| by Rodney A. Alves
Brazil is one of the largest and most diverse economies in the world. Brazil is a key nation in South America, with over 20% of surface area of Americas, 47.7% of surface area and 50% of population of South America as well as 22% of the world’s arable land surface. An emerging giant, it has a key role on FTAA, WTO. Today it is the world’s largest producer of regional jets, biggest producer of coffee, orange juice, sugar, electric power and ethanol, the leading exporter of sugar, coffee, beef and orange juice.
It is a major exporter of soybeans, aircraft, vehicles, iron ore, steel, textiles and footwear. With large and well-developed agricultural, mining, manufacturing and service sectors, Brazil is the only country, beyond US and China, with specific key factors for sustained growth.
Brazil has the world’s most modern electronic voting system, and it is the 2014 FIFA World Cup as well as 2016 Olympics Hosting Country. Its extensive use of alternative fuels makes Brazil a world leader in ethanol, as few countries are as prepared as Brazil to produce low-pollution fuels derived from renewable sources. Brazil became energy independent, discovering new 8 billion oil reserves offshore; the country will have the 10th largest oil reserves in the world.
With so many opportunities for investment, partnerships and trade, a myriad of investors are heading south. However, as a developing country, there are challenges to be overcome. Complex tax system, costly and protective labor environment, developing infrastructure and overloaded courts are just few examples of these challenges. Whether an investment or an acquisition, the first step is to understand how the legal framework of an investment operates in Brazil and this is the focus of this article.
Foreign Direct Investment
In Brazil, foreign investment means any goods, equipment, cash and or financial resources that enter Brazil for the production of goods or services, or for investment in economic activities, provided that in either case they belong to individuals or legal entities resident, domiciled or headquartered abroad. The Brazilian Constitution and some particular laws lay down restrictions to foreign investment in certain specific businesses. However, in essence three legal statutes provide the general regulatory framework for direct investment in Brazil: Law # 4131/62 (Foreign Direct Investment Law), Law # 4390/64 and Decreto (Executive Order) # 55762/65. In addition to these laws, the Brazilian Central Bank (“Bacen”) also issue Ordinances and Rulings.
Bacen is charged with registering, monitoring and following up on foreign investments, i.e. it exercises foreign exchange control. Accordingly, all foreign direct investment must be registered before the Bacen for purposes of (a) profit remittances to nonresident investors, (b) reinvestment of profits and (c) its eventual repatriation. Such registration must be made through an online proceeding, and investors have thirty (30) days from the date the money enter the country, otherwise late fine would apply. Similar to cash investments, international loans (i.e, when either the lender or the borrower is a nonresident) are also required to be registered with Bacen. Although the registration process is not complicated, the actual time to accomplish such requirement may take a while and it is advisable to take the first steps toward the registration as soon as the investment enters the country.
Whether to subscribe new shares or buy equities in an existing company, there is no prior authorization for cash investments. However, capitalization of credits is subjected to Bacen’s prior authorization. Similar to a cash investment, the capitalization of imported goods does not require Bacen’s prior approval but is subject to certain limitations: (a) only assets are eligible for capitalization, (b) capitalization of used assets is possible only if (i) such assets were not manufactured locally and (ii) investment is linked to a project that promotes the economic development of Brazil. The capitalization of intangible assets (e.g., intellectual property) is also subject to Bacen’s prior approval.
At the moment, profits can be distributed and remitted abroad without any restriction or limitations. Profits distributed to nonresidents can be reinvested locally in the same company or not. Although there is no corporate income tax on dividends, all reinvested amounts must be registered with Bacen, as if new investments.
Foreign capital registered with Bacen may be repatriated at anytime without prior authorization. However, the portion of the amount remitted abroad that exceeds the registered capital/ investment is considered as capital gain and subject to a fifteen percent (15%) withholding income tax. Bacen’s prior authorization is required for such remittances. On the other hand, there are no restrictions to the sale of interests in any Brazilian company. However, if the transaction occurs between foreign parties, the capital/interest assignment must be registered before Bacen.
Some industries are restricted or contain some limitation to foreign investment: nuclear energy, health services, mining, business abutting international borders, domestic flight routes, aerospace industry, fishing, press, telecommunication, post office and telegraph services, insurance, banking, pension funds and ownership of rural properties by aliens. A current debate is still in place on whether ownership of rural properties by Brazilian companies controlled by foreigners would be allowed.
Many are the issues surrounding an investment in Brazil. Even large corporations have incurred into unnecessary mistakes when it comes to the adequate procedures regarding their investments in Brazil. Because of the red tape, investors may suffer delays and fall into situations that would cause avoidable losses. It is important to understand the rules of this evolving country and the restrictions and limitations of each industry. To that extent, always count with the assistance from professionals who can navigate the Brazilian legal system and business environment as well as adequately translate and correlate them with the US legal and business principles.
Rodney A. Alves is an Attorney-at-Law, licensed in Brazil and CA and partner at Alves Videla Business Strategies. www.alvesvidela.com
April 11, 2011 - Doing Business in Brazil Investment Perspective