Brazil, the largest economy in South America, is a commodities export-oriented economy driven mostly by agribusiness and mining activities, with diversified industry and service sectors.
Foreign direct investment (FDI) in Brazil is sourced primarily from the United States, China, Netherlands and Spain. The country led FDI in Latin America between the end of the Second World War and the 1980s, when the sovereign debt crisis, coupled with high inflation and interest rates, resulted in Brazil becoming a less attractive target for FDI.
In the early 1990s, several liberalising measures were implemented to open the country to foreign trade and deregulate its domestic market. Further, a privatisation programme was structured to modernise activities that were under state monopoly, and the Brazilian government renegotiated its foreign debt with the International Monetary Fund and private banks. However, it was not until 1994 that the government managed to curb inflation with the launching of the Real Plan (Plano Real), which involved creating a new currency, restructuring the financial system, passing strict budgetary rules and privatising state-owned companies that were responsible for running a major part of the Brazilian infrastructure at the time, especially in the energy, telecommunications, transport and port sectors.
These policies were responsible for a new positive cycle of FDI in Brazil during the 1990s.
In the early 2000s, FDI declined again as a result of external events, such as the crisis within the US stock markets, the slowdown of the global economy as a result of terrorist attacks and wars, and the disclosure of accounting frauds by large US and multinational companies.
The increasing demand for commodities from emerging markets in the late 2000s benefited the Brazilian economy and resulted in a new surge in FDI in Brazil, which lasted until the early 2010s, when commodities prices decreased, the fiscal and economic environment of the country deteriorated, and Brazil’s credit rating was downgraded by major credit agencies.
Despite the instability created by the outbreak of the covid-19 pandemic, it is expected that FDI in Brazil may increase in the coming years thanks to the combination of the current excessive liquidity in global markets with local circumstances, such as (1) the depreciation of the Brazilian real against the US dollar, resulting in Brazilian assets becoming cheap targets for foreign investors, (2) changes in monetary policy to reduce interest rates, incentivising investors to shift their focus from debt products to equity investments, (3) the potential approval of key legislative structural reforms that are currently under discussion, such as tax and administrative reforms; and (4) a potential new round of privatisations involving some of the major state-owned companies.
FDI is not regulated in Brazil by any specific legislation. Rather, there are scattered rules in several laws and regulations dealing with FDI in different contexts and structures.
The primary obligation concerning FDI in Brazil refers to the need to register any type of investment with the Central Bank of Brazil (BACEN) through the Electronic Declaratory Registration System for Direct Foreign Investment (RDE-IED) up to 30 days after the applicable FDI event (e.g., foreign capital injection or transfer to foreigners of equity held by Brazilians in local entities). Registration with the RDE-IED is mandatory and is a condition for any FDI in Brazil, as established by BACEN Ordinance No. 3,689/2013.
The RDE-IED is structured to allow Brazilian companies that are recipients of FDI and foreign investors to register all relevant events regarding FDI, such as registration of:
- foreign investors with BACEN (as well as registration of changes to the name, address or corporate type of foreign investors);
- every Brazilian company that is a recipient of FDI, regardless of the amount, with BACEN (as well as registration of changes to the name, address and management of the Brazilian company, or changes to any information about the Brazilian company that is mentioned in the record of the Brazilian company in the RDE-IED – such as periodic updates to economic and financial information, whether annually or quarterly, depending on the amount of its assets and net worth as of 31 December of the previous year);
- capital injections and capital contributions paid in cash, assets or rights;
- events involving the repatriation of capital;
- payment of dividends and interest on equity to foreign investors;
- merger, spin-off and conversion transactions involving Brazilian companies that are recipients of FDI; and
- the dissolution and liquidation of Brazilian companies that are recipients of FDI and of the payment of the respective equity holdings to foreign investors, as applicable.
The RDE-IED is a declaratory system in which both Brazilian companies that are recipients of FDI and foreign investors may input information regarding events such as the above. Nevertheless, Brazilian companies that are recipients of FDI and foreign investors must produce and keep the supporting documentation underlying any event registered with the RDE-IED. Failure to present such documentation if required by BACEN may result in the application of fines and other penalties provided for in the regulation. According to Laws No. 4,131/1962 and No. 11,371/2006 and BACEN Circular No. 3,857/2017, failure to declare required FDI information or present supporting documentation requested by BACEN, late presentation of such information or documentation, or submission of incorrect, incomplete or false information and documentation, is subject to administrative penalties. In applying these penalties, BACEN considers the following criteria: (1) failure to declare required information or present supporting documentation requested by BACEN: fine equivalent to 5 per cent of the FDI, capped at 125,000 reais; (2) late presentation of information or documentation: fine equivalent to 5 per cent of the FDI, capped at 25,000 reais (for delays of less than 30 days, the fine will be reduced by 90 per cent; for delays of between 30 and 60 days, the fine will be reduced by 50 per cent); (3) presentation of incorrect or incomplete information or documentation: fine equivalent to 2 per cent of the FDI, capped at 50,000 reais; and (4) presentation of false information or documentation: fine equivalent to 10 per cent of the FDI, capped at 250,000 reais.
The amounts of the fines mentioned in points (1) to (3), above, will be increased by 50 per cent if the irregularity is detected by BACEN and not corrected within a reasonable time.
FDIs are also subject to other regulators besides BACEN. For example, Resolution No. 4,373/2014 of the National Monetary Council requires foreign investors that participate in the capital markets (for instance, by investing in (any number of) shares traded on a stock exchange by publicly held companies) appoint a representative in Brazil, who must be duly registered with the Brazilian Securities Exchange Commission (CVM). If the structure of a given FDI involves the assignment and transfer of intellectual property rights, it might be subject to registration with the National Institute of Industrial Property.
FDI is also subject to requirements concerning the vehicle used to carry out the investment, such as through the direct operation of a business in Brazil. The process of legalising a branch of a foreign company has peculiarities compared with the incorporation of a Brazilian company with foreign capital, especially concerning the requirement to obtain operational authorisation by the federal government. As provided under Article 1,134 of the Brazilian Civil Code, a foreign company cannot operate in Brazil without federal government permission. Generally, the Department of Business Registration and Integration, which is subordinated to the Ministry of Economy, has authority to analyse and approve authorisation requirements. In specific situations, that authority is lies with other government entities (for instance, the National Civil Aviation Authority has the power to authorise the legalisation of a branch of a foreign company engaged in air transportation services).
To apply for authorisation, a foreign company wishing to open a branch in Brazil must submit the following documents:
- evidence that the company is legally incorporated in its country of origin;
- the entire content of the by-laws or statutes of the company;
- a list of the officers of the company, with the name, nationality, profession, domicile and value of each one’s share participation in the company’s capital;
- a copy of the minutes that authorised the incorporation in Brazil and established the capital applied to the operations in Brazil;
- evidence of the appointment of the representative in Brazil, with express powers to accept the conditions required for the authorisation; and
- the most recent balance sheet.
In turn, if a company decides to set up a subsidiary in Brazil to make an investment in Brazil, the company should follow the ordinary procedure for establishing a Brazilian company organised under one of the corporate types provided for under Brazilian law. Generally, the vast majority of Brazilian companies are organised as a limited liability company (sociedade limitada) or as a corporation (sociedade anônima). The process to incorporate a Brazilian subsidiary usually takes between 30 and 60 days, which is considerably less than the time required to set up a branch of a foreign company. Furthermore, except for FDI restrictions applicable to certain businesses and sectors (some of which are analysed in ‘Restrictions’, below), a Brazilian subsidiary can be 100 per cent-owned by foreigners.
Furthermore, foreign investors, whether individuals or legal entities, must be registered with the National Taxpayers Registry (RFB) of the Federal Revenue. This is required even if the investor is exempt from complying with tax obligations in Brazil since, in addition to combating tax evasion, the RFB also aims to combat money laundering and corruption.
Finally, foreign investors are required to grant power of attorney to a Brazilian resident with powers to receive service of process in corporate matters and, should a foreign investor be represented by an attorney-in-fact in the corporate meetings of the Brazilian company, the attorney-in-fact must be a shareholder or a lawyer (in the case of Brazilian corporations, the attorney-in-fact may also be a member of company management).
Some restrictions to FDI are based on national interest, security and strategy. These restrictions involve a state monopoly over certain activities, the prohibition that certain Brazilian assets are owned or controlled by foreigners, or the limitation of FDI in certain types of businesses up to a cap.
As a result, there are restrictions limiting foreign ownership of rural property or border areas, as well as restrictions on foreign ownership of mass media companies (FDI in newspaper and broadcasting companies is limited to 30 per cent). In addition, there are limitations to foreign ownership of certain financial institutions (foreign financial institutions need government authorisation to establish a local presence or acquire equity in a Brazilian financial institution), and hospitals and healthcare service providers, as detailed below.
Nevertheless, these restrictions have been consistently softened, removed or reduced to increase the competitiveness of the Brazilian market in areas such as insurance, medical services and air transportation.
For instance, with the entry into force of Law No. 13,842/2019, the limitation on foreign ownership of Brazilian airline companies was removed; foreigners may now own 100 per cent of these companies. In addition, there is discussion about new legislation to lift restrictions on foreign ownership of rural properties.
Another example of liberalisation occurred in the healthcare sector. The Federal Constitution prohibits foreign companies from investing, both directly and indirectly, in companies engaged in the healthcare sector, except if authorised by a specific law. No such legislation was approved until 2015, when Law No. 13,097/2015 allowed foreign investors to invest in the healthcare sector, under specific circumstances, including transactions relating to (1) donations from international organisations linked to the United Nations or from technical cooperation, financing and loan entities, (2) companies whose corporate purpose is to instal, operate or develop hospitals, clinics, family planning activities and research, and (3) health services maintained by companies to serve employees and their families, outside the public social security.
However, certain activities, such as oil refining and the exploration of nuclear activities, are still under state monopoly, so entities engaged in these activities cannot receive FDI.
The Brazilian Trade and Investment Promotion Agency (APEX) is a public agency specifically created to promote international trade in Brazil and attract FDI. Besides leading strategic events and map opportunities, APEX also provides guidance to support foreign investors in identifying business opportunities in Brazil.
Review process – procedure and substantive assessment
As mentioned above, the legislation on FDI generally concerns formal registration requirements. The substantive assessment, in turn, is subject to the relevant sectoral regulation; therefore, specific requirements vary depending on the investment sector (e.g., foreign capital investment limit, as in the mass media sector) and the peculiarities of each transaction.
Besides being subject to regulatory restrictions, the FDI must also follow public bidding legislation. In 2021, Brazil enacted a new Public Procurement and Contracts Law (Law No. 14,133/2021), allowing for more flexible international bidding. However, the Bidding Law (Law No. 8,666/1993) remains in force, imposing certain restrictions on foreign capital (e.g., foreign companies can participate in a public consortium but a Brazilian company must lead the consortium).
Impact of the covid-19 pandemic
According to the 2021 World Investment Report released by the United Nations Conference on Trade and Development, FDI in Brazil decreased by more than 62 per cent in 2021, largely as a consequence of the measures adopted by the country to face the pandemic. Nevertheless, Brazil is expected to return quickly to pre-pandemic levels, particularly considering the current privatisation programme to attract foreign investors. In the first months of 2021, privatisation plans were approved by the legislative branch for (1) Correios, the public post office service, currently a state monopoly, (2) the national broadcasting company EBC, and (3) the privatisation of the country’s major electricity provider, Eletrobras (the government intends to sell a portion of its participation in the company, reducing its shareholding from 61 to 45 per cent).
Insights into recent enforcement practice and current trends
Considering that Brazil’s post-pandemic economic recovery is mainly focused on privatisations, reducing barriers to international investment is identified as one alternative to increase FDI. For instance, and as mentioned above, the cap on foreign ownership of Brazilian airline companies was recently lifted and there are discussions on new legislation to liberalise restrictions on foreign ownership of rural properties.
Practical insights and strategic guidance for investors
Brazil has strict employment, anti-corruption, environmental, consumer and data privacy laws, establishing successor or joint liability in many situations. Therefore, it is recommended, in addition to carefully analysing the structure of a given FDI transaction, that any investor carries out careful due diligence on the assets and liabilities of the investment target and its shareholders. Contingencies are not necessarily a deal breaker, as Brazilian law and practice offer tools that help mitigate the effects of identified risks, such as indemnification provisions, escrow deposits to secure the payment of indemnifications, and different categories of collateral (for instance, pledge, mortgage, fiduciary sale and personal guarantee).
We are not aware of any potential changes in the domestic regulations in respect of FDI.
1 Isabel Costa Carvalho is a partner, Rafael Szmid is a senior associate, Cíntia Rosa, Felipe Lacerda and Ana Laura Pongeluppi are associates at Hogan Lovells.
2 See United Nations Conference on Trade and Development, World Investment Report 2021, available at https://unctad.org/system/files/official-document/wir2021_en.pdf.