit (rates, additions, provisions, offsetting losses, etc.). If the company opts for payment based on yearly profits (the most common and generally adopted system), these profits will be calculated from the profit-and-loss statement prepared in December, covering earnings for the entire calendar year, but the tax must be pre-paid monthly. Monthly prepayment may be lowered or suspended if the taxpayer has accounting evidence that the pre-paid value until that month exceeds the tax value calculated based on real profits. Social Contribution on Net Profits (“Contribuição Social sobre o Lucro Líquido” - “CSLL”) Contribution to Social Integration Plan (“Contribuição para o Programa de Integração Social” - “PIS”) and Contribution to Finance Social Security (“Contribuição para Financiamento da Seguridade Social” - “COFINS”) Under the non-cumulative system, PIS and COFINS are generally levied at the rates of 1.65% and 7.6%, respectively, but the taxpayer is allowed to discount credits related to part of its costs and expenses, provided that certain conditions are met (PIS and COFINS levied at the rates of 0.65% and 4% for financial revenues earned by companies subject to the non-cumulative system, with some exceptions). Constitutional Amendment No. 132/2023 provides for the “replacement” of PIS and COFINS by the CBS and establishes a transition regime in which PIS, COFINS, and CBS will coexist until 2027, when PIS and COFINS will cease to exist and be replaced definitively by the CBS. We will comment on the tax reform and the transition regime on specific topics. Tax on Financial Transactions (“Imposto sobre Operações Financeiras” - “IOF”) In accordance with the Brazilian Constitution, the government has created several contributions for intervention in the economic domain (CIDEs):
These CIDEs are levied on specific transactions and sectors of the economy and their rates and calculation basis vary depending on each case. Import Duty Exceptionally, the import duty can be reduced on the importation of capital goods (BK), IT and telecommunications goods (BIT), if such goods are not produced in Brazil, by means of a formal request to the federal tax authorities. Export Tax
The tax is calculated on the export price of the goods. PIS-Import and COFINS-Import are respectively levied at 1.65% and 7.6% on the amounts paid, credited, delivered, utilized, or remitted abroad for the importation of services (calculation basis includes ISS, PIS-Import and COFINS-Import). PIS-Import and COFINS-Import are respectively levied at 2.1% and 9.65% on the customs value for the importation of goods (depending on the NCM of the products to be imported, an additional 1% COFINS-Import rate may be applicable). Please note that PIS-Import and COFINS-Import bear a close relationship with the PIS and COFINS already commented on above, but they are different contributions. PIS-Import and COFINS-Import are levied on the importation of services and goods, and the taxpayer is the importer domiciled in Brazil, whereas PIS and COFINS are contributions levied on revenues of Brazilian legal entities (which are the taxpayers of the contributions). Nonetheless, these contributions bear a relationship in regard to the calculation system and rates, and especially because within certain situations the credits of PIS-Import and COFINS-Import may be offset against the "local" PIS and COFINS contributions (under the non-cumulative system, if applicable). IPI The IPI is usually levied ad valorem. The rates are based on the type of product. The IPI is a value-added tax. A tax credit is allowed for the tax that has been paid in the purchase or importation of the raw material and components that are used in the manufacturing process of the product to be taxed or on the resale of the imported product. In the case of imported products, the IPI is calculated on the customs value, plus the import duty. Taxpayers with an IPI credit balance accumulated for three months (regarding inputs) can ask the Brazil Federal Revenue Department for reimbursement in cash of the accumulated amount, or its use to offset other federal taxes. State Taxes In other cases, rates are usually 12% but can be 7% depending on the state of destination; the rationale is the following: the more developed the state, the higher the rate. Interstate transactions involving products for non-taxpayers (individuals or entities not involved in merchandise commerce) trigger the payment of an amount of ICMS resulted from the difference of the interstate rate and internal rate of the state to which the product is being shipped. The ICMS is also imposed on interstate and inter-municipal transportation services and communications services. For certain products, the ICMS is due according to the tax substitution system (“Substituição Tributária do ICMS - ICMS/ST”), in which case the tax due on the entire commercial chain of the product must be collected at once, at the beginning (as a rule, by the manufacturer or the importer), based on estimated values determined by the government, to be applicable to future taxable events. As a rule, this system is implemented through a state agreement (“Convênio ICMS”) signed by all Brazilian states and the Federal District and is valid throughout the Brazilian territory (except if one or more states decide not to implement the rule within its territory) or throughout specific protocols (“Protocolo ICMS”) signed by two or more states. In the latter case, the system will only be valid for taxpayers located in the territory of each signatory state. However, there are cases in which one state, through a state law, can implement the ICMS/ST system for transactions within their territory, or for shipping products to taxpayers located in their territory. Finally, it is important to mention that one of the biggest issues regarding ICMS is tax incentives to attract companies and develop the local economy. This situation is commonly referred as “tax war”. To solve this, the Brazilian Congress issued Complementary Law No. 160/17 establishing requirements and procedures for validating the tax incentives granted without CONFAZ approval. Municipal Taxes The calculation basis is the service price, and the rates are fixed by the city where the renderer establishment is located. According to the legislation, such rate cannot be less than 2% or, as a rule, more than 5%. The responsibility for collecting and remitting ISS lies with the service provider, typically the construction company or contractor. Real Estate Transfer Tax (assessed on transfers for value) Property Tax Consumption Tax Reform The tax reform introduces a dual Value-Added Tax (dual-VAT), composed of a federal contribution on goods and services (CBS) and a sub-national goods and services tax (IBS), creates a new excise tax (imposto seletivo – “IS”) and a new state tax levied on primary and semi-finished products. The CBS will “replace” the current federal social contributions (PIS/COFINS), whereas the IBS substitutes both the state tax on goods (ICMS) and the municipal tax on services (ISS). In short, the dual-VAT will have a broad-based and full non-cumulative tax on goods and services, be charged at the destination, and have a few tax rates and exceptions. Both CBS and IBS will be subject to the same taxable events (domestic transactions and imports with tangible or intangible goods, including rights or with services), tax calculation bases, non-incidence events, and taxable persons; specific, exceptional, or favored taxation regimes; and non-cumulative and crediting rules. EC 132/2023 also simplified the calculation of the dual VAT, providing that the tax will be levied on the gross value of the goods and services (calculation without a gross-up expressly forced by the law), with the non-inclusion of the IBS and CBS in their tax basis calculation. Also, EC 132/2023 implemented a complete non-cumulative system, expanding the circumstances in which the tax can be credited. The Federal Senate will set each entity's IBS and CBS reference rates, which must be enough to keep the current overall tax burden. Each federal entity (the Federal Government, states, and municipalities) will set a single rate applicable to all goods and services. The tax reform also establishes the reduced rates applicable to specific transactions (goods and services), which may vary from 100% to 30%. Note that the enactment of EC 132/2023 is the first step regarding the implementation of the new consumption tax system. However, many subjects in the constitutional amendment need to be regulated, most through different supplementary laws that the Brazilian Congress will have to issue for the beginning of the new tax regime (further detailed below). Transition Regime Until 2027, all previous and new taxes will be imposed concurrently. This means that ICMS, ISS, IPI, PIS/COFINS, IBS, and CBS will coexist. However, in 2027, PIS/COFINS will cease to exist and be replaced definitively by CBS, which will have its standard rate. IPI will be zeroed out except for the products that are also industrialized in the Manaus Free Trade Zone on May 31, 2023, while the IS will also come into effect. |
| Labor | One of the most significant features of Brazil’s labor system is that the laws regulate the details of labor/management relations to a much greater extent than in other countries. In addition, the concept of collective bargaining is distinctively strong in Brazil. Among these include:
Other Contributions or Charges
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| Foreign Exchange and International Investment Regime | General Rules The new Law, originated from Bill No. 5,387/2019, (i) consolidates more than 40 regulations that provided for aspects relating to the foreign exchange market (“fx market”); (ii) amends the Brazilian legislation, in alignment with operational needs arising from global production chains, which facilitates foreign trade and the flow of investment resources; and (iii) favors foreign investments in Brazil, as well as Brazilian investments abroad, proportionally to the value of the business and the risks involved. On November 25, 2022, the National Monetary Council (“CMN”) enacted Resolution No. 5,042 (“CMN Resolution 5,042”), according to which the CMN established the general principles that must be observed within the scope of foreign exchange transactions, as well as the outflow and inflow of funds from and into Brazil. CMN Resolution 5,042 came into force on December 31, 2022. According to this rule, the general principles that regulate the foreign exchange market in Brazil are:
On December 31, 2022, in order to comply with the new Brazilian foreign exchange legislation, the Central Bank of Brazil (“BC”) enacted new rules that further regulate the foreign exchange market and foreign investments in Brazil, in line with the provisions of Law No. 14,286, as follows:
The new resolutions seek to modernize, simplify, and ensure greater legal certainty to the provisions of Law No. 14,286 regarding the Brazilian exchange market, as well as to minimize red-tape procedures and increase transparency within the Brazilian exchange market. In addition, the resolutions aim to adjust Brazil’s operations according to international standards, thus establishing an advantageous business environment and fostering international investment in Brazil. The stability of Brazilian foreign investment legislation is a clear indication of the country’s desire and firm commitment to attracting and welcoming overseas investors. Foreign investment is not subject to government approvals or authorizations, and there are no requirements regarding minimum investment or local participation in capital (except in very limited cases such as in financial institutions, insurance companies, and other entities subject to the regulating authority of BC). Foreign participation, however, is limited or forbidden in the few areas of activities, further explained in this chapter. With respect to foreign exchange control, BC is responsible for:
Foreign investments in the form of currency must be officially carried out through financial institutions duly authorized to operate in the fx market. Foreign currency must be converted into Brazilian currency and vice-versa through the execution of a foreign exchange contract with a financial institution authorized to operate in the fx market. Foreign investments can also be carried out through the contribution of assets and equipment intended for the local production of goods or services. Foreign Exchange Market In March 2005, BC unified both markets, extinguishing the differences between them and subsequently enacting more flexible exchange rules. Consequently, remittances of funds in and out of Brazil must now flow through one single exchange market, regardless of the nature of payments. Foreign Investment Registration Since August 2000, foreign investments in the form of capital have had to be registered through the Electronic System of Registration of BC’s online data system. Meanwhile, foreign loans also became subject to registration in BC’s Electronic System of Registration as of February 2001. The amount registered with BC as foreign investment includes the sum of:
The aggregate amount is the basis for the repatriation of capital and the calculation of any taxes levied on capital gains, as explained below. Remittance of Profits Payments of profits directly abroad are also permitted in compliance with Brazilian regulations. If the Brazilian subsidiary holds an overseas bank account with sufficient balance to pay the corresponding profits, such funds can be used to pay the foreign investor directly abroad. In such case, registration of the distribution of profits will have to be carried out manually in BC’s electronic system. Repatriation of Capital Other Forms of Funding Brazilian Subsidiaries Restrictions on Foreign Ownership of Companies |
| Customs | Not applicable. |
| Migration | Not applicable. |
| Environmental | Overview of Environmental Law
The increase of environmental concerns worldwide and the enactment of numerous international agreements resulted in a growing consciousness in Brazil, leading to the adoption of a National Policy Law for the Environment in 1981 (Federal Law No. 6,938/81), which was crowned with the approval of the Brazilian Constitution of 1988 containing an entire chapter addressing environmental issues. One could say that environmental protection as it is reflected in the legislation countrywide was ultimately consummated with the enactment of the National Environmental Criminal and Administrative Law in 1998 (Federal Law No. 9,605/98), which was regulated by Federal Decree No. 3,179/1999, revoked in 2008 by Federal Decree No. 6,514/2008 (updated by Federal Decree No. 11,373/2023). In 1985, another important law was enacted: Federal Law No. 7,347/1985, which created Public Civil Actions. Similarly to American class actions, Brazilian law, in general, allows the public prosecutors to file lawsuits aimed at protecting the environment, and it bestows standing to non-governmental agencies to bring suits under its terms. At present, regulations regarding environmental protection in the country abound. They range from the creation of conservation units to the possibility of generating carbon credits as part of forest concession activities, and tax benefits relating to environmental aspects, among others. Main requirements applicable to industrial activities In turn, pollution-control systems are implemented to a large extent in industrialized centers like the states of São Paulo, Rio de Janeiro, Minas Gerais, Paraná, Santa Catarina and Rio Grande do Sul, but also on smaller cities. Both the lack of environmental permits and the act of polluting, regardless of intention, can be deemed criminal acts and trigger criminal sanctions in addition to administrative penalties (warnings, fines, interdiction of the company’s activities, suspension of tax benefits, among others), and civil sanctions (obligation to repair or compensate environmental damage and affected third parties). Environmental liability
It can be said that the three spheres of liability mentioned above are “different and independent” because, on one hand, a sole action by the offender, including legal entities and individuals, may generate environmental liability at the three levels: civil, administrative, and criminal, which involves the applicability of three different sanctions. On the other hand, the absence of liability in one of those spheres does not necessarily exempt the offender from liability in the others. Environmental civil liability arises from action or omission - directly or indirectly - by the offender, that results in environmental damage of any kind. This type of liability is characterized as a modality of strict liability, regardless of fault. Such liability results in the civil penalty of repairing or indemnifying for the damage caused to the environment and consequent damage to third parties. In the case that the legal entity cannot pay for the environmental recovery, the requirement for indemnification may extend to partners and their property, commonly referred to as piercing of the corporate veil. In addition to the environmental damage, there is the possibility of individual and collective non-pecuniary moral damages. Environmental civil liability applies jointly to all those who directly or indirectly contributed to the environmental damage, regardless of fault. Such type of liability is established, for example, in circumstances that involve outsourcing in the process of transportation and final disposal of waste/residues, or in the case of contaminated areas and deforested areas. In these cases, more than one agent can be held liable for the environmental damage, or agents can be held individually liable with the right to request compensation from others. Based on this scenario, in theory, lenders and financial institutions can be exposed to civil environmental liability. Furthermore, Brazilian higher courts have also decided that civil liability due to environmental damages in Brazil is not subject to a statute of limitations or exceptions, such as act of God, act of a stranger, etc. Finally, criminal liability occurs through the action or omission of an individual or legal entity that is typified in criminal law. Among those who may be held liable for such crimes are officers, administrators, board members and technical committee members, auditors, managers, representatives, or commissioners, as well as any other person who is found to participate in or fails to prevent any acts involving the offenses referred to in the law from taking place. Thus, the law does not set forth the need to actually carry out the act considered as criminal; participating by any means in its practice is sufficient. Environmental Licensing The environmental licensing proceeding can be carried out by environmental agencies at different Brazilian federation levels (federal, state, or municipal), according to the characteristics of the proposed activity and/or its location. The competence to define the jurisdiction to carry out environmental licensing procedures is provided for the Federal Constitution, which determines that all Brazilian entities are entitled to protect the environment. However, Supplementary Law No. 140/2011 establishes parameters regarding jurisdiction, setting the roles of each federative entity at federal, state, and municipal levels. The legislation determines, for instance, that environmental licensing shall be a unique proceeding, whose jurisdiction at the federal, state, or municipal level shall rely on certain criteria, as follows:
Also, Supplementary Law No. 140/2011 sets out provisions for environmental infractions, ascribing the federal, state, or municipal responsibility for issuing infraction notices, depending on the entity responsible for its licensing or authorization procedure. The environmental licensing procedure generally involves a three-step administrative proceeding, including the issuance of three different (although connected) licenses by the competent environmental agency:
In certain cases, environmental licenses can be issued concomitantly. In other words, more than one phase of the licensing procedure can simultaneously be included in the same environmental license. Moreover, they can involve specific situations, such as the recovery of degraded areas. Simplified procedures can be established for certain activities. For example, the state of Rio de Janeiro issues the Environmental Recovery License ("LAR"), which authorizes the recovery of contaminated areas in closed, deactivated or abandoned activities or enterprises, or degraded areas. The Brazilian Congress is currently assessing Bill No. 3,729/2004, which intends to establish a national framework for environmental licensing. The current wording of this bill establishes other types of simplified licenses and permits/authorizations for potentially polluting activities, such as the Adhesion and Compromise License (“LAC”); Unified License (“LAU”); and Corrective License (“LAC”), for simpler and less environmentally harmful projects. In addition, in the event that the environmental impact resulting from the activity in question is deemed “significant”, the issuance of the preliminary license will be subject to the submission of an Environmental Impact Study and Report (EIA/RIMA), as well compliance with additional legal requirements (such as public hearings, compensatory payment measures, among others). Environmental agencies usually set technical or other conditions to be fulfilled for the environmental licenses to keep their effectiveness, under penalty of having the licenses barred from renewal or even canceled or suspended, among other sanctions within the scope of environmental administrative, criminal, and civil liabilities. The licenses are valid for a specific period and their renewal must be requested, generally, 120 days before their expiration date so that they remain valid until the new license is issued. Environmental licensing is a technical and multilateral procedure, in which the consultation of several government bodies may be necessary in addition to the authority that is directly responsible for the environmental licensing itself, such as the National Institute of Historic and Artistic Heritage (“IPHAN”), the National Institute for Colonization and Agrarian Reform (“INCRA”) and National Indigenous People Foundation (“FUNAI”) and Chico Mendes Biodiversity Conservation Institute (“ICMBio”). In general, the participation of other government bodies in the environmental licensing process is possible. Use of water resources and discharge of effluents According to such Water Policy, the by-pass, extraction, release, and catchment of water resources, as well as the discharge of effluents in water bodies, require prior authorization issued by the corresponding environmental agency. In general, obligations relating to sampling, monitoring and discharge of wastewater and stormwater, as well as disclosure of information about such activities, can originate from (i) legal requirements/provisions, such as domestic laws and regulation (e.g., decree, resolution, ordinance), and international laws (e.g. acts, agreements, treaties) that have already been incorporated into the national framework; and/or (ii) administrative acts/permits, either by means of a condition established for environmental licenses, water grants and authorizations, or as a regulatory requirement. CONAMA Resolutions No. 357/2005 and No. 430/2011 establish that the direct discharge of wastewater from any sources of pollution can only be carried out after proper treatment and must comply with legal standards, conditions, and obligations. The use of water resources without or not in compliance with the respective authorizations can subject those involved to the three different and independent types of environmental liability. In addition, Federal Law No. 9,433/97 provides for the possibility of financial charges for the use of water resources as a means of encouraging the rational use of this resource and obtaining financial support for the recovery of river basins. States such as São Paulo and Minas Gerais use this kind of instrument. Management of contaminated areas In addition, at the federal level, CONAMA Resolution 420/2009 sets forth the main requirements applying to the process of identification, delineation and remediation of soil and groundwater impacts. It is also important to highlight that some states have enacted specific regulations, such as Rio de Janeiro and São Paulo. São Paulo State Law 13,577/2009 lays out procedures for identification and mapping of contaminated areas and implementation of mechanisms for remediation. This law makes it possible not only for the party at fault and/or the owner of the property to be held liable for the contamination, but also the tenant, the holder of the effective title, and the economic beneficiaries of the area. Earlier, the state program on management of contaminated areas, which is a reference in Brazil, was operating by means of administrative rules of the São Paulo State Environmental Agency (“CETESB”), but these procedures were subsumed by Law 13,577 in 2009. The proceeding, which was updated in 2017, has also been adopted in other states, due to the lack of a Federal Regulation on the subject. CETESB has also established the necessity of an ecological risk assessment in the environmental management of contaminated areas, which aims to qualitatively and quantitatively assess the risk to which an ecological asset that must be protected may be exposed, due to potential physical, chemical or biological anthropogenic effects. In 2022, CETESB updated the technical parameters for the health risk assessment based on the United States Environmental Protection Agency’s (“EPA”) methodology. Furthermore, in case of change of use of the property (e.g. change of industrial use of the property to commercial or residential ones) or reuse of the area under a clean-up process, a statement from CETESB is required. Moreover, in general terms, the closing of activities subject to environmental licensing triggers the obligation to submit a decommissioning plan to the environmental authority and to verify the soil and groundwater quality, as well as to repair any environmental damage caused by the activity. Waste management and post-consumption liability According to the National Policy on Solid Waste Management, the management of industrial waste requires that the generator develop a “Solid Waste Management Plan” (“PGRS”), through which the project owner will provide the environmental agency with a comprehensive diagnosis of its operation, focusing on the generation and management of solid waste, as well as assessing the origin, volume and classification of such waste, so as to assign specific proceedings aimed at ensuring its proper storage, transportation and final disposal. The PGRS is a mandatory document for companies that generate waste:
The PGRS must be submitted to the competent environmental agency or to the municipality. Brazilian legislation also establishes that parties that generate or handle hazardous waste must be registered with the National Registry of Operators of Hazardous Wastes and develop a hazardous waste management plan that will be analyzed and reviewed by the competent environmental authority. Certain states have enacted stricter regulations, which condition the implementation of reverse logistics systems to the issuance or renewal of projects’ environmental licensing, and have included additional products that are subject to a reverse logistics system. One of the major innovations of the National Policy on Solid Waste Management is the acknowledgment of shared responsibility for the product lifecycle as a basic principle of solid waste management and the obligation to implement a reverse logistics system aimed at cradle-to-grave management of the products and waste. More recently, Federal Decree No. 11,413/2023 established three types of credits related to reverse logistics, enabling financial investments to fulfill the legal obligations related to the implementation of a reverse logistics system. Such law provides for the: (i) Reverse Logistics Recycling Credit Certificate (CCRLR) - used to prove compliance with reverse logistics goals, based on final destination certificates and electronic invoices of products or packaging returned to the manufacturer or company responsible for recycling; (ii) Certificate of Structuring and Recycling of Packaging in General (CERE) - issued to manufacturers, importers, distributors and traders who invest in structuring projects for the recovery of recyclable materials; and (iii) Future Mass Credit Certificate - intended for companies that implement structuring reverse logistics systems, with investments in initiatives that result in the effective recovery and additionality of recovered mass in the medium term. Therefore, Federal Decree No. 11,413/2023 offers flexible alternatives for companies to fulfill their reverse logistics obligations. Instead of implementing their own collection and recycling systems, companies can choose to acquire those credits, which attest to the carrying out of recycling actions and collaboration with the reverse logistics infrastructure. The inadequate disposing of waste or causing pollution can result in criminal and administrative sanctions, in addition to the obligation to repair or indemnify for the damage to the environment and affected third parties, even if the solid waste management, such as its transportation, treatment and final disposal were carried out by outsourced parties contracted specifically for such purposes. Air emissions Federal Law 14,850/2024 establishes the National Policy of Air Quality management in Brazil. This law provides for the concept of air quality standards, aiming to protect the environment and public health. The policy addresses maximum emission limits, air quality standards, air quality monitoring, emission inventories, management plans and programs, atmospheric modeling, fiscal and financial incentives, and the National Air Quality Management System (MonitorAr). The environmental authorities in Brazil will be responsible for monitoring air quality and will have to develop a National Air Quality Monitoring Network. Asbestos Certain states and municipalities have also enacted laws and regulations that provide for standards and limitations regarding the use of asbestos (e.g, Rio de Janeiro; Rio Grande do Sul; Pernambuco; São Paulo; Maranhão; Mato Grosso; Minas Gerais; Amazonas; Rondônia; Santa Catarina; Bahia; Goiás; Espírito Santo; Piauí and Paraíba). The use of asbestos, including in civil construction waste, is considered harmful to the environment and to human health. As a result, CONAMA´s Resolution 307/2002 classifies construction waste containing asbestos as hazardous. Banning the use of this mineral has long been an ongoing discussion in the Brazilian Congress. CONAMA, through Motion No. 030/2001, has recommended the progressive ban on the use of this mineral. The Brazilian Federal Supreme Court (“STF”) has already ruled for prohibiting the extraction, industrialization, and use of chrysotile asbestos/asbestos in Brazil. The STF has also ruled in different lawsuits against state laws regarding asbestos, always based on the precautionary principle. According to Brazilian legislation, the landowner and occupiers are jointly responsible for extracting or handling asbestos located on the property. Forestry Preservation This law establishes limits for intervention in public or private proprieties, taking into account the definitions for areas qualified as “permanent preservation areas” and legal reserve areas. Permanent preservation areas are those with significant environmental characteristics, such as riparian areas, springs, hilltops, mountain slopes, and mangroves, located in rural or even urban areas. Interference in such areas is only allowed if the activity is previously authorized and qualified as public utility, social interest, or low environmental impact. Legal reserves are portions of rural areas that must be preserved by maintaining the native vegetation or even recovering it. The size of the areas that must be preserved in the form of a legal reserve depends on where the property is located and the vegetation (biome) in the region, varying from 80%, 35% and 20%. In addition, the Federal Government can, in specific cases, reduce the mandatory legal reserve areas. For example, such reduction is possible in the event that property is located in areas of the Amazon rainforest within municipalities that maintain more than 50% of its area as indigenous territories and public domain conservation units. In these cases, the legal reserve areas – originally 80% of the property – can be reduced to 50%. Reduction of mandatory legal reserve areas to 50% can be also determined by states in the Amazon rainforest area whose economic and ecological zoning has been approved and that have restricted more than 65% of their territory for indigenous and public domain conservation units. In parallel, the Federal Government can increase by 50% the area allocated for legal reserves if deemed necessary through approved economic and ecological zonings in order to achieve the Brazilian targets for biodiversity protection or reduction of greenhouse gases. The Forestry Code also created a nationwide electronic system encompassing the environmental information on rural proprieties - the Rural Environmental Registry (CAR), as a condition for the obtaining of loans or rural credit. The Forestry Code allows for the compensation of legal reserve areas and creates a legal reserve quota that can be used to attest compliance with the Forestry Code requirements. In addition, it also defines specific rules for forest management and exploitation activities as well as forestry products supply control. Federal Law No. 12,651/2012 determined that the federal and state authorities should implement Environmental Regularization Programs (PRA) for rural properties whose vegetation was irregularly removed before July 22, 2008. After fulfilling the obligations established in the Program, the consolidated rural areas will be considered regularized, and any fines will be converted into services for the preservation, improvement, and recovery of the quality of the environment. In this way, states are currently issuing local rules regulating their own Programs in their territory. Federal Law No. 14,595/2023 extended the deadlines initially determined in Federal Law No. 12,651/2012 for adherence to the PRA by the owners and possessors of rural properties with: (i) an area of up to four fiscal modules, by March 12, 2025; and (ii) an area of more than four fiscal modules, by December 31, 2023. So far, no new federal regulations have been enacted to extend the deadline. Federal Law No. 14,285/2021 amended certain articles of Federal Law No. 12,651/2012 (Forestry Code), to provide for permanent preservation areas around watercourses in consolidated urban areas. The new law has established that municipalities will define, through local laws, the extension of permanent preservation areas related to marginal bands of water courses/bodies located in consolidated urban areas. According to the new law, a consolidated urban area must be included in the urban perimeter or in an urban zone by the master plan or by a specific municipal law; have a road system in place; be organized into predominantly built-up blocks and plots; and have a predominantly urban use, characterized by the existence of residential, commercial, industrial, institutional, mixed or service-oriented buildings. Furthermore, activities or enterprises to be installed in urban permanent preservation areas must also comply in cases of public utility, social interest or low environmental impact. Biodiversity Law
On March 4, 2021, Brazil ratified accession to the Nagoya Protocol, a multilateral agreement establishing rules on access to genetic resources and fair and equitable distribution of the benefits derived from their use, which was approved through Legislative Decree 136/2020. International Law Climate Change Law and air pollution standards It also created the Brazilian Market for Emission Reduction (“MBRE”), which is still pending regulation. Several states and municipalities have also issued laws regarding climate change policies. National financial initiatives have also been implemented for greenhouse gases offsets and nature-based solutions, such as the National Biofuels Policy (“RenovaBio”); the National Payment Policy for Environmental Services, which has set forth REDD+ programs such as the National Zero Methane Program. As such, Brazilian Courts have already addressed cases of climate-related litigation in Brazil. Most cases are directly related to recent changes to Federal Government policies that combat the deforestation of the Amazon rainforest, as well as other financial initiatives concerning climate change. There are also cases of class actions requesting indemnification for environmental damage based on arguments involving climate issues, such as carbon emissions due to illegal deforestation. Regarding this, the Brazilian Council of Justice (“CNJ”) has recently issued Resolution No. 433/2021, which provides that, when assessing environmental damage lawsuits, judges must consider, among other parameters, the impact of such damage on global climate change. In addition, Federal Law No. 14,590/2023 has provided that areas with granted forests can generate carbon credits. The new law allows public forest concessionaires to operationally unify forest management activities in continuous units. If they are located in the same conservation unit, this can also be done by different concessionaires, who will draw up a single Sustainable Forest Management Plan (“PMFS”). |
| Real Estate | Real estate regulation in Brazil is heavily rooted in the registry system introduced by Federal Law 6,015/1973. The most common matters are primarily governed by the Brazilian Civil Code and by Federal Laws No. 6,015/1973 (“Public Records Law”); 14,382/2022 (“Electronic System of Public Records Law”); 9,514/1997 (“Fiduciary Lien Law”); 14,711/2023 (“Legal Framework for Guarantees Law”); 13,465/2017 (“Land Regularization Law”); 8,245/1991 (“Urban Lease Law”); 4,591/64 and 6,766/79 (both the “Real Estate Development”); 5,709/1971 and Decree No. 74,965/1974 (both the “Rural Real Estate Legislation”); as well as Federal Decree No. 59,566/1966 (“Rural Leases and Partnership Law”) and Federal Law No. 4,504/1964 (“Rural Land Act”), as amended. A great deal of different and innovative laws and administrative rules relating to real estate transactions, rural and urban properties, that were enacted over the last years, brought a new trend in real estate transactions, with new forms of financing and the tools for a virtual environment at all steps of the transactions, including processes before the governmental agencies involved, Notary Officers and Real Estate Registry Officers and all others public records. Brazil has state regulations on notarial and conveyancing matters and municipal ordinances on land use and occupancy regulations, as well as urban property taxation. Rights over real estate have two primary stems, namely:
Real Estate Registry Offices are, in summary, responsible for keeping records of all title transfers, liens, encumbrances, physical changes and possession aspects of real estates. In some cases, the Real Estate Registry Office is responsible for keeping records of pledges and estate regimes in marriage and marital stable union. In summary, a notary public is responsible for drafting agreements that are required by law to be entered into by a public instrument, notarizing signatures, attesting as to the authenticity of copies of documents, certifying facts and information, including from the web, among others. Recently enacted federal and state laws permit lawyers to attest to the authenticity of certain documents in specific cases, for specific purposes. The types of in rem rights over real estate in Brazil are: (i) ownership; (ii) surface; (iii)easement/ right-of-way; (iv) usufruct; (v) use; (vi) habitation; (vii) committed buyers’ right to acquisition; (viii) assignment of in rem right of use; (ix) assignment of special use for housing purposes; and (x) right of floor slab (“Direito de Laje”, which roughly translates to the right of the floor slab, and allows for the obtaining of a distinct title for construction on top of or under another building, despite sitting on the same land); and (xi) the rights arising from the provisional imposition of possession, when granted to the Federal Government, the states, the Federal District, the municipalities or their delegated entities and the respective assignment and promise of assignment. Certain rights to guarantee are also in rem rights: such as pledge, mortgage, fiduciary lien and antichresis. The classification of a property depends on its use. Therefore, the location of the property is not a decisive factor (i.e., property located in an urban area with municipal zoning regulations will be considered rural property if used for rural purposes). There are two main types of property: (i) rural property; and (ii) urban property. Urban properties are primarily classified as residential, commercial, and industrial. The ownership of urban property may be classified as fractional ownership, joint ownership in a condominium building or co-ownership in an ordinary condominium. All regulations applicable to property records, rules relating to the property boundary description, its registry before the relevant authorities and governmental agencies, restrictions, property tax collection, and other requirements depend on the classification of the property, whether the real property is urban or rural. Recording of Acts and Information before the Competent Real Estate Registry Office With respect to real properties, the primary document created by Federal Law 6,015/1973 is the enrollment certificate, or the property record file, which contains a description of the real estate’s area, its boundaries, main characteristics and registered owner, valid and former liens, easements, environmental data, among others. Recordation of all acts relevant to that real estate is made on the enrollment certificate53. With regard to rural land, there are specific rules related to the description of a property’s boundaries and the confirmation by the federal authorities that such description does not overlap another. Certain acts have their recordation carried out before the enrollment certificate as a requisite of validity, such as acquisition, liens, and encumbrances (e.g., usufruct). This is to say that the parties to a given transaction can enter into and execute relevant documents, deeds or carry out necessary acts, but unless and until recordation is completed before the Competent Real Estate Registry Office, certain effects will not be achieved. Below are examples:
Other acts do not have recordation as a validity requirement, but a party holding interest in real estate can procure recordation to make such interest known to the public in general, as a way of protecting it. This is the case, for instance, of: The Law governing Public Records dictates that the recordation of relevant acts be made through registration (those which constitute the in rem right) or annotation (for all other acts or facts related to the property or its owner). The electronic registry contains, where available, information about real estate properties registered since 1976, and the corresponding statement history can be obtained either online or in physical document form along with an apostille. Acquisition of Title over Real Estate
As explained in item 2 above, the documents and facts listed need to undergo registration on the real estate’s enrollment certificate before the competent Real Estate Registry Office, so that the title to vest in their beneficiaries. Bilateral Instrument The act of drawing public deeds is subject to collection, normally by the acquirer, of the applicable transfer tax, “ITBI” (in case of onerous ownership transfer), and “ITCMD” (in case of ownership transfer by a donation or inheritance transfer54), in addition to the Notary Public’s costs. Other costs related to the deed registration on the property record files will be due. If the parties agree on an installed payment, such parties can execute a private or public instrument (commitment) governing acquisition contingent upon payment in full of installments. The structure whereby the commitment is typically entered into comprises a down payment from the buyer, followed by due diligence over the real estate, the seller, and prior owners. Positive due diligence findings work as a condition precedent to the deal closing (ownership transfer), which, if achieved, oblige the buyer to pay the remainder of the purchase price upon drawing and execution of the deed. The commitment of purchase and sale may be subject to other conditions precedent, which, like the due diligence, subject the effectiveness of the purchase to their achievement. Most common conditions precedent require the seller to make certain rectifications to the real estate records, e.g., cancelation of liens, annotation of constructions, but can also comprise other measures, such as confirmation of the viability of the intended use of the property, environmental investigations or building entitlements and permits, among others. Acquisition operated through a corporate act occurs in cases when a partner contributes to an entity’s corporate capital real estate in exchange for stock underwritten. In this case, the relevant corporate act, normally a bylaw, serves as title of acquisition. Unless the social purpose of the acquirer entity is real estate activities, ITBI taxes are not due by the entity. Irrespective of whether the acquisition is object to a public deed or a corporate act, the parties will be required to present certain mandatory documents, either to the Notary Public or to the Real Estate Registry Officer. Such documents reveal the seller’s financial liabilities and can impair or ultimately bar the transfer. The most common cases where this situation occurs are:
Adverse Possession (“Usucapião”) The interested party possessor of the real estate is required to produce evidence, either judicially or extrajudicially, of the possession, as well as compliance with other conditions. After a judicial or extrajudicial proceeding in which the evidence is accepted, a registrable property title will be issued in the name of such interested party. Typically, good-faith possessors are found in the countryside of Brazil, occupying either parts of bigger lands, where the owners may have difficulty controlling informal occupation, or in land previously held under public domain. It is somewhat common for good-faith possessors to enter into agreements with investors of energy projects, for instance. Accession The most common occurrence of this institute is the construction of a building on a third party’s land by an investor. Upon completion of the building, the individual/entity in charge of it will procure the issuance of the occupancy certificate (“Habite-se”) and the clearance certificate of social security taxes (“INSS”) specific to the construction. These documents will allow registration of the building on the land’s enrollment certificate, which will operate the acquisition thereof by the landowner. A party that constructs a building in good faith is entitled to obtain indemnification from the landowner, as consideration for said owner having acquired the building by accession. On the other hand, if the building’s value is found to be substantially higher than the land´s value, the party who carried out its construction can procure the purchase of the land upon payment of indemnification to the landowner as consideration for the acquisition. Inheritance Rights and Corporate Succession While title issuance and registration are pending, it is possible to enter into agreements over the real estate, contingent upon the effective transfer. Likewise, in a corporate transaction that results in the winding-up of an entity holding real estate, the surviving entity will be vested in the respective title of ownership. This title will be materialized in the corporate documents whereby the transaction was operated, and which will need to undergo registration before the competent Real Estate Registry Office. Unlike with the transfer of inheritance, corporate succession is not subject to ITCMD, but instead to ITBI, to be assessed and collected upon title registration. Collaterals over Real Estate Mortgage Registration of instrument to the mortgage before the Real Estate Registry Office is mandatory and essential for the creation of the collateral. Only after registration, the mortgage will be enforceable in avoiding any other creditors that the borrower may have from tapping the real estate in their recoveries. Considering that the borrower remains in ownership and possession of the mortgaged real estate, it can freely sell it to third parties, in which case the collateral survives the sale. This ultimately means that a third-party acquirer will be exposed to the risk of foreclosure if the borrower defaults its obligations and triggers accelerated maturity of the debt, which is usually a consequence of payment default in mortgage agreements. It is worth noting that one real estate may be encumbered by more than one mortgage, to more than one creditor. In this case, in a scenario of default, the mortgages are enforced in the order in which they were created (i.e., as registered in the respective real estate enrollment). Before the enaction of the Legal Framework for Guarantees Law, the execution of mortgage was only possible by judicial means. However, through the new provisions introduced by the Legal Framework for Guarantees Law, it is now possible to execute mortgage through extrajudicial means. This innovation does not depend on a contractual provision and is applicable to all mortgage cases, except for agricultural financing. In any case, in order to use the mortgaged real estate to resolve its credit, a lender must follow certain steps, namely:
Another significant change introduced by the Legal Framework for Guarantees Law is the possibility of renegotiating the mortgage, which allows a new debt to be guaranteed, with the return of the amount already written off from the previous debt by the creditor to the debtor. Thus, the creditor returns part of the amount already paid to the debtor, up to the limit of the original claim. This hypothesis can only be used in a transaction to open an existing credit limit, favoring the use of the residual credit granted over the use of surplus collateral in contracts in general. The advantage of this innovation is that the transaction can be carried out by means of a simple contractual amendment, regardless of the prior cancellation of the original guarantee and the creation of a new one. The new credit is subordinate in priority to the main credit and the new debt must be paid within the same period as the original debt, although it may have different interest rates. In a judicial reorganization scenario, real estate encumbered by a mortgage can be used in the recovery plan to pay creditors other than the collateral’s beneficiaries. In the event that the borrower undergoes bankruptcy, a lender beneficiary to the mortgage will prefer certain creditors (such as unsecured ones) but will fall behind other ones (such as labor and tax). Fiduciary Lien over Real Estate Fiduciary lien creates a condition where default in payment of the debt will revert the title of the real estate to the lender (“property consolidation”), who will have the obligation to auction the real estate in order to collect funds for the payment of the debt, subject to the exception below. This means that, unlike the mortgage, the foreclosure of the collateral triggers the applicable transfer taxes56, taking into consideration that in the beginning of the foreclosure the ownership entitled to creditor on a fiduciary basis will turn into full ownership. Normally, a fiduciary lien secures the debt's main amount and ancillary costs, such as interests, taxes, late payment charges and expenses, and, in some cases, preset losses and damages. In case of the latter, the borrower can incur in the event of failure to comply with the terms of the underlying credit agreement. The Borrower will not be able to sell the property. Also, leases require the borrower’s express consent to be enforceable against them if longer than one year. The foreclosure must follow certain steps, as follows:
In a judicial reorganization or bankruptcy proceeding, the encumbered real estate will not be reachable by other creditors that the borrower may have. It is interesting to highlight that with respect to the restrictions of farmland acquisition by foreign individuals, in some cases, recently enacted Federal Law No. 13,986 of April 07, 2020, authorizes foreign individuals to receive farmland as collateral by a fiduciary lien. This law recognizes that the foreign individual becomes the owner for the purpose of debt liquidation. Regarding the new features introduced by the Legal Framework for Guarantees Law, we highlight the possibility of registering the so-called “supervening fiduciary lien”, which are subsequent liens of the same property, without cancelling the previous ones. Despite the possibility of its registration right after its execution, the subsequent lien will only be effective when the previous one has been canceled. If the previous fiduciary sale is foreclosed, the creditor of the subsequent fiduciary sale will be subrogated to the surplus (if any) of the price obtained from the sale of the property by the previous creditor. Similarly to the mortgage, the Legal Framework for Guarantees Law also allows the possibility of renegotiating the fiduciary lien, which allows a new debt to be guaranteed, with the return of the amount already written off from the previous debt by the creditor to the debtor. Thus, the creditor returns part of the amount already paid to the debtor, up to the limit of the original claim. This hypothesis can only be used in an operation to open an existing credit limit, favoring the use of the residual credit granted over the use of surplus collateral in contracts in general. However, it is important to note some differences between the renegotiation of a fiduciary lien and the mortgage: (i) the renegotiation of the fiduciary lien can only be carried out with financial institutions or simple credit companies, while that of the mortgage is free to be carried out with any creditor; (ii) the credits secured by the same fiduciary sale can only be assigned together, to the same creditor, while there is no such limitation on the assignment of the mortgage; and (iii) the existence of a supervening fiduciary sale prevents the renegotiation of another preceding fiduciary sale, while the existence of supervening encumbrances does not prevent the renegotiation of a previous mortgage, but the new debt will be subject, in priority, to the encumbrances then existing on the property. Another advantage of this innovation is that the transaction can be carried out by means of a simple contractual amendment, regardless of the prior cancellation of the original guarantee and the creation of a new guarantee. The new credit is subordinate in priority to the main credit and the new debt must be paid within the same period as the original debt, although it may have different interest rates. Furthermore, in the case of the fiduciary sale of multiple properties and/or properties in multiple counties, the Legal Framework for Guarantees Law facilitates the judicial enforcement of the secured debt, so that, since each property is not linked to a portion of the debt, the creditor can simultaneously seize all the properties, auctioning them at the same time, or successively, until the debt is paid, even if the properties are located in different counties. Finally, the Legal Framework for Guarantees Law introduces the concept of the collateral agent, which must basically manage the assets and foreclose on the collateral, if necessary, and must, after receiving the value of the sale of the asset pledged as collateral, make the payment to the creditors within 10business days. Thus, the collateral agent is useful in cases where (i) there is more than one creditor or there are multiple debts, because the agent can execute the collateral directly; or (ii) there is a foreign creditor, because in this case the agent can be a local representative, able to manage and execute the collateral without the need for the creditor to intervene or formalize a power of attorney. Acquisition and Lease of Rural Real Properties by Foreigners Acquisition and lease of rural real estate by foreign individuals or foreign legal entities are governed by the Rural Real Estate Legislation, which is centered on two main legal issues:
Such restrictions are not applicable to urban properties. The ongoing discussions regarding the restrictions before Brazilian Courts reached the Brazilian Superior Court, where a ruling is expected, but has already been delayed a few times. It is possible that the discussion will end and, consequently, Brazilian Entities of Foreign Capital will not be considered as foreign entities. Therefore, such restrictions can be lifted, or not, depending on the decision rendered. Need for Government’s Approval This requirement to INCRA (and to NSC, when regarding areas secured by National Security) is extensive to corporate transactions resulting in the direct real estate title transfer of rural land, or in corporate transactions/reorganizations that result in transfer of shares or quotas in an entity holding rural land (consequently, the indirect real estate acquisition). However, when the authorization concerns the direct or indirect transfer of rural land located on border areas, the respective authorization process is initiated directly before the NSC. Consequences of Not Having the Approval This legal landscape establishes that Foreigners can only acquire rural real estate upon governmental authorization to be granted in view of a project to develop and implement agricultural, industrial and/or colonization projects. The Notaries Public, Real Estate Registry Officers and INCRA oversee application of the restrictions, not to mention that any individual or entity that holds rights over rural property Real Estate Registry Officers is obliged, under the law, to annually update the property registry before INCRA. This means that the control on farmland acquisition by foreigners can be made: (i) by the Notaries Public, upon drafting of the relevant deed; (ii) by the Real Estate Registry Officers, upon registration of the ownership transfer deed and obligation to submit a notification to INCRA every three months informing the acquisitions by Foreigners; and (iii) by INCRA, upon registration of the transaction, in the event that Notaries Public and Real Estate Registry Officers fail to bar a prescribed transaction, or upon the annual update of the property’s registry. The review made by any of these agents will initiate administrative procedures before INCRA, and judicial lawsuits, if necessary, that might lead to the annulment of a transaction that was subject to the restrictions, without regard for the restrictions currently in force. As stated previously, ongoing discussions related to restrictions before Brazilian Courts have reached the Brazilian Superior Court, where a ruling is expected. It is possible that the discussion will end and, consequently, Brazilian Entities of Foreign Capital will not be considered as a foreign entity and, therefore, such restrictions may, or may not, be lifted, depending on the decision rendered. Transactions Not Subject to Restrictions The law expressly mentions that the following rights are not subject to the restrictions: (i) the constitution of an in-rem collateral (ii) the transmission of fiduciary ownership of a rural property to Foreigners, (iii) cases of receipt of property in settlement of transactions, by means of execution of an in-rem collateral, payment in kind or any other form. Moreover, Foreigners can be granted access to rural lands by entering into instruments that are not subject to restrictions, such as the surface right, the usufruct, the free lease, or the assignment of use. Although none of these titles transfer the ownership of the rural land, it can guarantee Foreigners access to the land for long periods of time. Furthermore, a new category of investment funds, recently established in the agribusiness sector, is allowed to acquire, sell and lease rural lands. It is the "Investment Fund in Agro-Industrial Chains” or the “Agribusiness Investment Fund” (in Portuguese, Fundo de Investimento nas Cadeias Produtivas Agroindustriais), created by Law No. 14,130/2021, amended by Law No. 14,421/2022, and currently ruled by Law No. 8,668/1993 (“FIAGRO”). Leasing Real Estate Below are certain clauses that normally apply to the lease relation.
Rural Leases and Partnerships Federal Law 8,629/1993 stipulates that the restrictions imposed by the Rural Real Estate Legislation are also applicable to leases of rural real estate. Unlike purchase and sale transactions, lease agreements are normally entered into through a private instrument that does not require registration. Verification by the authorities of compliance with the restrictions is difficult to carry out. In order to address this issue, Instruction 43/2015, enacted by the National Justice Council, innovated the effective legislation by establishing that lease agreements executed by foreign individuals or legal entities over rural real estate must be entered into through public deed. Taxes Related to Real Property in Brazil Rural Real Estate Tax - ITR (Federal Tax) All rural real estate property in Brazil, owned by individuals or legal entities as of January 01 of each year, is subject to Rural Real Estate Property Tax, to be paid to the Federal Government. Calculation of the ITR is based on information provided by the property owner to the Federal Tax Revenue (information includes the surface area, the purpose of its use, extent of preserved native forest, agricultural production, among several other considerations). Real Estate Conveyance Tax (Onerous Transfers) - ITBI - (Municipal Tax) Such tax does not apply in cases of contribution of the real estate to the capital in exchange for underwritten stock of companies whose main income does not come from real estate activity (requirements to be observed). Inheritance and Donation Tax – ITCMD Foro Laudemium General Considerations over Other Real Estate Aspects Easements Surface Rights Usufruct Fees and expenses related to the acquisition of a real property Lawyer’s fees can be negotiated and are established by the Brazilian Bar Association in its main fee guidelines. To ensure the validity of negotiations and compliance with the relevant legal formalities, it is advisable to have a lawyer present. Furthermore, the presence of a lawyer also serves to ensure the accuracy of the deed’s content in relation to the description of the property, the description of the succession of rights of the seller and his/her predecessors, in addition to other legal requirements. Specificities with respect to rural land - property boundaries description and its environmental data Additionally, the description of rural properties through satellite geo-referenced coordinates must be certified by INCRA and can lead to other legal measures/requirements regarding the property regularization, given that the description must be recorded in the property ownership record file. In addition to certification by INCRA as a requirement for the valid execution of a deed of sale of rural land, registration with the relevant Real Estate Registry Office is also required if the property in question comprises an area of more than 100 hectares in extent (note that this provision will soon apply in transactions involving properties smaller than 100 hectares in extent). In addition, registration of rural property data with the State and the Federal environmental agencies is a further requirement for the execution of deed of sale for the acquisition of rural land, coupled with its registration with the relevant Real Estate Registry Office. Finally, the rural property must be registered with the Federal Revenue, since the property must have an identification number (“NIRF”). Notes on real estate realtor activities The realtor’s commission can vary in accordance with the arrangement between the party and the broker, with an upper limit of 6% (six per cent) of the purchase price, established by law in general/standard/conventional cases. Urban Land Regularization Informal urban centers are those that are clandestine, irregular or in which the occupants could not be given title, even if they comply with the municipal legislation in force at the time of their establishment or regularization. In this sense, the procedure involves the regularization of areas and lots with the appropriate governmental bodies, by registering each of the areas and lots as individual properties, assigning them a number before the municipal government, for purposes of registration and tax collection, and an enrollment with the Real Estate Registry Office, where the ownership title will be registered. The process also includes the implementation of public facilities and missing infrastructure, as well as environmental and social measures to guarantee the regular use and occupation of the real properties. F From this perspective, the aim is to occupy the land efficiently, combining its use in a functional way. The Land Regularization Law mostly aims is to expand access to urbanized land for the low-income population, in order to prioritize the permanence of occupants in the regularized informal urban centers and foster social integration and generation of employment and income. However, irregular urban lands that are not occupied or destined for the low-income population also benefits from the law, provided that there is a specific purpose for the regularization. In this case, the regularization may be necessary for a number of reasons, such as situations of possible overlapping areas. The regularization aimed at benefiting the low-income population is financially supported by the government, while the specific purpose regularization (not destined for low-income population) must be financially supported by their potential beneficiaries or private claimants. In both cases, the regularization adds value to the benefited areas. |
| Intellectual Property | Intellectual property in Brazil denotes not only industrial property rights but also other rights related to creations of the mind, such as copyright and software. Following the definition of “industrial property” introduced by the Paris Convention, industrial property rights in Brazil cover products and service trademarks, certification trademarks , collective trademarks and position trademarks , patents of invention and utility model patents, industrial designs, geographical indication and protection against unfair competition. It also encompasses technology transfer, franchising, technical and scientific services. Industrial property is mainly regulated by the Brazilian Industrial Property Law (Law 9,279 of 1996 – “LPI”), the Paris Convention, and its Stockholm Revision, several norms issued by the Brazilian Patent and Trademark Office (“BPTO”), and the Central Bank of Brazil. Industrial Property Law 9,279 of 1996, which entered into force on May 15, 1997, consolidated the various rules governing the subject and introduced changes to the current protection of industrial property rights in Brazil. The BPTO is the federal agency in charge of regulating and granting patent rights, registering trademarks, industrial designs, and geographical indications, as well as of approving licensing agreements and any other agreements involving industrial property rights, technology transfer and technical and scientific services as mentioned above. In 2023, the BPTO issued Ordinances 26 and 27 establishing new rules and formalizing certain requirements in relation to the recordal or registration of technology transfer and franchise agreements, as well as the annotation of licenses and assignments of industrial property rights. Ordinance No. 26/2023 expressly repealed the BPTO’s Normative Instructions No. 16/2013, No. 39/2015 and No. 70/2017; and Ordinance No. 27/2023 expressly repealed BPTO’s Resolution No. 199/2017. The key updates introduced by the ordinances are:
The ordinances published by the BPTO mark a significant improvement in the procedures for registering agreements. The ordinances simplify and streamline the requirements and formalities for such agreements. Furthermore, the ordinances are in line with the BPTO's efforts to modernize and enhance its services, and to foster the development and innovation of the Brazilian intellectual property system. Technology Contracts Trademarks In order to be registered, the trademark must be new, lawful, and cannot be identical or confusingly similar to previous applications or registrations, nor may it be an expression of common use or a generic expression. According to the LPI, visually perceptible and distinctive signs that are not included in the legal prohibitions can be registered as trademarks. Based on such definition, the BPTO included the possibility of registering the following traditional categories of trademarks:
Recently, the BPTO started to accept a new modality, the position mark, in which the protection is characterized by the application of a sign in a singular, specific, and invariable position of a given support object, resulting in a set capable of identifying the business origin and distinguishing products or services from others that are identical or similar. Trademark protection in Brazil is obtained through registration of the trademark with the BPTO. However, Law 9,279 introduced two exceptions to this rule:
Registration of a trademark is valid for a period of ten years and is renewable for successive ten-year periods. The extension must be requested during the last year in which registration is in effect (called the ordinary term) or within a six-month period following the ordinary term (called the extraordinary term) against payment of a surcharge. A trademark registration can be canceled if:
Trade names in Brazil are not governed by the Industrial Property Law, and therefore are not subject to registration with the BPTO, although Law 9,279 of 1996 forbids the registration of trademarks identical or confusingly similar to third parties' trade names if it leads to confusion or association between those distinctive signs. Trade names are regulated by the Paris Convention, which assures protection to the owner of a trade name in all signatory countries, without filing or registration obligation, as well as by specific regulations issued by the National Department of Commerce Registry that require the registration of trade names with the Commercial Registry. Even though the Paris Convention demands that the protection of trade names be afforded throughout Brazilian territory, the Brazilian Civil Code in force since January 11, 2003, states that protection of corporate names is limited to the Brazilian state where the company is registered. However, there is a special provision of law that allows a company to expand its trade name protection to other states in Brazil through the submission of special requests to the commercial registries of each state where protection is desired. Madrid Protocol With the Protocol now in effect in Brazil, Brazilian titleholders who wish to register their trademarks in any of the other 120 countries that are part of the Agreement can do so directly with the BPTO, filing a single international application and paying only one fee. The BPTO also receives trademark applications from international and Brazilian companies that enter the Protocol and choose Brazil as their designated country. The BPTO, as a designated office, has up to eighteen months to complete an initial analysis of the application, under penalty of automatic allowance. This first review can result in an office action or abeyance (which interrupts the 18-month review period) or a final decision (allowance or rejection of the application). In view of the accession to the Madrid Protocol, Brazil has sought to harmonize trademark registration procedures between national applications and designations received through the Madrid Protocol. As in other countries, in order to analyze the registrability of the trademark in a multiclass system, the BPTO Examiner will carry out an anteriority search exclusively within the classes claimed in the application under analysis, except for cases of correspondence in the former national classification, as is currently the case. Trademark licensing agreements Until 2023, trademark applications could not generate royalties, which meant that the trademark had to be duly granted by the BPTO before remittance of royalties. However, the Specialized Federal Prosecutor's Office (“PFE”), through Opinion 00035/2020/CGPI/PFE-INPI/PGF/AGU, analyzed the possibility of paying royalties for applications of trademark applications. The PFE understood that these are intangible assets with property value, protected by Articles 130 and 195, III, of LPI, and are part of the assets of its owner, and thus generate its effects. Patents Patent protection is obtained through patent granting from BPTO. An invention patent is valid for a period of 20 years, calculated from the filing date of the patent application. Utility models are valid for 15 years as of the filing date. Legal Aspects of Doing Business in Brazil 205 Therefore, the President of the BPTO announced that, in compliance with the preliminary decision of ADI, the provisions of the sole paragraph of article 40 of the LPI are no longer applicable to patents that granted from April 07, 2021. The BPTO has been adopting several measures to decrease the backlog37 on patent analysis, such as signing cooperation agreements with other patent offices, including the European Patent Office (EPO), Patent Office in Argentina (AR), Patent Office in Japan (JP) and the United States (USA), as well as using the results of searches made in other countries. As informed above, to be patentable, an invention must be new and capable of use in industry. An invention is considered new when it is not part of the “state-of-the-art”. The “state-of-the-art” includes all data and information made available to the public in Brazil or abroad, written or verbally, by use or by any other means before the filing or priority date. It includes the contents of patents in Brazil and abroad. An invention is deemed as of industrial use when it can be made or used in industry, including agricultural industry. The patent holder must use the patent in Brazilian territory within three years from the granting date, in order to avoid the possibility of having its patent subject to mandatory licensing to a third party. A patent can also be subject to mandatory licensing if its owner exerts his rights in an abusive manner, or whenever the sales volume of the patented products do not meet local market requirements. Patent licensing agreements According to the proposal, eligible applications would form a separate queue and would be allowed as published or notified upon their national phase entry. This means that such applications would not undergo substantive examination. Letters patent would be issued with a general disclaimer calling attention to the non-patentable subject matter set forth in Articles 10 and 18 of the Brazilian Industrial Property Act. It is important to note that this consultation is a preliminary step and has the purpose to invite the public to contribute with inputs on the proposed streamlined procedure. We noted several contributions, especially from Brazilians intellectual property associations, regarding the consultation. In the case that BPTO decides to move forward with the implementation of an Act, it will come into force. Patents can be the subject of a licensing agreement if they are registered with the BPTO or in the process of registration. Patent applications cannot generate remittance of royalties until the patent is granted by the BPTO. The PFE is still assessing the possibility of also applying this understanding for the potential payment of royalties for patent applications. Industrial designs Industrial design licensing agreements Technology license However, as previously mentioned, on July 11, 2023, the BPTO published Ordinances No. 26 and 27/2023, which expressly recognized the possibility of registering a license agreement for non-patented technologies (know-how), which must be registered under the "Technology Supply" category (Ordinance no. 26/2023, article 2, III, a). The deduction of the fees paid as compensation for the technology supply for tax purposes is restricted to the five-year period of the agreement (see Article 364, Paragraph 1 of the Income Tax Regulation instituted by Decree No. 9,580/2018). This term may be extended for an additional period of five years if the contracting parties can demonstrate that the technology was not completely transferred to the receiving party or that the agreement is essential to the maintenance of the competitiveness of the receiving party. Technical and scientific services In 2015 the BPTO issued a Resolution listing certain contracts for technical and scientific assistance services which are not subject to registration with the BPTO because they do not imply technology transfer, such as preventive maintenance services for equipment and/or machinery. Franchising New Law 13,966, known as Franchising Law, modifies certain aspects of Law 8,955 and regulates the terms of a franchising agreement, clarifying the relationship between franchisor and franchisee. The new Law came into force on March 27, 2020. The former Law created the “Franchise Disclosure Document”, which establishes the inclusion of mandatory pieces of information that must be disclosed to the potential franchisee, including a more detailed description of the franchise in which the prospective franchisee intends to engage, as well as information about the franchisor, both of which are crucial elements for the prospective franchisee to decide whether to engage with the business investment. A franchisee can obtain the cancelation of the franchise agreement even after it is signed if the Franchise Disclosure Document is not delivered to the prospective franchisee at least 10 days prior to execution of the franchise agreement, preliminary agreement or any other agreement related to the franchise deal or the payment of any amounts by the franchisee. In this regard, for instance, it is required that the Franchise Disclosure Document be delivered by the franchisor to the franchisee at least ten days prior to signing the franchise agreement or payment of any fee by the franchisee to the franchisor. The cancelation of the franchise agreement can obligate the franchisor to return all amounts paid by the franchisee plus damages. Franchising agreements Even if the franchise agreement includes only trademark application, the remittance of payments abroad due for the franchise agreement will be allowed. Registration Such registration, however, is still recommended to ensure the existence of an official document that proves and sets parameters for the Brazilian Federal Revenue Service (Receita Federal do Brasil) when analyzing transfer pricing and other tax obligations. Software
“Software” or “computer programs” are defined as “the expression of an organized set of instructions in natural or codified language embedded in physical media of any nature to be necessarily used in automated machines to handle data, devices, peripheral instruments or equipment, based on digital or analogous techniques to make them operate in a specific manner and for specific purposes.” The law grants authorship protection for software programs for 50 years from the first day of January of the year following the software’s publication or, in the absence of publication, 50 years from the date of the software's creation. In terms of protection for foreign individuals, the law applies the international principle of reciprocity. Protection extends to foreign individuals domiciled outside Brazil, provided that the country where the software was created grants the same rights to Brazilians. Software Law 9,609 establishes that authorship of the software is already assured, regardless of its registration. However, the author can pursue registration of the software with the BPTO in order to allow the shift of burden of proof in civil procedures. Registration can be requested on a secret or non-secret basis, and the software registration is automatically issued, if it complies with formal requirements. Copyright Copyright is regulated by Copyright Law 9,610, enacted on February 20, 1998, which protects and regulates all creative works of inspiration. Additionally, Brazil is a signatory to two other major international treaties, the Bern, and Geneva Conventions. Copyright ownership is vested in the author of the work (or contributors if developed jointly). The duration of a copyrighted work is for the entire life of its author, and seventy years thereafter. If the work was created by two or more authors, the seventy-year term commences following the death of the last surviving author. Copyright registration is not a prerequisite for obtaining protection. However, registration is always helpful to deter piracy, and as proof of ownership in case of litigation. In this case, the author can register their work with specialized entities, in accordance with the nature of such work. Recently, due to the growing market for e-sports, avatars, gaming, NFTs and the metaverse, companies' intellectual property assets, especially copyrights, must also undergo review in order to address these new challenges. Tax Aspects Withholding Income Tax (IRRF) The IRRF is an ordinary burden on the beneficiary of the payment abroad, and, as a rule, is deducted from the amount to be paid. Nevertheless, the parties can formally agree that the Brazilian payer will assume the burden of the IRRF owed by the beneficiary domiciled abroad. In this situation, Brazilian tax legislation establishes that the Brazilian payer must gross up the IRRF tax basis. Amounts withheld in Brazil as IRRF can generate credits for the beneficiary domiciled abroad that can offset its foreign income tax, if such provision is contained in a treaty to avoid double taxation between Brazil and the beneficiary’s country, or if it has been provided for in the legislation of the country to which remittance is being sent. Contribution for Interference with the Economic Order (CIDE)
There is a CIDE exemption to payments related to software licenses, unless the source code of the software is provided to the payer (in which case the agreement is considered technology transfer, according to the Brazilian legislation). However, this is a controversial matter, because Brazilian tax authorities deem certai methods of software payment (e.g., Software as a Service) taxable, given that they are more similar to a service. Payment of CIDE is incumbent on the company domiciled in the country, given that, unlike the IRRF, this contribution is due by the payer domiciled in Brazil and not by the foreign beneficiary. 11.3 PIS/COFINS-Importation The levy of PIS/COFINS-Importation on payments abroad as intellectual property rights used to be a controversial matter in Brazil. Because most of the agreements involving intellectual property rights does not involve a “to do” obligation (but the mere license of rights), there are legal grounds to sustain in courts that these specific transactions do not characterize a service rendering and should not subject to the levy of PIS/COFINS-Importation. Nevertheless, tax authorities have been rendering administrative decisions on the sense that agreements involving the payment of royalties are not subject to PIS/COFINS- Importation, provided that the amount of royalties charged in the respective agreement is segregated from other amounts charged as technical services technical assistance and other services rendered under the same agreement. In addition, certain methods of royalty payment are deemed fully taxable because of its similarity to a service provision (e.g., Software as a Service). Services Tax (ISS) 11.5 IOF tax 11.6 Deductibility Regarding the local payment of royalties, the discussion on the applicability of the fixed limits for the deductibility of royalties and payments for technical assistance has been repealed. Thus, royalties and technical, scientific, administrative or similar assistance services are no longer subject to the maximum deductibility percentages and, also, are not subject to the new TP rules on local transactions. |
| Consumer | Not applicable. |
| Compliance | Compliance in the Spotlight In this new legal landscape, it is essential that both national and foreign companies review their operational and administrative routines in view of the new rules, adopt and enhance their Codes of Ethics and Conduct, and implement practices in line with the legal standards for relationship with the Government through Compliance Policies. The main legislation directly addressing corporate risk and compliance management in Brazil are:
The Brazilian Clean Company Act has become the main statute in the fight against corruption, notwithstanding its recurrent joint application with the other legislations referred to above, on a case-by-case basis. It applies to any corporation, foundation, association or foreign company that has its registered office, branch or representation in Brazil and which practices wrongful acts against the government. Both foreign governments and public international organizations are encompassed by the term “government”. Parent companies, subsidiaries, affiliates, or co-members of a consortium, within the scope of the contract, may be deemed joint and severally liable for the corrupt practices established in the law, with such liability being limited to the payment of penalty fines and full compensation of the damages caused. In the event of a merger or amalgamation, the responsibility of the successor is restricted to payment of a fine to the extent of the assets transferred. Illegal Practices Within the context of public bids, such law also prohibits:
Fines and Penalties The amount of the fine may vary from 0.1% to 20% of the gross revenue of the last fiscal year prior to the initiation of the PAR. If it is not possible to apply such criteria, the competent authority may apply a fine that varies from BRL 6,000.00 to BRL 60 million. For purposes of evaluating the amount of the applicable fine, the competent authority will take the following into consideration: (i) seriousness of the offense; (ii) benefit earned; (iii) consummation or attempt; (iv) degree of injury; (v) negative effect caused by the unlawful act; (vi) the corporation’s financial soundness; (vii) cooperation in investigations of the legal entity; (viii) existence of internal control mechanisms (effective Integrity Program); and (ix) the amount subject to public contracts in force jointly with the injured government entity. At the judicial level, competent authorities may apply the following sanctions: (i) forfeiture of assets, rights or amounts representing advantage or profit directly or indirectly obtained from the wrongful act, subject to the right of the injured party or a good-faith third-party; (ii) partial suspension or interdiction of the activities of the company; (iii) compulsory dissolution of the company; (iv) prohibition from receiving incentives, subsidies, grants, donations or loans from public agencies and public financial institutions or from financial institutions controlled by the government for a minimum period of 1 year and a maximum period of 5 years. Additionally, the Brazilian Criminal Code also establishes criminal liability for several crimes relating to corrupt practices, such as money laundering, fraud and corruption of public officials. The Administrative Misconduct Law, on the other hand, establishes penalties for public officials who take part in administrative misconduct, but also for private parties that participate in the activity or benefit from it. Finally, the Brazilian Clean Company Act only sanctions corrupt practices between private companies and the government and its officials, as there are no penalties for corruption acts practiced between solely private companies and individuals (private corruption) under the Brazilian legal framework. Leniency Agreements Moreover, for purposes of the Brazilian Clean Company Act, only legal entities are entitled to obtain such benefits and, regarding natural persons, Brazilian legislation provides for criminal plea bargains, which also require individuals to provide useful information in order for the plea bargain to be successful. Thus, any individual who collaborates with the authorities by presenting information and documents, under the purpose of a leniency agreement to a legal entity, will not benefit from any possible reduction of sanctions eventually applied by the authority to the legal entity. Both tools result in a decrease of the company/ individual’s sanctions, if all requirements established by law are met. The fine sanction on a company can be reduced up to 2/3 as a result of a leniency agreement. In December 2022, Interministerial Normative Ordinance No. 36 was published, which provides for the criteria observed by Brazilian authorities to reduce, by up to 2/3, the applicable fine under leniency agreements, thus limiting the authorities’ discretion in defining the amount to be reduced. Summary Judgment of Administrative Liability Proceedings ("PAR")
As opposed to leniency agreements, however, entities that intend to enter into a summary judgment within a PAR do not necessarily need to provide extensive new information to the authorities concerning the wrongdoings. In addition to a fine reduction, such legal entity can potentially be exempted from the extraordinary publication of the condemnatory decision, as well as benefit from mitigating circumstances that underpin the penalties aimed at restricting participation in public bids, if applicable. Integrity Programs In this regard, each company will determine, on a case-by-case basis, the level of governance it intends to implement, following the best guidelines and legal standards provided by the legislation. In this regard, it is recommended that companies implement mechanisms and internal control proceedings against irregularities in the application of their conduct and ethics statutes. Such mechanisms, referred to as an ‘integrity program’, must be suitable and updated according to the activities and requirements of the undertaking. The existence of a well-structured integrity program helps to diminish penalties in the event of an infraction of the compliance or anticorruption obligations set out by law up to 5% (five percent) of the fine. As a corporate governance tool, a solid compliance program enables the establishment of a safe environment for interaction among the company, its investors and management, preserving directors and managers from potential Administrative, Civil and Criminal liabilities. Federal Decree No. 11,129/2022 provides for the minimum requirements for an integrity program to be considered effective and, thus, enables the involved company to benefit from a reduction in fines for infringements. According to the Decree, a compliance program consists of:
On a slightly different note, recently enacted Federal Law No. 14,457/22, which aims to improve labor regulations, establishes that certain entities must implement and execute internal measures such as conduct guidelines, informative campaigns, training events, reporting channels and disciplinary measures to prevent, detect and remediate sexual harassment and other forms of violence in the workplace. AML/CFT Applicable to Financial and Banking Operations As per these rules, the financial institutions and other BACEN-authorized entities are called upon to implement internal controls and procedures in accordance with the characteristics and complexity of the line of business carried out by each institution. Although the rules set forth certain guidelines, each institution has the flexibility to establish its own set of policies and procedures in a manner more compatible with its operational activities, which shall be based on the profile of its clients and service users, as well as on the risks of such activities and other elements related to the profile of the institution’s employees, partners and service renderers. AML Policy Prudential Conglomerate COAF was transferred to the Central Bank from the Ministry of Economy, as established by Law 13,974/2020, enacted in January 2020. In 2023, COAF was repositioned within the Ministry of Finance by Provisional Measure No. 1,158/2023. However, these changes did not modify the way companies should conduct their Know Your Customer ("KYC") and AML/CFT procedures. Appointed Officer Know Your Client (“KYC”) According to Resolution No. 169, the Central Bank requires the financial institution to obtain additional information about the client, such as place of residence/location of headquarters or branch. Ultimate Beneficiary Owners The institutions may establish a minimum value as a reference to the equity participation to determine when someone will be considered an ultimate beneficiary owner, subject to a minimum of 25% (calculated either directly or indirectly). To that end, the institution must follow the same patterns defined by the Brazilian Internal Revenue Service to facilitate the identification of the individual subject to the ultimate beneficiary owner regulatory treatment. Employees, Business Partners and Service Providers Risk Assessment Suspicious Operations and Business Situations Reports to COAF Politically Exposed Person (“PEP”) Law 9,613/1998 – Anti-money Laundering Law ("AML") Offenders are subject to a penalty ranging from three to ten years, as well as a fine. Nowadays, any crime can be deemed a predicate offense to the practice of money laundering.
Such obligations involve identifying clients and keeping records (of such clients and certain transactions), informing COAF of any suspect transactions, as well as responding to any of COAF’s requests, among others. In November 2023, the Brazilian Federal Supreme Court established a precedent that intelligence reports from the Financial Activities Control Council ("COAF") can be shared either spontaneously or upon request by criminal prosecution agencies for criminal purposes. This can be done without the need for judicial authorization. This decision, referenced as Constitutional Claim (“RCL”) 61,944, enables financial oversight and law enforcement to collaborate more efficiently in regard to the investigation and prosecution of financial crimes. The decision underscores the court’s recognition of the importance of intelligence in combating illegal financial activities. Finally, only individuals may be held criminally liable for the practice of or participation in the crime of money laundering, whereas legal entities are subject to administrative proceedings for failing to comply with AML obligations. |
| Personal Data | General principles and provisions on privacy and data protection are provided for in the Brazilian Federal Constitution, the Brazilian Civil Code (Law No. 10,406/2002), as well as in other laws and regulations that address specific types of relationships or activities, such as the Consumer Protection Code (Law No. 8,078/1990), labor laws and rules that govern financial institutions and other entities authorized to operate by the Central Bank of Brazil. Furthermore, the Brazilian Civil Framework of the Internet (Law No. 12,965/14) and Decree No. 8,771/2016, establish principles and guarantees for Internet users, including protection of their personal data in the digital environment, in addition to rights and duties of Internet connection and application providers, including their liability. The Brazilian General Data Protection Law (Law No. 13,709/2018, “LGPD”) aims to protect the fundamental rights of freedom and privacy of data subjects (individuals), as well as the free development of their personalities. The LGPD came into force on September 18, 2020, while the enforceability of its administrative sanctions became effective in August 2021. Since the Law’s entry into force, companies must adopt effective measures capable of proving compliance with the rules of privacy and data protection, including the efficacy of such measures. The Brazilian National Data Protection Authority (“ANPD”) was created in 2018 and has been carrying out its functions since August 2020. The ANPD has defined two regulatory agendas: one that refers to the 2021-2022 biennium, and another that refers to the 2023-2024 biennium. These regulatory agendas are aimed at regulating and introducing guidelines regarding different key matters within the scope of the LGPD. So far, the ANPD has published a regulation concerning the process of inspection and sanctions of the ANPD, the dosimetry regulation for the application of administrative sanctions, a regulation addressing security incident reporting, as well as a resolution on the application of the LGPD for small-scale data processing agents, such as startups, small businesses, private law legal entities, including non-profit organizations. Lastly, the ANPD has published several guidelines that provide for matters such as the processing of personal data for academic and research purposes, the use of cookies and data protection, the processing of personal data by the government, and the use of legitimate interest as a legal basis, among others. The LGPD: Applicability and Definitions According to the LGPD, “personal data” is defined as any information regarding an identified or identifiable natural person, while “processing” stands for any operation carried out with personal data, such as collection, production, receipt, classification, use, access, reproduction, transmission, distribution, processing, filing, storage, deletion, evaluation or control of the information, modification, communication, transfer, dissemination, or extraction. In contrast, “sensitive personal data” is defined as personal data concerning racial or ethnic origin, religious belief, political opinion, trade union or religious, philosophical, or political organization membership, data concerning health or sex life, genetic or biometric data, when related to a natural person. The LGPD applies to any processing operation carried out by a natural person or a legal entity of either public or private law, irrespective of the means, the country where its headquarters are located or the country where the data are located, provided that:
Legal Basis With the consent of the data subject;
The processing of sensitive personal data must only occur under a different set of legal bases, as follows:
Data Subjects’ Rights
Data Protection Officer (“DPO”)
Failure to comply with the LGPD and fulfill the responsibilities of the DPO can result in significant fines and penalties for the organization. International Transfer of Personal Data
Administrative Sanctions
When calculating the amount of the fine addressed in item (ii) above, the ANPD can consider the total revenues of the company or group of companies:
Moreover, sanctions provided for in items (x), (xi) and (xii) must be applied:
It is important to highlight that these sanctions must only be applied after the carrying out of an administrative procedure that provides the opportunity for a full defense, in a gradual, single, or cumulative manner, in accordance with the particularities of each case and taking into consideration the following parameters and criteria:
Measures of Compliance |
| Antitrust | The defense of competition in Brazil is structured by Law No. 12,529/2011 (“Brazilian Competition Law”), which is grounded on Article 170, item IV of the Brazilian Federal Constitution, establishing “free competition” as one of the guiding principles of Brazilian economic law. Brazilian Competition Law is enforced by the Brazilian Competition Defense System (“SBDC”), which is divided into the Administrative Council for Economic Defense (“CADE”), and the Secretariat for Economic Monitoring (“SEAE”) of the Ministry of Finance. This division encompasses the preventive, repressive and advocacy functions of the SBDC. In particular, CADE embodies the preventive and repressive roles by means of merger control and anticompetitive conduct prosecution, whereas SEAE concentrates on the expansion of the competition advocacy culture in Brazil. Merger Control Brazilian Competition Law has adopted a suspensory merger review regime under which the parties to a transaction must comply with a standstill obligation, prohibiting closing before a final clearance decision is issued by the GS and confirmed, when applicable, by CADE’s Tribunal. Parties that fail to comply with the standstill obligation may be subject to an investigation for gun-jumping, for which fines range from BRL 60,000.00 to BRL 60 million, in addition to the possible annulment of the acts performed by the parties before obtaining CADE’s approval, as well as the opening of an investigation into potential anticompetitive conduct12. To date, the highest gun-jumping fine ever applied by CADE amounted to BRL 60 million13, in May 2022. The burden to file a transaction before CADE falls upon all the parties involved and the buyer usually leads the filing process with the cooperation of the seller. Provided that it is carried out prior to closing, there is no deadline for a merger filing. CADE’s recent practice indicates that it is preferable that the parties file the transaction following the execution of a binding agreement, but the agency has already accepted filings based on more preliminary documents14. In any case, the payment of a filing fee in the amount of BRL 85,000.00 is mandatory. Criteria for Mandatory Submission
In addition, as set forth by CADE's Resolution No. 17/2016, associative/collaborative agreements are subject to mandatory submission in Brazil whenever collectively: (i) their duration is equal to or longer than two years16; (ii) there is a common undertaking for the exploitation of a business activity17; (iii) the companies involved share risks and results from the business activity referred therein; and (iv) the parties are competitors in the respective market affected by the agreement. CADE's Merger Review Process and Timing
For transactions that entail competition-related concerns, Brazilian Competition Law provides for the possibility of negotiating remedies. They can be structural or behavioral, but preferably the latter. Remedy negotiations may be carried out with the GS or with the case’s reporting commissioner at the Tribunal level (when applicable) but, in any event, a successful merger remedy negotiation will result in the undertaking of a Merger Control Agreement (“ACC”) between the parties to a transaction and CADE. Anticompetitive Conduct The Brazilian Competition Law did not specify which deeds constitute anticompetitive conduct, taking a general approach in Article 36 by setting forth that any act, intended or otherwise able to produce the following effects, even if they are not achieved in Brazil, shall constitute anticompetitive conduct:
As such, several conducts are qualifiable as anticompetitive. Paragraph 3 of Article 36 laid out a few examples of actual practices that may constitute a violation of the economic order to the extent that they may produce any of the effects mentioned in Article 36, such as:
The Brazilian Competition Law is enforced by means of an administrative proceeding, which usually originates in the GS, with the General Superintendent holding the necessary powers for the opening of both investigative and accusatory proceedings, in addition to carrying out the fact-finding phase via the request of information from public and private sector entities, dawn raids, among others. The standard of proof required for a conviction will vary according to the conduct under investigation. CADE has consistently reviewed explicitly collusive and naked restraint conduct (e.g., cartels, RPM, etc.) as per se illicit, that is, the mere confirmation of authorship and materiality is a sufficient means to support a conviction decision, regardless of whether the conduct produced any effects. Whereas for abuses of a dominant position (e.g., exclusivity arrangements, ancillary restraints, fidelity discount policies, etc.), the Brazilian antitrust authority has reviewed cases under the rule of reason, which will consider the net positive (or negative) effects on competition of a given conduct for a conviction/shelving decision. In an accusatory proceeding, after the defendants have presented their defenses, the GS will issue its opinion for their conviction or shelve the proceeding, the former necessarily being reviewed by the Tribunal, whereas the latter will become final after a 15-day waiting period has elapsed. The decision issued by the Tribunal is final and cannot be challenged by a higher administrative court or authority, and it may only be annulled or modified if challenged before the Brazilian Judicial Branch. Alternatively, in the case of associations, unions or when the legal entity’s turnover data is not available, imposed fines will range from fifty thousand reais (BRL 50,000.00) to two billion reais (BRL 2,000,000,000.00). In addition to the above pecuniary fines, the following penalties may also apply:
Criminal Implications
The penalties under Law 8,137/1990 range from two to five years of imprisonment, in addition to the imposition of a pecuniary fine. Leniency Program The requirements for granting full immunity under the Brazilian Competition Law are similar to those of North American legislation. The main conditions for full immunity are:
If all the above requirements are met, the signatories to the leniency agreement will be granted administrative and criminal immunity, but not civil (against damage claims). If requirements are partially met, partial immunity may be granted (with a fine amount discount varying from one to two-thirds of the original penalty). The process for leniency negotiations encompasses three phases: (i) marker request; (ii) presenting of information that confirms the existence of the reported conduct; and (iii) formalization and signing of the leniency agreement. The proposal, negotiations, applicants’ identities, and documents part of the leniency agreement are confidential until a final decision is rendered by CADE’s Tribunal, except if the signatories to the agreement waive their right to secrecy. Leniency negotiations can be forfeited at any moment by both parties to the negotiation without representing a confession to the reported conduct, provided that it occurs before the signing of an agreement. In such event, all information and documents obtained by the GS in the context of the negotiations must not be used by CADE for any purposes whatsoever. Notwithstanding, the GS may open a proceeding to investigate facts related to the reported conduct of the forfeited leniency investigations, but only if based on non-related information and evidence. After the original negotiations’ forfeiture, the GS will contact the next marker holder in line (if any) for the commencement of new negotiations. No aspect of the leniency negotiation process is open to the public unless there is a specific legal/judicial command or a request by the negotiating parties, provided that the GS confirms that the publicization of the leniency agreement will not impair its investigation. In addition, it is possible to negotiate a leniency agreement in the course of an ongoing investigation related to another infraction unknown to the antitrust authority (Leniency Plus), obtaining a fine amount reduction for the ongoing investigation in return. Likewise, the party negotiating a Leniency Plus agreement may combine it with a settlement agreement for the ongoing investigation, obtaining an even more substantial fine amount discount. Therefore, the TCC is an agreement that may be negotiated with CADE in order to advance the termination of the administrative proceeding. Any defendant interested in entering into a TCC may submit a marker request to CADE, which will be either negotiated with the GS or with the case’s reporting commissioner, depending on the phase of the proceeding at the time of the request. If a proposal is made while the case is still under review by the General Superintendence, the negotiation deadline will be established at the discretion of the authority. Contrastingly, if a proposal is made after the case has already been brought to the Tribunal for a final decision, the negotiation period will be limited to a maximum of 60 days. The negotiation process may be confidential, at CADE’s discretion. However, the TCC itself, once approved, will be made publicly available on CADE's website. Confidential information will be redacted.
Although CADE does not restrict the number of TCCs to be executed with interested parties, its bylaws predetermine the maximum applicable discount to the hypothetical fines that the parties would be subject to. Such discounts will consider the moment upon which the marker was requested and the degree of cooperation of the settling party. As regards the method applied by CADE for calculating the pecuniary contribution, CADE's directives set forth the following discount standards: (i) the first defendant to come forward and execute a TCC may benefit from a reduction of 30% to 50% of the expected fine in the event of a conviction; (ii) for the second defendant, the reduction is of 25% to 40% of the expected fine; (iii) from the third defendant onward, the reduction is up to 25% of the expected fine (this is the applicable discount considering the stage of the Administrative Proceeding); and (iv) for the agreements executed after the case is presented to the Tribunal, the maximum reduction will be of 15% of the expected fine. Whenever the administrative proceeding concerns an investigation of agreements, combination, manipulation, or adjustment between competitors (i.e., explicit collusion), the payment of a pecuniary contribution and the admission of guilt are mandatory. CADE may also request the party to cooperate extensively with the investigation. Finally, it is important to keep in mind that undertaking a settlement agreement with CADE does not grant criminal, civil or administrative immunity. CADE and the Judicial Branch Private damage claims within civil courts Thus, the legitimacy to propose damage claims is present on those affected, in the case of individual interests, or through the intermediation of representatives of society's interests on collective cases, such as the Public Prosecutor’s Office. The adverse impact of the overcharge that defines damages on these types of cases can be used as a procedural argument by both parties involved in the lawsuit (pass-on effect). The pass-on argument can be used by indirect purchasers when claiming damages as a consequence of anticompetitive conduct, or by the defendants, when claiming that the effect reduced the actual harm suffered. In Brazil, damage claims are not as common as in other legal systems, such as in the United States or Europe, but the tide is slowly turning. With the aim of improving the damage claims situation in Brazil, the Legislative Branch enacted Law No. 14,470/2022, which amends the Brazilian Competition Law with the purpose of settling controversial procedural matters concerning damage claims due to anticompetitive practices, while providing tools to facilitate the filing of this type of claim. The new Law bolsters the “private enforcement” of competition law in Brazil, providing incentives that encourage potential claimants to seek compensation for damages resulting from antitrust violations, such as cartels. Private enforcement is regarded as an initiative complementary to CADE’s public enforcement. The new Law also establishes that double damages will not apply to leniency applicants and to defendants that decide to settle with CADE, meaning that, in these cases, the parties will only be liable for the compensation of the actual damages. Similarly, the new Law determines that the parties that enter into such kinds of agreements with the antitrust authority will not be held jointly and severally liable for damage caused by other companies involved in the same practice. In addition, the new Law provides that the limitation period will not be triggered while an investigation is under CADE’s analysis. It further establishes a limitation period of five (5) years, which is prompted by the unequivocal acknowledgment of the damage, by the aggrieved party, which will be considered as the date of publication of CADE’s decision in the administrative proceeding related to such claim. Judicial Review of CADE's Decisions Civil Courts and Arbitration Also, in the Brazilian legal system, disputes between private parties involving competition matters may be resolved through arbitration, since damage claims involve rights that can be settled. However, considering that the Competition Law regulations are in force, arbitrators must apply them systematically, analyzing all of the provisions involved, and therefore adopting the necessary measures to ensure that whatever decision is restricted to the available rights of the parties involved in the proceeding. Ministry of Finance’s Secretariat for Economic Monitoring (“SEAE”) Although SEAE does not act as a deliberative body and its assessments are opinion-based, its influence often brings about normative or regulatory changes that are in favor of a more competitive and efficient environment. In its Intensive Regulatory and Competition Evaluation Front ("FIARC"), SEAE seeks to improve the regulatory framework in Brazil, issuing opinions on anticompetitive regulations, upon the request of individuals and private or public legal entities. |
| Infrastructure and Public Utilities | Public Law and Financing The model for attracting private investments also includes supporting states and municipalities through technical support for modeling PPP projects. The Federal Government, through the Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”) and Caixa Econômica Federal, is procuring qualified consultants to carry out technical, legal, and economic studies for projects in various sectors. The model paves the way for improving infrastructure projects in regions with little or no track record of PPPs, betting on improving local regulatory structures to guarantee long-term private investments and improvements in the provision of public services to the Brazilian population. The Federal Government has recently announced other measures aimed at fostering concessions and public-private partnerships. Two of these measures stand out:
What is more, opportunities within the Brazilian Infrastructure sector encompass not only long-term PPP contracts or public procurement construction or services but also complex and wide-ranging supplies of goods and services required to execute such contracts, which results in great opportunities for all types of business. Therefore, it is essential to know and understand the potential types of interaction between the government and the private sector, which can be deepened by Demarest's infrastructure and project finance teams. Public Procurement in Brazil The Federal Constitution defines that all rules and procedures for public bidding must comply with the following guidelines:
Most of the rules subsequently included in relevant statutes stem directly from such constitutional provisions. The legal framework for public procurement in Brazil was recently reformed through Law No. 14,133/2021, of April 2021. The main premises of this reform were the incorporation into the statute of judicial decisions and guidelines from the Federal Court of Accounts (“TCU”), encouraging legal certainty and good practices for public and private partners. International companies that intend to participate in international public procurement in Brazil must meet the requirements of the New Public Procurement Law, depending on the rules provided by the Notice, upon submission of equivalent translated and authenticated documents. International companies are also entitled to engage in such opportunities in a joint-venture model with Brazilian or other foreign companies. In this case, the consortium member companies are jointly responsible for the project's liabilities, including their risks and obligations. Procurement Modalities
Reverse Auction Competition Contest Auction Competitive dialogue Waiver of procurement proceedings
For cases in which a public procurement process is waived, the public authority must justify its decision and comply with the following requirements for entering into an agreement:
In addition, Article 75 of the New Procurement Law establishes more than 20 cases of exclusions and exemptions from a public procurement process.
Lowest price Biggest fee discount Best Technique or Artistic Content Technique and Price Highest bid Higher economic return Participation of international companies in federal procurement IN 10/2020 aims to reduce red tape so that international companies can easily participate in Federal Government procurement, which can result in attracting more foreign investment. Since Brazil is now a World Trade Organization (WTO) member and must comply with its requirements, IN 10/2020 is a necessary step to comply with WTO’s Government Procurement Agreement (GPA) requirements. GPA requires all members to establish public procurement rules that provide transparency commitments and access to national public procurement markets among its members. Penalties
Concessions & public-private partnerships (“PPPs”) PPPs are means of concession of public services, which can be partially or totally subsidized by the Government. PPPs are regulated by Law 11,079/2004 (“PPPs Law”) and involve a prior auction to select the private party. There are two modalities of concession under the subsidized PPP logic are:
The PPPs Law establishes that contracts can additionally provide for requirements and conditions for the authorization, by the public partner, of the transfer of control or the temporary administration of the PPP to the financiers of the project. The goal is to ensure financial restructuring while keeping the continuity of the public service. Investments Partnership Program - PPI The PPI considers public projects that (i) are already in the execution stage, or that will be executed through partnership agreements signed by the Federal Public Administration; (ii) will be executed through the execution of public agreements by the State or Municipal Public Administrations; (iii) any other agreements that are a part of the National Privatization Program (Law No. 9,491/1997). The main purposes of the PPI are the expansion of investment opportunities, job creation, and technological and industrial development incentives, according to the Brazilian social and economic goals. Also, the PPI intends to ensure the expansion of public infrastructure, the wide and fair competition among the partnerships and provision of service agreements, stability, and legal certainty, in addition to facilitating the Federal Government’s role in regulation, along with the self-sufficiency of public regulatory entities. Among the latest projects implemented or under implementation through the PPI are the following: Privatization of the Organized Port of Santos Such a project intends to improve the quality and operational efficiency of the services provided through investments and private sector participation. The project is currently pending approval by the control bodies. In 2023, the Brazilian Federal Government opposed the privatization of the Port of Santos. However, the state of São Paulo is rendering efforts to continue with the privatization by holding regular meetings with the Brazilian Federal Government. Leasing of Port Areas The law provides three contract instruments: (i) contractual extension; (ii) early extension; and (iii) procurement renewal. The contractual extension and early extension must consider the following rules:
In all cases, the original contract or invitation to bid must have a provision for extension. The extension must be for a shorter or equal period to what is set out in such documents. Any party can request the term extension. However, the contract must not have been extended before. The extensions must be submitted to a public call for comments and opened to contributions for at least 45 days. The parties must sign a contractual amendment with new terms and a new investment schedule. The amendment must be submitted to the TCU, along with the studies and reports regarding the case. In order to allow the contract renewal process, the original concessionaire must submit: (i) the justification and technical elements that demonstrate the necessity and grounds for the process, with proposals for the solution of the difficulties faced; (ii) waiver of the term for correction of failures and infractions, in case of forfeiture effects; (iii) formal statement on the intention to embrace the re-bid process irrevocably and irreversibly, in accordance with the law; (iv) necessary information for the re-bid process, especially the statements related to investments in reversible goods linked to the business and financing instruments used in the contract. The original concessionaire will be entitled to indemnification, to be defined through arbitration or other private dispute resolution instruments, and eventually paid by the new concessionaire. On the other hand, the Government will be responsible for the indemnification to the lessors of the original concessionaire. State-owned Companies Furthermore, the Law establishes specific rules for all kinds of agreements of such institutions, for their bidding procedures and for their contracts. In addition, it provides for the companies’ obligation to act in accordance with their social function, related to the fulfillment of collective interests aimed at the economic well-being and the allocation of resources generated by the company to society in a socially efficient way.
The Board of Directors will be composed of up to ten members, of which 25% must be independent, and must not hold any previous relation to the state-owned company, or with holders of public offices in the Executive and Legislative Branches. Project Financing In recent years, mainly due to the aftermath of the Lava-Jato Operation investigation, there has been a retraction of BNDES funds, and companies started to seek other forms of private financing that became available, such as syndicated financings granted by commercial banks and the issuance of incentivized debentures (under the terms of Law No. 12,431/2011).On April 25, 2023, the Executive Branch published Decree No. 11,498 (“New Decree”), amending Decree No. 8,874, of October 11, 2016, which regulates fundraising activity, with tax incentives, through securities issued as per Law No. 12,431, of June 24, 2011. The New Decree includes the following sectors in the priority category:
These new sectors refer to the ESG agenda (especially to the environmental and social aspects) and join the areas of logistics and transport, urban mobility, energy, telecommunications, broadcasting, basic sanitation, and irrigation, which were already listed as priority sectors. |
| Insolvency and Bankruptcy Regime | Legal Framework Both the judicial reorganization and the extrajudicial reorganization are intended to give the company in a temporary unhealthy financial situation the chance to reorganize its activities in order to preserve its existence as a going concern. On the other hand, the bankruptcy proceeding is applicable when a company’s business activities are no longer viable, and has the purpose of liquidating the company’s assets under a court-supervised environment. Proceeds of the sale of assets are used to pay off claims according to the priority rules provided for by the BIL. The term “bankruptcy” is understood in Brazil as liquidation, similar to U.S. Chapter 7, regarding filing procedures. Bankruptcy Proceeding A bankruptcy proceeding has to be ruled by a Court (“Bankruptcy Court”) and is never automatically granted upon filing:
Once the Bankruptcy Court accepts the filing and rules that the company is under liquidation, the company is immediately shut down, the officers are compulsorily removed from the company's management, and a trustee is appointed (by the court) to liquidate the company. In a few circumstances, the Court may determine that the company continues to operate for a specific period of time after the bankruptcy ruling, prior to it being liquidated. The BIL sets out the requirements upon which creditors can file for bankruptcy of the debtor, as outlined below:
A bankruptcy decree entails (i) acceleration of all company’s debts; and (ii) conversion of foreign currency-denominated debts into national currency ("BRL"). Upon being appointed to serve on the bankruptcy proceeding, the trustee is expected to prepare an inventory and arrange the valuation of the assets. Subsequently, the assets must be sold under a court-supervised competitive process (i.e. auction, competitive process arranged by a specialized agent or other mechanism approved by the Court) within 180 days from the date the trustee concludes the inventory of the assets. The proceeds of the asset sales will be distributed to creditors in compliance with the credit priority rule set forth in the BIL (“liquidation waterfall”). The liquidation waterfall comprises (i) claims considered bankruptcy-remote (créditos extraconcursais), which have priority over the claims impaired by the bankruptcy proceeding; and (ii) claims impaired by the bankruptcy proceeding. Within each category of claims there is a priority rule, as follows:
During the bankruptcy proceeding, an investigation will be opened to assess whether the debtor, its shareholders, directors and/or officers have committed any fraud or wrongdoing that might have caused or helped cause the bankruptcy. If fraud or wrongdoings are found, the debtor, its shareholders, directors and/or officers can be sued for damages, in accordance with the general rules of civil liability. The BIL does not provide for a specific framework of civil liability of shareholders, officers, and directors of insolvent or financially distressed companies. As a rule, a shareholder, a director, or an officer is not personally liable for the losses caused by the company to third parties or losses that it suffers as a result of its own activities, provided that such losses are derived from regular management acts, such as those carried out by the administrator within its legal and statutory attributions, in compliance with the company's corporate purpose. Credits collateralized by Mortgages or Pledges. Within this period the following acts are considered ineffective:
In all cases mentioned above, the Bankruptcy Court in charge of the bankruptcy proceeding may consider the corresponding transaction ineffective, regardless of the filing of a specific fraudulent conveyance lawsuit. The Bankruptcy Court can void such fraudulent transaction upon request made by creditors, the trustee, or the public prosecutor within 3 years counted from the issuance of the bankruptcy decree. Such a request must be filed in the form a specific revocation lawsuit. If the revocation lawsuit is granted, the transaction will be considered void and the assets will return to the bankruptcy estate. Finally, it is important to mention that a company undergoing a bankruptcy proceeding is prevented from doing business in the country until the conclusion of the proceeding. As a rule, the restriction to doing business in the country does not apply to the partners, shareholders, officers, and directors of the bankrupt company. Judicial Reorganization (Recuperação Judicial)
The BIL, as amended by Federal Law 14,112/2020, incorporated rules for joint filings of judicial reorganization and/or subsequent joinder and/or consolidation of proceedings of multiple debtors. Joint filings (or procedural consolidation) are allowed for debtors of the same economic group and result in the coordination of procedural steps of the judicial reorganization, although the corporate independence of the debtors is preserved, and each debtor must provide all documents for the filing and the means by which it intends to restructure. Bankruptcy Courts can, however, authorize substantive consolidation (i.e., consolidation of assets and liabilities of all debtors) regardless of creditors’ approval if:
If substantive consolidation is approved, the debtors must present a single consolidated plan for all debtors, which will be submitted to a vote at the general creditors’ meeting. Rejection of the plan will result in the liquidation of all debtors (assuming confirmation is not possible under cram-down rules or if no creditors plan has been presented). Given that the judicial reorganization is not designed to wind up the debtor, its officers and directors will keep running the business while the company undergoes the proceeding. thus, during the judicial reorganization, the debtor or its officers will remain conducting the debtor's business activities under the scrutiny of a committee of creditors (if implemented), and a court-appointed trustee. Although the relevant Reorganization Court appoints a trustee to oversee the judicial reorganization and monitor the company's affairs for the benefit of the interests of all stakeholders involved in the proceeding (specially the impaired creditors), such trustee does not manage the company. On the other hand, the BIL provides that the Bankruptcy Court may remove officers and managers of the debtor if any of them (i) has been sentenced for bankruptcy crimes and/or economic crimes pursuant to specific criminal law; (ii) has strong evidence against them of practice of any of the bankruptcy crimes provided for in the BIL; (iii) has acted in bad faith or with the intent to defraud creditors; (iv) has spent money on personal affairs in excessive amounts and inconsistent with his or her financial situation; (v) has authorized payment of expenses that would not be justified given their nature and/or amount in light of the debtor's business; (vi) has either caused the debtor to be left with unreasonably small capital or entered into transactions harmful to the debtor's regular course of business; (vii) deliberately created or omitted any credit in the submission of the list of creditors that should support the initial filing of the judicial reorganization without reasonable cause and/or Bankruptcy Court approval; (viii) refuses to provide information requested by the trustee and/or committee of the creditors; (ix) has their removal provided for in the reorganization plan. Removal, however, depends on a Bankruptcy Court ruling preceded by requests filed by interested parties and accompanied by supporting evidence. In other words, court proceedings are needed for an officer of the debtor to be removed from office due to one of the situations provided for above. All of the debtor's matured and unmatured debts up to the date of the filing of the judicial reorganization request (the “prepetition credits”) are subject to the judicial reorganization, except for a few types of credits, such as those derived from advances on foreign exchange contracts ("ACCs"), credits arising from certain leasing arrangements, as well as those secured by specific types of collateral (e.g., credits collateralized by fiduciary lien and credits with retention of title). Furthermore, certain credits related to agribusiness financing are also considered bankruptcy-remote pursuant to specific statutes governing the issue. On the other hand, debts originating after the date of the filing of the judicial reorganization request are also not subject to judicial reorganization and must be paid according to their original conditions (these are the so-called “post-petition” credits). Also, obligations incurred by a debtor prior to the filing of a judicial reorganization will maintain their original contractual conditions unless the reorganization plan provides otherwise. In summary, the judicial reorganization proceeding comprises the following phases:
According to the approval process provided for in the BIL, each class of creditors must either accept the reorganization plan or reject it. Regarding the judicial reorganization proceeding, there are four classes of creditors provided for in the BIL:
Within Class One (Labor) and Class Four (Micro and Small Business), acceptance of the reorganization plan requires holders of more than one-half in number of claims voting to accept the plan. Within Class Two (Secured) and Class Three (Unsecured), acceptance requires holders of more than one-half in real amount and in number of claims voting to accept the plan. At its discretion, the Bankruptcy Court can approve a reorganization plan that has not been accepted by all classes of creditors, provided that such plan meets certain voting standards and does not discriminate creditors within the dissenting class (cram-down). The cram-down standards are: (i) approval of the plan by more than one-half of claims in real amount regardless of the classes of creditors; (ii) approval of the plan by two classes of creditors or one class if there are only two classes of creditors; (iii) within the dissenting class, the plan must have been approved by one-third of the creditors: in number of creditors and real amount if the dissenting class is either the unsecured or secured claims; or in number of creditors if the dissenting class is either the labor class or the micro and small business class.For the purposes of both a straight approval or a cram-down decision, voting quorum is verified according to the holders of claims (number of claims and corresponding real amounts) that attend the creditors' meeting. Creditors may present an alternative reorganization plan in the following situations: (i) expiration of the stay period (as extended, if it is the case) without a reorganization plan being put to vote; or (ii) rejection of the debtor’s plan, provided that confirmation is not possible pursuant to cram-down rules. Creditors representing more than 50% of the BRL amount of claims that attended the creditors’ meeting may vote to approve a 30-day period for creditors to present an alternative reorganization plan. In this case, the stay period will be extended for an additional 180 days as of either the expiration of the original stay period or the creditors’ meeting that approved the 30-day period. The creditors’ plan must be supported by more than 25% of the BRL amount of all claims subject to the judicial reorganization or, alternatively, 35% of the BRL amount of claims that attended the creditors’ meeting at which the debtors’ plan was rejected. The judicial reorganization plan (either the one proposed by the debtor or the alternative one proposed by the creditors) only becomes effective after judicial confirmation. As a general rule, if the reorganization is not approved at the creditors’ meeting, the Bankruptcy Court must convert the Judicial Reorganization into a Bankruptcy Proceeding, provided that creditors did not vote for an alternative reorganization plan and confirmation is not possible under cram-down rules. If the Court confirms the reorganization plan, debtor and creditors will be strictly bound by it. Upon such decision, debtor will be under supervision of the Bankruptcy Court and under judicial reorganization protection for the period of two years, even if the reorganization plan provides for extensions of maturities longer than two years. Default on the plan during such supervision period can cause the conversion of the judicial reorganization into a bankruptcy proceeding. The reorganization plan can provide several alternatives for the company to emerge from the financial crisis, including grace periods, haircuts, postponement of maturity dates, mergers, drop-downs, sale of assets, replacements of managers, increase of the capital stock, conversion of debt into equity, Debtor in Possession Financing (DIP Financing), among any other lawful means approved by the creditors. Generally, the debtor has discretion to propose the payment conditions to creditors; however, already matured labor claims must be paid within one year from the approval of the reorganization plan. The 1-year deadline can be extended to two years, provided that (i) the debtor provides sufficient guarantee for payment of the labor claims; and (ii) labor creditors approve the extension at the creditors’ meeting. Similarly, wage-related claims of up to 5 minimum wages that had been matured for three months prior to the filing of the judicial reorganization request must be paid within 30 days. Additionally, the company under a judicial reorganization is not allowed to dispose of its non-current assets without the Bankruptcy Court’s and creditors' approval. In general, there are two mechanisms for sale of non-current assets within the context of a judicial reorganization: (i) a sale pursuant to the BIL’s Article 66, which requires court approval, followed by potential objections by creditors; and (ii) sale of an isolated business unit [Unidade Produtiva Isolada – “UPI”] established under the reorganization plan. In both cases, provided that the sale is carried out under a competitive process pursuant to BIL’s rules, the sale and purchase will be clear of encumbrances and liabilities, and free from succession, including labor, tax, anti-corruption and environmental obligations. The amendment made to the BIL by Federal Law No. 14,112/2020 stimulates the availability of new financing to debtors (the abovementioned DIP Financing) by (i) granting priority to the DIP Financing lenders over other claims, in the event of subsequent bankruptcy liquidation of the debtor; and (ii) insulating the DIP Financing, guarantees related thereto, and corresponding credit priority, from the uncertainty arising from litigation. Throughout the process of judicial reorganization, the Bankruptcy Court can authorize DIP Financing secured by fiduciary liens and/or other security interest in non-current assets of the debtor or third parties to fund debtor’s activities, the restructuring expenses, or the necessary measures to preserve the debtors’ assets. The DIP Financing will have priority over virtually all other claims against the debtor in the event of bankruptcy liquidation (see above) and potential reversal of the decision authorizing the DIP Financing will not adversely impact the DIP Financing’s priority. Further, Bankruptcy Courts may authorize the creation of subordinated liens in the debtors’ assets regardless of the consent of the holder of the existing lien except for assets subject to fiduciary liens and/or fiduciary assignments. In any event, the guarantee will be limited to the proceeds resulting from the sale of the underlying asset that exceed the value of the first lien guarantee. Any person can be the provider of the DIP Financing, including creditors (subject to or not subject to the judicial reorganization), shareholders and other companies of the debtors’ economic group. In addition, the credit priority of the DIP Financing and the guarantees granted to a good-faith investor must not be adversely affected by modifications to the Bankruptcy Court’s decision that authorizes the DIP Financing, provided that the funds have already been disbursed to the debtor. On the other hand, if the Judicial Reorganization is converted into a bankruptcy liquidation prior to the full disbursement of the DIP Financing amounts, the relevant financing contracts will be automatically terminated, and the credit priority and guarantees will be limited to the funds disbursed to the debtor prior to the bankruptcy decree. Extrajudicial Reorganization Although such proceeding is deemed “out-of-court”, the effects of the private reorganization plan and its imposition on other creditors depend on a Bankruptcy Court’s confirmation. In summary, the BIL allows a debtor to file for Extrajudicial Reorganization and request a Bankruptcy Court to impose the reorganization plan on other creditors, provided that creditors representing more than 50% of a same class or group of creditors have accepted and executed the reorganization plan. Furthermore, a debtor can file for an Extrajudicial Reorganization upon gathering support of 30% of the BRL amount of each group of impaired claims and secure the additional votes within 90 days from the filing date. Debtors can request that the Bankruptcy Court convert the extrajudicial proceeding into a judicial reorganization proceeding if they cannot secure the required majority within the 90-day period. All claims existing on the date of the extrajudicial reorganization request filing, except for tax claims and bankruptcy-remote claims (créditos extraconcursais), may be impaired by an extrajudicial reorganization. Consequently, the BIL, as amended, now allows debtors to use the Extrajudicial Reorganization also to impair labor claims. However, impairment of labor claims depends on previous negotiations with the labor unions that represent the debtor’s employees. BIL’s original wording did not explicitly provide for a stay period in extrajudicial reorganizations. Brazilian Courts, however, have consistently ruled that the processing of an extrajudicial reorganization guaranteed a stay period (similarly to the judicial reorganization stay) in order to prevent impaired claimants from taking actions and enforcing claims against the debtor. The amendment to the BIL included a specific provision stating that the stay period applies to the extrajudicial reorganization proceedings provided that the debtor has gathered support of the minimum required majority to file for the extrajudicial reorganization request. Upon the filing of the extrajudicial reorganization request, a public notice is released, and creditors can challenge the reorganization plan within 30 days, on the following limited grounds:
If an objection is filed, the debtor will have a 5-day term to reply to it. Afterwards, the Bankruptcy Court will make a ruling (i) analyzing the objections (rejecting or granting them); and (ii) provided all objections are rejected, confirming the reorganization plan and determining its imposition over the non-supporting creditors. Unlike the judicial reorganization, the rejection of the extrajudicial reorganization plan does not cause the bankruptcy liquidation of the debtor. Once the Bankruptcy Court rules on the reorganization plan, interested parties can appeal. Generally, and pursuant to the BIL’s rules, such appeal neither stays the proceeding nor prevents the implementation of the reorganization plan. Confirmation of the reorganization plan entails (i) replacement of the old indebtedness subject to the Extrajudicial Reorganization for the restructured indebtedness to be paid according to the terms and conditions of the reorganization plan; and (ii) dismissal of any lawsuit filed to collect on debt subject to the reorganization plan. Finally, the amendment to the BIL established a protection to creditors and investors against fraudulent conveyance claims related to transactions carried out within the context of implementation of an extrajudicial reorganization plan, in the event of subsequent bankruptcy liquidation of the debtor. |
Doing Business Latin America
Brazil
(Latin America/Caribbean) Firm Demarest AdvogadosContributors Paulo Rocha
Updated 16 Sep 2024Political Structure
The Federative Republic of Brazil is the largest country in Latin America and the fifth largest in the world. It covers more than 8.5 million square kilometers and occupies more than half of South America. Brazil borders all countries in South America, except Chile and Ecuador. Brasilia is the capital, Portuguese is the official language, and the Real ("BRL") has been the currency since 1994.
Brazil has about 208.5 million inhabitants, representing one-third of the population of Latin America. Approximately 84% live in urban areas along the Atlantic Coast, although the expansion of agribusiness and industrial activity into the interior of the country has led to the population expanding further and further away from the coast.
The economic forecast for Brazil at the end of 2024, according to Deloitte, indicates modest GDP growth, projected at between 1.9% and 2.2%, driven mainly by domestic consumption and a stronger labor market. Inflation is expected to remain within the targets set by the Brazilian Central Bank, while the Selic rate is expected to be further reduced in order to stimulate the economy. However, public debt is a growing concern, with projections indicating that the government's gross debt could reach 77.3 % of the GDP by the end of 2024. These factors suggest a stable economic environment, but with significant fiscal challenges that need to be managed to ensure long-term sustainability.
Brazil's largest states in terms of GDP are São Paulo, Rio de Janeiro and Minas Gerais, all located in the southeast region, with a combined population of around 83.37 million. The city of São Paulo contributes approximately 32.1 % of Brazil's GDP. B3 S/A (“BRAZIL, BOLSA, BALCÃO”), located in São Paulo, is one of the largest infrastructure companies in the global financial market and the largest stock exchange in South America, trading a large part of Brazilian production. In 2023, B3 recorded an Average Daily Turnover of BRL 24.3 billion, representing a significant variation compared to 2022.
The combined GDP of Mercosur, including Argentina, Brazil, Paraguay, Uruguay and Bolivia, is around USD 5.195 trillion in Purchasing Power Parity ("PPP") terms and approximately USD 2.638 trillion in nominal terms. This places Mercosur in 5th position, just behind the United States, China, Japan and Germany; considering Brazil alone, we are the 10th largest economy in the world. Its four members have been modernizing and opening up their national economies. In 1996, Mercosur signed agreements with Chile and Bolivia, in force from October and February 1997, respectively, for the development of free trade between the countries. Mercosur also signed free trade agreements with Israel in 2007 and Egypt in 2010. The Mercosur agenda, however, goes far beyond economic and trade issues, covering also education, employment, the environment, consumer protection and culture.
Brazil is divided into 26 states and a Federal District (within which Brasilia is located). This table shows the 5 regions, their populations and the percentage of the population living in urban areas:
The largest city in Brazil and South America is São Paulo, with more than 12 million inhabitants. This number increases to about 20 million when it includes urban centers - the metropolitan region - around São Paulo, known as Greater Sao Paulo. Another 14 cities, including Rio de Janeiro, have a population of over 1 million.
The Political System
Brazil is a democratic federative republic, composed of the Union, states, municipalities and the Federal District. It has a representative form of government with universal elections for the Executive and Legislative Powers.
A new constitution was introduced in October 1988. It provided a presidential type of government with three independent powers: The Executive, the Legislative and the Judiciary. A national referendum held in 1993 confirmed the presidential system as the preferred regime and the republic as the preferred form of government.
After more than 10 years of military dictatorship, Brazil adopted multiparty democracy in 1979. However, the Armed Forces maintained control over the Executive Branch until 1985, when the first civilian president was elected through an indirect vote by an electoral college. Direct 4-year elections for governors and mayors were readopted in 1982, and for the Presidency of the Republic in 1988.
Brazilian democracy is open to various forms of political participation. In addition to voting, there is participation from political players such as sectoral associations, unions, social movements and non-governmental organizations. There are also several mechanisms for direct participation by citizens in decision-making processes and in the exercise of control of power, for example, popular consultations and referendums, impeachment processes of the Executive Branch, and forums and public hearings involving the general voting public and companies.
The free press is a social and constitutional right, censorship is prohibited and the right to public opinion is granted.
The Executive Branch
At the federal level, the Executive Branch is headed by the President. The President and the Vice President are elected by direct vote for four-year terms. It is worth noting that since the implementation of direct elections in Brazil, voting is mandatory for citizens between 18 and 70 years of age. Both the president and the vice president can run for re-election. Key responsibilities of the Executive include:
- sanctioning and approving laws, as well as issuing decrees and regulations for their application;
- propose and implement public policies;
- signing of treaties, conventions and acts (which need to be approved by the National Congress);
- maintaining national security, public security and public services allocated by the Union; and
- executing the annual budget approved by Congress.
The Executive Branch also occasionally takes over the legislative functions of the Legislative Branch, adopting provisional measures (“MPs”) in urgent cases. MPs have the force of law, but they need to be approved by the National Congress within 60 days of its publication. Congress may extend the validity of MPs only once, for another 60 days. If this is not done, the MP will no longer produce effects.
Congress may, by resolution, delegate the power to legislate to the President. The resolution can determine that Congress must examine the topic of the proposed law.
The Vice President assists the President, when requested, and performs other functions assigned to the position through complementary laws. The Vice-President will replace the president if he or she is incapacitated, impeached or leaves office.
The President appoints and dismisses Ministers of State. They have two general functions: First, to run their ministries, and second, to advise the head of government on the policies of their department. However, the responsibility for these policies lies with the president. They remain subordinate to the president, who is solely responsible - after consulting his ministers - for the federal administration.
The Executive exercises direct and indirect administration. The direct administration includes the Ministers of State and their respective administrations, secretariats, chambers and committees, as well as the administration of the President. Indirect administration comprises government administrative organizations, state-owned enterprises and state-owned companies with private investors, federal foundations and federal regulatory agencies.
The Legislative Branch
The Legislative Branch consists of a two-chamber National Congress (the Senate and the House of Representatives). The Senate is composed of 81 Senators representing the states of the Federation (three Senators for each State and the Federal District). They fulfill eight-year staggered mandates. The House of Representatives consists of 513 deputies representing their electorate and have simultaneous mandates of four years. Members of the Senate and the House of Representatives are elected by direct popular vote. The House of Representatives employs a system of proportional representation, that is, each state and the Federal District elect between 8 and 70 deputies each.The legislature approves and oversees the implementation and effectiveness of the annual budget and exercises the legislative functions of the State, approving:
- constitutional amendments;
- complementary, ordinary and delegated laws;
- legislative decrees and resolutions; and
- Provisional Measures.
Before any bill becomes law, it needs to be approved by both chambers and receive presidential sanction.
The Federal Constitution provides for matters of exclusive competence of the House of Representatives and the Senate. It enables both bodies to establish their own rules on the organization, regulation and appointment of workers. The Federal Constitution also sets out the functions of the National Congress, establishing which matters must be submitted for approval by the President of the Republic and which are within his own competence.
Each house has committees that analyze and report their conclusions on the specific matters that are submitted to them. The House of Representatives has 20 permanent committees, while the Senate has 12. In addition, temporary committees, such as the Parliamentary Committees of Inquiry, can be set up to investigate certain issues. Both states and municipalities have legislative powers.
The Senate also has the mandate to approve the appointment by the president of the Supreme and Superior Courts, directors of regulatory agencies, the president of the Central Bank and other government officials, as defined in specific legislation.
The Judiciary Branch
The Judiciary Branch is composed of Federal and State Courts and is headed by the Federal Supreme Court (“STF”). The STF is the highest court of appeals for federal and state courts in matters of the Federal Constitution. The 11 STF members are appointed by the president following an absolute majority of the Senate.
Within the scope of the STF are the special courts. These are the highest courts of appeal for non-constitutional issues:
- Superior Court of Justice ("STJ"): judges appeals on the interpretation and application of federal law;
- Military Superior Court ("STM");
- Superior Electoral Court ("TSE"); and
- Superior Labor Court ("TST").
Below these special courts are the Federal Regional Courts and the State Courts. These hear appeals against decisions taken by both the lower Federal Courts and the lower State Courts (which are generally the first instance courts). The Federal Court can judge cases in which the Union or any of its companies or governmental entities are a party. State Courts judge cases involving individuals or legal entities not linked to the Union, or to state or municipal entities or authorities.
Finally, there are the Courts of First Instance for Labor matters; the Regional Courts of Labor Appeals (which deal only with labor issues); the Public Electoral Courts and the Regional Electoral Courts (organization, supervision and summary of elections) and the Lower Military Courts (military crimes). All these courts are part of the federal judicial system.
At the base of the court hierarchy are:
- Labor Courts and Regional Labor Courts (only for labor disputes);
- Regional and Lower Electoral Courts (for organization, oversight and electoral summary); and
- Low Instance Military Courts (for military crimes).
The Judiciary Branch is fiercely independent in its role of enforcing the law, providing fair and equal justice and protecting the individual rights of citizens.
Political Divisions
States
Brazil is divided into 5 regions and 26 states, consisting of:
- North: Acre, Amapá, Amazonas, Pará, Rondônia, Roraima and Tocantins;
- Northeast: Alagoas, Bahia, Ceará, Maranhão, Paraíba, Pernambuco, Piauí, Rio Grande do Norte and Sergipe;
- Southeast: Espírito Santo, Minas Gerais, Rio de Janeiro and São Paulo;
- Center-West: Goiás, Mato Grosso e Mato Grosso do Sul, and
- South: Paraná, Rio Grande do Sul and Santa Catarina.
Each has its own constitution, governor and state legislature. The Federal District, located on the border of the State of Goiás, in the Center-West region, also has its own governor and legislature.
The governor exercises the executive powers of each state. The governor and the vice-governor are elected by direct vote for four-year mandates. Secretaries of State assist the governor in the exercise of his duties. Their number and powers vary from state to state, but according to state laws and the State Constitution, they all govern the state. The Legislative Assembly, composed of state deputies - also elected by direct vote - exercises legislative power. The number of deputies for each State Assembly is proportional to its population.
The organization of the State Judiciary is the responsibility of each state, and is carried out by the highest court of the state, the State Court of Justice. The State Court of Justice is subject to both the Federal Supreme Court ("STF") and the Superior Court of Justice ("STJ").
Municipalities
The municipalities, which make up the states, are the smallest autonomous units in Brazil. They elect their own chief executives (mayors), deputy mayors and members of the legislature (councilors), and control local public services.
Municipalities are created by state law and are subject to the requirements of federal law regarding minimum population size, public revenue and consent of the population. The mayor governs the municipality, with the help of municipal secretaries or departmental directors. The Council is the municipality's legislative body. It can legislate on certain local matters authorized by the Federal Constitution.
The State Court has competence over the municipalities.
The Legal System
Brazil is a civil law country, and its legal system is based on laws issued by the National Congress, State Assemblies and Municipal Chambers according to the procedures provided for in its constitution or organic law, as the case may be.
The courts base their decisions on this promulgated law. If, however, a case does not fall under a specific rule or law, the Law of Introduction to the Rules of Brazilian Law establishes that the courts can base their decisions on case law, general principles of law, analogy, custom and usage.
The Federal Constitution
As mentioned previously, Brazil is composed of the Federal Union, states and Federal District, and municipalities. Each may pass laws and regulations on matters under its respective jurisdiction, in accordance with the Federal Constitution, and in accordance with its provisions. The Federal Constitution of 1988 addresses the legal system and ensures the fundamental rights of citizens. It also defines the political and administrative organization of the country. The Constitution defines the roles of the Executive, the Legislative and the Judiciary Branches. Legislation on tax, socioeconomic and economic policies, civil and commercial law, employment relations and criminal law.
Article 1 of the Constitution also enshrines essential principles such as national sovereignty, citizenship, dignity of life, social values of employment, freedom of association and political pluralism.
The Federal Constitution is divided into different titles covering:
- Titles I and II – ESSENTIAL PRINCIPLES: Chapter I of Title II describes individual rights and freedoms. It also guarantees the inviolability of the right to life, freedom, equality, security and property;
- Title III – the organization of the State;
- Title IV - The organization of the Legislative Branch and the National Congress, among other public bodies, including the Executive and Judiciary;
- Title V – the defense of the State and democratic institutions;
- Title VI – Tax and Tax Budget;
- Title VII – economic and financial order;
- Title VIII – social order; and
- Title IX – general provisions.
Each state has its own constitution and each municipality has its own organic law, which must be in accordance with the principles and rules established in the Federal Constitution.
There is a hierarchy in the application of laws in the Brazilian legal system based on legal criteria such as (i) temporality, (ii) jurisdiction, (iii) specificity, among others. These criteria are used to prevent conflicts between laws or misuse of current legislation.
Recent Political and Economic History
Brazil began as a Portuguese colony and had the unique experience of being host to the Conquering Royal Family that left its heir as ruler of the country. This ruler declared independence from Portugal before he later returned to Portugal and left his son in Brazil. During his reign, his military leaders declared Brazil an uncontested republic and kept the Royal Family safe and prosperous.
The Republic alternated between democratic and not-so-democratic periods, but at no time was there an outright rebellion or significant internal war.
Over the last half century, Brazil has lived a varied political life. After the military regime, which ruled from 1964 to 1985, there was a period of 'transition', instigated and governed by the military government, which led Brazil to full democracy through the approval of the current Federal Constitution in 1988, thus laying the foundations for a Democratic Republic that respects the due process, checks and balances, the independence of Congress and the Judiciary, free press and social and civil rights. Since the reinstatement of direct elections to choose the President of the Republic, there have been seven presidential elections, with alternation of power between political parties and the proper functioning of democratic institutions, including the impeachment of two presidents.
Current Scenario
Since the 1990s, Brazil has been undergoing a process of institutional modernization with a major impact on the business environment. The stabilization of the currency with the Real Plan in 1994, together with increased fiscal responsibility, introduced better management of public spending, which has been improved by successive governments. The Fiscal Responsibility Law of 2001, the constitutional amendment establishing the spending ceiling in 2016, the Pension Reform approved in 2019 and the New Fiscal Framework created in 2023 demonstrate the federal government's long-term commitment to Brazil's fiscal stability. The Pension Reform, for example, introduced a number of changes to the Brazilian pension system, including new retirement ages, a new minimum contribution period and transition rules for those who are already insured, generating savings of around BRL 800 billion for the Federal Government over 10 years.
The autonomy of the Central Bank, approved in 2021, is also a significant milestone in ensuring the institution's role in price stability, as regulator of the system, and guaranteeing that monetary decisions are made based on technical criteria, regardless of political cycles.
Over the last three decades, a framework change has also taken place to allow the private sector to take an increasing part in the provision of public services and infrastructure. In-depth regulatory reforms were implemented, allowing for the privatization of state-owned companies and the participation of the private sector in the provision of services and the construction and operation of infrastructure. To this end, laws were passed that sought to guarantee legal certainty for delegation contracts, which established new regulatory frameworks providing guidelines for private participation in different sectors, and 112 independent regulatory agencies were created with the power to issue new regulations and supervise partnership contracts.
Public service concessions in infrastructure sectors have come to represent a fundamental strategy for the country's development and modernization. The General Concession Law, in force since 1995, was a decisive step towards reforming the state and fostering private sector participation in the management of essential services. This legal framework has enabled significant advances in sectors such as transport, telecommunications, energy and sanitation. Concessions are carried out through competitive tenders, ensuring that capable companies take over the operation of services, with a commitment to invest and improve quality, always under the supervision of the granting authority. The model has been crucial in attracting investment, optimizing resources and guaranteeing the provision of efficient and sustainable public services for the population.
The initial milestone for the entry of the private sector into assets that were managed by public authorities was the National Privatization Program ("PND"), set up in 1990, initially aimed at privatizing state-owned companies and later expanded to include the delegation of public services and movable and immovable federal property. In 2016, the Investment Partnership Program ("PPI") was created to structure the governance of federal government projects in partnership with the private sector. Both are still running today, even with the various changes of government, demonstrating the commitment to reducing government participation in the economy.
In 2017, Brazil enacted the Labor Reform, which represented a substantial change to the Consolidation of Labor Laws ("CLT") in Brazil. With the aim of modernizing labor relations and stimulating the economy, the reform introduced intermittent work, made working hours more flexible, and changed rules on holidays, pay and collective bargaining.
Two important milestones for improving the business environment were approved in 2019. The first was the Regulatory Agencies Law, which improved the institutional framework for federal regulatory agencies in Brazil, providing for the management, organization, decision-making process and social control of these entities, and fostering greater functional, decision-making, administrative and financial autonomy. The law also amends several previous pieces of legislation relating to regulatory agencies, with the aim of improving transparency, governance and the stability of directors, as well as reinforcing the absence of hierarchical subordination in relation to the executive branch.
The second milestone was the Economic Freedom Act, which established rules to protect free enterprise and the free exercise of economic activities. It also defines rules on the actions of the state as a normative and regulatory agent, ensuring economic freedom, good faith and respect for contracts and property. The law also amends various existing laws and repeals others, aimed at guaranteeing a freer and less bureaucratic market environment, fostering the country's economic development and growth. It is important to emphasize that these two laws instituted regulatory impact analysis as mandatory for all federal regulators, and must be part of the process for drafting new rules.
The measure with the greatest capacity to impact the business environment in Brazil is the tax reform. An important part of it was approved in 2023 and aims to simplify the tax system, unifying taxes on consumption and creating a more transparent system. The main change is the introduction of the Value Added Tax ("VAT"), which will replace five existing taxes (PIS, Cofins, IPI, ICMS and ISS) with two new ones: the Contribution on Goods and Services ("CBS") and the Tax on Goods and Services ("IBS"). In addition, a Federal Excise Tax will be created on specific products such as alcoholic drinks and cigarettes. The reform provides for a transition period until 2033, when it will be fully implemented, and includes measures such as a tax ‘cashback’ for low-income families and a basic food basket with tax exemption for essential items.
International Treaties
Given the influence of the American and French Constitutions, in Brazil the Executive and the Legislative branches jointly approve, ratify and promulgate international treaties.
According to the Federal Constitution, the president has the power to sign international treaties. He or she may also delegate these powers to appointed plenipotentiaries. With the exception of less formal treaties, known as executive agreements, all other forms of treaty, after signed by the Executive representative, must go to Congress for approval. Once a treaty has been approved - by Legislative Decree - the Executive will decide whether to ratify it. If the President decides to ratify, he or she will sign the instrument of ratification and exchange it with that of the other signatory (for bilateral treaties) or forward it to the depositary mentioned in the treaty. The treaty must then be approved in Brazil by Presidential Decree and published in the Federal Official Gazette.
There have always been discussions in Brazil about whether international treaties are binding on domestic legislation. The STF has decided that the treaties incorporated into the Brazilian legal system have the same force as ordinary laws. Therefore, if a treaty conflicts with a domestic law on the same subject, the most recent one will prevail. The exception is in tax matters: The National Tax Code expressly states that treaties override ordinary laws. In addition, human rights treaties may have the same status as a constitutional amendment, depending on the approval quorum of Congress. Brazil has revised its foreign trade policy and now focuses on negotiating new free trade and preferential agreements. The Free Trade Agreement between the South Common Market ("Mercosur") and the European Union ("EU") appears to be a priority for Brazil. This trade agreement could intensify already dense economic relations with the EU - Brazil ranks sixth as the EU's main investor (excluding offshore companies) and is the third destination for EU investment actions worldwide5. In June 2019, the agreement was politically announced and now awaits approval and ratification by the member countries of both blocs.
There are other advances in Mercosur trade negotiations, such as the joint declaration signed in June 2018 with the Pacific Alliance(6), which signaled the shared intention to increase trade relations between the two blocs. Another important achievement was the launch of negotiations with the Republic of Korea in May 2018, with Canada in March 2018, and ongoing negotiations with the EFTA countries (Iceland, Liechtenstein, Norway and Switzerland). It is also worth mentioning the recent analysis of a possible economic partnership agreement with(7) Japan.
Mercosur is also expanding its preferential trade agreement with India and conducting trade negotiations with Lebanon and Tunisia. In addition, Brazil isn’t currently negotiating the expansion of the Economic Complementation Agreement No. 53 ("ACE No. 53") (with Mexico).
Furthermore, official sources indicate that there are dialogues with a view to opening trade negotiations with other partners, such as Singapore and New Zealand.
As part of the Brazilian government's broader plan to improve the business environment, align its public policies with the best international practices and strengthen its position on the global economic stage to attract foreign investors, Brazil has already signed up to 120 of the Organization’s almost 250 instruments. The country’s collaboration with the OECD began in the 90s and gradually deepened. In 2007, Brazil and other emerging economies became the organization's “Key Partners”. Currently, Brazil participates in numerous OECD committees and working groups, including as a member of the Inclusive Framework on Base Erosion and Profit Shifting ("BEPS") and as a member of the Global Forum on Exchange of Information and Transparency for Tax Purposes. Currently, Brazil has signed up to at least 108 of the Organization’s almost 250 instruments.
FORMS OF BUSINESS ORGANIZATIONS
In Brazil, two types of corporate entities are most used in business transactions: the limited liability company and the corporation.
In general terms, the limited-liability company offers a number of practical advantages and is recommended if the partners desire simplicity and flexibility in the corporate structure, including lower maintenance costs and the inapplicability of some legal formalities that are mandatory for the corporations. A limited liability company is usually suitable for wholly-owned subsidiaries or restricted joint ventures.
A new rule introduced by Law No. 14,195, enacted on August 26, 2021 (“Law No. 14,195”), allows limited-liability companies to issue commercial notes. However, in the event that the partners wish for the company to issue debentures or other securities in the future, in order to become a publicly held company, or to admit other groups of investors, then the adoption of a corporation structure is preferable. A corporation structure is also preferable for ventures with a larger number or different groups of shareholders.
There are two categories of public registries of legal entities in Brazil: civil registries of legal entities and boards of trade. Both have state jurisdiction. A business entity, such as the limited liability company and the corporation, must be registered with the board of trade of the state where the company’s head office is located, as well as with the board of trade of any other state where the company opens a branch. Simple partnerships, associations and foundations are registered at civil registries of legal entities. Corporate documents, such as amendments to articles of associations or bylaws, as applicable, as well as certain minutes of partner meetings, must be filed with the respective registry of the company.
What is more, according to the Brazilian legislation, all entities enrolled with the Brazilian Federal Revenue Office (“Receita Federal”) will have 30 days, calculated from the date of issuance of their federal taxpayer identification number (“CNPJ”) to provide the Federal Revenue Office with documents that identify their ultimate beneficial owner(s) holding “significant influence” or deemed an “affiliated entity”.
Presumed “significant influence” means that the ultimate beneficial owner holds more than 20% of the capital stock of a certain entity, either directly or indirectly, and holds predominant control over corporate deliberations, as well as the power to elect the majority of the entity’s managers, even without controlling it.
A legal entity can be deemed an “affiliated entity” in the event that:
- the legal entity’s equity interest in the capital stock of a foreign entity classifies it as such foreign entity’s direct or indirect controlling entity;
- the legal entity is classified as (a) directly controlled by, (b) indirectly controlled by or (c) related to the foreign entity;
- the legal entity and the foreign entity share the same corporate or administrative control, or if at least 10% of the capital stock of each entity belongs to the same individual or legal entity;
176 - the legal entity is associated with a foreign entity in the form of a consortium or condominium, as provided for in the Brazilian legislation, in any venture; and
- the foreign entity is resident or domiciled in a low-tax jurisdiction, or benefits from a preferential tax regime, as provided for by articles 24 and 24-A of Law No. 9,430, of 1996 (the latter of which provides for the controlling entities that are not already included in items I to IV above).
Limited-Liability Company
A Brazilian limited-liability company, which resembles an American limited liability company ("LLC"), is the most common type of company in Brazil. Nowadays, it accounts for an estimated 70% to 85% of all companies consolidated in Brazil. They range from small enterprises with few partners to some of the largest businesses in the country.
A Brazilian limited-liability company can have one or more partners, who can be legal entities or individuals, Brazilian or foreign. Single-member limited-liability companies were introduced in Brazil in 2019. After the implementation of Law No. 14,195, all individual limited-liability companies ("EIRELI") in Brazil were automatically converted into single-member limited-liability companies ("SLU"), without requiring any changes to the respective articles of association of such companies. Consequently, the "EIRELI" corporate type has been discontinued. If the partners are not Brazilian residents, they must have an attorney-in-fact in Brazil with powers to represent them in general corporate matters and to receive services of process on their behalf.
According to Brazilian laws, the company’s assets are not linked to the partners’ net worth. The partners will only be held liable if they abuse their powers or violate the law or the articles of association.
In the event that the company’s assets are not sufficient to bear the company’s obligations, and the capital stock has not been fully paid in, the partners (if more than one) will be jointly liable up to the amount of capital stock. If the subscribed capital stock has been fully paid in by the partners, the partners will be solely liable up to the amount of their respective interest in the capital stock.
A Brazilian limited-liability company is organized through articles of association, which is a written agreement between or among the partners, and that must be drafted in accordance with the Brazilian Civil Code. Such an agreement must contain a clear statement of the partners’ intentions regarding the company, such as the company’s purposes, capital stock, administrators, authority of the administrators, etc.
On June 10, 2020, the Department of Business Registration and Integration (“DREI”) issued Normative Instruction No. 81/2020 (“IN No. 81/2020”), which changed the requirement for limited-liability companies to state its corporate purpose in its corporate, although this requirement is expressly provided for in the Brazilian Civil Code. Pursuant to IN No. 81/2020, the provision of the corporate purpose in the company’s corporate name is optional, but if applied, must correspond to the activity carried out by the respective company.
On June 02, 2021, the DREI issued Normative Instruction No. 55/2021 (“IN No. 55/2021”), which allowed companies to state, in their corporate names, the CNPJ.
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The incorporation of a limited-liability company occurs through the registration of the articles of association of the company with the board of trade of the state where the company’s head office is located, concomitantly with its registration with the Federal Revenue Office for issuance of the company’s CNPJ. Once the company is duly enrolled with the Federal Revenue Office, it will be allowed to open bank accounts in Brazil and execute contracts.
After its incorporation, the limited-liability company must obtain other standard licenses, such as the Municipal Tax ID, the State Tax ID (if applicable) and the Operating License. Depending on the company’s activities, other licenses can be required, such as registrations with governmental agencies (for example, the Brazilian National Health Regulatory Agency "ANVISA"). In case the company carries out import and/or export activities, such a company must obtain a license issued by the Foreign Trade Department, called RADAR.
Due to recent legislative changes introduced through Law No. 14,451, of September 21, 2022, which amended Law No. 6,404 of December 15, 1976 (“Brazilian Corporations Law”), amendments to articles of association now require the approval of the simple majority of the capital stock. Law No. 14,451 also introduced other important changes regarding the quorum for deliberating on the merger, amalgamation, dissolution, and termination of the status of liquidation of limited-liability companies, changing the quorum from 75% to the simple majority of the capital stock.
Limited liability companies must adopt an accounting system, which consists of regular bookkeeping of commercial and financial information related to their activities. DREI Normative Instruction No. 82, of February 19, 2021, provided for the possibility of keeping corporate books of corporations and limited liability companies in digital form. The corporate books must be signed with any digital certificate issued by an entity accredited by the Brazilian Public Key Infrastructure – ICP-Brazil, or through any other means of certifying the authorship and integrity of digital documents, pursuant to paragraph 2 of art. 10 of Provisional Measure No. 2,200-2, of August 24, 2001, and to Law No. 14,063, of September 23, 2020.
Any remittance of funds to Brazil by foreign partners, either as an investment or as a loan, must be registered with the Central Bank of Brazil’s Electronic System. This registration is essential for future payment of profits to foreign partners, repatriation of capital (for capital investments), and/or payment of interest and principal (for loans).
All foreign individuals that hold equity in Brazilian companies must be registered with the National Register of Legal Entities to obtain a CNPJ if they are a legal entity, or an individual taxpayer identification number ("CPF") if they are an individual.
The capital stock of a limited-liability company is divided into quotas, which can be assigned and transferred. The number and ownership of quotas must be identified in the company’s articles of association.
If not provided otherwise in the articles of association, transfers of quotas to other partners or third parties are permitted, unless partners representing more than one-fourth of capital stock do not agree with such transfer. Furthermore, in accordance with IN No. 81/2020, partners can assign and transfer their quotas without amending the company’s articles of association immediately, through the execution of a separate document for the sole purpose of such assignment and transfer of quotas. Such document must be registered with the respective registry, and the referred transfer, with the new corporate structure, must be reflected within the subsequent amendment and restatement of the company’s articles of association.
As a rule, no minimum capital stock is required (exceptions in case of obtaining certain licenses).
Nevertheless, the capital stock must be consistent with the company’s initial operational needs. In the event that more is needed, the partners can increase the company’s capital stock at any time, provided that the existing capital stock has been already paid in, by amending the articles of association.
The partners can pay in the capital stock with cash, credits or assets, and there is no legal time frame set forth by the law for payment thereof. Services cannot be rendered in lieu of paying in capital stock. Capital increases will only be allowed after full payment of the previously subscribed amount.
Decisions taken by the partners in a partner’s meeting are binding upon all partners, even if they were absent from the meeting or dissented from the deliberation taken.
Regarding such partners’ meetings, Law 14,030/2020, enacted on July 20, 2020, allows the partners to participate and vote remotely in the meetings by means of a digital platform, provided that the necessary regulatory requirements established in the Law are observed.
A limited liability company may be managed by one or more persons — partners or not —, Brazilian citizens or foreigners, provided that they are residents of Brazil. The manager will be in charge of the company’s management and representation. The publication of Law No. 14,451 introduced changes to the quorum for approval of the appointment of non-partner officers. Due to the legislative change, the appointment of non-partner officers now depends on the approval of:
- at least two-thirds (2/3) of the partners, in the event that the capital stock has not yet been paid in; and
- holders of quotas corresponding to more than half of the capital stock, in the case that it is fully paid in.
It is worth highlighting that, although partners are allowed to elect officers that reside abroad, it is recommended that the individual to be appointed as officer of a limited-liability company or a corporation be duly enrolled with the Federal Revenue Office and with the CPF, so that such individual can obtain a digital certificate after having been appointed, given that several responsibilities within the role of an officer require such enrollments.
The articles of association may establish different levels of control for the company and determine which matters depend on the partners’ prior authorization, in addition to the matters already provided by the law.
Generally, the managers of the company are not liable for acts performed within the regular course of business. However, when they: (i) engage in negligent or wrongful conducts (abuse or misuse of corporate powers), although within the level of their duties or powers; or (ii) act in violation of the Law or the Articles of Association, they will be held personally liable under civil law for the losses they have caused.
The restrictions imposed on management powers, as set out in the articles of association duly filed with the competent registry, are also imposed on third parties negotiating with the company. For this reason, if the current articles of association impose clear limits on the manager’s powers, the third party contracting with the company must observe the rules in this corporate document for the business to be effective.
A modification introduced by a law enacted in 2007 has established that the abovementioned rules (previously applicable only to corporations) related to the booking and preparation of financial statements, as well as independent audits, are also applicable to limited-liability companies, or to a group of companies under common control, provided that, in the previous financial year, they held assets in an amount greater than BRL 240,000,000.00 or annual gross revenue greater than BRL 300,000,000.00. As a result, it is the understanding of certain Boards of Trade that limited-liability companies (or any other corporate type) that meet such requirements have the obligation to publish their financial statements in the newspaper.
However, on November 25, 2022, the DREI issued Circular No. 4,742/2022/ME, establishing that the publication of financial statements by large-sized limited-liability companies (i.e. companies whose assets exceed BRL 240,000,000.00 or whose annual gross revenue exceeds BRL 300,000,000.00) is optional. As a result, boards of trade must not request confirmation that such statements have been published.
Corporations
The main purpose of a Brazilian corporation (Sociedade anônima), like U.S. corporations, is to make profits and distribute such profits as dividends to their shareholders.
A corporation’s equity interest is represented by shares, which can be of different types, according to the advantages, rights, and restrictions attributable to the shareholders. The two (2) major types of shares are common and preferred. Corporations are also allowed to issue debentures.
Publicly held corporations must be registered with, and subject to, the supervision of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM). Corporations can also be privately held.
Only publicly held corporations can issue depositary receipts (“DRs”), which are certificates representing shares in the corporation. DRs are traded on foreign markets, enabling the company to raise funds outside of Brazil.
Brazilian corporations are organized through their bylaws, which are written documents that must abide by the Corporations Law. Such bylaws must be approved in the inaugural general meeting and can be amended in a special general meeting.
To validly exist, a corporation must file with the board of trade the minutes of the inaugural shareholders’ meeting and the approved bylaws, a complete list of all the subscribers of the capital stock, and the bank receipt for the initial ten percent (10%) payment (if the capital is paid in cash). As an exception, in accordance with Law 4,595 of 1964, as amended, where the corporation is a financial institution, the percentage of the initial payment must be equal to or greater than fifty percent (50%) of the subscribed capital stock.
As a rule, after submitting the relevant documents to the Board of Trade, filing usually occurs within five (5) days, unless the Board of Trade requires changes in the documents or requests additional information.
Like limited-liability companies, corporations must also obtain all other standard registrations, as well as specific ones depending on the type of business to be carried out. Similarly, a corporation’s shareholders, whether legal entities or individuals, must be enrolled with the CNPJ or CPF.
Corporations must adopt an accounting system that consists of standard bookkeeping of commercial and financial information related to their activities, in addition to a (i) ledger of nominative shares; (ii) ledger of nominative share transfers; (iii) ledger of minutes from the general meeting of shareholders; (iv) ledger of shareholder attendance; (v) ledger of minutes from executive board meetings; and (vii) ledger of opinions and minutes from the oversight council’s meetings.
Pursuant to Law No. 14,195, for closely held corporations, the ledgers mentioned in items “i” to “iv” above can be replaced by mechanized or electronic records.
Unless otherwise provided for by law or bylaws, shareholder decisions require a simple majority of votes, without abstentions being taken into consideration.
Regarding such shareholders’ meetings, Law 14,030/2020, enacted on July 20, 2020, allows shareholders to participate and vote remotely in such meetings through a digital platform, provided that the necessary regulatory requirements established in the Law are complied with.
As a rule, each common share held by a shareholder grants the right to a single vote at a shareholders’ general meeting. However, Law No. 14,195 included plural voting in the Brazilian Corporations Law for closed corporations, which includes the possibility of granting the right to ten votes for a single common share. This mechanism was previously prohibited by the Brazilian Corporations Law.
The creation of a class of common shares that have plural voting rights depends on a favorable vote by shareholders representing at least half of the voting capital stock; or, at least half of the non-voting preferred shares or those with restricted voting rights, if issued. The company’s bylaws, however, may require a larger quorum in order to grant plural voting rights.
The corporation can be managed by a board of officers and a board of directors (required in the case of publicly held corporations), or solely a board of officers.
The board of directors is a collective decision-making body that consists of at least three members, appointed at the shareholders’ general meeting. If the members of the board of directors are not residents of Brazil, they must appoint a representative who is a Brazilian resident to receive services of process in legal proceedings, according to Brazilian Corporations Law.
The corporations can be managed by one officer, since Supplementary Law No. 182 enacted on June 01, 2021 (“CL No. 182”) amended the Brazilian Corporations Law, which provided for a minimum of two officers to act in the management of corporations. The officers represent the corporation and carry out all acts necessary for its normal operation. Further, pursuant to Law No. 14,195, persons resident outside Brazil can also be appointed as officers and are subject to the same considerations established as regards the nationality of managers in limited-liability companies, although they must appoint an attorney-in-fact to receive services of process in Brazil. Formerly, only members of the board of directors were allowed to be non-residents in Brazil.
Generally, officers and directors are only personally liable for their acts when they involve an abuse of power, excess of mandate, or violation of the law.
Corporations also have an oversight council whose basic function, when installed, is to oversee the acts of management.
Most of the corporate documents of a corporation, such as its bylaws, minutes of shareholder’s meetings and board of officers’ meetings, annual reports, balance sheets, and other financial statements must be published in a widely read newspaper where the company’s headquarters is located. The information must be provided in a summary format along with simultaneous publishing of full copies of documents on the same newspaper page on the Internet. Such webpage must provide digital certification of the authenticity of the documents, kept on a separate page issued by an accredited certification authority under the Brazilian Public Key Infrastructure.
Pursuant to CL No. 182, closely held companies with annual gross revenue of up to seventy-eight million reais (BRL78,000,000.00) can freely establish the distribution of dividends, subject to the mandatory dividends provided for in article 202 of the Brazilian Corporations Law and the rights of preferred shareholders, as well as in accordance with the provisions of the bylaws and the shareholders’ agreement.
As of January 2022, with the entry into force of Law 13,818/2019, which amended Art. 289 of the Brazilian Corporations Law, the publications required by the Brazilian Corporations Law are now mandatory only in large circulation newspapers, published in the location in which the company is headquartered. It is worth mentioning that the documents must be published in full on the newspaper’s online webpage, and in a summarized form in its physical copy, simultaneously. It is also important to mention that the summarized publication of the financial statements must contain, at minimum, the global information or values related to each group and the respective classification of accounts or records, as well as extracts of the relevant information included in the explanatory notes and in the opinions of the independent auditors and the fiscal council, if applicable.
Especially for closely held companies with annual gross revenues of up to seventy-eight million reais (BRL 78,000,000.00), under the terms of Article 294, item III of the Brazilian Corporations Law, it is possible for the mandatory publications to be made only electronically, provided they are made using a digital certificate on (i) the Balance Sheet Center of the Public Digital Bookkeeping System ("SPED"); and (ii) on the company’s own website.
While there are no legal sanctions for private companies that do not publish their financial statements, it can still create obstacles or hindrances to their regular business activities. For instance, companies may face difficulties participating in bidding processes, obtaining loans, or financing, or signing contracts with clients or suppliers who require financial statements as a prerequisite for contracting.
Other Legal Entities
Brazilian laws provide for other types of corporate entities, such as simple partnership (sociedade simples), secret partnership (sociedade em conta de participação, a form of unincorporated joint venture), ordinary partnership (sociedade em nome coletivo), limited partnership (sociedade em comandita simples), associations and foundations. However, those types of legal entities are not commonly adopted unless there is a specific business decision or operational reason that justifies adopting any of these types of legal entities.
IN No. DREI 81/2020 established that the board of trade can register the corporate acts of any entities duly signed electronically with any digital certificate issued by an entity accredited by the Brazilian Public Key Infrastructure ("ICP-Brasil"), or any other means of proof of authorship and integrity of documents in electronic form, pursuant to paragraph 2 of Article 10 of Provisional Measure No. 2,200-2 of August 24, 2001.
BUSINESS OPERATION TAXES
Taxation in Brazil is a vast and complex field, comprising numerous federal, state, and municipal taxes. The main taxes are:
- FEDERAL TAXES: Corporate Income Tax (“IRPJ”), Import Duties, Export Tax, Tax on Manufactured Products (“Imposto sobre Produtos Industrializados” – “IPI”), Tax on Financial Transactions (“Imposto sobre Operações Financeiras” – “IOF”), Social Contribution on Net Profits (“Contribuição Social sobre o Lucro Líquido” – “CSLL”), Contribution to the Social Integration Plan (“Contribuição ao Programa de Integração Social” – “PIS”), Contribution for the Financing of Social Security ( “Contribuição para Financiamento da Seguridade Social” – “COFINS”), and Contribution for Intervention in the Economic Domain (“Contribuição de Intervenção no Domínio Econômico” – “CIDE”);
- STATE TAXES: Sales Tax on the Circulation of Goods and Services (“Imposto sobre a Circulação de Mercadorias e Serviços” – “ICMS”), Motor Vehicle Tax (“Imposto sobre a Propriedade de Veículos Automotores” – “IPVA”); and Tax on Donation and Inheritances (“Imposto sobre Heranças e Doações” – “ITCMD”); and
- MUNICIPAL TAXES: Service Tax (“Imposto sobre Serviços” – “ISS”), Real Estate Transfer Tax (“Imposto sobre Transmissão Inter Vivos” – “ITBI”) and Property Tax (“Imposto sobre a Propriedade Territorial Urbana” – “IPTU”).
It is important to highlight that at the end of 2023, Brazil approved the Brazilian Tax Reform on consumption when the final wording of Constitutional Amendment No. 132/2023 (“EC 132/2023”) was enacted. We will comment on the consumption tax reform on a specific topic(8).
Federal Taxes
Corporate Income Tax (“Imposto sobre a Renda da Pessoa Jurídica” - “IRPJ”)
The taxable profit is levied at the basic rate of 15% plus an additional rate of 10% on taxable profit that exceeds BRL 20,000.00 per month.
Basically, there are two methods of calculating the taxable profit:
- Real-profit basis (a method for calculating taxable profit based on the accounting result with some adjustments established by tax law, including transfer pricing and thin capitalization adjustments); and
- Presumed-profit basis (a method for calculating taxable profits based on a percentage of gross revenue).
Companies with total annual gross revenue in excess of BRL 78 million and others required by law must calculate real profits based on quarterly or annual balance sheets. They are not allowed to calculate this tax based on presumed profits.
There is a third method, the Arbitrated profit basis, which can be applied by the tax authorities, at their discretion, in certain limited circumstances. Therefore, the taxpayer does not select this method by choice. For example, when proper records of revenues and costs/expenses are not maintained, the Arbitrated method is applied.
If taxation is based on a quarterly balance sheet, payment of taxes will be definitive, and all rules for calculating annual profits will apply to such quarterly profit (rates, additions, provisions, offsetting losses, etc.).
If the company opts for payment based on yearly profits (the most common and generally adopted system), these profits will be calculated from the profit-and-loss statement prepared in December, covering earnings for the entire calendar year, but the tax must be pre-paid monthly. Monthly prepayment may be lowered or suspended if the taxpayer has accounting evidence that the pre-paid value until that month exceeds the tax value calculated based on real profits.
Social Contribution on Net Profits (“Contribuição Social sobre o Lucro Líquido” - “CSLL”)
This tax is owed at a general rate of 9% on adjusted net income calculated quarterly or annually (depending on the taxpayer’s income tax option) and is not deductible from corporate income tax. While the basis of this tax is similar to that of corporate income tax, adjustments to calculate the taxable basis of the CSLL are sometimes different. Some activities (such as financial institutions, insurance companies, among others) may be subject to higher rates (i.e., 20% or 15%, depending on the case).
Contribution to Social Integration Plan (“Contribuição para o Programa de Integração Social” - “PIS”) and Contribution to Finance Social Security (“Contribuição para Financiamento da Seguridade Social” - “COFINS”)
Social Integration Program Contribution (PIS) and Social Security Financing Contribution (COFINS) are contributions levied on legal entities’ overall revenues (currently, export revenues and capital gain obtained from the sale of permanent assets are not subject to PIS and COFINS). There are basically two systems for the calculation of PIS and COFINS, namely: (i) cumulative system and (ii) non-cumulative system.
Under the cumulative system, PIS and COFINS are generally levied at the rates of 0.65% and 3% respectively, and the taxpayer is not allowed to offset any tax credits.
Under the non-cumulative system, PIS and COFINS are generally levied at the rates of 1.65% and 7.6%, respectively, but the taxpayer is allowed to discount credits related to part of its costs and expenses, provided that certain conditions are met (PIS and COFINS levied at the rates of 0.65% and 4% for financial revenues earned by companies subject to the non-cumulative system, with some exceptions).
Constitutional Amendment No. 132/2023 provides for the “replacement” of PIS and COFINS by the CBS and establishes a transition regime in which PIS, COFINS, and CBS will coexist until 2027, when PIS and COFINS will cease to exist and be replaced definitively by the CBS. We will comment on the tax reform and the transition regime on specific topics.
Tax on Financial Transactions (“Imposto sobre Operações Financeiras” - “IOF”)
The IOF is levied on general financial transactions (i.e. those involving exchange, securities, credit, gold and/or insurance). IOF tax rates vary according to the nature of the taxable transaction.
1.5 Contributions for Intervention in the Economic Domain (“Contribuições de Intervenção no Domínio Econômico” – “CIDE”)
In accordance with the Brazilian Constitution, the government has created several contributions for intervention in the economic domain (CIDEs):
- CIDE for the Universal Telecommunications Service Fund (FUST);
- CIDE on remittances abroad of royalties and payment of services;
Legal Aspects of Doing Business in Brazil 57 - CIDE levied on the importation and marketing of petrol, oil products, natural gas and its by-products, ethylic alcohol and ethylic alcohol fuel;
- CIDE for the Development of the Cinematographic Industry; and
- CIDE for the Telecommunications Technological Development Fund – FUNTTEL.
These CIDEs are levied on specific transactions and sectors of the economy and their rates and calculation basis vary depending on each case.
Import Duty
This is levied on the customs value of imported goods at different rates according to the goods tariff code in the Mercosur Tariff Schedule (TEC), which is based on the Harmonized System of the World Customs Organization (WCO). The customs value of imported goods is determined in accordance with the Customs Valuation Agreement of the World Trade Organization (WTO). As a rule, the customs value corresponds to the invoiced value of imported goods, plus the cost of international freight and insurance. Brazil has entered into preferential trade agreements with almost all Latin American countries and, as such, imports from those countries may benefit from reduction or exemption of the import duty. Imports from other member countries of the Southern Common Market are duty free, as long as the imported item has a certificate of origin from one of those countries.
Exceptionally, the import duty can be reduced on the importation of capital goods (BK), IT and telecommunications goods (BIT), if such goods are not produced in Brazil, by means of a formal request to the federal tax authorities.
Export Tax
A small number of products are subject to the export tax, such as:
- raw hides and the skins classified as bovine (including buffalos), equine, sheep, or lamb;
- cigarettes containing tobacco (when exported to the Caribbean, Central and South America);
- weapons and ammunition (when exported to South America, except Argentina, Chile, Ecuador, and Central America, including the Caribbean Islands).
The tax is calculated on the export price of the goods.
Social Contributions on Import - PIS – Import and COFINS – Import
PIS-Import and COFINS-Import are levied on the import of goods and services. PIS-Import and COFINS-Import are applicable regardless of the nature of the service purpose of the import (i.e., technical, or non-technical). Services performed in the country or performed abroad whose results are verified in Brazil are subject to these contributions.
PIS-Import and COFINS-Import are respectively levied at 1.65% and 7.6% on the amounts paid, credited, delivered, utilized, or remitted abroad for the importation of services (calculation basis includes ISS, PIS-Import and COFINS-Import). PIS-Import and COFINS-Import are respectively levied at 2.1% and 9.65% on the customs value for the importation of goods (depending on the NCM of the products to be imported, an additional 1% COFINS-Import rate may be applicable).
Please note that PIS-Import and COFINS-Import bear a close relationship with the PIS and COFINS already commented on above, but they are different contributions. PIS-Import and COFINS-Import are levied on the importation of services and goods, and the taxpayer is the importer domiciled in Brazil, whereas PIS and COFINS are contributions levied on revenues of Brazilian legal entities (which are the taxpayers of the contributions). Nonetheless, these contributions bear a relationship in regard to the calculation system and rates, and especially because within certain situations the credits of PIS-Import and COFINS-Import may be offset against the "local" PIS and COFINS contributions (under the non-cumulative system, if applicable).
IPI
This tax is similar to an excise tax. It is levied on most manufactured products, whether made in Brazil or imported. Although the IPI is ultimately passed on to the final consumer, it is charged on each production step or phase of independent manufacturers. As it encompasses imported goods, the IPI is charged both on customs clearance and resale, if applicable.
The IPI is usually levied ad valorem. The rates are based on the type of product. The IPI is a value-added tax. A tax credit is allowed for the tax that has been paid in the purchase or importation of the raw material and components that are used in the manufacturing process of the product to be taxed or on the resale of the imported product. In the case of imported products, the IPI is calculated on the customs value, plus the import duty.
Taxpayers with an IPI credit balance accumulated for three months (regarding inputs) can ask the Brazil Federal Revenue Department for reimbursement in cash of the accumulated amount, or its use to offset other federal taxes.
State Taxes
ICMS
The ICMS is a value-added tax. It is levied on imported and domestic products at the time the goods leave the business premises. The ICMS due on each transaction is based on the price of products sold, and a tax credit is granted for ICMS paid on the purchase or importation of the products, as it is for the IPI.
Currently, ordinary rates in the state of São Paulo are 12% on transportation services and 18% on products imported, sold, or transferred within the state. Other rates may also apply depending on the specific product, service, or state where the transaction occurs. Rates may also vary for interstate transactions: imported products or products with an imported content greater than 40% are subject to a tax rate of 4% (this rule is not applicable to products without similar in Brazil or if the product were manufactured in Brazil under a basic productive process - PPB).
In other cases, rates are usually 12% but can be 7% depending on the state of destination; the rationale is the following: the more developed the state, the higher the rate. Interstate transactions involving products for non-taxpayers (individuals or entities not involved in merchandise commerce) trigger the payment of an amount of ICMS resulted from the difference of the interstate rate and internal rate of the state to which the product is being shipped. The ICMS is also imposed on interstate and inter-municipal transportation services and communications services.
For certain products, the ICMS is due according to the tax substitution system (“Substituição Tributária do ICMS - ICMS/ST”), in which case the tax due on the entire commercial chain of the product must be collected at once, at the beginning (as a rule, by the manufacturer or the importer), based on estimated values determined by the government, to be applicable to future taxable events.
As a rule, this system is implemented through a state agreement (“Convênio ICMS”) signed by all Brazilian states and the Federal District and is valid throughout the Brazilian territory (except if one or more states decide not to implement the rule within its territory) or throughout specific protocols (“Protocolo ICMS”) signed by two or more states. In the latter case, the system will only be valid for taxpayers located in the territory of each signatory state. However, there are cases in which one state, through a state law, can implement the ICMS/ST system for transactions within their territory, or for shipping products to taxpayers located in their territory.
Finally, it is important to mention that one of the biggest issues regarding ICMS is tax incentives to attract companies and develop the local economy. This situation is commonly referred as “tax war”. To solve this, the Brazilian Congress issued Complementary Law No. 160/17 establishing requirements and procedures for validating the tax incentives granted without CONFAZ approval.
ITCMD
The Tax on Donations and Inheritances is levied on the transfer of personal assets or rights resulting from legal or testamentary inheritance and/or donations. Rates vary from 1% to 8% - depending on the state - of the fair market value of the transferred asset or right.
Municipal Taxes
ISS
The ISS is a municipal tax levied on all services listed in Supplementary Law 116/2003 (“Lei Complementar - LC 116/2003”), which are not subject to state taxation through the ICMS.
The calculation basis is the service price, and the rates are fixed by the city where the renderer establishment is located. According to the legislation, such rate cannot be less than 2% or, as a rule, more than 5%.
The responsibility for collecting and remitting ISS lies with the service provider, typically the construction company or contractor.
Real Estate Transfer Tax (assessed on transfers for value)
This tax is assessed on property transfers at a progressive rate that varies depending on the property value on all transfers for value of any nature, except in cases of contribution to capital stock (requirements to be fulfilled for the exception).
Property Tax
The property tax ("IPTU") is a municipal tax levied annually, normally, at a 1% rate on the appraised value of the real estate; rates vary by municipality.
Consumption Tax Reform
Overview
Despite the above tax system overview, it is important to point out that Brazilian had approved the Consumption Tax Reform when the final wording of Constitutional Amendment no. 132/2023 (EC 132/2023) was approved.
The tax reform introduces a dual Value-Added Tax (dual-VAT), composed of a federal contribution on goods and services (CBS) and a sub-national goods and services tax (IBS), creates a new excise tax (imposto seletivo – “IS”) and a new state tax levied on primary and semi-finished products.
The CBS will “replace” the current federal social contributions (PIS/COFINS), whereas the IBS substitutes both the state tax on goods (ICMS) and the municipal tax on services (ISS). In short, the dual-VAT will have a broad-based and full non-cumulative tax on goods and services, be charged at the destination, and have a few tax rates and exceptions.
Both CBS and IBS will be subject to the same taxable events (domestic transactions and imports with tangible or intangible goods, including rights or with services), tax calculation bases, non-incidence events, and taxable persons; specific, exceptional, or favored taxation regimes; and non-cumulative and crediting rules.
EC 132/2023 also simplified the calculation of the dual VAT, providing that the tax will be levied on the gross value of the goods and services (calculation without a gross-up expressly forced by the law), with the non-inclusion of the IBS and CBS in their tax basis calculation. Also, EC 132/2023 implemented a complete non-cumulative system, expanding the circumstances in which the tax can be credited.
The Federal Senate will set each entity's IBS and CBS reference rates, which must be enough to keep the current overall tax burden. Each federal entity (the Federal Government, states, and municipalities) will set a single rate applicable to all goods and services. The tax reform also establishes the reduced rates applicable to specific transactions (goods and services), which may vary from 100% to 30%.
Note that the enactment of EC 132/2023 is the first step regarding the implementation of the new consumption tax system. However, many subjects in the constitutional amendment need to be regulated, most through different supplementary laws that the Brazilian Congress will have to issue for the beginning of the new tax regime (further detailed below).
Transition Regime
Constitutional Amendment no. 132/2023 establishes that the transition period for implementing the new tax system will last seven years. Starting in 2026, both IBS and CBS will enter a "testing period". During this time, IBS will be imposed at a rate of 0.1%, while CBS will have a test rate of 0.9%.
Until 2027, all previous and new taxes will be imposed concurrently. This means that ICMS, ISS, IPI, PIS/COFINS, IBS, and CBS will coexist. However, in 2027, PIS/COFINS will cease to exist and be replaced definitively by CBS, which will have its standard rate. IPI will be zeroed out except for the products that are also industrialized in the Manaus Free Trade Zone on May 31, 2023, while the IS will also come into effect.
Between 2029 and 2032, the IBS rates will gradually increase yearly, while the ICMS and ISS rates will be steadily reduced, along with the tax benefits granted. Finally, in 2033, the IBS will be fully implemented, while the ICMS and ISS will be abolished.
One of the most significant features of Brazil’s labor system is that the laws regulate the details of labor/management relations to a much greater extent than in other countries. In addition, the concept of collective bargaining is distinctively strong in Brazil. Among these include:
- Brazilian Labor Code
Most of Brazil’s employee rights are compiled in what is known as the Brazilian Labor Code, or the CLT (“Consolidação das Leis do Trabalho”). As of November 2017, Law No. 13,467/2017 (“Labor Reform”) modified certain significant aspects of labor relations, in order to make labor relations in Brazil less bureaucratic and more flexible. The basic labor rights granted to employees in Brazil are as follows: - Employment Relationship
Brazilian Labor Law defines the “employee” as the person (individual) who is hired by a company to render services on a personal and frequent basis. This person rendering services is economically dependent on the contracting company and, most importantly, subordinated to representatives or other employees of the contracting company (“elements that define an employment relationship”). Please note that subordination is the main aspect that defines an employment relationship.
Employment relationships in Brazil are usually set for an indefinite term and can be terminated at any time. Employment agreements for a definite term are possible only when executed in accordance with the specific legal requirements and for a maximum of two years. If the employment relationship continues after the expiration of this two-year period, the contract automatically becomes effective for an indefinite term.
Also, the parties may set a “Probationary Period” before the indefinite term employment agreement becomes fully effective, for a maximum term of 90 days (or two shorter successive periods). The applicable collective bargaining agreements may set shorter maximum terms. - Legal Limit of Regular Working Hours
The Brazilian legislation stipulates that working hours in Brazil are limited to 44 hours per week or eight hours per day (item XIII, Article 7 of the Brazilian Constitution) unless provided for otherwise in a collective bargaining agreement entered into with the workers’ union. The Labor Reform also authorized the “12x36” work system (twelve hours of work followed by thirty-six hours of rest), provided that the constitutional limit of weekly working hours is observed. Despite the lack of regulations on the matter, other working schedule systems are also deemed valid by the labor courts, provided that such systems are in compliance with general regulations. - Salary
In Brazil, as a rule, salaries are paid monthly on a fixed basis, although variable salaries are also a possibility. Likewise, it is possible to establish a mixed compensation arrangement, where the salary is partially fixed and partially variable (commissions, premiums, bonuses, etc.).
Salaries must be paid in Brazilian currency up to the fifth business day of the month after the worked month. Salary advances are customarily granted up to halfway through the month, while salaries are usually paid in the last business day of the worked month.
Furthermore, salary adjustments are defined annually through collective bargaining agreements attempting to offset inflation. - Vacation
Upon completion of each twelve-month work period, employees are entitled to paid vacation of up to thirty calendar days, plus an additional payment equal to one-third that amount.
If vacations are not granted within the 12 months subsequent to the completion of each vacations’ acquisitive period, the employer must pay the vacation period in double.
Upon an employee’s request, vacation periods can be divided into a maximum of three periods, of which one period must not be shorter than 14 days and none can be shorter than 5 days. Employees may also waive 10 vacation days in exchange for the payment of the corresponding amount.
Legal Aspects of Doing Business in Brazil 229 - Minimum Wage
Employees in Brazil are entitled to a mandatory federal minimum monthly wage, which is annually adjusted by the Brazilian government (BRL 1,412.00 – as of January 01, 2024). Some Brazilian states also set a regional minimum wage, which must be complied with by a company carrying out its activities in that state. In addition, collective bargaining agreements can also set a minimum salary, which must be granted if higher than the Federal/State minimum wages. - 13th Salary
Employees in Brazil are entitled to an annual bonus, called the 13th salary (“13º salário”), usually paid at the end of the year, on the basis of one-twelfth of their December earnings for each month worked that year. The employer must pay 50% of the 13th salary in advance between February and November of the same year to which the 13th salary corresponds, at the employer's discretion, unless the employee requests the advancement of such amount together with his/her vacations. - Profit/Results Sharing
Employees in Brazil are entitled to participate in a profits/results sharing plan of the company, implemented by a specific program negotiated between employers, employees, and workers' union, pursuant to Federal Law 10,101/2000. - Overtime Pay
Employees in Brazil are entitled to overtime pay with an additional allowance of at least 50% of the hourly rate. The legal eight-hour working day may be extended by up to two hours per day, as overtime.
For work performed on Sundays and holidays, in addition to the payment of the overtime work rendered with the applicable additional premium, the employee will be entitled to a compensatory day off within the same week. If not granted, the employee is entitled to receive a payment equivalent to one additional (full) day of work for the compensatory day off not granted, without losing the payment of potential overtime work rendered within that week.
Some categories of employees are exempt from receiving overtime upon the accomplishment of legal requirements. - Maternity Leave
Employees in Brazil are entitled to paid maternity leave of 120 days (the amount paid by the employer is offset by social security contributions). Law 11,770/2008 establishes that employers can extend maternity leave for an additional 60-day period, provided that the employer pays the employee’s salaries during this additional period and the employee has joined a program of the federal government called “Empresa Cidadã” (“Citizen Company”). Employers granting this benefit to their employees are entitled to a tax benefit.
In 2022, Law 14,457/2022 allowed the extension of the leave to be shared between both parents, an alternative that is still pending regulation. Additionally, as an alternative to the extended maternity leave, Law 14,457/2022 allowed employees to opt for a 120-day reduction of 50% in their working schedule, without salary reduction. - Paternity Leave
Employees in Brazil are entitled to five (5) days of paternity leave; Law 13,257/2016 establishes that employers can extend paternity leave for an additional 15-day period (totaling 20 days), provided that the employer pays the employee’s salaries during this additional period and the employee has joined the same program “Empresa Cidadã” (“Citizen Company”) applicable for maternity leave. Employers granting this benefit to their employees are entitled to a tax benefit. - Prior Notice Period
In cases of dismissal without cause, the employer must grant the employee prior notice of dismissal of thirty (30) days in addition to three (3) days for each completed year of work for the company, limited to a total of ninety (90) days. Applicable collective agreements can have additional rules on prior notice. - Remunerated Weekly Day Off
Employees in Brazil are entitled to a 24-hour rest period for each week of work, preferably on Sundays. There are certain economic activities that are authorized by law to work on Sundays.
Even if work is authorized on Sundays, it requires the respective compensatory rest to be granted within the same week, to avoid double payment for that day (Precedent 146 of the Superior Labor Court). Therefore, employees cannot work for more than six consecutive days without enjoying a weekly day off.
Other Contributions or Charges
Companies are also subject to the following social contributions or charges:
- Social Security (“Instituto Nacional de Seguridade Social” - “INSS”)
Generally, companies must pay from 20% to 31.8% of the payroll to the Brazilian Social Security Administration (“INSS”) – other companies, depending on the activity carried out, pay their social security contributions on gross income at rates that vary between 1% and 4.5%. Additionally, employees have 7.5% to 14% (as of January 01, 2021) of their monthly earnings deducted from salaries and withheld by the company for the INSS, subject to the limits provided for by law.
Payment of certain labor-intensive services (e.g., outsourcing, construction) is subject to an 11% withholding tax assessed on the total amount invoiced. The amount withheld may be offset against the social security tax to be paid by the service provider. - Guarantee Fund for Length of Service (“Fundo de Garantia do Tempo de Serviço” – “FGTS”)
Every month, an amount equivalent to 8% of the employee’s monthly earnings must be deposited by the employer into the employee’s Guarantee Fund for Length of Service (a type of unemployment savings fund), in a blocked account registered at the “Caixa Econômica Federal” (a Federal Savings Bank in Brazil). If an employee is dismissed without cause, such employee is entitled to withdraw the deposits made into the FGTS account during his/her employment with the company. The employer will also have to pay a fine of 40% of the total amount deposited into the employee's account in the case of termination without cause on the employer's initiative. The employee also has access to the Fund upon retirement, or on specific occasions, as provided by law.
Mandatory severance pay for termination of employment contracts in Brazil varies according to the type of termination, as follows: - Termination without cause, on employer’s initiative
- Prior notice (30 days plus 3 days for each completed year of service in the same company, up to a maximum of 90 days of prior notice period);
- Balance of wages from the termination month;
- Unused earned vacations plus an additional one-third payment;
- Pro-rated vacation plus an additional one-third payment;
- 13th salary (or pro-rated 13th salary, depending on the termination date);
- FGTS deposits: deposit in the employee’s blocked account (equal to 8% of the employee’s pay) in the termination month, based on the balance of wages, as well as prior notice and 13th salary;
- Forty percent (40%) FGTS fine based on the amount deposited in the employee’s FGTS account;
- Any other labor right related to termination provided for under the current Collective-Bargaining Agreement;
- Any other compensation or benefit contractually agreed with the employee.
The payments above must be made within 10 days of the employee’s last day of work.
- Termination with cause, on employer’s initiative
- Balance of wages in the termination month;
- Earned vacation plus an additional one-third payment;
- FGTS deposits: deposit in the employee’s account (equal to 8% of the employee’s pay) in the termination month.
Permitted circumstances for dismissal with cause are set out in Article 482 of the Brazilian Labor Code. Such circumstances entitle the employer to terminate the employee’s employment immediately, without notice and without making payment in lieu of notice.
- Termination as a result of an employee’s resignation
- Balance of wages in the termination month;
- 13th salary (or pro-rated 13th salary, depending on termination date);
- Earned vacation plus an additional one-third payment;
- Pro-rated vacation plus an additional one-third payment;
- FGTS deposits: deposit in the employee’s account (equal to 8% of the employee’s pay) in the termination month, as well as on the 13th salary.
- Resignation based on constructive dismissal (“indirect termination”) due to serious fault committed by the employer
If an employee feels that his or her employer has committed a fundamental breach of the employment contract, he or she can request indirect termination of his or her employment contract citing the employer’s fault. In this situation, the employee must seek an order from the labor courts, recognizing indirect termination and ordering payment of all sums due on termination of the employment contract, along with any other outstanding payments that can potentially have been the cause of the indirect termination, such as previously unpaid wages.
If the employee wins the case, the same amounts due on dismissal without cause must be paid. - Termination by Mutual Agreement
Law No. 13,467/2017 set a new termination alternative, by mutual agreement, entitling the employee to the following severance:- Half of the prior notice that would be due on a termination without cause on the employer’s initiative;
- Balance of wages from the termination month;
- Unused earned vacations plus an additional one-third payment;
- Pro-rated vacation plus an additional one-third payment;
- 13th salary (or pro-rated 13th salary, depending on the termination date);
- FGTS deposits: deposit in the employee’s blocked account (equal to 8% of the employee’s pay) in the termination month, based on the balance of wages, as well as prior notice and 13th salary;
- Half of the FGTS fine is based on the amount deposited in the employee’s FGTS account that would be due on a termination without cause by the employer’s initiative;
- Any other labor right related to termination provided for under the current Collective-Bargaining Agreement;
- Any other compensation or benefit contractually agreed with the employee.
- Mass Termination
As of November 2017, Law No. 13,467/2017 stated that collective dismissals must be treated equivalently to individual dismissals and that no previous authorization of the labor union is necessary for such proceedings to be carried out.
However, according to recurrent decisions issued by the Brazilian labor courts, it is mandatory to negotiate with the unions before mass redundancies are effectively carried out, under the pain of having the terminations annulled and the company compelled to negotiate with the union.
For this purpose, the courts understand mass termination as the simultaneous termination of a collectivity of employees, resulting in a considerable reduction, in percentage terms, in the total number of a company's employees or in the total number of employees of a certain establishment. However, there is no definition of the minimum number of terminated employees that is considered mass termination.
Such understanding was validated in 2022 by the Brazilian Federal Supreme Court, which agreed that collective dismissals require prior involvement of the labor union – however, the dismissals do not require consent from the union nor the effective execution of a collective agreement. As a result, the definition of a mass termination and the effective involvement of the labor union in such matters remain uncertain.
General Rules
Foreign investment has been welcomed in Brazil for a long time and is an important source of capital for the development of the Brazilian economy. On December 29, 2021, the Federal Government enacted the new Brazilian foreign exchange legislation (Law 14,286), which entered into force on December 31, 2022.
The new Law, originated from Bill No. 5,387/2019, (i) consolidates more than 40 regulations that provided for aspects relating to the foreign exchange market (“fx market”); (ii) amends the Brazilian legislation, in alignment with operational needs arising from global production chains, which facilitates foreign trade and the flow of investment resources; and (iii) favors foreign investments in Brazil, as well as Brazilian investments abroad, proportionally to the value of the business and the risks involved.
On November 25, 2022, the National Monetary Council (“CMN”) enacted Resolution No. 5,042 (“CMN Resolution 5,042”), according to which the CMN established the general principles that must be observed within the scope of foreign exchange transactions, as well as the outflow and inflow of funds from and into Brazil. CMN Resolution 5,042 came into force on December 31, 2022. According to this rule, the general principles that regulate the foreign exchange market in Brazil are:
- competition to render services to the people involved in foreign exchange transactions;
- fulfillment of people’s needs, particularly freedom of choice, privacy, transparency, and access to clear and complete information regarding the conditions involved in foreign exchange transactions;
- efficiency of foreign exchange transactions;
- fostering innovation, taking into consideration the legality of the transactions and the diversity of business models;
- cost reduction of foreign exchange transactions;
- financial inclusion;
- reliability and quality of products and services offered in the foreign exchange market; and
- integrity, good standing, security and secrecy of foreign exchange transactions or funds transfers.
On December 31, 2022, in order to comply with the new Brazilian foreign exchange legislation, the Central Bank of Brazil (“BC”) enacted new rules that further regulate the foreign exchange market and foreign investments in Brazil, in line with the provisions of Law No. 14,286, as follows:
- Resolution No. 277 (BC Resolution 277), which regulates the foreign exchange market and the inflow and outflow of amounts in Brazilian reais and in foreign currencies in Brazil;
- Resolution No. 278 (BC Resolution 278), which regulates foreign capital in Brazil and the reporting of information to BC;
- Resolution No. 279 (BC Resolution 279), which provides for Brazilian capital abroad;
172 - Resolution No. 280 (BC Resolution 280), which establishes the definition of residents and non-residents for the purposes of the New Legal Framework for the Brazilian Exchange Market; and
- Resolution No. 281 (BC Resolution 281), which establishes transitional provisions that must be in compliance with BC Resolution 278.
The new resolutions seek to modernize, simplify, and ensure greater legal certainty to the provisions of Law No. 14,286 regarding the Brazilian exchange market, as well as to minimize red-tape procedures and increase transparency within the Brazilian exchange market. In addition, the resolutions aim to adjust Brazil’s operations according to international standards, thus establishing an advantageous business environment and fostering international investment in Brazil. The stability of Brazilian foreign investment legislation is a clear indication of the country’s desire and firm commitment to attracting and welcoming overseas investors.
Foreign investment is not subject to government approvals or authorizations, and there are no requirements regarding minimum investment or local participation in capital (except in very limited cases such as in financial institutions, insurance companies, and other entities subject to the regulating authority of BC). Foreign participation, however, is limited or forbidden in the few areas of activities, further explained in this chapter.
With respect to foreign exchange control, BC is responsible for:
- managing the daily control over foreign capital outflows and inflows from and into Brazil (risk capital and loans under any form);
- establishing administrative rules and regulations for registering investments; and
- monitoring foreign currency remittances.
Foreign investments in the form of currency must be officially carried out through financial institutions duly authorized to operate in the fx market. Foreign currency must be converted into Brazilian currency and vice-versa through the execution of a foreign exchange contract with a financial institution authorized to operate in the fx market. Foreign investments can also be carried out through the contribution of assets and equipment intended for the local production of goods or services.
Foreign Exchange Market
There used to be two official exchange-rate markets in Brazil (the commercial and floating-rate markets), both of which were regulated and monitored by BC. The choice between one market or the other was mandatory and depended on the nature of the remittance of funds.
In March 2005, BC unified both markets, extinguishing the differences between them and subsequently enacting more flexible exchange rules. Consequently, remittances of funds in and out of Brazil must now flow through one single exchange market, regardless of the nature of payments.
Foreign Investment Registration
Foreign direct investments carried out in the form of currency or assets in an amount exceeding USD 100,000.00, or an equivalent amount in other currencies, must be registered with BC. Such registration grants foreign investors the right to receive dividends and interest, and also to repatriate investments. Since December 31, 2022, foreign direct investments in amounts of up to USD 100,000.00 are no longer subject to registration in the BC system.
Since August 2000, foreign investments in the form of capital have had to be registered through the Electronic System of Registration of BC’s online data system. Meanwhile, foreign loans also became subject to registration in BC’s Electronic System of Registration as of February 2001.
The amount registered with BC as foreign investment includes the sum of:
- the original investment (whether in cash or in kind);
- subsequent additional investments (including the capitalization of credits); and
- potential reinvestment of profits.
The aggregate amount is the basis for the repatriation of capital and the calculation of any taxes levied on capital gains, as explained below.
Remittance of Profits
Since January 1996, profits paid by a Brazilian company to a foreign investor are not subject to withholding taxes. In order to be remitted, the foreign currency must be purchased directly from any financial institution authorized to operate in the fx market, upon the submission of a corporate act declaring dividends and relevant financial statements. Until January 30, 2017, in order to enable the outflow of funds, the distribution of profits also had to be registered in BC’s Electronic System of Registration, in the form of Foreign Direct Investment (Investimento Estrangeiro Direto). As of January 30, 2017, such registration is no longer necessary. No further approval or consent from BC is necessary, and there is no limitation concerning the amounts to be remitted, provided that the original investment has been registered with BC, as described above.
Payments of profits directly abroad are also permitted in compliance with Brazilian regulations. If the Brazilian subsidiary holds an overseas bank account with sufficient balance to pay the corresponding profits, such funds can be used to pay the foreign investor directly abroad. In such case, registration of the distribution of profits will have to be carried out manually in BC’s electronic system.
Repatriation of Capital
Foreign capital invested in Brazil can be repatriated at any time, and there is no minimum period of investment.
Repatriation of the investment can be exempt from all taxes, provided that such investment does not exceed the amount established in the Foreign Direct Investment category of BC’s Foreign Capital Reporting System (SCE – IED). Generally, any surplus above the registered amount will be treated as capital gain and subject to withholding tax.
Other Forms of Funding Brazilian Subsidiaries
Brazil’s foreign debt challenges, combined with other circumstances, have forced the market to find alternative forms of funding Brazilian companies through the issuance of notes/bonds and commercial papers placed outside Brazil under private and public placements. In recent years, BC has authorized the foreign trade of a large volume of bonds, fixed-rate notes, floating-rate notes, commercial papers, and fixed- or floating-rate certificates of deposit. In contrast, foreign loans contracted before March 18, 2022, and with an average maturity term of up to 180 days, are subject to a 6% tax on financial transactions (“IOF”). On the other hand, Decree 10,997, of March 15, 2022, established that foreign loans contracted as of March 18, 2022, are subject to a 0% IOF tax, regardless of their average maturity term. Interest paid to foreign investors is subject to withholding tax. Finally, an additional source of funding has been the issuance of American Depositary Receipts (ADRs) and International Depositary Receipts (IDRs).
Restrictions on Foreign Ownership of Companies
Foreign capital can generally be invested freely in Brazil, and benefits from the same treatment can be granted to Brazilian capital, with a few exceptions, as provided for in our Investment Policies section.
Not applicable.
Not applicable.
Overview of Environmental Law
Historically, environmental regulations were created and have been updated to address different impacts arising from economic activities in the country, such as:
- National Policy Law for the Environment (Federal Law No. 6,938/81)
- Mineral resources (Mining Code – Federal Decree-Law No. 227/1967);
- Fishing (Federal Decree-Law No. 221/1967);
- Activities involving wild fauna in general (Hunting Code – Federal Law No. 5,197/1967);
- Water use (Water Code – Federal Decree No. 24,643/1934, and the National Policy for the Use of Water Resources - Law 9,433/1997);
Water quality, wastewater and stormwater standards (CONAMA Resolutions No. 357/2005 and 430/2011, Brazilian National Waters Agency (ANA) Resolution No. 188/2024);
Dam safety (Law No. 12,334/2010 – updated by Federal Law No. 14,066/2020 and Federal Decree No. 11,310/2022, among other regulations)
Use and protection of Atlantic (tropical) Forest Biome (Federal Law No. 11,428/2006);
Administrative and criminal infractions (Federal Law No. 9,605/1998 and Federal Decree No. 6,514/2008, updated by Federal Decree No. 11,373/2023);
Public Civil Actions (Federal Law No. 7,347/1985);
Air emissions and (Federal Law No. 14,850/2024; CONAMA Resolution No. 382/2006 and No. 436/2011, CONAMA Resolution No. 15/1995 and 491/2018 and several others); - Management of soil and contaminated areas (CONAMA Resolution No. 420/2009).
- Waste management (National Policy on Solid Waste Management – Federal Law No. 12,305/2010; Federal Decree No. 10,936/2022 and Federal Decree No. 11.413/2023);
- Environmental licensing for potentially pollutant activities (Supplementary Law No. 140/2011 and Federal Decree No. 8,437/2015);
- Forests and use of native vegetation (Brazilian Forestry Code – Federal Law No. 12,651/2012; Federal Decree No. 7,830/2012; Ministry of Environment Normative Instruction No. 02/2014; IBAMA’s Normative Instructions No. 21/2014, 17/2021, 8/2022 and 16/2022; Law No. 9,985/2000);
- Access to biodiversity (Federal Law No. 13,123/2015, and Federal Decree No. 8,772/2016);
- Use of polychlorinated biphenyls and asbestos (Federal Laws No. 14,250/2021 and No. 9,055/1995, among others);
- Climate change (National Climate Change Policy – Federal Law No. 12,187/2009 -; Federal Law No. 12,114/2009; Decree 9,578/2018; ); and
- Payment for environmental services (Federal Law No. 14,119/2021 and 14,590/2023).
The increase of environmental concerns worldwide and the enactment of numerous international agreements resulted in a growing consciousness in Brazil, leading to the adoption of a National Policy Law for the Environment in 1981 (Federal Law No. 6,938/81), which was crowned with the approval of the Brazilian Constitution of 1988 containing an entire chapter addressing environmental issues. One could say that environmental protection as it is reflected in the legislation countrywide was ultimately consummated with the enactment of the National Environmental Criminal and Administrative Law in 1998 (Federal Law No. 9,605/98), which was regulated by Federal Decree No. 3,179/1999, revoked in 2008 by Federal Decree No. 6,514/2008 (updated by Federal Decree No. 11,373/2023).
In 1985, another important law was enacted: Federal Law No. 7,347/1985, which created Public Civil Actions. Similarly to American class actions, Brazilian law, in general, allows the public prosecutors to file lawsuits aimed at protecting the environment, and it bestows standing to non-governmental agencies to bring suits under its terms.
At present, regulations regarding environmental protection in the country abound. They range from the creation of conservation units to the possibility of generating carbon credits as part of forest concession activities, and tax benefits relating to environmental aspects, among others.
Additionally, the states and sometimes the municipalities (when there is a local and specific interest) across the country can implement their own regulations regarding environmental protection and the use of natural resources at state and local levels.
Main requirements applicable to industrial activities
Regarding industrial activities, applicable regulations generally require environmental licenses and permits prior to the start of a company’s activity.
In turn, pollution-control systems are implemented to a large extent in industrialized centers like the states of São Paulo, Rio de Janeiro, Minas Gerais, Paraná, Santa Catarina and Rio Grande do Sul, but also on smaller cities. Both the lack of environmental permits and the act of polluting, regardless of intention, can be deemed criminal acts and trigger criminal sanctions in addition to administrative penalties (warnings, fines, interdiction of the company’s activities, suspension of tax benefits, among others), and civil sanctions (obligation to repair or compensate environmental damage and affected third parties).
Environmental liability
Environmental liability, under Brazilian law, may occur at three different independent levels:
- civil;
- administrative, and
- criminal.
It can be said that the three spheres of liability mentioned above are “different and independent” because, on one hand, a sole action by the offender, including legal entities and individuals, may generate environmental liability at the three levels: civil, administrative, and criminal, which involves the applicability of three different sanctions. On the other hand, the absence of liability in one of those spheres does not necessarily exempt the offender from liability in the others.
Environmental civil liability arises from action or omission - directly or indirectly - by the offender, that results in environmental damage of any kind. This type of liability is characterized as a modality of strict liability, regardless of fault.
Such liability results in the civil penalty of repairing or indemnifying for the damage caused to the environment and consequent damage to third parties. In the case that the legal entity cannot pay for the environmental recovery, the requirement for indemnification may extend to partners and their property, commonly referred to as piercing of the corporate veil.
In addition to the environmental damage, there is the possibility of individual and collective non-pecuniary moral damages.
Environmental civil liability applies jointly to all those who directly or indirectly contributed to the environmental damage, regardless of fault. Such type of liability is established, for example, in circumstances that involve outsourcing in the process of transportation and final disposal of waste/residues, or in the case of contaminated areas and deforested areas. In these cases, more than one agent can be held liable for the environmental damage, or agents can be held individually liable with the right to request compensation from others. Based on this scenario, in theory, lenders and financial institutions can be exposed to civil environmental liability.
Furthermore, Brazilian higher courts have also decided that civil liability due to environmental damages in Brazil is not subject to a statute of limitations or exceptions, such as act of God, act of a stranger, etc.
Administrative liability results from an action or omission by the offender that involves violation of environmental protection regulation, regardless of actual occurrence of environmental damage.
Regarding the applicable sanctions, the competent environmental authority may apply the following penalties: warning, fines of up to BRL 50 million, embargo on work or activity and their respective areas, demolition of work, partial or total suspension of activities, and restriction of rights, such as suspension or cancelation of registration, license or authorization; loss or restriction of tax incentives and benefits; loss or suspension of participation in lines of credit from official credit institutions; and prohibition from contracting with the government).
Finally, criminal liability occurs through the action or omission of an individual or legal entity that is typified in criminal law. Among those who may be held liable for such crimes are officers, administrators, board members and technical committee members, auditors, managers, representatives, or commissioners, as well as any other person who is found to participate in or fails to prevent any acts involving the offenses referred to in the law from taking place.
Thus, the law does not set forth the need to actually carry out the act considered as criminal; participating by any means in its practice is sufficient.
Administrative and criminal environmental claims are subject to a statute of limitations but in case of permanent or continuous infractions, such statute of limitation will be calculated from the day when such infractions have ceased to occur.
Environmental Licensing
In Brazil, most industrial activities are qualified as potential pollutants and therefore demand compliance with specific requirements pertaining to the environmental licensing of such activities, which also apply to activities that involve the use of natural resources.
The environmental licensing proceeding can be carried out by environmental agencies at different Brazilian federation levels (federal, state, or municipal), according to the characteristics of the proposed activity and/or its location.
The competence to define the jurisdiction to carry out environmental licensing procedures is provided for the Federal Constitution, which determines that all Brazilian entities are entitled to protect the environment. However, Supplementary Law No. 140/2011 establishes parameters regarding jurisdiction, setting the roles of each federative entity at federal, state, and municipal levels. The legislation determines, for instance, that environmental licensing shall be a unique proceeding, whose jurisdiction at the federal, state, or municipal level shall rely on certain criteria, as follows:
- Federal, depending on the location (i.e., involvement of two or more states) or subject matter (i.e., production of radioactive material, installation of enterprise located or developed in conservation units instituted by the Federal Government, federal highways, federal waterways, certain types of electricity generation and transmission systems, exploitation of oil, natural gas and other hydrocarbons, organized ports, except for port facilities handling cargo in volumes of less than 450,000 TEU/year or 15 million tons/year, private use terminals and port facilities handling cargo in volumes of more than 450,000 TEU/year or 15 million tons/year);
- Municipal, for activities that have local impacts; and
- State, in a residual manner, in connection with activities not subject to licensing by Federal or Municipal authorities.
Also, Supplementary Law No. 140/2011 sets out provisions for environmental infractions, ascribing the federal, state, or municipal responsibility for issuing infraction notices, depending on the entity responsible for its licensing or authorization procedure.
The environmental licensing procedure generally involves a three-step administrative proceeding, including the issuance of three different (although connected) licenses by the competent environmental agency:
- Preliminary License – approves the project location and conception, and confirms environmental feasibility, based on environmental impact studies, setting forth the required conditions to be met throughout the subsequent stages of project implementation.
- Installation License – authorizes the implementation/construction of the project.
- Operation License – authorizes the operation of the company´s activities.
In certain cases, environmental licenses can be issued concomitantly. In other words, more than one phase of the licensing procedure can simultaneously be included in the same environmental license. Moreover, they can involve specific situations, such as the recovery of degraded areas. Simplified procedures can be established for certain activities. For example, the state of Rio de Janeiro issues the Environmental Recovery License ("LAR"), which authorizes the recovery of contaminated areas in closed, deactivated or abandoned activities or enterprises, or degraded areas.
The Brazilian Congress is currently assessing Bill No. 3,729/2004, which intends to establish a national framework for environmental licensing. The current wording of this bill establishes other types of simplified licenses and permits/authorizations for potentially polluting activities, such as the Adhesion and Compromise License (“LAC”); Unified License (“LAU”); and Corrective License (“LAC”), for simpler and less environmentally harmful projects.
In addition, in the event that the environmental impact resulting from the activity in question is deemed “significant”, the issuance of the preliminary license will be subject to the submission of an Environmental Impact Study and Report (EIA/RIMA), as well compliance with additional legal requirements (such as public hearings, compensatory payment measures, among others).
Environmental agencies usually set technical or other conditions to be fulfilled for the environmental licenses to keep their effectiveness, under penalty of having the licenses barred from renewal or even canceled or suspended, among other sanctions within the scope of environmental administrative, criminal, and civil liabilities.
The licenses are valid for a specific period and their renewal must be requested, generally, 120 days before their expiration date so that they remain valid until the new license is issued.
Any modification or expansion of the licensed project must receive prior approval by the competent environmental authority.
Environmental licensing is a technical and multilateral procedure, in which the consultation of several government bodies may be necessary in addition to the authority that is directly responsible for the environmental licensing itself, such as the National Institute of Historic and Artistic Heritage (“IPHAN”), the National Institute for Colonization and Agrarian Reform (“INCRA”) and National Indigenous People Foundation (“FUNAI”) and Chico Mendes Biodiversity Conservation Institute (“ICMBio”).
In general, the participation of other government bodies in the environmental licensing process is possible.
Developing activities without or non-compliant with environmental licensing rules can result in administrative and criminal environmental liabilities, in addition to the obligation to repair and/or indemnify for the environmental damage and/or affected third parties (environmental civil liability).
Use of water resources and discharge of effluents
Law No. 9,433/1997 establishes the National Water Resources Policy and provides for the main principles, instruments, and definitions regarding the use of water resources, in addition to creating the Brazilian National Water Resources Management System.
According to such Water Policy, the by-pass, extraction, release, and catchment of water resources, as well as the discharge of effluents in water bodies, require prior authorization issued by the corresponding environmental agency.
In general, obligations relating to sampling, monitoring and discharge of wastewater and stormwater, as well as disclosure of information about such activities, can originate from (i) legal requirements/provisions, such as domestic laws and regulation (e.g., decree, resolution, ordinance), and international laws (e.g. acts, agreements, treaties) that have already been incorporated into the national framework; and/or (ii) administrative acts/permits, either by means of a condition established for environmental licenses, water grants and authorizations, or as a regulatory requirement.
CONAMA Resolutions No. 357/2005 and No. 430/2011 establish that the direct discharge of wastewater from any sources of pollution can only be carried out after proper treatment and must comply with legal standards, conditions, and obligations.
The use of water resources without or not in compliance with the respective authorizations can subject those involved to the three different and independent types of environmental liability.
In addition, Federal Law No. 9,433/97 provides for the possibility of financial charges for the use of water resources as a means of encouraging the rational use of this resource and obtaining financial support for the recovery of river basins. States such as São Paulo and Minas Gerais use this kind of instrument.
Within the public sanitation sector, Federal Law No. 14,026/2020 was published, amending Federal Law No. 11,445/2007, which provides for the legal framework of basic sanitation, in order to regulate deadlines for the environmentally appropriate final disposal of waste in municipalities.
Management of contaminated areas
In general terms, the management of contaminated areas derives from the application of the environmental liability concepts, triggering the obligation to repair any environmental damage caused by the activity.
It is important to note that the concept of environmental liability can be extended to the property owner, financing agents, as well as to the lessee, based on certain legal doctrines that have been applied by court decisions.
In addition, at the federal level, CONAMA Resolution 420/2009 sets forth the main requirements applying to the process of identification, delineation and remediation of soil and groundwater impacts. It is also important to highlight that some states have enacted specific regulations, such as Rio de Janeiro and São Paulo.
São Paulo State Law 13,577/2009 lays out procedures for identification and mapping of contaminated areas and implementation of mechanisms for remediation. This law makes it possible not only for the party at fault and/or the owner of the property to be held liable for the contamination, but also the tenant, the holder of the effective title, and the economic beneficiaries of the area. Earlier, the state program on management of contaminated areas, which is a reference in Brazil, was operating by means of administrative rules of the São Paulo State Environmental Agency (“CETESB”), but these procedures were subsumed by Law 13,577 in 2009. The proceeding, which was updated in 2017, has also been adopted in other states, due to the lack of a Federal Regulation on the subject.
CETESB has also established the necessity of an ecological risk assessment in the environmental management of contaminated areas, which aims to qualitatively and quantitatively assess the risk to which an ecological asset that must be protected may be exposed, due to potential physical, chemical or biological anthropogenic effects. In 2022, CETESB updated the technical parameters for the health risk assessment based on the United States Environmental Protection Agency’s (“EPA”) methodology.
Furthermore, in case of change of use of the property (e.g. change of industrial use of the property to commercial or residential ones) or reuse of the area under a clean-up process, a statement from CETESB is required.
Moreover, in general terms, the closing of activities subject to environmental licensing triggers the obligation to submit a decommissioning plan to the environmental authority and to verify the soil and groundwater quality, as well as to repair any environmental damage caused by the activity.
The Brazilian Congress is currently analyzing a bill (Bill of Law 2,732/2011) aimed at establishing a national framework for the management of contaminated areas.
Waste management and post-consumption liability
The National Policy on Solid Waste Management (Federal Law No. 12,305/2010) consolidates a set of principles, tools, goals, and actions aiming at an integrated management of solid waste. Many Brazilian states have already enacted their own solid waste policy, establishing goals and obligations at the local level which may differ from those determined by federal legislation and arrangements.
Pursuant to Brazilian legislation, producers/generators of solid waste are responsible for its management until it is adequately allocated.
According to the National Policy on Solid Waste Management, the management of industrial waste requires that the generator develop a “Solid Waste Management Plan” (“PGRS”), through which the project owner will provide the environmental agency with a comprehensive diagnosis of its operation, focusing on the generation and management of solid waste, as well as assessing the origin, volume and classification of such waste, so as to assign specific proceedings aimed at ensuring its proper storage, transportation and final disposal.
The PGRS is a mandatory document for companies that generate waste:
- originating from the public sanitation system, industrial processes, health services and mining activities;
- classified as hazardous and non-domestic;
originating from the civil construction sector, if so, stated by the regulation established by the competent federal authority; - originating from ports, airports, customs terminals, roadways, railroads, and border control passages, as defined by the competent regulatory and environmental agencies; and
- originating from agricultural and silviculture activities, if required by the competent body.
The PGRS must be submitted to the competent environmental agency or to the municipality.
Parties involved in the waste management process must also comply with several technical and registering obligations to allow public authorities to verify the regularity of such process. The main source of information in this regard is the National System of Waste Management Information (“SINIR”); and one of the most important documents to be issued by the parties is the Residue Transportation Manifesto (“MTR”), in which the generator of waste must declare information relating to the quality, transportation and final disposal of the waste.
Brazilian legislation also establishes that parties that generate or handle hazardous waste must be registered with the National Registry of Operators of Hazardous Wastes and develop a hazardous waste management plan that will be analyzed and reviewed by the competent environmental authority.
In addition, such federal regulation establishes the liability of manufacturers, importers, distributors/wholesalers, retailers, among others, regarding certain products classified as generators of significant environmental impact through relevant post-consumption waste, such as tires, batteries, , electronics, lubricant oils, packaging and fluorescent lamps.
Certain states have enacted stricter regulations, which condition the implementation of reverse logistics systems to the issuance or renewal of projects’ environmental licensing, and have included additional products that are subject to a reverse logistics system.
One of the major innovations of the National Policy on Solid Waste Management is the acknowledgment of shared responsibility for the product lifecycle as a basic principle of solid waste management and the obligation to implement a reverse logistics system aimed at cradle-to-grave management of the products and waste.
More recently, Federal Decree No. 11,413/2023 established three types of credits related to reverse logistics, enabling financial investments to fulfill the legal obligations related to the implementation of a reverse logistics system. Such law provides for the: (i) Reverse Logistics Recycling Credit Certificate (CCRLR) - used to prove compliance with reverse logistics goals, based on final destination certificates and electronic invoices of products or packaging returned to the manufacturer or company responsible for recycling; (ii) Certificate of Structuring and Recycling of Packaging in General (CERE) - issued to manufacturers, importers, distributors and traders who invest in structuring projects for the recovery of recyclable materials; and (iii) Future Mass Credit Certificate - intended for companies that implement structuring reverse logistics systems, with investments in initiatives that result in the effective recovery and additionality of recovered mass in the medium term.
Therefore, Federal Decree No. 11,413/2023 offers flexible alternatives for companies to fulfill their reverse logistics obligations. Instead of implementing their own collection and recycling systems, companies can choose to acquire those credits, which attest to the carrying out of recycling actions and collaboration with the reverse logistics infrastructure.
The inadequate disposing of waste or causing pollution can result in criminal and administrative sanctions, in addition to the obligation to repair or indemnify for the damage to the environment and affected third parties, even if the solid waste management, such as its transportation, treatment and final disposal were carried out by outsourced parties contracted specifically for such purposes.
Air emissions
Air quality standards in Brazil have been provided for through CONAMA Resolution No. 491/2018, which also establishes other obligations relating to the control and monitoring of air emissions.
This resolution was challenged by a lawsuit that is currently being assessed by the Federal Supreme Court, due to the alleged reduction of air quality standards. States and municipalities also have jurisdiction to establish additional standards and obligations relating to air emissions.
Federal Law 14,850/2024 establishes the National Policy of Air Quality management in Brazil. This law provides for the concept of air quality standards, aiming to protect the environment and public health. The policy addresses maximum emission limits, air quality standards, air quality monitoring, emission inventories, management plans and programs, atmospheric modeling, fiscal and financial incentives, and the National Air Quality Management System (MonitorAr). The environmental authorities in Brazil will be responsible for monitoring air quality and will have to develop a National Air Quality Monitoring Network.
Asbestos
The use of asbestos in Brazil is regulated – and restricted – by Law 9,055/1995 and by CONAMA Resolutions.
Certain states and municipalities have also enacted laws and regulations that provide for standards and limitations regarding the use of asbestos (e.g, Rio de Janeiro; Rio Grande do Sul; Pernambuco; São Paulo; Maranhão; Mato Grosso; Minas Gerais; Amazonas; Rondônia; Santa Catarina; Bahia; Goiás; Espírito Santo; Piauí and Paraíba).
The use of asbestos, including in civil construction waste, is considered harmful to the environment and to human health. As a result, CONAMA´s Resolution 307/2002 classifies construction waste containing asbestos as hazardous.
Banning the use of this mineral has long been an ongoing discussion in the Brazilian Congress. CONAMA, through Motion No. 030/2001, has recommended the progressive ban on the use of this mineral. The Brazilian Federal Supreme Court (“STF”) has already ruled for prohibiting the extraction, industrialization, and use of chrysotile asbestos/asbestos in Brazil. The STF has also ruled in different lawsuits against state laws regarding asbestos, always based on the precautionary principle.
According to Brazilian legislation, the landowner and occupiers are jointly responsible for extracting or handling asbestos located on the property.
Forestry Preservation
All activities related to the use and suppression of forest resources are subject to Law 12,651/2012 (Forestry Code), among others, establishing goals against illegal deforestation, the protection of native forests or relevant environmental areas.
This law establishes limits for intervention in public or private proprieties, taking into account the definitions for areas qualified as “permanent preservation areas” and legal reserve areas.
Permanent preservation areas are those with significant environmental characteristics, such as riparian areas, springs, hilltops, mountain slopes, and mangroves, located in rural or even urban areas. Interference in such areas is only allowed if the activity is previously authorized and qualified as public utility, social interest, or low environmental impact.
Legal reserves are portions of rural areas that must be preserved by maintaining the native vegetation or even recovering it.
The size of the areas that must be preserved in the form of a legal reserve depends on where the property is located and the vegetation (biome) in the region, varying from 80%, 35% and 20%. In addition, the Federal Government can, in specific cases, reduce the mandatory legal reserve areas. For example, such reduction is possible in the event that property is located in areas of the Amazon rainforest within municipalities that maintain more than 50% of its area as indigenous territories and public domain conservation units. In these cases, the legal reserve areas – originally 80% of the property – can be reduced to 50%.
Reduction of mandatory legal reserve areas to 50% can be also determined by states in the Amazon rainforest area whose economic and ecological zoning has been approved and that have restricted more than 65% of their territory for indigenous and public domain conservation units.
In parallel, the Federal Government can increase by 50% the area allocated for legal reserves if deemed necessary through approved economic and ecological zonings in order to achieve the Brazilian targets for biodiversity protection or reduction of greenhouse gases.
The Forestry Code also created a nationwide electronic system encompassing the environmental information on rural proprieties - the Rural Environmental Registry (CAR), as a condition for the obtaining of loans or rural credit.
The Forestry Code allows for the compensation of legal reserve areas and creates a legal reserve quota that can be used to attest compliance with the Forestry Code requirements. In addition, it also defines specific rules for forest management and exploitation activities as well as forestry products supply control.
Federal Law No. 12,651/2012 determined that the federal and state authorities should implement Environmental Regularization Programs (PRA) for rural properties whose vegetation was irregularly removed before July 22, 2008. After fulfilling the obligations established in the Program, the consolidated rural areas will be considered regularized, and any fines will be converted into services for the preservation, improvement, and recovery of the quality of the environment. In this way, states are currently issuing local rules regulating their own Programs in their territory. Federal Law No. 14,595/2023 extended the deadlines initially determined in Federal Law No. 12,651/2012 for adherence to the PRA by the owners and possessors of rural properties with: (i) an area of up to four fiscal modules, by March 12, 2025; and (ii) an area of more than four fiscal modules, by December 31, 2023. So far, no new federal regulations have been enacted to extend the deadline.
Federal Law No. 14,285/2021 amended certain articles of Federal Law No. 12,651/2012 (Forestry Code), to provide for permanent preservation areas around watercourses in consolidated urban areas. The new law has established that municipalities will define, through local laws, the extension of permanent preservation areas related to marginal bands of water courses/bodies located in consolidated urban areas. According to the new law, a consolidated urban area must be included in the urban perimeter or in an urban zone by the master plan or by a specific municipal law; have a road system in place; be organized into predominantly built-up blocks and plots; and have a predominantly urban use, characterized by the existence of residential, commercial, industrial, institutional, mixed or service-oriented buildings. Furthermore, activities or enterprises to be installed in urban permanent preservation areas must also comply in cases of public utility, social interest or low environmental impact.
Biodiversity Law
Access to biodiversity resources in Brazil is currently regulated by Federal Law No. 13,123/2015 and Federal Decree No. 8,772/2016. The main provisions of the 2015 Biodiversity Law are:
- creation of a registry (SISGen – launched in November 2017), in which activities involving access or export of genetic resources shall be previously registered by the relevant company, on a self-declaratory basis;
- definition of activities that are subject to previous authorization or mere registration;
- requirement of notification by the company to CGEN, previously to the economic use of the final product resulting from the access;
- distinction between the concepts of remittance and sending of samples of genetic resources to foreign institutions;
- establishment of minimum of 1% of the annual net revenue resulting from the economic use of the final product (% can be reduced to up to 0.1%, in case a sector agreement in this sense is signed by the industry), for purposes of benefit sharing, and
- special treatment for the regularization of past uses.
On March 4, 2021, Brazil ratified accession to the Nagoya Protocol, a multilateral agreement establishing rules on access to genetic resources and fair and equitable distribution of the benefits derived from their use, which was approved through Legislative Decree 136/2020.
International Law
Brazil is party to numerous multilateral environmental agreements, such as the Climate Change Convention, the Biodiversity Convention, the Basel Convention on the Movement of Hazardous Waste, the Montreal Protocol, the Stockholm Convention on Persistent Organic Pollutants, and UNCLOS, among many others. Rules reflecting such agreements are being enacted at the national level to comply with relevant international obligations set forth in these agreements.
Climate Change Law and air pollution standards
Brazil has signed all climate change international treaties, such as the United Nations Framework Convention on Climate Change (“UNFCC”), Kyoto Protocol and Paris Agreement.
Federal Law No. 12,187/2009 established the National Climate Change Policy (“PNMC”) and provided for the main guidelines and public policies aimed at tackling climate change at the national level, such as sectoral plans for mitigation and adaptation, and the National Climate Change Plan.
It also created the Brazilian Market for Emission Reduction (“MBRE”), which is still pending regulation. Several states and municipalities have also issued laws regarding climate change policies.
What is more, voluntary carbon market transactions have increased in Brazil, which is considered one of the countries with the highest potential to generate carbon credits.
National financial initiatives have also been implemented for greenhouse gases offsets and nature-based solutions, such as the National Biofuels Policy (“RenovaBio”); the National Payment Policy for Environmental Services, which has set forth REDD+ programs such as the National Zero Methane Program.
As such, Brazilian Courts have already addressed cases of climate-related litigation in Brazil. Most cases are directly related to recent changes to Federal Government policies that combat the deforestation of the Amazon rainforest, as well as other financial initiatives concerning climate change.
There are also cases of class actions requesting indemnification for environmental damage based on arguments involving climate issues, such as carbon emissions due to illegal deforestation. Regarding this, the Brazilian Council of Justice (“CNJ”) has recently issued Resolution No. 433/2021, which provides that, when assessing environmental damage lawsuits, judges must consider, among other parameters, the impact of such damage on global climate change.
In addition, Federal Law No. 14,590/2023 has provided that areas with granted forests can generate carbon credits. The new law allows public forest concessionaires to operationally unify forest management activities in continuous units. If they are located in the same conservation unit, this can also be done by different concessionaires, who will draw up a single Sustainable Forest Management Plan (“PMFS”).
Real estate regulation in Brazil is heavily rooted in the registry system introduced by Federal Law 6,015/1973. The most common matters are primarily governed by the Brazilian Civil Code and by Federal Laws No. 6,015/1973 (“Public Records Law”); 14,382/2022 (“Electronic System of Public Records Law”); 9,514/1997 (“Fiduciary Lien Law”); 14,711/2023 (“Legal Framework for Guarantees Law”); 13,465/2017 (“Land Regularization Law”); 8,245/1991 (“Urban Lease Law”); 4,591/64 and 6,766/79 (both the “Real Estate Development”); 5,709/1971 and Decree No. 74,965/1974 (both the “Rural Real Estate Legislation”); as well as Federal Decree No. 59,566/1966 (“Rural Leases and Partnership Law”) and Federal Law No. 4,504/1964 (“Rural Land Act”), as amended. A great deal of different and innovative laws and administrative rules relating to real estate transactions, rural and urban properties, that were enacted over the last years, brought a new trend in real estate transactions, with new forms of financing and the tools for a virtual environment at all steps of the transactions, including processes before the governmental agencies involved, Notary Officers and Real Estate Registry Officers and all others public records. Brazil has state regulations on notarial and conveyancing matters and municipal ordinances on land use and occupancy regulations, as well as urban property taxation.
Rights over real estate have two primary stems, namely:
- possession: a fact consisting of the occupation of a real estate by an individual or legal entity out of which certain rights and obligations derive; (e.g., from a mere detention to a in rem possession right or a possession that represents ownership itself); and
- ownership: a right of proprietorship over real estate, mandatorily constituted by title duly registered before the competent Real Estate Registry Office.
Real Estate Registry Offices are, in summary, responsible for keeping records of all title transfers, liens, encumbrances, physical changes and possession aspects of real estates. In some cases, the Real Estate Registry Office is responsible for keeping records of pledges and estate regimes in marriage and marital stable union.
In summary, a notary public is responsible for drafting agreements that are required by law to be entered into by a public instrument, notarizing signatures, attesting as to the authenticity of copies of documents, certifying facts and information, including from the web, among others. Recently enacted federal and state laws permit lawyers to attest to the authenticity of certain documents in specific cases, for specific purposes.
The types of in rem rights over real estate in Brazil are: (i) ownership; (ii) surface; (iii)easement/ right-of-way; (iv) usufruct; (v) use; (vi) habitation; (vii) committed buyers’ right to acquisition; (viii) assignment of in rem right of use; (ix) assignment of special use for housing purposes; and (x) right of floor slab (“Direito de Laje”, which roughly translates to the right of the floor slab, and allows for the obtaining of a distinct title for construction on top of or under another building, despite sitting on the same land); and (xi) the rights arising from the provisional imposition of possession, when granted to the Federal Government, the states, the Federal District, the municipalities or their delegated entities and the respective assignment and promise of assignment. Certain rights to guarantee are also in rem rights: such as pledge, mortgage, fiduciary lien and antichresis.
The classification of a property depends on its use. Therefore, the location of the property is not a decisive factor (i.e., property located in an urban area with municipal zoning regulations will be considered rural property if used for rural purposes). There are two main types of property: (i) rural property; and (ii) urban property.
Urban properties are primarily classified as residential, commercial, and industrial. The ownership of urban property may be classified as fractional ownership, joint ownership in a condominium building or co-ownership in an ordinary condominium.
All regulations applicable to property records, rules relating to the property boundary description, its registry before the relevant authorities and governmental agencies, restrictions, property tax collection, and other requirements depend on the classification of the property, whether the real property is urban or rural.
Different bills are under discussion in the Brazilian National Congress and amendments in different aspects of different laws related to real estate transactions are expected, not only to urban land, real estate developments and financing, but also to rural land, investment funds and publicly owned real properties. In this sense, the Federal Government and several different State Governments have enacted interesting Laws that reveal equally interesting initiatives concerning the sale of public real estate properties to private entities.
Recording of Acts and Information before the Competent Real Estate Registry Office
Federal Law 6,015/1973 was enacted to create the “public records”, which serve the purpose of ensuring that all acts and information concerning real property are available to public access and rights opposable to third parties, and in accordance with the sequential order of the events. This legislation assigned special emphasis on the recording of acts and information related to real estate and their titleholders.
With respect to real properties, the primary document created by Federal Law 6,015/1973 is the enrollment certificate, or the property record file, which contains a description of the real estate’s area, its boundaries, main characteristics and registered owner, valid and former liens, easements, environmental data, among others. Recordation of all acts relevant to that real estate is made on the enrollment certificate53. With regard to rural land, there are specific rules related to the description of a property’s boundaries and the confirmation by the federal authorities that such description does not overlap another.
Certain acts have their recordation carried out before the enrollment certificate as a requisite of validity, such as acquisition, liens, and encumbrances (e.g., usufruct). This is to say that the parties to a given transaction can enter into and execute relevant documents, deeds or carry out necessary acts, but unless and until recordation is completed before the Competent Real Estate Registry Office, certain effects will not be achieved. Below are examples:
- in an acquisition, the acquirer is not fully vested in the title of ownership to the real estate, and the seller remains as owner for all intents and purposes;
- in collateral, the creditor will not be able to foreclose on the real estate, in the event of payment default; and
- in a usufruct, the use right will not be upheld before a good-faith third party who acquires the real estate.
Other acts do not have recordation as a validity requirement, but a party holding interest in real estate can procure recordation to make such interest known to the public in general, as a way of protecting it. This is the case, for instance, of:
(i) recordation of urban lease agreements, which assure tenant’s right of first refusal and the lease validity clause in the event of a sale. This means that if the lease is registered, an acquirer: (a) will be precluded from purchasing the real estate unless the tenant does not exercise its right of first refusal; and/or (b) will have to maintain the lease in force until the expiration of its term.
(ii) purchase rights (commitment of purchase and sale and purchase option), which will bar the sale of the real estate to a third party without the purchaser’s consent. Also, the purchase rights will be acknowledgeable as an in rem right upon the recordation of the agreement, including for tax purposes.
The registration of any title acts is public. One may obtain information from this procedure personally in the registration division or via special online service called the “Center of Electronic Services in the area of Real Estate Registration”. Information about the registration is available after payment of a duty.
The unified electronic real estate registry was established in Brazil. However, not all information about real properties in Brazil are available online. For more detailed information, refer directly to the competent registration division.
The Law governing Public Records dictates that the recordation of relevant acts be made through registration (those which constitute the in rem right) or annotation (for all other acts or facts related to the property or its owner).
The electronic registry contains, where available, information about real estate properties registered since 1976, and the corresponding statement history can be obtained either online or in physical document form along with an apostille.
Acquisition of Title over Real Estate
According to the Brazilian Civil Code, real estate can be acquired by:
- bilateral instrument;
- adverse possession (title acquisition by limitation - “usucapião”);
- accession; and
- inheritance rights.
As explained in item 2 above, the documents and facts listed need to undergo registration on the real estate’s enrollment certificate before the competent Real Estate Registry Office, so that the title to vest in their beneficiaries.
Bilateral Instrument
Real Estate acquisition through a bilateral instrument is operated either by a public deed or a corporate act. In some cases, a bilateral instrument operated by a private agreement is applicable.
In Brazil, a public deed is an agreement drawn by and executed before a public notary whereby a party transfers to another a certain right over a real property (e.g., ownership, usufruct, or any collateral), whether by purchase and sale, donation, property exchange, payment in-kind, mortgage or any other type of agreement.
The act of drawing public deeds is subject to collection, normally by the acquirer, of the applicable transfer tax, “ITBI” (in case of onerous ownership transfer), and “ITCMD” (in case of ownership transfer by a donation or inheritance transfer54), in addition to the Notary Public’s costs. Other costs related to the deed registration on the property record files will be due.
If the parties agree on an installed payment, such parties can execute a private or public instrument (commitment) governing acquisition contingent upon payment in full of installments. The structure whereby the commitment is typically entered into comprises a down payment from the buyer, followed by due diligence over the real estate, the seller, and prior owners. Positive due diligence findings work as a condition precedent to the deal closing (ownership transfer), which, if achieved, oblige the buyer to pay the remainder of the purchase price upon drawing and execution of the deed.
The commitment of purchase and sale may be subject to other conditions precedent, which, like the due diligence, subject the effectiveness of the purchase to their achievement. Most common conditions precedent require the seller to make certain rectifications to the real estate records, e.g., cancelation of liens, annotation of constructions, but can also comprise other measures, such as confirmation of the viability of the intended use of the property, environmental investigations or building entitlements and permits, among others.
Acquisition operated through a corporate act occurs in cases when a partner contributes to an entity’s corporate capital real estate in exchange for stock underwritten. In this case, the relevant corporate act, normally a bylaw, serves as title of acquisition. Unless the social purpose of the acquirer entity is real estate activities, ITBI taxes are not due by the entity.
Irrespective of whether the acquisition is object to a public deed or a corporate act, the parties will be required to present certain mandatory documents, either to the Notary Public or to the Real Estate Registry Officer. Such documents reveal the seller’s financial liabilities and can impair or ultimately bar the transfer.
The most common cases where this situation occurs are:
- judicial attachments: a Judicial authorization is required for disposal of the real estate;
- federal tax outstanding liabilities: the seller may be required to present information to allow the Notary Public / Real Estate Registry Officer to assess whether the disposal’s ultimate intention is to evade taxes; and
- labor debts: require the acquirer to publicly acknowledge that the liabilities can cause the transaction to be undone.
Adverse Possession (“Usucapião”)
Adverse possession is a form of acquisition of real estate through the exercise of possession rights by an individual over an extended period, provided that certain legal requirements are met. This institution awards a good-faith possessor of the real estate with the ownership title, thus granting stability and legal safety to acts perpetrated over said real estate.
The interested party possessor of the real estate is required to produce evidence, either judicially or extrajudicially, of the possession, as well as compliance with other conditions. After a judicial or extrajudicial proceeding in which the evidence is accepted, a registrable property title will be issued in the name of such interested party.
Typically, good-faith possessors are found in the countryside of Brazil, occupying either parts of bigger lands, where the owners may have difficulty controlling informal occupation, or in land previously held under public domain. It is somewhat common for good-faith possessors to enter into agreements with investors of energy projects, for instance.
Accession
Pursuant to Brazilian legislation, real estate acquisition by accession is the incorporation onto the land of an asset (either man-made or deriving of natural occurrence), which attaches to the land and entitles its owner to acquire such asset by accession. Under certain conditions, accessions also trigger indemnification obligations by the landowner.
The most common occurrence of this institute is the construction of a building on a third party’s land by an investor.
Upon completion of the building, the individual/entity in charge of it will procure the issuance of the occupancy certificate (“Habite-se”) and the clearance certificate of social security taxes (“INSS”) specific to the construction. These documents will allow registration of the building on the land’s enrollment certificate, which will operate the acquisition thereof by the landowner.
A party that constructs a building in good faith is entitled to obtain indemnification from the landowner, as consideration for said owner having acquired the building by accession. On the other hand, if the building’s value is found to be substantially higher than the land´s value, the party who carried out its construction can procure the purchase of the land upon payment of indemnification to the landowner as consideration for the acquisition.
Inheritance Rights and Corporate Succession
Transfer of real estate through inheritance rights occurs upon the passing of its owner, followed by a judicial or extrajudicial proceeding in which the heirs claim their rights over the deceased’s estate, including any real estate owned. This proceeding will cause a title to be issued, which, once registered, will operate the real estate transfer to the heir's estate. As a condition for registration, the heir will be subject to the payment of the corresponding ITCMD55.
While title issuance and registration are pending, it is possible to enter into agreements over the real estate, contingent upon the effective transfer.
Likewise, in a corporate transaction that results in the winding-up of an entity holding real estate, the surviving entity will be vested in the respective title of ownership. This title will be materialized in the corporate documents whereby the transaction was operated, and which will need to undergo registration before the competent Real Estate Registry Office.
Unlike with the transfer of inheritance, corporate succession is not subject to ITCMD, but instead to ITBI, to be assessed and collected upon title registration.
Collaterals over Real Estate
A collateral over a real estate grants the creditor the right to foreclose on the real estate if the debtor defaults any of its financial obligations, provided that the creditor has the asset sold to keep its proceeds.
Mortgages and fiduciary sales are the most commonly used real estate-backed collaterals in secured transactions. These collaterals serve as basis to securitization operations.
Mortgage
A mortgage is a collateral that encumbers the real estate owned by debtor borrower or a third party. The lender is not vested in neither possession nor ownership rights over the real estate.
Normally, a mortgage secures the loan's main amount and ancillary costs, such as interest, taxes, late payment charges and expenses, and, in some cases, preset losses and damages, in which the borrower may incur in the event of failure to comply with the terms of the underlying credit agreement.
A mortgage is created through a public deed registered before the competent Real Estate Registry Office, or by a private instrument, most commonly used in financial operations.
Registration of instrument to the mortgage before the Real Estate Registry Office is mandatory and essential for the creation of the collateral. Only after registration, the mortgage will be enforceable in avoiding any other creditors that the borrower may have from tapping the real estate in their recoveries.
Considering that the borrower remains in ownership and possession of the mortgaged real estate, it can freely sell it to third parties, in which case the collateral survives the sale. This ultimately means that a third-party acquirer will be exposed to the risk of foreclosure if the borrower defaults its obligations and triggers accelerated maturity of the debt, which is usually a consequence of payment default in mortgage agreements.
It is worth noting that one real estate may be encumbered by more than one mortgage, to more than one creditor. In this case, in a scenario of default, the mortgages are enforced in the order in which they were created (i.e., as registered in the respective real estate enrollment).
Before the enaction of the Legal Framework for Guarantees Law, the execution of mortgage was only possible by judicial means. However, through the new provisions introduced by the Legal Framework for
Guarantees Law, it is now possible to execute mortgage through extrajudicial means. This innovation does not depend on a contractual provision and is applicable to all mortgage cases, except for agricultural financing.
In any case, in order to use the mortgaged real estate to resolve its credit, a lender must follow certain steps, namely:
- file a judicial enforcement lawsuit before the competent Court or an administrative proceeding before the competent Real Estate Registry Office, seeking acknowledgment of the debt and its amount;
- if the lender prevails, it is awarded foreclosure on the real estate, which means that, in a judicial lawsuit, the real property will be seized and, in an administrative proceeding, the Real Estate Registry Office will provide the annotation of the default before the enrollment certificate of the real property – both cases allow the initiation of the execution through a public auction;
- once the execution is initiated, the real estate must be sold in a public auction (the lender is precluded from keeping the real estate as payment in-kind, subject to the exception below), in this sense, to register the real property in its name, the winner of the auction must bear (a) the letter of auction (carta de arrematação) to be issued in the case file, in the lawsuit; and (b) the notary act to be drafted in the Notary Office, in the administrative proceeding;
- the proceeds from the sale will be used to pay judicial or administrative costs and the debt; and
- if the proceeds from the sale are insufficient, the lender will still have an appeal against the borrower.
- in the event that the bid offered in the first public auction is not equal to or greater than the value of the property established in the contract for excussion purposes, or the valuation carried out by the public body competent to calculate the tax on inter vivos transfer, whichever is larger, the second auction will be held in the following 15 days.
- in the second auction, the highest bid offered will be accepted, as long as it is equal to or greater than the full value of the debt guaranteed by the mortgage, expenses, including notary fees, insurance premiums, legal charges, taxes, and condominiums contributions, and, if there is no bid that reaches this value, the mortgage creditor may, at its sole discretion, accept a bid that corresponds to at least half of the appraised value of the property.
- before the asset is sold at auction, the debtor or, if applicable, the provider of the mortgage guarantee is assured the right to redeem the execution, upon payment of the entire debt, the value of which will be increased by the expenses relating to the collection and auction procedures, authorizing the Real Estate Registry Office to receive and transfer the corresponding amounts to the creditor within three days.
- if the bid for auction of the property exceeds the value of the total debt, plus the expenses provided for above, the excess amount will be delivered to the debtor within 15 days, counting from the date of payment of the auction price.
- in the event that the bid offered in the second auction is not equal to or greater than the minimum reference established above for auction, the creditor will have the option of: (i) take ownership of the property in payment of the debt, at any time, for the value corresponding to the duly updated minimum reference, upon request to the competent Real Estate Registry Office, who will register the records of the negative auctions with the notation of the ownership transfer; (ii) carry out, within a period of up to 180 days, counting from the last auction, the direct sale of the property to a third party, for a value not lower than the minimum reference, excluding a new auction, in which case the mortgage creditor will remain invested with an irrevocable mandate to represent the mortgage guarantor, with powers to transfer domain, right, possession and action, manifest the seller's responsibility for the eviction and give the acquirer possession of the real property.
Another significant change introduced by the Legal Framework for Guarantees Law is the possibility of renegotiating the mortgage, which allows a new debt to be guaranteed, with the return of the amount already written off from the previous debt by the creditor to the debtor. Thus, the creditor returns part of the amount already paid to the debtor, up to the limit of the original claim. This hypothesis can only be used in a transaction to open an existing credit limit, favoring the use of the residual credit granted over the use of surplus collateral in contracts in general.
The advantage of this innovation is that the transaction can be carried out by means of a simple contractual amendment, regardless of the prior cancellation of the original guarantee and the creation of a new one. The new credit is subordinate in priority to the main credit and the new debt must be paid within the same period as the original debt, although it may have different interest rates.
In a judicial reorganization scenario, real estate encumbered by a mortgage can be used in the recovery plan to pay creditors other than the collateral’s beneficiaries. In the event that the borrower undergoes bankruptcy, a lender beneficiary to the mortgage will prefer certain creditors (such as unsecured ones) but will fall behind other ones (such as labor and tax).
Fiduciary Lien over Real Estate
A fiduciary lien over real estate (“Alienação Fiduciária em Garantia”) is a transaction in which a borrower holds possession and the right to reacquire the property ownership by paying the debt, transferring the ownership of the property on a fiduciary basis to the lender. The constitution of a fiduciary lien causes the real estate property title to be shared between borrower and lender, in an inseparable manner, creating certain limitations to the exercise of property and possession rights, such as leasing, sale, encumbering and others.
Fiduciary lien creates a condition where default in payment of the debt will revert the title of the real estate to the lender (“property consolidation”), who will have the obligation to auction the real estate in order to collect funds for the payment of the debt, subject to the exception below. This means that, unlike the mortgage, the foreclosure of the collateral triggers the applicable transfer taxes56, taking into consideration that in the beginning of the foreclosure the ownership entitled to creditor on a fiduciary basis will turn into full ownership.
Normally, a fiduciary lien secures the debt's main amount and ancillary costs, such as interests, taxes, late payment charges and expenses, and, in some cases, preset losses and damages. In case of the latter, the borrower can incur in the event of failure to comply with the terms of the underlying credit agreement.
A fiduciary lien is created through a private or public instrument (some state laws provide for the obligation of providing a public instrument and this particular aspect is the subject of a great discussion), and its effectiveness depends on its registration before the relevant Real Estate Registry Office. Therefore, only after being registered, will the fiduciary lien be enforceable, including to prevent the property from being affected by other creditors.
The Borrower will not be able to sell the property. Also, leases require the borrower’s express consent to be enforceable against them if longer than one year. The foreclosure must follow certain steps, as follows:
- upon default, the lender will notify the borrower of the default for payment within 15 days following receipt of the notice;
- should the borrower’s default be confirmed, the lender will have to collect the property ownership transfer tax and carry out the registration of the property consolidation on his behalf;
- procure an extrajudicial auction sale of the property (the lender is precluded, at this point, from keeping the real estate as payment in-kind);
- the property must be auctioned for the minimum amount, whichever is higher, between: (a) the amount stated by the parties in the corresponding instrument; or (b) the amount assessed by the municipality for purposes of calculating the transfer taxes;
- if the proceeds of the auction are not sufficient to fully pay the amount of the debt, expenses and charges, the debtor will still be obliged to pay the remaining balance, which may be charged through an execution action and, if applicable, foreclosures of other debt guarantees, except in the event of extinguishment of the remaining debt balance provided for below;
- if, on the other hand, the minimum amount mentioned above is not achieved, a second auction will take place for an amount equivalent, at least, to the sum of the debt, auction expenses, insurance premiums, legal charges, including taxes and common area expenses;
- if there is no bid that meets the minimum amount mentioned above in the second auction, the fiduciary creditor may, at its sole discretion, accept a bid that corresponds to at least half of the appraised value of the asset or consider the debit extinguished, with reciprocal discharge, in which case the creditor will be vested with free availability;
- the proceeds from the sale will be used to pay the auction costs and the debt, provided that any amount remaining is returned to the borrower57; and
- it is guaranteed to the fiduciary, assignees or successors, including the purchaser of the property through the public auction, the repossession of the property, which will be granted outright and, once the property has been auctioned or has been definitively consolidated in the event of a frustrated auction, legal actions aimed at disputes over contractual stipulations or procedural requirements for collection and auction, except for the requirement to notify the debtor and, if applicable, of the third party trustor, will not prevent the repossession of the real property and will be resolved in damages.
In a judicial reorganization or bankruptcy proceeding, the encumbered real estate will not be reachable by other creditors that the borrower may have.
It is interesting to highlight that with respect to the restrictions of farmland acquisition by foreign individuals, in some cases, recently enacted Federal Law No. 13,986 of April 07, 2020, authorizes foreign individuals to receive farmland as collateral by a fiduciary lien. This law recognizes that the foreign individual becomes the owner for the purpose of debt liquidation.
Regarding the new features introduced by the Legal Framework for Guarantees Law, we highlight the possibility of registering the so-called “supervening fiduciary lien”, which are subsequent liens of the same property, without cancelling the previous ones. Despite the possibility of its registration right after its execution, the subsequent lien will only be effective when the previous one has been canceled. If the previous fiduciary sale is foreclosed, the creditor of the subsequent fiduciary sale will be subrogated to the surplus (if any) of the price obtained from the sale of the property by the previous creditor.
57 The fiduciary sale was initially created as a means to secure real estate acquisition. Over time, its application was expanded to comprise more complex transactions.
Similarly to the mortgage, the Legal Framework for Guarantees Law also allows the possibility of renegotiating the fiduciary lien, which allows a new debt to be guaranteed, with the return of the amount already written off from the previous debt by the creditor to the debtor. Thus, the creditor returns part of the amount already paid to the debtor, up to the limit of the original claim. This hypothesis can only be used in an operation to open an existing credit limit, favoring the use of the residual credit granted over the use of surplus collateral in contracts in general.
However, it is important to note some differences between the renegotiation of a fiduciary lien and the mortgage: (i) the renegotiation of the fiduciary lien can only be carried out with financial institutions or simple credit companies, while that of the mortgage is free to be carried out with any creditor; (ii) the credits secured by the same fiduciary sale can only be assigned together, to the same creditor, while there is no such limitation on the assignment of the mortgage; and (iii) the existence of a supervening fiduciary sale prevents the renegotiation of another preceding fiduciary sale, while the existence of supervening encumbrances does not prevent the renegotiation of a previous mortgage, but the new debt will be subject, in priority, to the encumbrances then existing on the property.
Another advantage of this innovation is that the transaction can be carried out by means of a simple contractual amendment, regardless of the prior cancellation of the original guarantee and the creation of a new guarantee. The new credit is subordinate in priority to the main credit and the new debt must be paid within the same period as the original debt, although it may have different interest rates.
Furthermore, in the case of the fiduciary sale of multiple properties and/or properties in multiple counties, the Legal Framework for Guarantees Law facilitates the judicial enforcement of the secured debt, so that, since each property is not linked to a portion of the debt, the creditor can simultaneously seize all the properties, auctioning them at the same time, or successively, until the debt is paid, even if the properties are located in different counties.
Finally, the Legal Framework for Guarantees Law introduces the concept of the collateral agent, which must basically manage the assets and foreclose on the collateral, if necessary, and must, after receiving the value of the sale of the asset pledged as collateral, make the payment to the creditors within 10business days. Thus, the collateral agent is useful in cases where (i) there is more than one creditor or there are multiple debts, because the agent can execute the collateral directly; or (ii) there is a foreign creditor, because in this case the agent can be a local representative, able to manage and execute the collateral without the need for the creditor to intervene or formalize a power of attorney.
Acquisition and Lease of Rural Real Properties by Foreigners
Applicable Restrictions
Acquisition and lease of rural real estate by foreign individuals or foreign legal entities are governed by the Rural Real Estate Legislation, which is centered on two main legal issues:
- A general limitation on the acquisition and lease of rural real estates by any foreign individual or legal entity; and
- The applicability of such restrictions for a Brazilian legal entity that has the majority of its capital held, at any title, by a foreign individual or legal entity (“Brazilian Entities of Foreign Capital”), once it is considered as a foreign entity.
Such restrictions are not applicable to urban properties. The ongoing discussions regarding the restrictions before Brazilian Courts reached the Brazilian Superior Court, where a ruling is expected, but has already been delayed a few times. It is possible that the discussion will end and, consequently, Brazilian Entities of Foreign Capital will not be considered as foreign entities. Therefore, such restrictions can be lifted, or not, depending on the decision rendered.
Need for Government’s Approval
Due to the applicable restrictions, authorization of the National Institute of Colonization and Agrarian Reform (“INCRA”) is required for the acquisition or lease of rural land by a foreign individual, foreign legal entity or Brazilian Entities of Foreign Capital (“Foreigners”) and it is contingent on a prior request/submission of an exploitation project (describing the intended use of such property) to INCRA. Therefore, the issuance of INCRA’s prior authorization is a legal requirement to proceed with such transaction. For rural lands located on border areas, or on any area considered indispensable to National Security, besides the INCRA’s approval, authorization from the National Security Council (“NSC”) is also required to proceed with the transaction and, in this case, the NSC must also approve the exploitation project, whose approval proceeding must be initially submitted to INCRA.
This requirement to INCRA (and to NSC, when regarding areas secured by National Security) is extensive to corporate transactions resulting in the direct real estate title transfer of rural land, or in corporate transactions/reorganizations that result in transfer of shares or quotas in an entity holding rural land (consequently, the indirect real estate acquisition). However, when the authorization concerns the direct or indirect transfer of rural land located on border areas, the respective authorization process is initiated directly before the NSC.
Consequences of Not Having the Approval
The acquisition and lease of farmland by Foreigners without prior authorization can be considered null and void, and its registration on the real property ownership record file, before the competent Real Estate Registry Office, can be canceled or refused, as applicable. The analysis of the validity of such acquisition or lease depends on the time when the property was acquired, its use, its location, and the size of its area, among other aspects. Considering that not only the law on farmland acquisition or lease by Foreigners, but also the Federal Constitution, and the official understanding from the Federal authorities that are binding to the governmental agencies, changed a few times in the past 30 years, such analysis must be made on each case, upon the presentation of the proper documentation.
This legal landscape establishes that Foreigners can only acquire rural real estate upon governmental authorization to be granted in view of a project to develop and implement agricultural, industrial and/or colonization projects.
The Notaries Public, Real Estate Registry Officers and INCRA oversee application of the restrictions, not to mention that any individual or entity that holds rights over rural property Real Estate Registry Officers is obliged, under the law, to annually update the property registry before INCRA. This means that the control on farmland acquisition by foreigners can be made: (i) by the Notaries Public, upon drafting of the relevant deed; (ii) by the Real Estate Registry Officers, upon registration of the ownership transfer deed and obligation to submit a notification to INCRA every three months informing the acquisitions by Foreigners; and (iii) by INCRA, upon registration of the transaction, in the event that Notaries Public and Real Estate Registry Officers fail to bar a prescribed transaction, or upon the annual update of the property’s registry. The review made by any of these agents will initiate administrative procedures before INCRA, and judicial lawsuits, if necessary, that might lead to the annulment of a transaction that was subject to the restrictions, without regard for the restrictions currently in force. As stated previously, ongoing discussions related to restrictions before Brazilian Courts have reached the Brazilian Superior Court, where a ruling is expected. It is possible that the discussion will end and, consequently, Brazilian Entities of Foreign Capital will not be considered as a foreign entity and, therefore, such restrictions may, or may not, be lifted, depending on the decision rendered.
Transactions Not Subject to Restrictions
The Brazilian law expressly restricts the acquisition and the lease of rural land by Foreigners, which does not mean that Foreigners cannot occupy or have rights over rural lands is Brazil, since there are other rights that are not subject to these restrictions.
The law expressly mentions that the following rights are not subject to the restrictions: (i) the constitution of an in-rem collateral (ii) the transmission of fiduciary ownership of a rural property to Foreigners, (iii) cases of receipt of property in settlement of transactions, by means of execution of an in-rem collateral, payment in kind or any other form.
Moreover, Foreigners can be granted access to rural lands by entering into instruments that are not subject to restrictions, such as the surface right, the usufruct, the free lease, or the assignment of use. Although none of these titles transfer the ownership of the rural land, it can guarantee Foreigners access to the land for long periods of time.
Furthermore, a new category of investment funds, recently established in the agribusiness sector, is allowed to acquire, sell and lease rural lands. It is the "Investment Fund in Agro-Industrial Chains” or the “Agribusiness Investment Fund” (in Portuguese, Fundo de Investimento nas Cadeias Produtivas Agroindustriais), created by Law No. 14,130/2021, amended by Law No. 14,421/2022, and currently ruled by Law No. 8,668/1993 (“FIAGRO”).
The types of assets that may be included in FIAGRO’s portfolio are innovative, all regarding to agribusiness sectors, which can be associated with rural real properties or activities concerning production in the sector. Real Estate FIAGRO is a class of FIAGRO that invests in rural real properties and generates income from leasing the rural real property, seeking to increase the value of the land in the medium and long term. The goal is to increase the value of the property and subsequently sell it to generate a profit for investors.
FIAGRO’s law is an interesting alternative to the current restrictions applicable to Foreigners acquiring rural property, since it allows foreign investors to participate in the rural land market through FIAGRO, but with no possession or ownership over the rural land. As a result, it is possible for foreign funds to enter the rural sector without falling foul of the limits on the acquisition of rural land imposed on Foreigners. Thus, Foreigners can invest and receive income without directly purchasing the land and, therefore, will not be subject to the restrictions of the current legislation.
Leasing Real Estate
Urban Leases
Urban real estate leases are governed by the Urban Lease Law. The legal framework introduced by the Urban Lease Law is a regulation that promotes the tenants’ right to remain on the leased property real estate, even, at times and in commercial leases, to the detriment of the landlord’s will. As such, the Urban Lease Law awards great protection to the individual’s residence and the legal entity’s goodwill.
Below are certain clauses that normally apply to the lease relation.
- Right of First Refusal: Tenant has right of first refusal over the leased real estate, if the landlord intends to sell it to a third party, in equal conditions to the ones offered by such third party. This right is applicable irrespective of contractual provisions. Nonetheless, if contractually stipulated, the tenant can request registration of the agreement on the leased real estate’s enrollment certificate. This registration will have the effect of acknowledging the right of first refusal to the public in general, including for its enforceability.
- At-will termination: The landlord is not entitled to lease at-will termination. Early termination by the landlord is restricted to causes strictly outlined in the Urban Lease Law. The tenant, on the other hand, can terminate the agreement early, irrespective of cause, upon payment of a contractually agreed penalty, reduced proportionally to the period of the agreement already elapsed.
- Renewal Right: In commercial lease agreements the tenant can, upon filing a specific lawsuit, have the right to extend the lease term for another term, provided that all of the following conditions are met:
- the lease agreement must be executed in writing and for a specific term;
- the minimal term of the agreement, or sum of the terms of continuous and uninterrupted leases must be of at least five (5) years;
- the tenant must have been using the real estate to develop the same business for, at least, the last three (3) years prior to the filing of the lawsuit; and
Legal Aspects of Doing Business in Brazil 319 - the landlord must request extension of the term in the period comprised between one (1) year and six (6) months prior to the lease’s expiration date.
- Validity Clause: Sale of the leased real estate does not trigger the termination of the lease agreement, but the purchaser of a leased real estate has the right to terminate the agreement upon prior notice of 90 days following the registration of the sale on the real estate record files before the relevant Real Estate Registry Office. A validity clause eliminates such right upon the registration of the lease agreement on the real estate record files for validity clause purposes. If not registered, the tenant will only be entitled to losses and damages.
- Built-to-suit agreements: The Urban Lease Law specifically governs built-to-suit lease agreements. The provisions of the Urban Lease Law stipulate: (i) that the parties can waive the right to have the mark-to-market rent judicially reviewed (landlords’ and tenants’ triannual statutory rights); and (ii) in the event of tenant at-will termination, the tenant is subject to an early termination fine up to an amount to all rents maturing until the expiration of the original lease’s term.
Rural Leases and Partnerships
Rural leases are governed by the Rural Leases and Partnership Law. They are defined as the transfer of possession from landlord to the tenant for the latter to exploit a rural activity, as defined under the Rural Land Act. This means that the activity must be of agricultural, livestock or agribusiness nature.
The Rural Leases and Partnership Law stipulates the minimum duration of rural leases, in accordance with the activity developed, to which the parties are bound.
Federal Law 8,629/1993 stipulates that the restrictions imposed by the Rural Real Estate Legislation are also applicable to leases of rural real estate.
Unlike purchase and sale transactions, lease agreements are normally entered into through a private instrument that does not require registration. Verification by the authorities of compliance with the restrictions is difficult to carry out. In order to address this issue, Instruction 43/2015, enacted by the National Justice Council, innovated the effective legislation by establishing that lease agreements executed by foreign individuals or legal entities over rural real estate must be entered into through public deed.
Rural partnerships are the agreements whereby a landowner partners with a third party for the development of an activity under the Rural Land Act. The parties share the proceeds (both financial and in-kind) of such partnership as compensation for their activities, subject to certain percentages, as stipulated in the Rural Leases and Partnership Law.
Taxes Related to Real Property in Brazil
Under Brazilian law, there are specific taxes related to real property.
Urban Real Estate Tax – IPTU (Municipal Tax)
A municipal tax accruing annually on the ownership of urban real estate and assessed over the value attributed by the municipal tax authorities to such real estate (usually close to market value). The rates vary according to the municipality where the real estate is located.
All urban real estate property in Brazil owned by individuals or legal entities as of January 01 of each year, is subject to Urban Real Estate Property Tax, to be paid to the municipality whose jurisdiction the property is located in. The IPTU is the main annual tax imposed on urban real estate properties, and the surface area of the real estate property, its location, the value of its constructions etc. are used to calculate such tax.
Rural Real Estate Tax - ITR (Federal Tax)
A federal tax accruing annually on the ownership of rural real estate and assessed over the value of the land itself (without crops, constructions etc.). The rates vary in accordance with the size and degree of use of the real estate.
All rural real estate property in Brazil, owned by individuals or legal entities as of January 01 of each year, is subject to Rural Real Estate Property Tax, to be paid to the Federal Government. Calculation of the ITR is based on information provided by the property owner to the Federal Tax Revenue (information includes the surface area, the purpose of its use, extent of preserved native forest, agricultural production, among several other considerations).
Real Estate Conveyance Tax (Onerous Transfers) - ITBI - (Municipal Tax)
A municipal tax accruing at a variable rate (depending on the municipality) on all onerous ownership transfers or usufruct of real estate. The real estate conveyance tax rate will be applied on the transaction’s actual price; although the value of the real estate can be assessed by the municipality if the transaction’s actual price is not in accordance with a fair market value.
Such tax does not apply in cases of contribution of the real estate to the capital in exchange for underwritten stock of companies whose main income does not come from real estate activity (requirements to be observed).
Inheritance and Donation Tax – ITCMD
A state tax accruing at a variable rate (depending on the state) on all transfers by donation or as a consequence of inheritance rights, and normally assessed over the higher between: (i) the transaction price; or (ii) the value of the real estate as assessed by the state.
The same issues indicated above relating to the value of the transaction and the value established by the municipality referring to the real property are also applicable to the ITCMD.
Foro
A fee due by individuals or legal entities holding a right to use a real estate owned by a third party, usually the Federation, under an aforamento regime. This fee is due annually in addition to the IPTU or ITR, and is assessed over the value attributed by relevant tax authorities.
Laudemium
A fee accruing at a 2% rate on all onerous transfers, of any kind, of real estate owned by a third party, usually the Federation, under an aforamento regime, and normally assessed over the higher between: (i) the transaction price; or (ii) the value of the real estate as assessed by the Federal Government.
General Considerations over Other Real Estate Aspects
Co-ownership
Real estate can be owned jointly by more than one individual or legal entities, in which case they share the costs, expenses and income relating to the use of the real estate. This means that ownership title is held jointly, without possession allocation over the common real estate. There are two main forms of joint or common ownership, namely tenancy in common (undivided portion of ownership or “Condomínio Geral”) and co-ownership or “Condomínio Edilício”, the latter applicable to real estate with constructions (residential or office buildings, industrial facilities, storage & logistics facilities).
Easements
Easements confer limited rights in favor of one’s real estate (the “dominant” land) over another’s real estate (the “servient” land). They can either be positive, permitting the owner of the dominant land to exercise certain rights over the servient land (e.g., a right-of-way); or negative, prohibiting the owner of the servient land from exercising one of its ownership rights (e.g., building above a certain height).
This institute was created in 2002 and, as such, certain aspects of the legislation are still pending regulation, such as, for instance, taxes accruing over its creation and extinction, by the relevant municipalities.
Surface Rights
Surface rights (“Direito de Superfície”) entitle its holder to build or to plant on a real estate owned by a third party for a determined term. The concession of surface rights can be paid or free of charge and must be granted by a public deed.
Usufruct
Usufruct is the temporary right to use and to profit from a third party's real estate (except for the practice of any acts that may result in the disposal of the real estate). The usufruct’s maximum duration is for the life of the usufructuary, if the beneficiary is an individual, or for 30 years, renewable for an additional 30 years, if the beneficiary is a legal entity.
Fees and expenses related to the acquisition of a real property
Notarial and Real Estate Registry Office fees vary from state to state and are regulated by state law. In each state, the same fees will be charged by every Real Estate Registry Office and Notary Public practicing in that state.
Lawyer’s fees can be negotiated and are established by the Brazilian Bar Association in its main fee guidelines. To ensure the validity of negotiations and compliance with the relevant legal formalities, it is advisable to have a lawyer present. Furthermore, the presence of a lawyer also serves to ensure the accuracy of the deed’s content in relation to the description of the property, the description of the succession of rights of the seller and his/her predecessors, in addition to other legal requirements.
Depending on the circumstances, other costs might be applicable, such as the laudemium, applied to marine land (properties located on islands or properties that fall under an occupancy regime or a permit issued by the Federal Government).
Specificities with respect to rural land - property boundaries description and its environmental data
Brazilian Law prescribes particular provisions in relation to rural land, and anyone with the intention of acquiring rural land must be aware of (i) specific rules/regulations concerning the description of the boundaries of rural land that detail satellite geo-referenced coordinates, in accordance with the proper topographical rules established by the National Institute of Colonization and Agrarian Reform (“INCRA”), and (ii) specific rules/regulations with respect to demarcated preservation areas on such properties and registration thereof with the State and the federal environmental agencies.
Additionally, the description of rural properties through satellite geo-referenced coordinates must be certified by INCRA and can lead to other legal measures/requirements regarding the property regularization, given that the description must be recorded in the property ownership record file. In addition to certification by INCRA as a requirement for the valid execution of a deed of sale of rural land, registration with the relevant Real Estate Registry Office is also required if the property in question comprises an area of more than 100 hectares in extent (note that this provision will soon apply in transactions involving properties smaller than 100 hectares in extent).
In addition, registration of rural property data with the State and the Federal environmental agencies is a further requirement for the execution of deed of sale for the acquisition of rural land, coupled with its registration with the relevant Real Estate Registry Office.
Finally, the rural property must be registered with the Federal Revenue, since the property must have an identification number (“NIRF”).
Notes on real estate realtor activities
Under Brazilian law, a Real Estate Realtor must be registered with the relevant agency (“CRECI”). A broker’s participation in a transaction is not mandatory unless a broker has been hired, even if the broker is not responsible for the effective conclusion of the transaction. Regardless of whether the transaction is duly concluded, the realtor’s fees are still due. The parties can (and are advised to) reach an agreement regarding the incorporation of a provision in the deed of sale stipulating effective conclusion of the transaction as a prerequisite to the payment of the realtor’s commission.
The realtor’s commission can vary in accordance with the arrangement between the party and the broker, with an upper limit of 6% (six per cent) of the purchase price, established by law in general/standard/conventional cases.
Urban Land Regularization
The Land Regularization Law provides for instruments that allow for the regularization of urban land, by establishing legal, urban planning, environmental and social measures with the aim of regularizing informal urban centers into the urban organization and guaranteeing the land title to its occupants.
Informal urban centers are those that are clandestine, irregular or in which the occupants could not be given title, even if they comply with the municipal legislation in force at the time of their establishment or regularization.
In this sense, the procedure involves the regularization of areas and lots with the appropriate governmental bodies, by registering each of the areas and lots as individual properties, assigning them a number before the municipal government, for purposes of registration and tax collection, and an enrollment with the Real Estate Registry Office, where the ownership title will be registered.
The process also includes the implementation of public facilities and missing infrastructure, as well as environmental and social measures to guarantee the regular use and occupation of the real properties. F From this perspective, the aim is to occupy the land efficiently, combining its use in a functional way.
The Land Regularization Law mostly aims is to expand access to urbanized land for the low-income population, in order to prioritize the permanence of occupants in the regularized informal urban centers and foster social integration and generation of employment and income.
However, irregular urban lands that are not occupied or destined for the low-income population also benefits from the law, provided that there is a specific purpose for the regularization. In this case, the regularization may be necessary for a number of reasons, such as situations of possible overlapping areas.
The regularization aimed at benefiting the low-income population is financially supported by the government, while the specific purpose regularization (not destined for low-income population) must be financially supported by their potential beneficiaries or private claimants. In both cases, the regularization adds value to the benefited areas.
Intellectual property in Brazil denotes not only industrial property rights but also other rights related to creations of the mind, such as copyright and software.
Following the definition of “industrial property” introduced by the Paris Convention, industrial property rights in Brazil cover products and service trademarks, certification trademarks , collective trademarks and position trademarks , patents of invention and utility model patents, industrial designs, geographical indication and protection against unfair competition. It also encompasses technology transfer, franchising, technical and scientific services.
Industrial property is mainly regulated by the Brazilian Industrial Property Law (Law 9,279 of 1996 – “LPI”), the Paris Convention, and its Stockholm Revision, several norms issued by the Brazilian Patent and Trademark Office (“BPTO”), and the Central Bank of Brazil. Industrial Property Law 9,279 of 1996, which entered into force on May 15, 1997, consolidated the various rules governing the subject and introduced changes to the current protection of industrial property rights in Brazil.
The BPTO is the federal agency in charge of regulating and granting patent rights, registering trademarks, industrial designs, and geographical indications, as well as of approving licensing agreements and any other agreements involving industrial property rights, technology transfer and technical and scientific services as mentioned above.
In 2023, the BPTO issued Ordinances 26 and 27 establishing new rules and formalizing certain requirements in relation to the recordal or registration of technology transfer and franchise agreements, as well as the annotation of licenses and assignments of industrial property rights. Ordinance No. 26/2023 expressly repealed the BPTO’s Normative Instructions No. 16/2013, No. 39/2015 and No. 70/2017; and Ordinance No. 27/2023 expressly repealed BPTO’s Resolution No. 199/2017.
The key updates introduced by the ordinances are:
- Possibility of registering licensing agreements for the licensing of non-patented technologies (know-how);
- Payment of royalties over trademark application licenses;
- Dismissal of the requirement to (i) include parties’ initials on all pages of the agreement and its exhibits; (ii) appoint two witnesses’ signatures; (iii) present the corporate documents of assignee, franchisee or licensee; (iv) submission of the registration form (“ficha cadastro”) at the BPTO’s website; and (v) provide the notarization and apostille/consularization of documents signed abroad digitally; and
- Acceptance of digital signatures without an ICP-Brasil certification.
The ordinances published by the BPTO mark a significant improvement in the procedures for registering agreements. The ordinances simplify and streamline the requirements and formalities for such agreements. Furthermore, the ordinances are in line with the BPTO's efforts to modernize and enhance its services, and to foster the development and innovation of the Brazilian intellectual property system.
The changes above are limited to the agreements registered with the BPTO’s General Coordination of
Technology Contracts
Trademarks
As previously stated, Brazil is a signatory of the Paris Convention, and therefore, trademarks that have been registered with the appropriate governmental agencies of other signatory countries have priority in the granting of local registration and protection. However, if a foreign holder applies for registration of a trademark in Brazil without a priority claim, as established in the Paris Convention (within six months of the foreign application), then priority protection from the Paris Convention for the interim period of time before application in Brazil will not be granted.
In order to be registered, the trademark must be new, lawful, and cannot be identical or confusingly similar to previous applications or registrations, nor may it be an expression of common use or a generic expression.
According to the LPI, visually perceptible and distinctive signs that are not included in the legal prohibitions can be registered as trademarks. Based on such definition, the BPTO included the possibility of registering the following traditional categories of trademarks:
- Word - when the sign consists of one or more words, provided that these elements are not associated with any figurative element.
- Compound - when the sign is made up of a combination of nominative and figurative elements or even just nominative elements whose spelling is presented in fanciful or stylized form.
- Figurative - when the sign consists of drawings, images, figures and/or symbols.
- Tridimensional - when the sign is constituted by the distinctive plastic form itself, capable of individualizing the products or services to which it applies.
Recently, the BPTO started to accept a new modality, the position mark, in which the protection is characterized by the application of a sign in a singular, specific, and invariable position of a given support object, resulting in a set capable of identifying the business origin and distinguishing products or services from others that are identical or similar.
Trademark protection in Brazil is obtained through registration of the trademark with the BPTO. However, Law 9,279 introduced two exceptions to this rule:
- For well-known trademarks, special protection is granted, regardless of whether they have been registered in Brazil before. This provision is aimed at protecting holders from piracy of well-known trademarks that are registered outside of Brazil, but not in Brazil. It also reinforces the protection of Article 6 bis of the Paris Convention, which has long granted protection for well-known trademarks regardless of their registration.
Legal Aspects of Doing Business in Brazil 203 - For any person who, in good faith, at the date of priority claim or of the application filing with the BPTO by a third party, had been using an identical or similar mark for at least six months in Brazil, to distinguish or certify a product or service that is identical, similar, or akin, will have preferential right to registration.
Registration of a trademark is valid for a period of ten years and is renewable for successive ten-year periods. The extension must be requested during the last year in which registration is in effect (called the ordinary term) or within a six-month period following the ordinary term (called the extraordinary term) against payment of a surcharge. A trademark registration can be canceled if:
- it is not used for five years from the date of its registration;
- its use is interrupted for more than five consecutive years; or
- the mark has been used in a modified form that implies alteration of its original distinctive character, as found on the certificate of registration.
Trade names in Brazil are not governed by the Industrial Property Law, and therefore are not subject to registration with the BPTO, although Law 9,279 of 1996 forbids the registration of trademarks identical or confusingly similar to third parties' trade names if it leads to confusion or association between those distinctive signs. Trade names are regulated by the Paris Convention, which assures protection to the owner of a trade name in all signatory countries, without filing or registration obligation, as well as by specific regulations issued by the National Department of Commerce Registry that require the registration of trade names with the Commercial Registry. Even though the Paris Convention demands that the protection of trade names be afforded throughout Brazilian territory, the Brazilian Civil Code in force since January 11, 2003, states that protection of corporate names is limited to the Brazilian state where the company is registered. However, there is a special provision of law that allows a company to expand its trade name protection to other states in Brazil through the submission of special requests to the commercial registries of each state where protection is desired.
Madrid Protocol
On October 02, 2019, Decree No. 10,033/19 was published, implementing in Brazil the Protocol on the Madrid Agreement for the international registration of trademarks, signed in Madrid, Spain, on June 27, 1989.
With the Protocol now in effect in Brazil, Brazilian titleholders who wish to register their trademarks in any of the other 120 countries that are part of the Agreement can do so directly with the BPTO, filing a single international application and paying only one fee.
The BPTO also receives trademark applications from international and Brazilian companies that enter the Protocol and choose Brazil as their designated country.
The BPTO, as a designated office, has up to eighteen months to complete an initial analysis of the application, under penalty of automatic allowance. This first review can result in an office action or abeyance (which interrupts the 18-month review period) or a final decision (allowance or rejection of the application).
The Protocol is an advantage for trademark owners as it not only simplifies the registration process in several countries but also significantly reduces the costs of filing and maintaining trademarks in such countries.
In view of the accession to the Madrid Protocol, Brazil has sought to harmonize trademark registration procedures between national applications and designations received through the Madrid Protocol.
To this end, it is important to stress two substantial changes: Brazil adopted the trademark regime in a multiclass system and co-ownership, which stills need to be implemented. However, until now, the BPTO’s system has not allowed national applications to be filed through the multiclass system.
As in other countries, in order to analyze the registrability of the trademark in a multiclass system, the BPTO Examiner will carry out an anteriority search exclusively within the classes claimed in the application under analysis, except for cases of correspondence in the former national classification, as is currently the case.
Trademark licensing agreements
Trademarks can be subject to licensing agreements, provided that they are registered or in the process of registration with the BPTO.
Until 2023, trademark applications could not generate royalties, which meant that the trademark had to be duly granted by the BPTO before remittance of royalties.
However, the Specialized Federal Prosecutor's Office (“PFE”), through Opinion 00035/2020/CGPI/PFE-INPI/PGF/AGU, analyzed the possibility of paying royalties for applications of trademark applications. The PFE understood that these are intangible assets with property value, protected by Articles 130 and 195, III, of LPI, and are part of the assets of its owner, and thus generate its effects.
On July 11, 2023, the BPTO published Ordinances No. 26 and 27/2023, in order to formalize changes to the administrative procedure.
Patents
Industrial Property Law establishes two types of patents: patents of invention and patents of utility model, depending on the degree of the inventive procedure involved. For both kinds of patents, the law requires that the product or the process to be patented result in an inventive procedure, be new and have an inventive activity and industrial application.
Patent protection is obtained through patent granting from BPTO. An invention patent is valid for a period of 20 years, calculated from the filing date of the patent application. Utility models are valid for 15 years as of the filing date.
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Given the usual delay of the BPTO in issuing patents, the legislation used to have a provision in the sole paragraph of article 40 of the LPI, aimed at remedying such delay. This article established that “the term of validity must not be less than 10 years for the invention patent and 7 years for the utility model patent, counting from the granting date”. However, on May 07, 2021, the Brazilian Federal Supreme Court (“STF”) ruled on the direct action for the declaration of unconstitutionality - ADI 5529, filed by the Attorney General's Office (“PGR”) in 2016, whose subject matter was the sole paragraph of article 40 of the LPI.
By a majority of the votes, the STF declared the unconstitutionality of the sole paragraph of article 40 of the LPI, arguing that the extension of the term was of “unfair and unconstitutional” character, “privileging the private interest to the detriment of the community”.
Therefore, the President of the BPTO announced that, in compliance with the preliminary decision of ADI, the provisions of the sole paragraph of article 40 of the LPI are no longer applicable to patents that granted from April 07, 2021.
The BPTO has been adopting several measures to decrease the backlog37 on patent analysis, such as signing cooperation agreements with other patent offices, including the European Patent Office (EPO), Patent Office in Argentina (AR), Patent Office in Japan (JP) and the United States (USA), as well as using the results of searches made in other countries.
As informed above, to be patentable, an invention must be new and capable of use in industry. An invention is considered new when it is not part of the “state-of-the-art”. The “state-of-the-art” includes all data and information made available to the public in Brazil or abroad, written or verbally, by use or by any other means before the filing or priority date. It includes the contents of patents in Brazil and abroad. An invention is deemed as of industrial use when it can be made or used in industry, including agricultural industry.
The patent holder must use the patent in Brazilian territory within three years from the granting date, in order to avoid the possibility of having its patent subject to mandatory licensing to a third party. A patent can also be subject to mandatory licensing if its owner exerts his rights in an abusive manner, or whenever the sales volume of the patented products do not meet local market requirements.
Patent licensing agreements
Furthermore, on July 27, 2017, the BPTO issued a public consultation on a proposal to reduce the current patent backlog by streamlining examination of pending applications.
According to the proposal, eligible applications would form a separate queue and would be allowed as published or notified upon their national phase entry. This means that such applications would not undergo substantive examination. Letters patent would be issued with a general disclaimer calling attention to the non-patentable subject matter set forth in Articles 10 and 18 of the Brazilian Industrial Property Act.
It is important to note that this consultation is a preliminary step and has the purpose to invite the public to contribute with inputs on the proposed streamlined procedure. We noted several contributions, especially from Brazilians intellectual property associations, regarding the consultation. In the case that BPTO decides to move forward with the implementation of an Act, it will come into force.
Patents can be the subject of a licensing agreement if they are registered with the BPTO or in the process of registration.
Patent applications cannot generate remittance of royalties until the patent is granted by the BPTO.
However, royalties can be charged and credited in licensee’s financial statements for payment after the patent granting, from the date of the registration request of the patent licensing agreement before the BPTO.
The PFE is still assessing the possibility of also applying this understanding for the potential payment of royalties for patent applications.
Industrial designs
Any ornamental shape of an object, or the ornamental combination of outlines and colors applicable to a product, which result in a new visual effect, can be considered an Industrial Design.
Granting an industrial design, unlike patent regulation, is not subject to prior examination by the BPTO regarding its merit. Registration is immediately published and granted by the BPTO if the application complies with all legal requirements. However, the applicant can, at any time, request examination by the BPTO concerning the novelty and originality of its industrial design.
Registration is valid for a period of ten years from its filing date and can be extended for three consecutive five-year periods.
Industrial design licensing agreements
Industrial designs can be subject to a licensing agreement provided that they are duly registered with the BPTO or in the process of registration.
The PFE is still assessing the possibility of also applying this understanding for the potential payment of royalties for industrial designs applications.
Technology license
Technology in Brazil is defined as know-how not protected by a patent of invention or utility model. Until 2023, the basic concept of the Brazilian rules regarding the use of technology by a Brazilian party had been that technology is subject to “transfer” to a Brazilian party, rather than to a “license”.This rationale has prevailed since 1975, due to the former (and repealed) BPTO Normative Act 15.
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However, as previously mentioned, on July 11, 2023, the BPTO published Ordinances No. 26 and 27/2023, which expressly recognized the possibility of registering a license agreement for non-patented technologies (know-how), which must be registered under the "Technology Supply" category (Ordinance no. 26/2023, article 2, III, a).
The deduction of the fees paid as compensation for the technology supply for tax purposes is restricted to the five-year period of the agreement (see Article 364, Paragraph 1 of the Income Tax Regulation instituted by Decree No. 9,580/2018). This term may be extended for an additional period of five years if the contracting parties can demonstrate that the technology was not completely transferred to the receiving party or that the agreement is essential to the maintenance of the competitiveness of the receiving party.
Since 2017 the parties are free to stipulate the term of the agreement in accordance with the necessary duration of the know-how provision, provided that the agreement is executed for a determined term (indefinite terms are not accepted by the BPTO, according to its rules).
Technical and scientific services
Agreements involving the rendering of technical and scientific services, where there is transfer of know-how (through, for example, provision of reports and data) from one party to the other party are subject to recordation with the BPTO. These services usually involve engineering services and should not be confused with the category of “professional services”, which are exempt from registration with the BPTO to enable the remittance of payment abroad and the payment can be made through any commercial bank.
The BPTO only accepts that payments for technical and scientific services that take place based on man/hour or man/day costs.
In 2015 the BPTO issued a Resolution listing certain contracts for technical and scientific assistance services which are not subject to registration with the BPTO because they do not imply technology transfer, such as preventive maintenance services for equipment and/or machinery.
Franchising
Franchising is defined as a system through which a franchisor grants a franchisee the right to use a trademark or patent (in practice and according to Brazilian legal doctrine, the right to use trademark is essential in a franchise deal), along with the right to the exclusive or semi-exclusive distribution of products or services, and potentially also the right to use the technology of implementation or management of related business or operational system developed or retained by the franchisor.
New Law 13,966, known as Franchising Law, modifies certain aspects of Law 8,955 and regulates the terms of a franchising agreement, clarifying the relationship between franchisor and franchisee. The new Law came into force on March 27, 2020.
The former Law created the “Franchise Disclosure Document”, which establishes the inclusion of mandatory pieces of information that must be disclosed to the potential franchisee, including a more detailed description of the franchise in which the prospective franchisee intends to engage, as well as information about the franchisor, both of which are crucial elements for the prospective franchisee to decide whether to engage with the business investment.
A franchisee can obtain the cancelation of the franchise agreement even after it is signed if the Franchise Disclosure Document is not delivered to the prospective franchisee at least 10 days prior to execution of the franchise agreement, preliminary agreement or any other agreement related to the franchise deal or the payment of any amounts by the franchisee. In this regard, for instance, it is required that the Franchise Disclosure Document be delivered by the franchisor to the franchisee at least ten days prior to signing the franchise agreement or payment of any fee by the franchisee to the franchisor.
The cancelation of the franchise agreement can obligate the franchisor to return all amounts paid by the franchisee plus damages.
Franchising agreements
Franchising agreements executed between a local franchisee and a foreign franchisor must be registered with the BPTO.
Even if the franchise agreement includes only trademark application, the remittance of payments abroad due for the franchise agreement will be allowed.
Registration
As a rule, agreements related to industrial property rights, technology transfer and technical and scientific services involving transfer of know-how, must be approved by, and registered with the BPTO for the enforcement of the obligations in relation to third parties. Registering a licensing agreement with the BPTO is not mandatory for the authority to admit documents issued by the licensee as proof of actual use of the licensed trademarks or patents, in the event that a third party requests cancelation due to lack of use.
Additionally, upon changes in fiscal laws, registering contracts with the BPTO or the Central Bank of Brazil is no longer mandatory for the purposes of remittance of royalties abroad and deductibility of payments as operational expenses for Brazilian income tax purposes.
Such registration, however, is still recommended to ensure the existence of an official document that proves and sets parameters for the Brazilian Federal Revenue Service (Receita Federal do Brasil) when analyzing transfer pricing and other tax obligations.
Software
Software is regulated by Law 9,609, known as the Software Law, enacted on February 19, 1998. The law contains provisions regarding:
- Copyright protection for software;
- Rules for marketing software; and
- Penalties are imposed in the case of infringement of software copyrights and marketing.
“Software” or “computer programs” are defined as “the expression of an organized set of instructions in natural or codified language embedded in physical media of any nature to be necessarily used in automated machines to handle data, devices, peripheral instruments or equipment, based on digital or analogous techniques to make them operate in a specific manner and for specific purposes.”
The law grants authorship protection for software programs for 50 years from the first day of January of the year following the software’s publication or, in the absence of publication, 50 years from the date of the software's creation.
In terms of protection for foreign individuals, the law applies the international principle of reciprocity. Protection extends to foreign individuals domiciled outside Brazil, provided that the country where the software was created grants the same rights to Brazilians.
Software Law 9,609 establishes that authorship of the software is already assured, regardless of its registration. However, the author can pursue registration of the software with the BPTO in order to allow the shift of burden of proof in civil procedures. Registration can be requested on a secret or non-secret basis, and the software registration is automatically issued, if it complies with formal requirements.
Copyright
Copyright protection extends to original works of authorship in any tangible form of expression, such as books, letters, conferences, music compositions, cinematography works, photographs, translations, and any other kind of transformation of the original works, drawings, paintings, sculptures, and other tangible forms thereof.
Copyright is regulated by Copyright Law 9,610, enacted on February 20, 1998, which protects and regulates all creative works of inspiration. Additionally, Brazil is a signatory to two other major international treaties, the Bern, and Geneva Conventions.
Copyright ownership is vested in the author of the work (or contributors if developed jointly). The duration of a copyrighted work is for the entire life of its author, and seventy years thereafter. If the work was created by two or more authors, the seventy-year term commences following the death of the last surviving author.
Copyright registration is not a prerequisite for obtaining protection. However, registration is always helpful to deter piracy, and as proof of ownership in case of litigation. In this case, the author can register their work with specialized entities, in accordance with the nature of such work.
Recently, due to the growing market for e-sports, avatars, gaming, NFTs and the metaverse, companies' intellectual property assets, especially copyrights, must also undergo review in order to address these new challenges.
Tax Aspects
Withholding Income Tax (IRRF)
Generally, the payment (credit, delivery, employment, or remittance) of royalties or fees abroad under intellectual property rights agreements is subject to withholding 15% in income tax (or a 25% rate if the beneficiary is domiciled in a “low-tax jurisdiction” as defined by Brazilian tax law). Treaties signed by Brazil to avoid double taxation may change the standard rates above.
The IRRF is an ordinary burden on the beneficiary of the payment abroad, and, as a rule, is deducted from the amount to be paid. Nevertheless, the parties can formally agree that the Brazilian payer will assume the burden of the IRRF owed by the beneficiary domiciled abroad. In this situation, Brazilian tax legislation establishes that the Brazilian payer must gross up the IRRF tax basis.
Amounts withheld in Brazil as IRRF can generate credits for the beneficiary domiciled abroad that can offset its foreign income tax, if such provision is contained in a treaty to avoid double taxation between Brazil and the beneficiary’s country, or if it has been provided for in the legislation of the country to which remittance is being sent.
Contribution for Interference with the Economic Order (CIDE)
CIDE is levied on the payment (or credit, delivery, remittance, or employment) of remuneration to parties domiciled abroad, related to:
- Supplying technology;
- Providing technical support (i.e., technical support services or specialized technical services) with or without technology or know-how transfer;
- Transferring and licensing trademarks;
- Transferring and licensing to exploit patents;
- Administrative assistance and those of similar nature; and
- Royalties of any kind.
There is a CIDE exemption to payments related to software licenses, unless the source code of the software is provided to the payer (in which case the agreement is considered technology transfer, according to the Brazilian legislation). However, this is a controversial matter, because Brazilian tax authorities deem certai methods of software payment (e.g., Software as a Service) taxable, given that they are more similar to a service.
Payment of CIDE is incumbent on the company domiciled in the country, given that, unlike the IRRF, this contribution is due by the payer domiciled in Brazil and not by the foreign beneficiary.
11.3 PIS/COFINS-Importation
PIS/COFINS-Importation is levied at a joint rate of 9.25% on the importation of services (and at a joint rate of 11.75% on the importation of goods). Services subject to these taxes include those performed in Brazil or abroad, whose results are verified in Brazil. The taxable basis of PIS/COFINS-Importation taxes is the amount paid (or credited, delivered, used, or remitted) abroad before the withholding income tax (IRRF) deduction, plus the Services Tax (ISS) and the PIS/COFINS-Importation tax amounts. If the Brazilian company is under the non-cumulative system and if the “services” imported could be regarded as inputs used or consumed in the company’s core business, then PIS/COFINS-Importation collected may be offset against PIS and COFINS accruing on the Brazilian company’s monthly revenue.
The levy of PIS/COFINS-Importation on payments abroad as intellectual property rights used to be a controversial matter in Brazil. Because most of the agreements involving intellectual property rights does not involve a “to do” obligation (but the mere license of rights), there are legal grounds to sustain in courts that these specific transactions do not characterize a service rendering and should not subject to the levy of PIS/COFINS-Importation.
Nevertheless, tax authorities have been rendering administrative decisions on the sense that agreements involving the payment of royalties are not subject to PIS/COFINS- Importation, provided that the amount of royalties charged in the respective agreement is segregated from other amounts charged as technical services technical assistance and other services rendered under the same agreement. In addition, certain methods of royalty payment are deemed fully taxable because of its similarity to a service provision (e.g., Software as a Service).
Services Tax (ISS)
The Services Tax (ISS) is a municipal tax levied on the provision of services at a range of 2% to 5%, depending on the nature of the service and the location (municipality) of the Brazilian company. The ISS is also levied on imported services, in which case the payer is responsible for collecting ISS due on service importation. Some intellectual property rights were included in the list of services subject to ISS (such as trademark license, software license and franchising). Because these agreements in general do not involve a performance obligation (but the mere licensing of rights), there are legal grounds to sustain in court that the ISS should not be due in these cases.
11.5 IOF tax
Currency transactions to pay royalties or fees abroad are subject to the Tax on Financial Transactions (IOF) at a 0.38% rate. The IOF taxpayer is the Brazilian company that pays the funds abroad, but the Brazilian bank in charge of the currency exchange is responsible for collection and payment.
11.6 Deductibility
Generally (applicable to all expenses), only necessary, usual, and regular expenses made in connection with a company’s business may be deducted from the tax basis of Corporate Income Taxes (IRPJ and CSLL).
In addition to the general deductibility rule above, Brazilian income tax legislation used to establish fixed limits for the deductibility of certain intellectual property rights expenses on the calculation of IRPJ. These specific conditions for tax deductibility needed to be analyzed on a case-by-case basis up to 2023. This changed after Law No. 14,596 of June 14, 2023, was enacted, amending the transfer pricing ("TP") rules for the purposes of calculating Corporate Income Taxes. As a result, from 2024 on, the deductibility of royalties in transactions involving related parties and parties that benefit from more beneficial tax treatment must comply with the “arm’s-length” principle, based on a balance of risks and benefits between the entities involved in the transaction. TP rules prohibit the deduction of royalties when it results in “double non-taxation”.
Regarding the local payment of royalties, the discussion on the applicability of the fixed limits for the deductibility of royalties and payments for technical assistance has been repealed. Thus, royalties and technical, scientific, administrative or similar assistance services are no longer subject to the maximum deductibility percentages and, also, are not subject to the new TP rules on local transactions.
Not applicable.
Compliance in the Spotlight
In order to correspond to requirements set forth by the international treaties against corruption, Brazil enacted Law No. 12,846/2013 (commonly named the “Brazilian Clean Company Act” or “BCCA”) on August 1, 2013. Such law provides for the civil and administrative liability of legal entities due to harmful acts against the Government, practiced in their interest or for their benefit. In addition, Federal Decree No. 11,129/2022, enacted on July 11, 2022, regulates the Brazilian Clean Company Act and establishes the guidelines for evaluating an Integrity Program, under Brazilian authorities.
In this new legal landscape, it is essential that both national and foreign companies review their operational and administrative routines in view of the new rules, adopt and enhance their Codes of Ethics and Conduct, and implement practices in line with the legal standards for relationship with the Government through Compliance Policies.
The main legislation directly addressing corporate risk and compliance management in Brazil are:
- Law No. 12,846/2013 - Brazilian Clean Company Act
- Federal Decree No. 11,129/2022 – Regulation of Brazilian Clean Company Act
- Law Decree No. 2.848/1940 - Criminal Code
- Law Decree No 3,689/1941 – Criminal Procedure Code
- Law No. 12.850/2013 – Criminal Organizations
- Law No. 12,529/2011 – Competition Law
- Law No. 9,613/1998 – Anti-Money Laundering Law
- Law No. 8,666/1993 – Public Bidding Law
- Law No. 14,133/2021 – New Public Bidding Law
- Law No. 8,429/1992 – Administrative Misconduct Law
- Law No. 13,869/2019 – Abuse of Authority Law
- Law No. 7,492/1986 – White Collar Law
- Law no. 13,964/2019 – Anticrime Law
- Law No. 13,608/2018 – Reporting Channels Law
- Law No. 7,347/1985 – Public Civil Action Law
- Law No. 13,303/2016 – State-owned Company’s Law
- Law No. 14,478/2022 – Crypto-assets Law
- Normative Ordinance No. 19/2022 – Summary Judgment of Administrative Liability Proceedings (PAR) amended by Normative Ordinance No. 54/2023
- Ordinance No. 909/2015 – Evaluation of Integrity Programs
- Ordinance No. 910/2015 – Administrative Responsibility and Leniency Agreements
- Interministerial Normative Ordinance No. 36/2022 – Leniency Agreements
- Law No. 12,813/2013 – Conflict of Interest Law
104 - Central Bank Circular 3,978/2020 – Policy and Procedures related to AML/CFT
- Resolution CVM No. 50/2021 – Policy and Procedures related to AML/CFT
- Resolutions of the Public Ethics Committee (2000)
- Resolution No. 20 of the Federal Senate (1993)
The Brazilian Clean Company Act has become the main statute in the fight against corruption, notwithstanding its recurrent joint application with the other legislations referred to above, on a case-by-case basis. It applies to any corporation, foundation, association or foreign company that has its registered office, branch or representation in Brazil and which practices wrongful acts against the government. Both foreign governments and public international organizations are encompassed by the term “government”.
The Law provides for administrative and civil strict liability of legal entities, but it does not exclude the criminal and civil individual liability of its directors or officers or of any natural person who is a perpetrator, co-perpetrator or participant of the harmful act. Directors and officers shall only be held accountable in connection with a harmful act to the extent of their culpability under the Brazilian Criminal Code, New Public Bidding Law and others.
Parent companies, subsidiaries, affiliates, or co-members of a consortium, within the scope of the contract, may be deemed joint and severally liable for the corrupt practices established in the law, with such liability being limited to the payment of penalty fines and full compensation of the damages caused. In the event of a merger or amalgamation, the responsibility of the successor is restricted to payment of a fine to the extent of the assets transferred.
Illegal Practices
Under the Brazilian Clean Company Act, the following acts are prohibited from: (i) offering, promising or granting any undue advantage to a national or foreign public official; (ii) provenly financing, paying, sponsoring or, through any other means, subsidizing such illegal acts; (iii) provenly using an individual or legal entity to conceal or disguise the real interests or the identity of the beneficiaries of the acts committed; and (iv) hindering the government’s investigations or inspection activities, or interfering in their operations.
Within the context of public bids, such law also prohibits:
- frustrating or defrauding the competitiveness of a public procurement procedure by means of an arrangement, agreement or any other method;
- preventing, disturbing or defrauding the performance of any act in a public procurement procedure;
- removing or attempting to remove a bidder in public procurement procedure, by means of fraud or offering any kind of advantage;
- defrauding public procurement procedures or related contracts;
- creating a legal entity to defraud a public procurement procedure or to enter into a government contract;
- obtaining, fraudulently, an undue advantage or benefit from an amendment to or an extension of the agreement with the government, or from the notice of the public procurement procedure or the related contractual instruments; or
- rigging bids, manipulating or defrauding the economic-financial balance of a government contract.
This broad definition of wrongful acts may lead to diverse interpretations of such Law on the part of the government when initiating investigations and proceedings against corporations, thus exposing companies to greater risks. These risks will be better measured when regulations are implemented, and jurisprudence and case law evolve.
Fines and Penalties
At the administrative level, companies held liable for wrongful acts under the law shall be fined and required to publish the condemnatory decision in a widely circulated media outlet and on the company’s website after undergoing an Administrative Liability Proceeding ("PAR").
The amount of the fine may vary from 0.1% to 20% of the gross revenue of the last fiscal year prior to the initiation of the PAR. If it is not possible to apply such criteria, the competent authority may apply a fine that varies from BRL 6,000.00 to BRL 60 million. For purposes of evaluating the amount of the applicable fine, the competent authority will take the following into consideration: (i) seriousness of the offense; (ii) benefit earned; (iii) consummation or attempt; (iv) degree of injury; (v) negative effect caused by the unlawful act; (vi) the corporation’s financial soundness; (vii) cooperation in investigations of the legal entity; (viii) existence of internal control mechanisms (effective Integrity Program); and (ix) the amount subject to public contracts in force jointly with the injured government entity.
At the judicial level, competent authorities may apply the following sanctions: (i) forfeiture of assets, rights or amounts representing advantage or profit directly or indirectly obtained from the wrongful act, subject to the right of the injured party or a good-faith third-party; (ii) partial suspension or interdiction of the activities of the company; (iii) compulsory dissolution of the company; (iv) prohibition from receiving incentives, subsidies, grants, donations or loans from public agencies and public financial institutions or from financial institutions controlled by the government for a minimum period of 1 year and a maximum period of 5 years.
Additionally, the Brazilian Criminal Code also establishes criminal liability for several crimes relating to corrupt practices, such as money laundering, fraud and corruption of public officials. The Administrative Misconduct Law, on the other hand, establishes penalties for public officials who take part in administrative misconduct, but also for private parties that participate in the activity or benefit from it. Finally, the Brazilian Clean Company Act only sanctions corrupt practices between private companies and the government and its officials, as there are no penalties for corruption acts practiced between solely private companies and individuals (private corruption) under the Brazilian legal framework.
Leniency Agreements
The Brazilian Clean Company Act establishes the possibility of companies entering into leniency agreements with investigative authorities. These agreements are possible if collaboration with the government results in the identification of other involved parties and the swift acquisition of information and documents proving the illegal act. However, since the Law establishes a “first come, first served” rule, other companies involved in the wrongdoing may not feel as encouraged to come forth and provide potentially useful information as well.
Moreover, for purposes of the Brazilian Clean Company Act, only legal entities are entitled to obtain such benefits and, regarding natural persons, Brazilian legislation provides for criminal plea bargains, which also require individuals to provide useful information in order for the plea bargain to be successful. Thus, any individual who collaborates with the authorities by presenting information and documents, under the purpose of a leniency agreement to a legal entity, will not benefit from any possible reduction of sanctions eventually applied by the authority to the legal entity. Both tools result in a decrease of the company/ individual’s sanctions, if all requirements established by law are met.
The fine sanction on a company can be reduced up to 2/3 as a result of a leniency agreement. In December 2022, Interministerial Normative Ordinance No. 36 was published, which provides for the criteria observed by Brazilian authorities to reduce, by up to 2/3, the applicable fine under leniency agreements, thus limiting the authorities’ discretion in defining the amount to be reduced.
Summary Judgment of Administrative Liability Proceedings ("PAR")
Normative Ordinance No. 19, of July 2022, included the possibility of summary judgment of PARs that are pending before the Brazilian Office of the Comptroller-General ("CGU"). The summary judgment introduced a settlement option that is simpler and faster than a leniency agreement, and enables mitigating circumstances to be taken into consideration for companies that:
- assume strict liability for the acts under investigation;
- agree to pay compensation for any damage caused;
- return any advantages resulting from the offenses;
- agree to pay the applicable fine;
- comply with requests for information regarding the proceeding that the legal entity has access to; and
- waive the right to file a defense or lawsuit relating to the PAR.
As opposed to leniency agreements, however, entities that intend to enter into a summary judgment within a PAR do not necessarily need to provide extensive new information to the authorities concerning the wrongdoings.
In addition to a fine reduction, such legal entity can potentially be exempted from the extraordinary publication of the condemnatory decision, as well as benefit from mitigating circumstances that underpin the penalties aimed at restricting participation in public bids, if applicable.
Integrity Programs
Unless required in specific cases (e.g., for entering into government contracts as provided for by the New Public Bidding Law and certain entities that receive public financing) the implementation of an anticorruption Compliance Program is not mandatory under Brazilian legislation.
In this regard, each company will determine, on a case-by-case basis, the level of governance it intends to implement, following the best guidelines and legal standards provided by the legislation. In this regard, it is recommended that companies implement mechanisms and internal control proceedings against irregularities in the application of their conduct and ethics statutes. Such mechanisms, referred to as an ‘integrity program’, must be suitable and updated according to the activities and requirements of the undertaking. The existence of a well-structured integrity program helps to diminish penalties in the event of an infraction of the compliance or anticorruption obligations set out by law up to 5% (five percent) of the fine.
As a corporate governance tool, a solid compliance program enables the establishment of a safe environment for interaction among the company, its investors and management, preserving directors and managers from potential Administrative, Civil and Criminal liabilities.
Federal Decree No. 11,129/2022 provides for the minimum requirements for an integrity program to be considered effective and, thus, enables the involved company to benefit from a reduction in fines for infringements. According to the Decree, a compliance program consists of:
“[the] mechanisms and internal proceedings of integrity, auditing and incentives to denounce violations in the context of a corporation, and the effective application of codes of ethics and conduct, policies and guidelines with the objective to I - prevent, detect and remediate violations, fraud, irregularities and illicit acts committed against the government, either national or international; and II - foster and maintain a culture of integrity in the organizational environment.”
Minimum requirements for the program to be considered a mitigating factor include:
- Engagement of senior management of the company and allocation of appropriate resources for the integrity program;
- Implementation of a code of ethics, code of conduct and compliance policies applicable to all employees and management;
- Extension of the program to third parties such as suppliers, service providers, agents and associated companies;
- Periodic training and campaigns to disseminate information on the integrity program;
- Periodic risk assessment;
- Proper accounting registries;
- Internal controls that secure trustworthy financial reports;
- Internal proceedings that prevent fraud and illicit acts within the context of public bids, public contracts and overall interaction with public officials;
- Independence means and delegation of powers to the compliance officer;
- An open communication channel for reporting of irregular activity, available to employees and third parties;
- Disciplinary actions in case of violations;
- Internal procedures to secure the immediate interruption of the detected violation, and damage remediation;
- Appropriate checking measures, based on a risk-based approach for:
- Contracting of third parties
- Hiring of politically exposed persons
- Participating in sponsorships and donations;
- Vetting measures during merger and acquisition procedures as well as corporate restructuring operations regarding past misconduct or vulnerabilities of the involved companies; and
- Continuous monitoring of the integrity program.
On a slightly different note, recently enacted Federal Law No. 14,457/22, which aims to improve labor regulations, establishes that certain entities must implement and execute internal measures such as conduct guidelines, informative campaigns, training events, reporting channels and disciplinary measures to prevent, detect and remediate sexual harassment and other forms of violence in the workplace.
AML/CFT Applicable to Financial and Banking Operations
Aiming to bring the Brazilian banking system closer to the current reality affected by the risks of new forms of money laundering crimes, the Central Bank of Brazil enacted — in January 2020 — Circular 3,978, providing for new AML (Anti-money laundering) / CFT (combating the financing of terrorism) rules, which came into effect on October 1, 2020. What is more, on July 27, 2021, the Central Bank of Brazil enacted Resolution No. 119, which modified certain provisions of Circular 3,978. The Brazilian Securities and Exchange Commission ("CVM") also enacted its own rules regarding this matter, through Resolution CVM No. 50/2021.
As per these rules, the financial institutions and other BACEN-authorized entities are called upon to implement internal controls and procedures in accordance with the characteristics and complexity of the line of business carried out by each institution.
Although the rules set forth certain guidelines, each institution has the flexibility to establish its own set of policies and procedures in a manner more compatible with its operational activities, which shall be based on the profile of its clients and service users, as well as on the risks of such activities and other elements related to the profile of the institution’s employees, partners and service renderers.
AML Policy
AML Policy must be documented and previously approved by the institution’s board of directors and/or the board of officers. Furthermore, the institution’s personnel must be trained to deal with the combat of money laundering and financing of terrorism.
Prudential Conglomerate
Institutions comprising prudential conglomerates are authorized to adopt one single AML/CFT set of policies, procedures and internal risk analysis, upon prior approval by the board of directors or board of officers, as applicable. Moreover, the procedures intended to monitor, select and analyze the suspicious operations, including the report of such operations to the Federal Financial Operation Board (“COAF”), may also be shared on a centralized basis by all the institutions of the same conglomerate.
COAF was transferred to the Central Bank from the Ministry of Economy, as established by Law 13,974/2020, enacted in January 2020. In 2023, COAF was repositioned within the Ministry of Finance by Provisional Measure No. 1,158/2023. However, these changes did not modify the way companies should conduct their Know Your Customer ("KYC") and AML/CFT procedures.
Appointed Officer
Each institution must submit to BACEN the name and qualification of one specific officer in charge of representing the institution before BACEN in connection with all AML/CFT-related matters.
Know Your Client (“KYC”)
As to the KYC policies, Circular 3,978 provides for the related processes, determining that they must consider basic elements regarding the clients and users, specific identification, qualification and associated risk level. The procedures for the qualification of the clients must be carried out upon the gathering and processing of personal and financial information pertaining to each client and duly evidenced by means of proper and valid documentation compatible with the level of risk and the nature of the business with each client.
According to Resolution No. 169, the Central Bank requires the financial institution to obtain additional information about the client, such as place of residence/location of headquarters or branch.
Ultimate Beneficiary Owners
Equally relevant and mandatory upon the enactment of Circular 3,978 is the need to identify the individuals who are considered the ultimate beneficiary owners of legal entities that deal with and enter into agreements with the financial institution. The rule creates the obligation for the institutions to apply to the ultimate beneficiary owners the same procedures that are applicable to the legal entity for the risk measurement related to the intended business.
The institutions may establish a minimum value as a reference to the equity participation to determine when someone will be considered an ultimate beneficiary owner, subject to a minimum of 25% (calculated either directly or indirectly). To that end, the institution must follow the same patterns defined by the Brazilian Internal Revenue Service to facilitate the identification of the individual subject to the ultimate beneficiary owner regulatory treatment.
Employees, Business Partners and Service Providers
Financial institutions must implement procedures to be applied to the relationship with their own personnel, and various business partners and service providers. The gathered KYC information and documents related to such relationships must be maintained by the institutions for ten years as of the date of termination of each contractual relationship.
Risk Assessment
The institution must take into account and assess the risks related to the likelihood of materialization and magnitude of financial impacts, as well as legal, reputational and socioenvironmental effects stemming from its business and operational relationships with clients, users, employees, business partners and services providers, as applicable. The current rules permit the institution to create specific sets of risk categories in order to enable the establishment of specific controls.
Suspicious Operations and Business Situations
As to suspicious operations and business situations, the procedure related to monitoring, selection and analysis of risks must be detailed and in written format in a risk manual distributed across the institution following its approval by the institution’s board of directors and/or board of officers, as applicable. The monitoring and selection of suspicious situations must be fully carried out within forty-five days of the date the facts occurred.
Reports to COAF
All suspicious cases must be reported to the COAF and the communications derived from suspicious activities must occur within 24 (twenty-four) hours from the date the suspicious activity took place. In case an institution does not report any suspicious activities to the COAF within a one-year time period, a declaration must be filed, stating that no suspicious cases to be reported occurred. This ‘negative report’ must be filed within ten business days of the termination of the respective fiscal year.
Politically Exposed Person (“PEP”)
The current rules broaden the already existing concept of PEP. Besides the individuals already enlisted prior to Circular Letter 3,978, city counselors, mayors and state congressmen, as well as political parties’ presidents and treasurers or equivalent must also be included.
Law 9,613/1998 – Anti-money Laundering Law ("AML")
According to the Anti-Money Laundering Law, it is a crime to conceal the nature, origin, location, disposition, movement or ownership of assets, rights or amounts resulting, directly or indirectly, from a criminal offense.
Offenders are subject to a penalty ranging from three to ten years, as well as a fine.
Nowadays, any crime can be deemed a predicate offense to the practice of money laundering.
The Law also provides for a list of business activities whose management is subject to specific obligations in terms of AML, including:
- raising, intermediating and investing financial resources from third parties in national or foreign currency;
- purchasing and selling foreign currency or gold as a financial asset or exchange instrument;
- holding in custody, issuing, distributing, liquidating, negotiating, intermediating or managing bonds or securities.
Such obligations involve identifying clients and keeping records (of such clients and certain transactions), informing COAF of any suspect transactions, as well as responding to any of COAF’s requests, among others.
In November 2023, the Brazilian Federal Supreme Court established a precedent that intelligence reports from the Financial Activities Control Council ("COAF") can be shared either spontaneously or upon request by criminal prosecution agencies for criminal purposes. This can be done without the need for judicial authorization. This decision, referenced as Constitutional Claim (“RCL”) 61,944, enables financial oversight and law enforcement to collaborate more efficiently in regard to the investigation and prosecution of financial crimes. The decision underscores the court’s recognition of the importance of intelligence in combating illegal financial activities.
Finally, only individuals may be held criminally liable for the practice of or participation in the crime of money laundering, whereas legal entities are subject to administrative proceedings for failing to comply with AML obligations.
General principles and provisions on privacy and data protection are provided for in the Brazilian Federal Constitution, the Brazilian Civil Code (Law No. 10,406/2002), as well as in other laws and regulations that address specific types of relationships or activities, such as the Consumer Protection Code (Law No. 8,078/1990), labor laws and rules that govern financial institutions and other entities authorized to operate by the Central Bank of Brazil. Furthermore, the Brazilian Civil Framework of the Internet (Law No. 12,965/14) and Decree No. 8,771/2016, establish principles and guarantees for Internet users, including protection of their personal data in the digital environment, in addition to rights and duties of Internet connection and application providers, including their liability.
The Brazilian General Data Protection Law (Law No. 13,709/2018, “LGPD”) aims to protect the fundamental rights of freedom and privacy of data subjects (individuals), as well as the free development of their personalities.
The LGPD came into force on September 18, 2020, while the enforceability of its administrative sanctions became effective in August 2021. Since the Law’s entry into force, companies must adopt effective measures capable of proving compliance with the rules of privacy and data protection, including the efficacy of such measures.
The Brazilian National Data Protection Authority (“ANPD”) was created in 2018 and has been carrying out its functions since August 2020. The ANPD has defined two regulatory agendas: one that refers to the 2021-2022 biennium, and another that refers to the 2023-2024 biennium. These regulatory agendas are aimed at regulating and introducing guidelines regarding different key matters within the scope of the LGPD.
So far, the ANPD has published a regulation concerning the process of inspection and sanctions of the ANPD, the dosimetry regulation for the application of administrative sanctions, a regulation addressing security incident reporting, as well as a resolution on the application of the LGPD for small-scale data processing agents, such as startups, small businesses, private law legal entities, including non-profit organizations.
Lastly, the ANPD has published several guidelines that provide for matters such as the processing of personal data for academic and research purposes, the use of cookies and data protection, the processing of personal data by the government, and the use of legitimate interest as a legal basis, among others.
The LGPD: Applicability and Definitions
The LGPD is highly inspired by the GDPR – General Data Protection Regulation (the European Data Protection Regulation). However, Brazilian legislation takes on certain particularities.
According to the LGPD, “personal data” is defined as any information regarding an identified or identifiable natural person, while “processing” stands for any operation carried out with personal data, such as collection, production, receipt, classification, use, access, reproduction, transmission, distribution, processing, filing, storage, deletion, evaluation or control of the information, modification, communication, transfer, dissemination, or extraction.
In contrast, “sensitive personal data” is defined as personal data concerning racial or ethnic origin, religious belief, political opinion, trade union or religious, philosophical, or political organization membership, data concerning health or sex life, genetic or biometric data, when related to a natural person.
The LGPD applies to any processing operation carried out by a natural person or a legal entity of either public or private law, irrespective of the means, the country where its headquarters are located or the country where the data are located, provided that:
- processing is carried out in Brazil;
- processing has the purpose of offering goods or services or the processing to data subjects located in Brazil; or
- the personal data of data subjects were collected in Brazil (including foreign individuals).
Legal Basis
Under the LGPD, personal data must only be processed under one of the following legal bases:
With the consent of the data subject;
- For compliance with a legal or regulatory obligation by the controller;
- By the government, for the processing and shared use of data necessary for the execution of public policies provided in laws or regulations, or based on contracts, agreements or similar instruments;
- Within the scope of studies carried out by research entities, ensuring, whenever possible, the anonymization of personal data;
- When necessary for the execution of a contract or preliminary procedures related to a contract to which the data subject is a party, at the request of the data subject;
- When necessary for the regular exercise of rights in judicial, administrative or arbitration procedures;
- When necessary to protect the life or physical safety of the data subject or a third party;
- When necessary to protect the health, exclusively, in a procedure carried out by health professionals, health services or sanitary authorities;
- When necessary to fulfill the legitimate interests of the controller or a third party, except when the data subject’s fundamental rights and liberties which require personal data protection prevail; or
- When necessary to protect credit, including as provided for in specific legislation.
The processing of sensitive personal data must only occur under a different set of legal bases, as follows:
- When there is specific and distinct consent granted by the data subject or their legal representative for specific purposes; or
- Without consent from the data subject, but exclusively in cases when the processing is indispensable for:
- The controller’s compliance with a legal or regulatory obligation;
- Shared processing of data when necessary to the public administration for the enforcement of public policies provided in laws or regulations;
- Studies carried out by a research entity, ensuring, whenever possible, the anonymization of sensitive personal data;
- The regular exercise of rights, including in a contract and in a judicial, administrative and arbitration procedure;
- Protecting the life or physical safety of the data subject or a third party;
- Protecting health, exclusively, in a procedure carried out by health professionals, health services or sanitary authorities;
- Ensuring the prevention of fraud and the safety of the data subject, in processes of identification and authentication of registration in electronic systems.
Data Subjects’ Rights
Any individual to whom the personal data are the object of processing (“Data Subject”) has the right to request from the data controllers:
- Right to confirmation (Art. 18, I, LGPD) - Right to request confirmation of the existence or otherwise of personal data processing activities.
- Right to access (Art. 18, II, LGPD) - Right to request access to the personal data being processed. The data subject is entitled to request a complete statement regarding ongoing personal data processing activities and additional information about these activities. Personal data must be stored in a format that favors the exercise of the right to access.
- Right to rectification (Art. 18, III, LGPD) - Right to request the correction, amendment, or update of personal data if they are incorrect or incomplete.
- Right to opposition (Art. 18, §2, LGPD) - Right to object to the processing of personal data in case of non-compliance with the LGPD.
- Right to portability (Art. 18, V, LGPD) - Right to request the portability of personal data to another service or product provider, upon express request. This means that a data subject can request a digital copy of their personal data and transfer it to a third-party service. However, portability is only allowed in regard to a data subjects’ own personal data and not to third parties’ data.
- Right to anonymization, blocking or deletion (Art. 18, IV, LGPD) - Right to request the removal, blocking or anonymization of stored personal Data that is no longer necessary or is excessive for the purposes for which it was initially collected.
- Right to petition (Art. 18, §1, LGPD) - The data subject has the right to petition in relation to their personal data against the controller before the ANPD.
- Right to request the review of solely automated decisions (Art. 20, LGPD) - Right not to be subject to decisions made solely by automated means that affect the interests of the data subjects, including decisions aimed at defining personal, professional, consumer and credit profiles or aspects of personality. In such cases, the data subject has the right to request that these decisions be reviewed.
- Right to withdraw consent (Art. 18, IX, LGPD) - The data subject has the right to request withdrawal of previous consent at any time through a free and facilitated procedure.
- Right to information on the possibility of denying consent (Art. 18, VIII, LGPD) - Consent must be requested and granted in a clear, transparent, and completely free manner. Therefore, the data subject has the right to be informed that they have the right to deny consent and of what the potential consequences are.
- Right to information on shared use of data (Art. 18, VII, LGPD) - The data subject has the right to request information about public and private entities with which the controller has made shared use of personal data, i.e., all communication, dissemination, international transfer, or shared processing of personal data.
Data Protection Officer (“DPO”)
The DPO plays a crucial role in ensuring compliance with the LGPD. However, to date, the ANPD has not established supplementary regulations to provide for this role and its requirements. Furthermore, the LGPD indicates the activities of the DPO in Art 41, paragraph 2:
- Receiving complaints and inquiries from data subjects, providing explanations and adopting necessary measures;
- Receiving inquiries from the ANPD and adopting necessary measures;
- Advising the entity’s employees and contractors regarding necessary practices in regard to personal data protection; and
- Carrying out duties determined by the controller or set forth in supplementary regulations.
Failure to comply with the LGPD and fulfill the responsibilities of the DPO can result in significant fines and penalties for the organization.
International Transfer of Personal Data
In order for a company to legally carry out the processing of personal data internationally, such process must occur under one of the following legal basis:
- Directed to countries or international organizations that provide a level of personal data protection that is adequate to the provisions established by the LGPD;
- When the controller offers and proves guarantees of compliance with the principles and the rights of the data subject and the system of data protection provided in the LGPD, in the form of:
- Specific contractual clauses for a given transfer;
- Standard contractual clauses;
- Binding corporate rules;
- Regularly issued stamps, certificates and codes of conduct;
- When the transfer is necessary for international legal cooperation between public intelligence, investigative and prosecutorial agencies, in accordance with the instruments of international law;
- When the transfer is necessary to protect the life or physical safety of the data subject or of a third party;
- When the ANPD authorizes the transfer;
- When the transfer results in a commitment undertaken through international cooperation;
- When the transfer is necessary for the enforcement of a public policy or legal attribution of public service, which shall be publicized pursuant to item I of the lead sentence of Art. 23 of the LGPD;
- When the data subject has given her/his specific and highlighted consent for the transfer, having been given prior information regarding the international nature of the operation, with this being clearly distinct from other purposes;
- For compliance with a legal or regulatory obligation of the controller;
- When necessary for the execution of a contract or preliminary procedures concerning a contract of which the data subject is a party, at the request of the data subject;
- For the regular exercise of rights in judicial, administrative or arbitration procedures.
Administrative Sanctions
The LGPD establishes the following administrative sanctions that can be applied by the ANPD:
- Warning, establishing a deadline for adoption of corrective measures;
- Simple fine of up to two percent of a private legal entity’s, group’s or conglomerate’s revenues in Brazil, for the previous fiscal year, excluding taxes, up to a maximum total of brl 50 million per infraction;
- Daily fine, subject to the maximum total of brl 50 million;
- Disclosure and publicization of the infraction once it has been duly ascertained and its occurrence has been verified;
- Blocking of the personal data to which the infraction refers until its regularization;
- Deletion of the personal data to which the infraction refers to;
- Partial suspension of the operation of the database concerning the infraction, for a maximum period of six months, extendable for the same period, until the normalization of the processing activity by the controller;
- Suspension of the personal data processing activity concerning the infraction, for a maximum period of six months, extendable for the same period;
- Partial or total prohibition of activities related to data processing.
When calculating the amount of the fine addressed in item (ii) above, the ANPD can consider the total revenues of the company or group of companies:
- In the event that the ANPD does not have precise data regarding the specific amounts in revenues from the business activity within which the infraction occurred, defined by ANPD; or
- If the amount in question is submitted in an incomplete form or is not demonstrated unequivocally and reputably.
Moreover, sanctions provided for in items (x), (xi) and (xii) must be applied:
- Only after at least one of the sanctions mentioned in items (ii), (iii), (iv), (v) and (vi) have already been applied, due to the same facts; and
- In the event that controllers are subject to other agencies and entities that hold sanctioning powers, after such entities and agencies are heard.
It is important to highlight that these sanctions must only be applied after the carrying out of an administrative procedure that provides the opportunity for a full defense, in a gradual, single, or cumulative manner, in accordance with the particularities of each case and taking into consideration the following parameters and criteria:
- Severity and nature of the infractions and of the personal rights affected;
- Good faith of the offender;
- Advantage obtained or intended by the offender;
- Economic condition of the offender;
- Recidivism;
- Degree of damage;
- Cooperation of the offender;
- Repeated and verified adoption of internal mechanisms and procedures capable of minimizing the damage, to ensure secure and proper data processing;
- Adoption of good practices and a governance policy;
- Timely adoption of corrective measures; and
- Proportionality between the severity of the breach and the intensity of the sanction.
Measures of Compliance
Companies must adopt measures aimed at ensuring compliance with the LGPD, in order to avoid administrative sanctions before the ANPD, and other administrative entities, as well as prevent liability before the Judiciary through a comprehensive privacy and data protection program, which should include the mapping of personal data, implementing privacy policies, the revision process, drafting of contracts, appointing of a DPO, procedures to attend claims and requirements made by data subjects, adopting administrative and technical information security measures, among other measures. In the event of security incidents that may generate risk, or are relevant to the data subjects, data controllers must communicate the ANPD in three working days. This notice may be updated with additional information, if there is justification, within 20 working days from the date of the preliminary communication.
The defense of competition in Brazil is structured by Law No. 12,529/2011 (“Brazilian Competition Law”), which is grounded on Article 170, item IV of the Brazilian Federal Constitution, establishing “free competition” as one of the guiding principles of Brazilian economic law.
Brazilian Competition Law is enforced by the Brazilian Competition Defense System (“SBDC”), which is divided into the Administrative Council for Economic Defense (“CADE”), and the Secretariat for Economic Monitoring (“SEAE”) of the Ministry of Finance.
This division encompasses the preventive, repressive and advocacy functions of the SBDC. In particular, CADE embodies the preventive and repressive roles by means of merger control and anticompetitive conduct prosecution, whereas SEAE concentrates on the expansion of the competition advocacy culture in Brazil.
Merger Control
CADE is an independent administrative agency in charge of merger control analysis in Brazil. CADE’s internal structure comprises a tribunal composed of seven commissioners, which includes a president and a General Superintendence (the “GS”), composed of multiple units led by a chief superintendent.
Mergers that are subject to mandatory filing before CADE are initially reviewed by the GS, which may submit a final clearance decision, provided that a transaction does not result in competition-related concerns. If the GS concludes that a given transaction should be either blocked or have its approval conditioned to the enforcement of remedies, it will draft an opinion with the applicable recommendation to CADE’s Tribunal, which, in turn, will issue a final decision on the matter.
Brazilian Competition Law has adopted a suspensory merger review regime under which the parties to a transaction must comply with a standstill obligation, prohibiting closing before a final clearance decision is issued by the GS and confirmed, when applicable, by CADE’s Tribunal.
It is prohibited, for instance, to interfere with one another’s strategic commercial matters and/or to exchange commercially sensitive information, unless strictly necessary for the proper execution of the transaction, and provided that certain safeguards are put in place.
Parties that fail to comply with the standstill obligation may be subject to an investigation for gun-jumping, for which fines range from BRL 60,000.00 to BRL 60 million, in addition to the possible annulment of the acts performed by the parties before obtaining CADE’s approval, as well as the opening of an investigation into potential anticompetitive conduct12. To date, the highest gun-jumping fine ever applied by CADE amounted to BRL 60 million13, in May 2022.
The burden to file a transaction before CADE falls upon all the parties involved and the buyer usually leads the filing process with the cooperation of the seller.
Provided that it is carried out prior to closing, there is no deadline for a merger filing. CADE’s recent practice indicates that it is preferable that the parties file the transaction following the execution of a binding agreement, but the agency has already accepted filings based on more preliminary documents14. In any case, the payment of a filing fee in the amount of BRL 85,000.00 is mandatory.
Criteria for Mandatory Submission
The Brazilian Competition Law sets out that merger filings are mandatory if all elements of a three-prong test are present, defined as follows:
- Effects: The transaction or agreement is either wholly or partially performed or produces effects (actual or potential) in Brazil.
- Revenues: At least one of the groups involved in the transaction or agreement must have had gross revenue in Brazil (including export sales) exceeding BRL 750 million in the year prior to the transaction, in parallel with at least another group that has registered gross revenues (including export sales) in Brazil exceeding BRL 75 million in the year prior to the transaction15.
- Concentration: the transaction or agreement constitutes a Concentration Act under the definition of the Brazilian Competition Law (mergers, acquisitions, joint ventures and certain types of collaborative or cooperation agreements).
In addition, as set forth by CADE's Resolution No. 17/2016, associative/collaborative agreements are subject to mandatory submission in Brazil whenever collectively: (i) their duration is equal to or longer than two years16; (ii) there is a common undertaking for the exploitation of a business activity17; (iii) the companies involved share risks and results from the business activity referred therein; and (iv) the parties are competitors in the respective market affected by the agreement.
CADE's Merger Review Process and Timing
There are two types of merger review procedures under the Brazilian Competition Law: (a) the fast-track procedure and (b) the ordinary/regular proceeding, which are defined in more detail below.
- Merger review is concluded in up to 30 (thirty) days under the fast-track procedure, which is available to non-complex mergers only, such as: (i) mergers with post-transaction market shares below 20% in horizontal overlaps and/or below 30% regarding potential vertical links; (ii) collaborative agreements or JVs in markets where the parties are not horizontally or vertically related; (iii) mergers resulting in the simple substitution of an economic agent or entry via an acquisition; (iv) horizontal overlaps above 20% whenever the HHI variation is below 200 points, provided that the transaction does not lead to a combined market share of above 50%; or in (v) other cases that are not included in any of the situations above and that do not result in competition concerns, to be determined at CADE’s discretion.
- Mergers that entail major concentrations or that raise competition concerns are reviewed by CADE within a maximum of three hundred and thirty (330) days via the regular procedure. In such cases, the agency carries out a thorough analysis of the joint market share arising from the transaction, mainly from a rivalry and barriers-to-entry perspective. Compared to the fast-track procedure, the regular proceeding tends to be more time-consuming, given that economic studies, recurrent interactions with CADE’s personnel and possibly a remedy negotiation may be required for the approval of the transaction.
For transactions that entail competition-related concerns, Brazilian Competition Law provides for the possibility of negotiating remedies. They can be structural or behavioral, but preferably the latter. Remedy negotiations may be carried out with the GS or with the case’s reporting commissioner at the Tribunal level (when applicable) but, in any event, a successful merger remedy negotiation will result in the undertaking of a Merger Control Agreement (“ACC”) between the parties to a transaction and CADE.
Finally, parties are only allowed to close the transaction once a fifteen (15) day waiting period following the publication of the clearance decision elapses. Within this period, third parties admitted in the merger review, regulatory agencies or members of CADE’s Tribunal are allowed to challenge the GS’ clearance recommendation, which inevitably delays the issuing of a final decision.
Anticompetitive Conduct
As CADE is the main enforcer of the Brazilian Competition Law, it also holds powers for the imposition of penalties on legal entities and individuals who engage in anticompetitive conduct, such as cartel formation and abuse of a dominant position.
The Brazilian Competition Law did not specify which deeds constitute anticompetitive conduct, taking a general approach in Article 36 by setting forth that any act, intended or otherwise able to produce the following effects, even if they are not achieved in Brazil, shall constitute anticompetitive conduct:
- to limit, restrain, or in any way hinder free competition or free enterprise;
- to dominate a major market of a certain product or service;
- to increase profits on a discretionary basis; or
- to abuse a dominant position.
As such, several conducts are qualifiable as anticompetitive. Paragraph 3 of Article 36 laid out a few examples of actual practices that may constitute a violation of the economic order to the extent that they may produce any of the effects mentioned in Article 36, such as:
- price fixing;
- territorial and client-base restrictions;
- exclusivity agreements;
- refusal to deal;
- tie-in arrangements;
- price discrimination;
- resale price-maintenance, among others.
The Brazilian Competition Law is enforced by means of an administrative proceeding, which usually originates in the GS, with the General Superintendent holding the necessary powers for the opening of both investigative and accusatory proceedings, in addition to carrying out the fact-finding phase via the request of information from public and private sector entities, dawn raids, among others.
The standard of proof required for a conviction will vary according to the conduct under investigation. CADE has consistently reviewed explicitly collusive and naked restraint conduct (e.g., cartels, RPM, etc.) as per se illicit, that is, the mere confirmation of authorship and materiality is a sufficient means to support a conviction decision, regardless of whether the conduct produced any effects.
Whereas for abuses of a dominant position (e.g., exclusivity arrangements, ancillary restraints, fidelity discount policies, etc.), the Brazilian antitrust authority has reviewed cases under the rule of reason, which will consider the net positive (or negative) effects on competition of a given conduct for a conviction/shelving decision.
In an accusatory proceeding, after the defendants have presented their defenses, the GS will issue its opinion for their conviction or shelve the proceeding, the former necessarily being reviewed by the Tribunal, whereas the latter will become final after a 15-day waiting period has elapsed.
The decision issued by the Tribunal is final and cannot be challenged by a higher administrative court or authority, and it may only be annulled or modified if challenged before the Brazilian Judicial Branch.
As such, the Brazilian Competition Law sets forth that the fines imposed on the convicted legal entities will range from 0.1% to 20% of their revenues in the year prior to the opening of the administrative proceeding, within the business activity segment of the conduct. Whereas the related individuals’ fine will range from 1% to 20% of the fine imposed on its related legal entity.
Alternatively, in the case of associations, unions or when the legal entity’s turnover data is not available, imposed fines will range from fifty thousand reais (BRL 50,000.00) to two billion reais (BRL 2,000,000,000.00).
In addition to the above pecuniary fines, the following penalties may also apply:
- at the violator's expense, half-page publication of the summary of the decision in a court-appointed newspaper for two consecutive days, from one to three consecutive weeks;
- ineligibility for official financing or bidding processes involving purchases, sales, works, services or utility concessions with federal, state, municipal and Federal District authorities and related entities, for a period equal to or exceeding five years;
- recommendation of compulsory licensing of patents held by the violator; and
- the company's spin-off, transfer of corporate control, sale of assets, and partial discontinuance of activities, among others.
Criminal Implications
In parallel to administrative investigations, Law 8,137/1990 states that crimes against the economic order occur due to an abuse of economic power through the domination of the market or elimination of competition, even if partially, by means of agreements or alliances among competitors (i.e., collusive conduct), with the purposes of:
- artificially fixing prices or outputs;
- regionally controlling the market by company or group of companies; and
- obtaining control of the distribution or supply network, to the detriment of competition.
The penalties under Law 8,137/1990 range from two to five years of imprisonment, in addition to the imposition of a pecuniary fine.
Leniency Program
The Brazilian Leniency Program, in force since 2000, comprises a set of initiatives that seek to (a) detect, investigate and punish anticompetitive conduct; (b) inform and provide constant guidance to individuals and legal entities regarding the rights and warranties provided for in Articles 86 and 87 of the Brazilian Competition Law; and (c) stimulate, guide and aid the signatories to the leniency agreement in the provision of supporting evidence to a future proceeding, in exchange for full or partial administrative and criminal immunity.
The requirements for granting full immunity under the Brazilian Competition Law are similar to those of North American legislation. The main conditions for full immunity are:
- applicants must be the first to inform of the violation;
- applicants must cease their involvement in the infraction completely, as of the date of the proposal;
- insufficient evidence to file charges against the applicants at the time of the proposal;
- applicants must admit to involvement in the violation and provide full/permanent cooperation with the investigation; and
- applicants must cooperate with the investigation for the identification of all other co-participants, as well as collect information and documents to prove the violation beyond a reasonable doubt.
If all the above requirements are met, the signatories to the leniency agreement will be granted administrative and criminal immunity, but not civil (against damage claims). If requirements are partially met, partial immunity may be granted (with a fine amount discount varying from one to two-thirds of the original penalty).
The process for leniency negotiations encompasses three phases: (i) marker request; (ii) presenting of information that confirms the existence of the reported conduct; and (iii) formalization and signing of the leniency agreement.
The proposal, negotiations, applicants’ identities, and documents part of the leniency agreement are confidential until a final decision is rendered by CADE’s Tribunal, except if the signatories to the agreement waive their right to secrecy.
Leniency negotiations can be forfeited at any moment by both parties to the negotiation without representing a confession to the reported conduct, provided that it occurs before the signing of an agreement. In such event, all information and documents obtained by the GS in the context of the negotiations must not be used by CADE for any purposes whatsoever. Notwithstanding, the GS may open a proceeding to investigate facts related to the reported conduct of the forfeited leniency investigations, but only if based on non-related information and evidence.
After the original negotiations’ forfeiture, the GS will contact the next marker holder in line (if any) for the commencement of new negotiations. No aspect of the leniency negotiation process is open to the public unless there is a specific legal/judicial command or a request by the negotiating parties, provided that the GS confirms that the publicization of the leniency agreement will not impair its investigation.
In addition, it is possible to negotiate a leniency agreement in the course of an ongoing investigation related to another infraction unknown to the antitrust authority (Leniency Plus), obtaining a fine amount reduction for the ongoing investigation in return. Likewise, the party negotiating a Leniency Plus agreement may combine it with a settlement agreement for the ongoing investigation, obtaining an even more substantial fine amount discount.
Settlement Agreement
Article 85 of the Brazilian Competition Law sets out that CADE may, at its own discretion, and considering the public interest, undertake a settlement agreement with a defendant to an ongoing proceeding, in order to have the settling party cease its participation in the investigated conduct (Termo de Compromisso de Cessação, “TCC”).
Therefore, the TCC is an agreement that may be negotiated with CADE in order to advance the termination of the administrative proceeding. Any defendant interested in entering into a TCC may submit a marker request to CADE, which will be either negotiated with the GS or with the case’s reporting commissioner, depending on the phase of the proceeding at the time of the request.
If a proposal is made while the case is still under review by the General Superintendence, the negotiation deadline will be established at the discretion of the authority. Contrastingly, if a proposal is made after the case has already been brought to the Tribunal for a final decision, the negotiation period will be limited to a maximum of 60 days.
The negotiation process may be confidential, at CADE’s discretion. However, the TCC itself, once approved, will be made publicly available on CADE's website. Confidential information will be redacted.
The settlement agreement must:
- specify the respondent’s obligations to cease the conduct under investigation or its harmful effects, as well as other obligations deemed applicable;
- set a daily fine for full or partial contempt of the obligations undertaken; and
- set the pecuniary contribution amount, when applicable.
Although CADE does not restrict the number of TCCs to be executed with interested parties, its bylaws predetermine the maximum applicable discount to the hypothetical fines that the parties would be subject to. Such discounts will consider the moment upon which the marker was requested and the degree of cooperation of the settling party.
As regards the method applied by CADE for calculating the pecuniary contribution, CADE's directives set forth the following discount standards: (i) the first defendant to come forward and execute a TCC may benefit from a reduction of 30% to 50% of the expected fine in the event of a conviction; (ii) for the second defendant, the reduction is of 25% to 40% of the expected fine; (iii) from the third defendant onward, the reduction is up to 25% of the expected fine (this is the applicable discount considering the stage of the Administrative Proceeding); and (iv) for the agreements executed after the case is presented to the Tribunal, the maximum reduction will be of 15% of the expected fine.
Whenever the administrative proceeding concerns an investigation of agreements, combination, manipulation, or adjustment between competitors (i.e., explicit collusion), the payment of a pecuniary contribution and the admission of guilt are mandatory. CADE may also request the party to cooperate extensively with the investigation.
Finally, it is important to keep in mind that undertaking a settlement agreement with CADE does not grant criminal, civil or administrative immunity.
CADE and the Judicial Branch
The Judicial Branch will act when called upon by the administrative authority, in cases where CADE seeks the enforcement of its decisions, or by those harmed by an anticompetitive conduct in damage claims brought against the violators. It can also act when called upon by parties that disagree with the decision rendered in the administrative sphere, seeking its annulment.
Private damage claims within civil courts
Those affected by anticompetitive conduct may seek injunctive relief and compensation for damages under Article 47 of the Brazilian Competition Law. Since CADE does not protect individual interests, this article seeks to provide for the private interests involved, in which case the text should be understood as any individual or legal entity who has suffered damage resulting from the anticompetitive conduct, directly or indirectly.
Thus, the legitimacy to propose damage claims is present on those affected, in the case of individual interests, or through the intermediation of representatives of society's interests on collective cases, such as the Public Prosecutor’s Office.
The adverse impact of the overcharge that defines damages on these types of cases can be used as a procedural argument by both parties involved in the lawsuit (pass-on effect). The pass-on argument can be used by indirect purchasers when claiming damages as a consequence of anticompetitive conduct, or by the defendants, when claiming that the effect reduced the actual harm suffered.
In Brazil, damage claims are not as common as in other legal systems, such as in the United States or Europe, but the tide is slowly turning.
With the aim of improving the damage claims situation in Brazil, the Legislative Branch enacted Law No. 14,470/2022, which amends the Brazilian Competition Law with the purpose of settling controversial procedural matters concerning damage claims due to anticompetitive practices, while providing tools to facilitate the filing of this type of claim.
The new Law bolsters the “private enforcement” of competition law in Brazil, providing incentives that encourage potential claimants to seek compensation for damages resulting from antitrust violations, such as cartels. Private enforcement is regarded as an initiative complementary to CADE’s public enforcement.
Law 14,740/2022 establishes that those harmed by antitrust violations provided for in Article 36, paragraph 3, items I and II of the Brazilian Competition Law (which includes practices of collusion, such as cartels) will be entitled to claim for double damages.
The new Law also establishes that double damages will not apply to leniency applicants and to defendants that decide to settle with CADE, meaning that, in these cases, the parties will only be liable for the compensation of the actual damages. Similarly, the new Law determines that the parties that enter into such kinds of agreements with the antitrust authority will not be held jointly and severally liable for damage caused by other companies involved in the same practice.
In addition, the new Law provides that the limitation period will not be triggered while an investigation is under CADE’s analysis. It further establishes a limitation period of five (5) years, which is prompted by the unequivocal acknowledgment of the damage, by the aggrieved party, which will be considered as the date of publication of CADE’s decision in the administrative proceeding related to such claim.
Judicial Review of CADE's Decisions
Because of CADE’s position as an administrative authority, the decisions rendered in the administrative sphere will always be subject to the analysis of the Judicial Branch, due to the constitutional principle of the non-void function of judicial control, as provided for in article 5, item XXXV, which states that: "the law shall not exclude any injury or threat to a right from the appreciation of the Judicial Branch".
Civil Courts and Arbitration
Due to the number of cases involving antitrust matters being submitted for consideration, the Judicial Branch has sought ways to improve the upholding of justice in this type of lawsuit. In this context, Resolution No. 445/2017 of the Federal Court Council, provided for the creation of federal courts specialized in competition law and international trade matters, with concurrent competence for the trial of these types of claims.
Also, in the Brazilian legal system, disputes between private parties involving competition matters may be resolved through arbitration, since damage claims involve rights that can be settled. However, considering that the Competition Law regulations are in force, arbitrators must apply them systematically, analyzing all of the provisions involved, and therefore adopting the necessary measures to ensure that whatever decision is restricted to the available rights of the parties involved in the proceeding.
Ministry of Finance’s Secretariat for Economic Monitoring (“SEAE”)
Among the duties of this secretariat, SEAE is in charge of the development of competition advocacy in Brazil (or competition promotion), which focuses on incorporating competition concerns into public policies and regulation, as well as assessing legislative proposals before Congress.
Although SEAE does not act as a deliberative body and its assessments are opinion-based, its influence often brings about normative or regulatory changes that are in favor of a more competitive and efficient environment.
In its Intensive Regulatory and Competition Evaluation Front ("FIARC"), SEAE seeks to improve the regulatory framework in Brazil, issuing opinions on anticompetitive regulations, upon the request of individuals and private or public legal entities.
Public Law and Financing
Over the last decades, the Brazilian Government has shifted its public services and infrastructure model to a private investments logic regulated through long-term contracts, positioning the private sector as a key player in national development. Different measures adopted by the government aim to boost total infrastructure investment and attract foreign equity via public concessions, partnerships, and privatizations.
In 2023, the Brazilian Federal Government launched a program to coordinate investments in infrastructure in Brazil, the Programa de Aceleração do Crescimento –Novo PAC, regulated by Federal Decree No. 11.632/2023, seeking to increase private investment and make public spending in the infrastructure sector more efficient. According to the Federal Government, the goal is to attract BRL 1.7 trillion by 2026 through projects that will include public and private investments through partnership models in sectors such as highways, ports, and airports.
The model for attracting private investments also includes supporting states and municipalities through technical support for modeling PPP projects. The Federal Government, through the Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”) and Caixa Econômica Federal, is procuring qualified consultants to carry out technical, legal, and economic studies for projects in various sectors. The model paves the way for improving infrastructure projects in regions with little or no track record of PPPs, betting on improving local regulatory structures to guarantee long-term private investments and improvements in the provision of public services to the Brazilian population.
The Federal Government has recently announced other measures aimed at fostering concessions and public-private partnerships. Two of these measures stand out:
- Structural measures, aim to facilitate credits and ensure the clearance of those partnerships by states and municipalities. These measures seek to reduce existing obstacles and inefficiency in the credit market, protect investors in the capital market, improve the operation of institutions that support banking and capital markets, and streamline the process of using guarantees.
- Definition of parameters for calculating continuous expenses derived from the set of partnerships contracted by the Federal Government, states and municipalities, to verify compliance with the net current revenue limit of 5%, as established by art. 28 of Federal Law No. 11,079/04, which must be observed for granting, or not, a guarantee or carrying out a voluntary transfer.
What is more, opportunities within the Brazilian Infrastructure sector encompass not only long-term PPP contracts or public procurement construction or services but also complex and wide-ranging supplies of goods and services required to execute such contracts, which results in great opportunities for all types of business. Therefore, it is essential to know and understand the potential types of interaction between the government and the private sector, which can be deepened by Demarest's infrastructure and project finance teams.
Public Procurement in Brazil
The public procurement process aims at selecting private-party agreements with the Government in Brazil. Given that Brazil is a Federation, public procurement can be conducted by the Federal Government, State Governments or Municipal Governments. The main objective is to guarantee the most advantageous proposal to public authorities, generating equal competition for bidders able to provide services and transparency to avoid public or private corruption.
The Federal Constitution defines that all rules and procedures for public bidding must comply with the following guidelines:
- Legality
- Impersonality
- Morality
- Publicity
- Efficiency
Most of the rules subsequently included in relevant statutes stem directly from such constitutional provisions.
The legal framework for public procurement in Brazil was recently reformed through Law No. 14,133/2021, of April 2021. The main premises of this reform were the incorporation into the statute of judicial decisions and guidelines from the Federal Court of Accounts (“TCU”), encouraging legal certainty and good practices for public and private partners.
International companies that intend to participate in international public procurement in Brazil must meet the requirements of the New Public Procurement Law, depending on the rules provided by the Notice, upon submission of equivalent translated and authenticated documents.
International companies are also entitled to engage in such opportunities in a joint-venture model with Brazilian or other foreign companies. In this case, the consortium member companies are jointly responsible for the project's liabilities, including their risks and obligations.
Procurement Modalities
There are five modalities of bidding procedures, regulated by Law No. 14,133/2021:
- Reverse Auction (pregão)
- Competition (concorrência)
- Contest (concurso)
- Auction (leilão)
- Competitive dialogue (diálogo competitivo)
Reverse Auction
Reverse Auction expedites the mandatory bidding modality for the acquisition of common goods and services. The judgment criteria can be the lowest price or the highest fee discount. It is mandatory for low-value acquisitions, and evaluation standards are usually objective.
Competition
Competition is the procurement modality for contracting special goods and services, and common and special engineering construction and services. The judgment criteria can be the lowest price, best technique or artistic content, technique and price, higher economic return, or greater discount.
Contest
A contest is the bidding modality for choosing a technical, scientific, or artistic work. The judgment criteria will be the best technique or artistic content, and the winner will be awarded or remunerated.
Auction
Auction is the modality of bidding for the disposal of immovable property or movable property that is useless or legally seized to the highest bidder.
Competitive dialogue
Competitive dialogue is the modality for contracting construction, services, and goods in which the Public Administration carries out dialogues with bidders previously selected according to objective criteria in order to develop one or more alternatives capable of meeting their needs. In this modality, bidders must submit a final proposal after the closing dialogue. This modality is restricted to the following conditions: (i) technological or technical innovations; (ii) solutions that are not available on the market; and (iii) the public administration alone cannot determine technical specifications with sufficient precision.
Waiver of procurement proceedings
The Public Procurement Law defines that a public procurement proceeding might be waived in the following cases:
- Acquisition of materials, equipment, products, or contracting of services that only an exclusive manufacturer, company, or sales representative can provide.
- Contracting of a professional artist, directly or through an exclusive business manager, if they are recognized by specialized critics or by public opinion.
- Contracting the following specialized technical services of a predominantly intellectual nature with professionals or companies of well-known specialization:
- technical studies, plans, basic engineering designs, or detailed engineering designs;
- opinions, expert examinations, and general assessments;
- technical advice or consulting services and financial or tax audits;
- inspection, supervision, works or services management;
- sponsorship or appeals in lawsuits or administrative proceedings;
- training and development of personnel;
- works of art restoration and properties of historical value;
- quality and technological controls, analyses, field and laboratory tests and trials, instrumentation, and monitoring of specific work and environmental parameters, and other engineering services that fall under the provisions of this item;
- objects that may be or are required to be contracted through registration; and
- acquisition or lease of real estate that is necessary in the case of facilities and locations.
For cases in which a public procurement process is waived, the public authority must justify its decision and comply with the following requirements for entering into an agreement:
- documents that formalize the demand and, as the case may be, a preliminary technical study, risk analysis, and terms of reference;
- estimated expenses;
- legal opinion and expert opinions that certify compliance with the requirements;
- proof of compatibility between the expected budgetary resources and the commitment to be assumed, and proof that the contracted party meets the minimum qualification and eligibility requirements;
- legal opinion and expert opinions evidencing compliance with the requirements;
- reasoning for the choice of the contracted party and definition of the price; and
- authorization issued by the competent authority.
In addition, Article 75 of the New Procurement Law establishes more than 20 cases of exclusions and exemptions from a public procurement process.
Winning Bid Evaluation Criteria:
Public procurement may use the following criteria for deciding the winning bid:
- lowest price;
- biggest fee discount;
- best technique or artistic content;
- technique and price;
- highest bid in the auction; and
- higher economic return.
Lowest price
The “lowest price” criterion is the most common type of procurement bidding, in which the lowest-priced proposal wins the bid.
Biggest fee discount
Considers the least expensive contract for the Administration, meeting the minimum quality parameters defined in the bidding notice. This criterion will have the global price fixed in the bidding notice as a reference, and the discount will be extended to any amendment terms.
Best Technique or Artistic Content
Considers solely the technical or artistic proposals submitted by the bidders, and the bid notice must define the prize or remuneration that will be awarded to the winners. This evaluation criterion may be used for contracting projects of a technical, scientific, or artistic nature.
Technique and Price
Considers the highest score obtained from waiving technical and price features of the proposal.
The evaluation by technique and price must be carried out through an analysis of the bidder’s: a) qualification and experience; b) proposal; and c) performance in previous contracts.
Highest bid
The highest bid evaluation criterion is used in auctions.
Higher economic return
Used exclusively for contracts that can bring economic advantages to Public Administration, and the remuneration must be fixed at a percentage that will be proportional to the savings obtained through the contract.
Participation of international companies in federal procurement
On February 12, 2020, the Federal Government of Brazil enacted Rule No. 10/2020 (“IN 10/2020”), which allows international companies that do not operate in the country to participate in public procurement opportunities. Their participation will now require registering with the Unified Registration System for Suppliers (Sistema de Cadastramento Unificado de Fornecedores), “SICAF”.
IN 10/2020 aims to reduce red tape so that international companies can easily participate in Federal Government procurement, which can result in attracting more foreign investment. Since Brazil is now a World Trade Organization (WTO) member and must comply with its requirements, IN 10/2020 is a necessary step to comply with WTO’s Government Procurement Agreement (GPA) requirements. GPA requires all members to establish public procurement rules that provide transparency commitments and access to national public procurement markets among its members.
Penalties
Under Law No. 14,133/21, art. 156, if a contracted party fails to comply with the provisions under the law or if a contracted party fails to perform the respective agreement, public authorities can apply the following penalties:
- warnings;
- fines (amount established in the respective agreement);
- temporary suspension from engaging in procurement opportunities and ban from contracting with the Government; and
- affidavit of unsuitability to bid or sign contracts with the Government (blacklisting).
Concessions & public-private partnerships (“PPPs”)
Law 8,987/1995 (“Concessions Law”) establishes general rules regarding long-term agreements for public services, which may or may not include constructions to improve public facilities. The risks associated with the concession must be borne by the concessionaire, which must recoup its investments from revenues collected from users.
PPPs are means of concession of public services, which can be partially or totally subsidized by the Government. PPPs are regulated by Law 11,079/2004 (“PPPs Law”) and involve a prior auction to select the private party.
There are two modalities of concession under the subsidized PPP logic are:
- sponsored PPP, in which the private party is partially remunerated by the Administration, together with the fares charged for executing the public service; and
- administrative PPP, in which the object will be directly or indirectly used by the Administration, and therefore totally subsidized by it.
The PPPs Law establishes that contracts can additionally provide for requirements and conditions for the authorization, by the public partner, of the transfer of control or the temporary administration of the PPP to the financiers of the project. The goal is to ensure financial restructuring while keeping the continuity of the public service.
Investments Partnership Program - PPI
The Investments Partnership Program ("PPI") was created to foster public-private interactions, for the performance of public infrastructure and other privatization projects.
The PPI considers public projects that (i) are already in the execution stage, or that will be executed through partnership agreements signed by the Federal Public Administration; (ii) will be executed through the execution of public agreements by the State or Municipal Public Administrations; (iii) any other agreements that are a part of the National Privatization Program (Law No. 9,491/1997).
The main purposes of the PPI are the expansion of investment opportunities, job creation, and technological and industrial development incentives, according to the Brazilian social and economic goals. Also, the PPI intends to ensure the expansion of public infrastructure, the wide and fair competition among the partnerships and provision of service agreements, stability, and legal certainty, in addition to facilitating the Federal Government’s role in regulation, along with the self-sufficiency of public regulatory entities.
The main guidelines of the Program are stability of public policies, legality, quality, efficiency and transparency in the Federal Government’s performance, and the guarantee of legal certainty, not only to public agents but also to the public and private entities involved.
Among the latest projects implemented or under implementation through the PPI are the following:
Privatization of the Organized Port of Santos
The Brazilian Agency of Waterway Transport ("ANTAQ") has conducted the public consultation procedure for privatizing the “Organized Port of Santos—SP.”
Such a project intends to improve the quality and operational efficiency of the services provided through investments and private sector participation.
The project is currently pending approval by the control bodies.
In 2023, the Brazilian Federal Government opposed the privatization of the Port of Santos. However, the state of São Paulo is rendering efforts to continue with the privatization by holding regular meetings with the Brazilian Federal Government.
Leasing of Port Areas
ANTAQ is holding public tender bids for the leasing of an area and infrastructure in the following ports: (i) Vila do Conde (both solid and liquid bulk cargo); (ii) Itaqui (combustible liquid bulk); (iii) Mucuripe (both solid and liquid bulk cargo and passenger transit); (iv) Maceió (fuel handling and storage and solid bulk/sugar); (v) Salvador (general cargo storage); (vi) Ilhéus (vegetable solid bulk, mineral solid bulk, general cargo, and the Passenger Terminal); (vii) Rio de Janeiro (liquid bulk cargo); (viii) Santos (solid bulk, liquid and cargo handling and storage); and (ix) Paranaguá (liquid and vegetable bulk); (x) Itaguaí (mineral solid bulk); (xi) Porto Alegre (vegetable solid bulk); (xii) Rio Grande (vegetable solid bulk); (xiii) São Francisco do Sul (general cargo storage); and (xiv) Fortaleza (passenger transit).
Contractual Extension, Early Extension, and Procurement Renewal
Law No. 13,448 was enacted in June 2017, creating new rules and guidelines for the extension or termination of partnership contracts in highway, railroad, and airport sectors. The rules are applicable to projects qualified for this purpose according to the Investments Partnership Program ("PPI").
The law provides three contract instruments: (i) contractual extension; (ii) early extension; and (iii) procurement renewal.
The contractual extension and early extension must consider the following rules:
- Contractual, in cases of end of contractual term, provided that it is formally expressed within 24 months before the end of the original contractual term;
- Early/In advance, in which the final term of the contract will be altered and can include new investments not previously set out in the original contract; such can only be used in cases whose contractual execution is between 50-90% of the original term;
- for highway concessions, at least 80% of the due mandatory construction works must have been executed between the initial concession term and the date of the extension request;
- for railroad concessions, it is necessary to prove compliance with security and production goals defined in the contract for three years within a five-year interval or compliance with security goals defined in the contract within the last five years, both cases counting from the date of the extension’s request.
In all cases, the original contract or invitation to bid must have a provision for extension. The extension must be for a shorter or equal period to what is set out in such documents. Any party can request the term extension. However, the contract must not have been extended before.
The extensions must be submitted to a public call for comments and opened to contributions for at least 45 days. The parties must sign a contractual amendment with new terms and a new investment schedule. The amendment must be submitted to the TCU, along with the studies and reports regarding the case.
The contract renewal provides for an amicable extinction of the concession agreements in place in cases where the concessionaire is unable to comply with contractual or financial obligations originally undertaken. The parties must sign a contractual amendment formalizing the details of the agreement.
In order to allow the contract renewal process, the original concessionaire must submit: (i) the justification and technical elements that demonstrate the necessity and grounds for the process, with proposals for the solution of the difficulties faced; (ii) waiver of the term for correction of failures and infractions, in case of forfeiture effects; (iii) formal statement on the intention to embrace the re-bid process irrevocably and irreversibly, in accordance with the law; (iv) necessary information for the re-bid process, especially the statements related to investments in reversible goods linked to the business and financing instruments used in the contract.
The original concessionaire will be entitled to indemnification, to be defined through arbitration or other private dispute resolution instruments, and eventually paid by the new concessionaire. On the other hand, the Government will be responsible for the indemnification to the lessors of the original concessionaire.
On May 19, 2023, the first contract renewal auction of Brazil was held at the B3 headquarters in São Paulo – also the first auction of infrastructure assets of the current Federal Government – involving the concession of the São Gonçalo do Amarante Airport ("ASGA"), located in Rio Grande do Norte. The auction took place after the previous operator voluntarily gave back the asset to the Government, in 2020.
State-owned Companies
Law No. 13,303, published in June 2016, introduced rules regarding the legal status of state-owned companies, mixed corporations, and their subsidiaries within the Federal, State, and Municipal scopes.
Upon regulation of the administration of such companies, the Law intends to promote efficiency, establish governing and transparency mechanisms, and foster legal certainty and the actions of the regulatory public entities. Accordingly, the Law establishes that state-owned companies must make public, annually, their goals regarding public policies, as well as financial data that expresses the costs of such activities.
Furthermore, the Law establishes specific rules for all kinds of agreements of such institutions, for their bidding procedures and for their contracts. In addition, it provides for the companies’ obligation to act in accordance with their social function, related to the fulfillment of collective interests aimed at the economic well-being and the allocation of resources generated by the company to society in a socially efficient way.
Another goal of this Law is to make the criteria for the appointment of its manager stricter, aiming for a separation from politics. Thus, it is established that appointments for management positions can only include citizens whose reputations are unblemished, who hold significant knowledge of the company’s area of operation, such as academic education consistent with the position they are appointed to, and who must not be ineligible. In addition, they must meet one of the following criteria:
- ten years of professional experience in the public or private sector, in the company’s area of operation;
- four years of experience as director of a company with a corporate purpose similar to the state-owned company, a position of trust in the public sector, or as a professor/researcher in the areas in which the company operates;
- four years as an independent professional in activity related to the area of operation of the state-owned company.
The Board of Directors will be composed of up to ten members, of which 25% must be independent, and must not hold any previous relation to the state-owned company, or with holders of public offices in the Executive and Legislative Branches.
Project Financing
BNDES has played a key role in project financing transactions in Brazil throughout the last decades and has been supported by two federal state-owned banks (Banco do Brasil and Caixa Econômica Federal) and other local state-owned banks (such as Banco do Nordeste and Banco da Amazônia). Other state-owned lenders that are usually sought by project owners in Brazil include the investment fund of the Fundo de Garantia por Tempo de Serviço - FI-FGTS (in English - Guarantee Fund for Length of Service).
In recent years, mainly due to the aftermath of the Lava-Jato Operation investigation, there has been a retraction of BNDES funds, and companies started to seek other forms of private financing that became available, such as syndicated financings granted by commercial banks and the issuance of incentivized debentures (under the terms of Law No. 12,431/2011).On April 25, 2023, the Executive Branch published Decree No. 11,498 (“New Decree”), amending Decree No. 8,874, of October 11, 2016, which regulates fundraising activity, with tax incentives, through securities issued as per Law No. 12,431, of June 24, 2011.
The New Decree includes the following sectors in the priority category:
- Education
- Healthcare
- Public security and prison system
- Urban parks and conservation facilities
- Cultural and sports facilities
- Social housing and urban renewal (“New Sectors”).
These new sectors refer to the ESG agenda (especially to the environmental and social aspects) and join the areas of logistics and transport, urban mobility, energy, telecommunications, broadcasting, basic sanitation, and irrigation, which were already listed as priority sectors.
Legal Framework
Federal Law No. 11,101/2005 (the “Brazilian Insolvency Law” or “BIL”), as amended by Federal Law 14,112/2020, sets out the rules for bankruptcy and insolvency in Brazil. There are three procedures that deal with companies in distressed financial situations: (i) bankruptcy proceeding (liquidation); (ii) judicial reorganization; and (iii) extrajudicial reorganization.
Both the judicial reorganization and the extrajudicial reorganization are intended to give the company in a temporary unhealthy financial situation the chance to reorganize its activities in order to preserve its existence as a going concern.
On the other hand, the bankruptcy proceeding is applicable when a company’s business activities are no longer viable, and has the purpose of liquidating the company’s assets under a court-supervised environment. Proceeds of the sale of assets are used to pay off claims according to the priority rules provided for by the BIL. The term “bankruptcy” is understood in Brazil as liquidation, similar to U.S. Chapter 7, regarding filing procedures.
Bankruptcy Proceeding
The bankruptcy proceeding is not aimed at reorganizing the financial situation of the debtor, but rather to liquidate its assets and use the proceeds of such sale to pay off creditors.
A bankruptcy proceeding can be filed by the company (debtor), its shareholders, or partners, or any of its creditors.
A bankruptcy proceeding has to be ruled by a Court (“Bankruptcy Court”) and is never automatically granted upon filing:
- if requested by the company itself, the Bankruptcy Court must accept the request; and
- if requested by creditors, the Bankruptcy Court will rule on the case after the debtor can present a defense and/or make a deposit of the underlying debt.
Once the Bankruptcy Court accepts the filing and rules that the company is under liquidation, the company is immediately shut down, the officers are compulsorily removed from the company's management, and a trustee is appointed (by the court) to liquidate the company. In a few circumstances, the Court may determine that the company continues to operate for a specific period of time after the bankruptcy ruling, prior to it being liquidated.
Although the company participates in the proceeding, the purpose of the bankruptcy proceeding is to maximize the recovery of assets to the benefit of the creditors; therefore, the interests of the company's shareholders and officers are subordinated to the interests of the creditors.
The BIL sets out the requirements upon which creditors can file for bankruptcy of the debtor, as outlined below:
- default to provide payment of any liquid obligation stated in a credit instrument in an amount higher than 40 minimum Brazilian monthly wages;
- failure to pay, make a deposit of or post-collateral to secure obligation subject to an enforcement proceeding;
- arbitrarily advancing the liquidation of assets or making payment in a damaging or fraudulent way;
- attempt to perform or perform simulated transactions or disposal of all or substantially all assets to a third party, whether a creditor or not; and
- transfer of establishment to third parties, whether creditors or not, without the consent of all other creditors and without keeping sufficient assets to fulfill its obligations.
A bankruptcy decree entails (i) acceleration of all company’s debts; and (ii) conversion of foreign currency-denominated debts into national currency ("BRL").
Upon being appointed to serve on the bankruptcy proceeding, the trustee is expected to prepare an inventory and arrange the valuation of the assets. Subsequently, the assets must be sold under a court-supervised competitive process (i.e. auction, competitive process arranged by a specialized agent or other mechanism approved by the Court) within 180 days from the date the trustee concludes the inventory of the assets.
The proceeds of the asset sales will be distributed to creditors in compliance with the credit priority rule set forth in the BIL (“liquidation waterfall”).
The liquidation waterfall comprises (i) claims considered bankruptcy-remote (créditos extraconcursais), which have priority over the claims impaired by the bankruptcy proceeding; and (ii) claims impaired by the bankruptcy proceeding. Within each category of claims there is a priority rule, as follows:
- Bankruptcy-Remote Claims:
- out-of-pocket expenses related to the management of the bankruptcy estate (massa falida) and the bankruptcy proceeding and labor claims strictly related to unpaid wages outstanding in the three months preceding the bankruptcy decree limited to the amount equivalent to five Brazilian minimum wages;
- the amounts effectively disbursed by the creditor of a Debtor in Possession Financing (DIP Financing, as defined below) granted to the debtor during the period it was under a Judicial Reorganization Proceeding;
- claims for restitution in cash;
- compensation of the trustee and labor credits arising from work performed or after the bankruptcy decree;
- credits arising from transactions carried out during a Judicial Reorganization Proceeding (in the event of conversion of the Judicial Reorganization into a Bankruptcy Proceeding) or after the bankruptcy decree;
- amounts provided by the creditors to the estate after the bankruptcy decree;
- costs, fees and taxes related to the preparation of the inventory, the management of the Bankruptcy Estate and the sale of the assets;
- court costs arising from lawsuits in which the Bankruptcy Estate has faced an unfavorable outcome; and
- tax liability arising from facts that occurred after the bankruptcy decree.
- Claims Impaired by the Bankruptcy Proceedings:
- credits arising from labor relationships up to 150 Brazilian minimum monthly wages per creditor and those resulting from labor accidents;
- secured credits, up to the amount of the asset offered as security;
- tax credits, regardless of their nature and time of constitution, except for the bankruptcy-remote tax credits and tax penalties;
- unsecured credits;
- contractual penalties and monetary penalties due to breach of criminal or administrative law, including tax penalties;
- subordinated credits (i.e. credits of equity holders and those owed to the debtor’s management members of the debtor --- as long as the management member is not an employee --- provided that the contractual conditions have not been agreed on a commutative basis and under market conditions); and
- interest on claims accruing after the bankruptcy decree.
During the bankruptcy proceeding, an investigation will be opened to assess whether the debtor, its shareholders, directors and/or officers have committed any fraud or wrongdoing that might have caused or helped cause the bankruptcy.
If fraud or wrongdoings are found, the debtor, its shareholders, directors and/or officers can be sued for damages, in accordance with the general rules of civil liability. The BIL does not provide for a specific framework of civil liability of shareholders, officers, and directors of insolvent or financially distressed companies.
As a rule, a shareholder, a director, or an officer is not personally liable for the losses caused by the company to third parties or losses that it suffers as a result of its own activities, provided that such losses are derived from regular management acts, such as those carried out by the administrator within its legal and statutory attributions, in compliance with the company's corporate purpose.
Credits collateralized by Mortgages or Pledges.
In regard to transactions carried out by the debtor prior to the bankruptcy decree, the BIL sets forth a preference period of up to 90 days, which is counted retrospectively as of one of the following events: (i) the date when the Bankruptcy Proceeding has been requested; (ii) the date when the judicial reorganization proceeding has been requested (in cases of conversion of the judicial reorganization into a bankruptcy proceeding); (iii) the date when the first protest of a commercial title not paid by the debtor has taken place.
Within this period the following acts are considered ineffective:
- payment of any unmatured debt or liability;
- payment of matured debts through means different from those established in the relevant contract;
- granting of mortgages or pledges to secure already existing debt;
- any obligations assumed for free, during a period of two (2) years before the bankruptcy decree;
- waiver to assets which would be inherited by the debtor;
- sale of business without the prior consent of the creditors or the payment of the credits existing at the moment, in the event that the remaining assets are not sufficient to cover such liabilities existing at the time such business has been sold;
- registration of any right over, or transfer of, immovable property after the bankruptcy decree.
In all cases mentioned above, the Bankruptcy Court in charge of the bankruptcy proceeding may consider the corresponding transaction ineffective, regardless of the filing of a specific fraudulent conveyance lawsuit.
Furthermore, any other act and/or transaction carried out with the intent of defrauding creditors is subject to avoidance, as long there is proof of (i) the collusion between the parties to the transaction and the corresponding fraudulent intent; and (ii) actual losses to the bankruptcy estate.
The Bankruptcy Court can void such fraudulent transaction upon request made by creditors, the trustee, or the public prosecutor within 3 years counted from the issuance of the bankruptcy decree. Such a request must be filed in the form a specific revocation lawsuit. If the revocation lawsuit is granted, the transaction will be considered void and the assets will return to the bankruptcy estate.
Finally, it is important to mention that a company undergoing a bankruptcy proceeding is prevented from doing business in the country until the conclusion of the proceeding. As a rule, the restriction to doing business in the country does not apply to the partners, shareholders, officers, and directors of the bankrupt company.
Judicial Reorganization (Recuperação Judicial)
Judicial reorganization is intended to give a company in a distressed financial situation the chance to voluntarily reorganize its activities, in order to preserve its existence as a going concern, upon the approval of a reorganization plan by the majority of its creditors. Consequently, it is aimed at providing sufficient means for a company to reorganize its capital structure and emerge from a financial crisis.
In order to be entitled to benefit from a judicial reorganization, the debtor:
- must prove that it has been in operation for at least two consecutive years;
- must not have been declared bankrupt before, or, if so, must have obtained a final discharge court decision regarding its previous liabilities;
- must not have obtained judicial reorganization benefits over the past five years preceding the request; and
- must not have had its managers or controlling shareholders sentenced for any type of crime provided for in the Brazilian Insolvency Law.
The BIL, as amended by Federal Law 14,112/2020, incorporated rules for joint filings of judicial reorganization and/or subsequent joinder and/or consolidation of proceedings of multiple debtors. Joint filings (or procedural consolidation) are allowed for debtors of the same economic group and result in the coordination of procedural steps of the judicial reorganization, although the corporate independence of the debtors is preserved, and each debtor must provide all documents for the filing and the means by which it intends to restructure.
Bankruptcy Courts can, however, authorize substantive consolidation (i.e., consolidation of assets and liabilities of all debtors) regardless of creditors’ approval if:
- there is interconnection and commingling of assets in a manner that makes any attempt to separate the debtors excessively burdensome; and
- two or more of the following factual circumstances are met:
- existence of cross-guarantees;
- debtors have a relationship of control or dependency; and
- debtors operate as a single entity.
If substantive consolidation is approved, the debtors must present a single consolidated plan for all debtors, which will be submitted to a vote at the general creditors’ meeting. Rejection of the plan will result in the liquidation of all debtors (assuming confirmation is not possible under cram-down rules or if no creditors plan has been presented).
Given that the judicial reorganization is not designed to wind up the debtor, its officers and directors will keep running the business while the company undergoes the proceeding. thus, during the judicial reorganization, the debtor or its officers will remain conducting the debtor's business activities under the scrutiny of a committee of creditors (if implemented), and a court-appointed trustee. Although the relevant Reorganization Court appoints a trustee to oversee the judicial reorganization and monitor the company's affairs for the benefit of the interests of all stakeholders involved in the proceeding (specially the impaired creditors), such trustee does not manage the company.
On the other hand, the BIL provides that the Bankruptcy Court may remove officers and managers of the debtor if any of them (i) has been sentenced for bankruptcy crimes and/or economic crimes pursuant to specific criminal law; (ii) has strong evidence against them of practice of any of the bankruptcy crimes provided for in the BIL; (iii) has acted in bad faith or with the intent to defraud creditors; (iv) has spent money on personal affairs in excessive amounts and inconsistent with his or her financial situation; (v) has authorized payment of expenses that would not be justified given their nature and/or amount in light of the debtor's business; (vi) has either caused the debtor to be left with unreasonably small capital or entered into transactions harmful to the debtor's regular course of business; (vii) deliberately created or omitted any credit in the submission of the list of creditors that should support the initial filing of the judicial reorganization without reasonable cause and/or Bankruptcy Court approval; (viii) refuses to provide information requested by the trustee and/or committee of the creditors; (ix) has their removal provided for in the reorganization plan.
Removal, however, depends on a Bankruptcy Court ruling preceded by requests filed by interested parties and accompanied by supporting evidence. In other words, court proceedings are needed for an officer of the debtor to be removed from office due to one of the situations provided for above.
All of the debtor's matured and unmatured debts up to the date of the filing of the judicial reorganization request (the “prepetition credits”) are subject to the judicial reorganization, except for a few types of credits, such as those derived from advances on foreign exchange contracts ("ACCs"), credits arising from certain leasing arrangements, as well as those secured by specific types of collateral (e.g., credits collateralized by fiduciary lien and credits with retention of title). Furthermore, certain credits related to agribusiness financing are also considered bankruptcy-remote pursuant to specific statutes governing the issue.
On the other hand, debts originating after the date of the filing of the judicial reorganization request are also not subject to judicial reorganization and must be paid according to their original conditions (these are the so-called “post-petition” credits). Also, obligations incurred by a debtor prior to the filing of a judicial reorganization will maintain their original contractual conditions unless the reorganization plan provides otherwise.
In summary, the judicial reorganization proceeding comprises the following phases:
- The debtor files the judicial reorganization request seeking a court decision authorizing it to take advantage of the judicial reorganization;
- Upon fulfillment of several procedural and formal items, the Bankruptcy Court grants a decision authorizing the processing of the judicial reorganization procedure (“processing order”). Such a decision immediately stays all collection lawsuits filed against the debtor and suspends the enforceability of credits due but not collected yet (except, as a rule, for tax collection lawsuits and bankruptcy-remote claims).
- This “stay period” lasts 180 days from the date when the processing order was granted, subject to one extension of 180 days, provided that the debtor did not cause any delay in the judicial reorganization.
- concomitantly with the processing order, the Bankruptcy Court also appoints a Trustee, who will be in charge of overseeing the debtor's activities and reporting them in the judicial reorganization records through periodic reports.
- after the processing order is granted, the trustee has the duty to publish a list with all creditors and their respective credits. creditors have the right to challenge the figures and the nature of their credit in case they are inaccurate.
- in parallel, within 60 days from the processing order, the debtor has the obligation to file a reorganization plan, setting out a detailed description of the alternatives that the company will follow to implement the reorganization, and the payment plan for all the debt subject to the Judicial Reorganization, including maturity extension, interest rate caps, discounts applied to principal amounts, as well as any other relevant features related to the restructuring such as additional collateral granted.
- If the debtor fails to file the reorganization plan in a timely fashion, the Judicial Reorganization must be converted into a Bankruptcy Proceeding. Because of that, the initial plan filed by the debtor is often a placeholder, and it is usual for debtors to subsequently file a new reorganization plan or amendments to the reorganization plan previously filed.
- After the filing, creditors can file their written objections to the reorganization plan.
- If any objection to the reorganization plan is filed, the Court must call a general creditors' meeting to put the reorganization plan to a vote. As a rule, the purpose of the creditors' meeting is to approve, reject or propose amendments to the reorganization plan presented by the debtor.
- In the creditors’ meeting, the creditors must be represented by fully empowered attorneys-in-fact responsible for carrying out discussions about the features of the reorganization plan, as well as challenging and proposing amendments to it, as necessary.
According to the approval process provided for in the BIL, each class of creditors must either accept the reorganization plan or reject it. Regarding the judicial reorganization proceeding, there are four classes of creditors provided for in the BIL:
- Class One – Labor Claims: holders of credit rights deriving from labor legislation or indemnities arising from labor accidents;
- Class Two – Secured Claims: holders of credit rights secured by in rem collateral (i.e. mortgages, pledges etc.);
- Class Three – Unsecured Claims: unsecured creditors, as a whole, general privilege and special privilege; and
- Class Four – Micro and Small Business: creditors holding credits framed as micro or small business.
Within Class One (Labor) and Class Four (Micro and Small Business), acceptance of the reorganization plan requires holders of more than one-half in number of claims voting to accept the plan. Within Class Two (Secured) and Class Three (Unsecured), acceptance requires holders of more than one-half in real amount and in number of claims voting to accept the plan.
At its discretion, the Bankruptcy Court can approve a reorganization plan that has not been accepted by all classes of creditors, provided that such plan meets certain voting standards and does not discriminate creditors within the dissenting class (cram-down). The cram-down standards are: (i) approval of the plan by more than one-half of claims in real amount regardless of the classes of creditors; (ii) approval of the plan by two classes of creditors or one class if there are only two classes of creditors; (iii) within the dissenting class, the plan must have been approved by one-third of the creditors: in number of creditors and real amount if the dissenting class is either the unsecured or secured claims; or in number of creditors if the dissenting class is either the labor class or the micro and small business class.For the purposes of both a straight approval or a cram-down decision, voting quorum is verified according to the holders of claims (number of claims and corresponding real amounts) that attend the creditors' meeting.
Creditors may present an alternative reorganization plan in the following situations: (i) expiration of the stay period (as extended, if it is the case) without a reorganization plan being put to vote; or (ii) rejection of the debtor’s plan, provided that confirmation is not possible pursuant to cram-down rules. Creditors representing more than 50% of the BRL amount of claims that attended the creditors’ meeting may vote to approve a 30-day period for creditors to present an alternative reorganization plan. In this case, the stay period will be extended for an additional 180 days as of either the expiration of the original stay period or the creditors’ meeting that approved the 30-day period. The creditors’ plan must be supported by more than 25% of the BRL amount of all claims subject to the judicial reorganization or, alternatively, 35% of the BRL amount of claims that attended the creditors’ meeting at which the debtors’ plan was rejected.
Further, the creditors’ plan must (i) meet the same formalities and requirements provided under the BIL for the debtor’s plan; (ii) provide for the release of guarantees granted by individuals in connection with claims of creditors who supported the creditors’ plan; (iii) not create any new obligation (not provided by law or existing contracts) to the debtor’s shareholders; and (iv) not result in burden to the debtor or its shareholders higher than the burden that the debtors and its shareholders would have experienced in the event of liquidation of the debtor.
The judicial reorganization plan (either the one proposed by the debtor or the alternative one proposed by the creditors) only becomes effective after judicial confirmation. As a general rule, if the reorganization is not approved at the creditors’ meeting, the Bankruptcy Court must convert the Judicial Reorganization into a Bankruptcy Proceeding, provided that creditors did not vote for an alternative reorganization plan and confirmation is not possible under cram-down rules.
If the Court confirms the reorganization plan, debtor and creditors will be strictly bound by it. Upon such decision, debtor will be under supervision of the Bankruptcy Court and under judicial reorganization protection for the period of two years, even if the reorganization plan provides for extensions of maturities longer than two years. Default on the plan during such supervision period can cause the conversion of the judicial reorganization into a bankruptcy proceeding.
The reorganization plan can provide several alternatives for the company to emerge from the financial crisis, including grace periods, haircuts, postponement of maturity dates, mergers, drop-downs, sale of assets, replacements of managers, increase of the capital stock, conversion of debt into equity, Debtor in Possession Financing (DIP Financing), among any other lawful means approved by the creditors.
Generally, the debtor has discretion to propose the payment conditions to creditors; however, already matured labor claims must be paid within one year from the approval of the reorganization plan. The 1-year deadline can be extended to two years, provided that (i) the debtor provides sufficient guarantee for payment of the labor claims; and (ii) labor creditors approve the extension at the creditors’ meeting. Similarly, wage-related claims of up to 5 minimum wages that had been matured for three months prior to the filing of the judicial reorganization request must be paid within 30 days.
Additionally, the company under a judicial reorganization is not allowed to dispose of its non-current assets without the Bankruptcy Court’s and creditors' approval.
In general, there are two mechanisms for sale of non-current assets within the context of a judicial reorganization: (i) a sale pursuant to the BIL’s Article 66, which requires court approval, followed by potential objections by creditors; and (ii) sale of an isolated business unit [Unidade Produtiva Isolada – “UPI”] established under the reorganization plan.
In both cases, provided that the sale is carried out under a competitive process pursuant to BIL’s rules, the sale and purchase will be clear of encumbrances and liabilities, and free from succession, including labor, tax, anti-corruption and environmental obligations.
The amendment made to the BIL by Federal Law No. 14,112/2020 stimulates the availability of new financing to debtors (the abovementioned DIP Financing) by (i) granting priority to the DIP Financing lenders over other claims, in the event of subsequent bankruptcy liquidation of the debtor; and (ii) insulating the DIP Financing, guarantees related thereto, and corresponding credit priority, from the uncertainty arising from litigation.
Throughout the process of judicial reorganization, the Bankruptcy Court can authorize DIP Financing secured by fiduciary liens and/or other security interest in non-current assets of the debtor or third parties to fund debtor’s activities, the restructuring expenses, or the necessary measures to preserve the debtors’ assets.
The DIP Financing will have priority over virtually all other claims against the debtor in the event of bankruptcy liquidation (see above) and potential reversal of the decision authorizing the DIP Financing will not adversely impact the DIP Financing’s priority.
Further, Bankruptcy Courts may authorize the creation of subordinated liens in the debtors’ assets regardless of the consent of the holder of the existing lien except for assets subject to fiduciary liens and/or fiduciary assignments. In any event, the guarantee will be limited to the proceeds resulting from the sale of the underlying asset that exceed the value of the first lien guarantee.
Any person can be the provider of the DIP Financing, including creditors (subject to or not subject to the judicial reorganization), shareholders and other companies of the debtors’ economic group.
As indicated above, the granting of DIP Financing by a good-faith investor must not be rendered void or unenforceable as a result of subsequent liquidation, provided that the debtor has received the corresponding amounts provided under the DIP Financing instrument.
In addition, the credit priority of the DIP Financing and the guarantees granted to a good-faith investor must not be adversely affected by modifications to the Bankruptcy Court’s decision that authorizes the DIP Financing, provided that the funds have already been disbursed to the debtor. On the other hand, if the Judicial Reorganization is converted into a bankruptcy liquidation prior to the full disbursement of the DIP Financing amounts, the relevant financing contracts will be automatically terminated, and the credit priority and guarantees will be limited to the funds disbursed to the debtor prior to the bankruptcy decree.
Extrajudicial Reorganization
the extrajudicial reorganization allows a debtor and certain of its creditors to draft a reorganization plan, aiming at restructuring the debtor’s indebtedness. in specific circumstances, the extrajudicial reorganization allows a debtor to impose such workout on other creditors of the same class of creditors (e.g., secured, and unsecured), or of a certain group of creditors of the same nature, and subject to similar payment terms within a same class (e.g., suppliers and creditors that hold unsecured notes).
Although such proceeding is deemed “out-of-court”, the effects of the private reorganization plan and its imposition on other creditors depend on a Bankruptcy Court’s confirmation.
In summary, the BIL allows a debtor to file for Extrajudicial Reorganization and request a Bankruptcy Court to impose the reorganization plan on other creditors, provided that creditors representing more than 50% of a same class or group of creditors have accepted and executed the reorganization plan. Furthermore, a debtor can file for an Extrajudicial Reorganization upon gathering support of 30% of the BRL amount of each group of impaired claims and secure the additional votes within 90 days from the filing date. Debtors can request that the Bankruptcy Court convert the extrajudicial proceeding into a judicial reorganization proceeding if they cannot secure the required majority within the 90-day period.
All claims existing on the date of the extrajudicial reorganization request filing, except for tax claims and bankruptcy-remote claims (créditos extraconcursais), may be impaired by an extrajudicial reorganization. Consequently, the BIL, as amended, now allows debtors to use the Extrajudicial Reorganization also to impair labor claims. However, impairment of labor claims depends on previous negotiations with the labor unions that represent the debtor’s employees.
BIL’s original wording did not explicitly provide for a stay period in extrajudicial reorganizations. Brazilian Courts, however, have consistently ruled that the processing of an extrajudicial reorganization guaranteed a stay period (similarly to the judicial reorganization stay) in order to prevent impaired claimants from taking actions and enforcing claims against the debtor.
The amendment to the BIL included a specific provision stating that the stay period applies to the extrajudicial reorganization proceedings provided that the debtor has gathered support of the minimum required majority to file for the extrajudicial reorganization request.
Upon the filing of the extrajudicial reorganization request, a public notice is released, and creditors can challenge the reorganization plan within 30 days, on the following limited grounds:
- debtor has failed to meet the 50% threshold to cram down the plan over non-supporting creditors;
- the reorganization plan entails acts forbidden by law or fraudulent transactions; and
- non-compliance with any other requirement or formality imposed by law that may apply to the case.
If an objection is filed, the debtor will have a 5-day term to reply to it. Afterwards, the Bankruptcy Court will make a ruling (i) analyzing the objections (rejecting or granting them); and (ii) provided all objections are rejected, confirming the reorganization plan and determining its imposition over the non-supporting creditors.
Unlike the judicial reorganization, the rejection of the extrajudicial reorganization plan does not cause the bankruptcy liquidation of the debtor.
Once the Bankruptcy Court rules on the reorganization plan, interested parties can appeal. Generally, and pursuant to the BIL’s rules, such appeal neither stays the proceeding nor prevents the implementation of the reorganization plan.
Confirmation of the reorganization plan entails (i) replacement of the old indebtedness subject to the Extrajudicial Reorganization for the restructured indebtedness to be paid according to the terms and conditions of the reorganization plan; and (ii) dismissal of any lawsuit filed to collect on debt subject to the reorganization plan.
Finally, the amendment to the BIL established a protection to creditors and investors against fraudulent conveyance claims related to transactions carried out within the context of implementation of an extrajudicial reorganization plan, in the event of subsequent bankruptcy liquidation of the debtor.