Brazil: How to Adhere to Restrictions in an Uncertain yet Competitive Climate
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Brazil, the largest economy in Latin America and one of the top 10 largest economies in the world is a commodities export-oriented economy driven by agribusiness, with diversified industry and service sectors.
Some of the main investing countries in Brazil are China, the United States, the Netherlands, France, Spain, France and Germany. Foreign direct investment (FDI) is typically focused on the real estate, infrastructure, mining and technology sectors.
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 Brazilian government managed to curb inflation with the implementation of the Real Plan (Plano Real), which involved creating a new currency (the current Brazilian currency, the real), restructuring the financial system, passing strict budgetary rules and privatising state-owned companies that were responsible for running a significant part of the Brazilian infrastructure at the time, especially in the energy, telecommunications, transportation 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 affecting the US stock markets, the slowdown of the global economy as a result of terrorist attacks and wars, and the disclosure of accounting frauds perpetuated 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.
Brazil’s FDI landscape is navigating through a challenging climate. Amidst Brazil’s shifting economic landscape under the new government that took office on January 1, 2023, there are both challenges and opportunities for investors looking to do business in Brazil.
After a polarised dispute, Luiz Inácio Lula da Silva (Lula) narrowly defeated Jair Bolsonaro (current president at election) to win Brazil’s presidency again for a third mandate. While the new government should not continue the round of privatisations initiated in the previous administration, ESG-related investments and infrastructure deals are anticipated to become more prevalent.
Lula’s government has recently relaunched the Growth Acceleration Plan (Plano de Aceleração do Crescimento (PAC)) adopted in his previous mandates. PAC will fund around 1 trillion Brazilian reais (approximately US$200 million) in infrastructure, energy and transportation projects over the next four years. While PAC is expected to contribute to boost economic growth and employment in Brazil, it will be necessary to strike a balance between public spending and fiscal targets, which can be challenging.
In addition, FDI in Brazil is expected to continue increasing in the coming years thanks to the depreciation of the Brazilian real against the US dollar, resulting in Brazilian assets becoming relatively inexpensive targets for foreign investors, as well as the potential approval of key legislative structural reforms that are currently under discussion, including tax and administrative reforms.
In August 2023, the Brazilian Chamber of Representatives (Câmara dos Deputados) approved a new fiscal framework, which aims to streamline and simplify the Brazilian tax system. The new fiscal framework has yet to be approved by the Brazilian Senate (Senado Federal) and ratified by the Brazilian President before it comes into effect. Generally speaking, the new tax framework was perceived by the market as a tool that can reduce transactional costs by alleviating the often-confusing complexities of Brazilian tax rules.
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 investment with the Central Bank of Brazil (Central Bank) 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 of equity held by Brazilians in local entities to non-Brazilians). Registration with the RDE-IED is mandatory and is a condition for any FDI in Brazil, regardless of the amount, as established by Central Bank 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 the registration of:
- foreign investors with the Central Bank (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 the Central Bank (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 Brazilian companies that are recipients of FDI and foreign investors may input information regarding events such as the above. Nevertheless, Brazilian companies receiving 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 the Central Bank may result in the application of fines and other penalties provided for in the regulation.
According to Laws No. 4,131/1962 and 11,371/2006 and Central Bank Circular No. 3,857/2017, failure to declare required FDI information or present supporting documentation requested by the Central Bank, late submission of such information or documentation, or submission of incorrect, incomplete or false information and documentation, is subject to administrative penalties. In applying these penalties, the Central Bank considers the following criteria:
- failure to declare required information or present supporting documentation requested by the Central Bank: fine equivalent to 5 per cent of the FDI, limited to 125,000 reais;
- late submission of information or documentation: fine equivalent to 5 per cent of the FDI, limited to 25,000 reais (for delays lower than 30 days, the fine will be reduced by 90 per cent; for delays between 30 and 60 days, the fine will be reduced by 50 per cent);
- submission of incorrect or incomplete information or documentation: fine equivalent to 2 per cent of the FDI, limited to 50,000 reais; and
- submission of false information or documentation: fine equivalent to 10 per cent of the FDI, limited to 250,000 reais.
The amounts of the fines mentioned in items (1) to (3) above will be increased by 50 per cent if the irregularity is detected by the Central Bank and not corrected within a reasonable time.
FDI is also subject to other regulators besides the Central Bank. For example, Resolution No. 4,373/2014 of the National Monetary Council requires that any foreign investors that participate in the Brazilian capital markets (for instance, by investing in shares traded on a stock exchange by publicly held companies), regardless of the FDI amount, 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. Article 1,134 of the Brazilian Civil Code provides that a foreign company cannot operate in Brazil without Brazilian federal government permission. Generally, the Department of Business Registration and Integration (Departamento Nacional de Registro Empresarial e Integração (DREI)), which is subordinated to the Ministry of Economy, has authority to analyse and approve authorisation requirements. In specific situations, that authority 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 invest in Brazil (which is more common than opening a foreign branch), 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, most Brazilian companies are organised as a limited liability company (sociedade limitada) or as a corporation (sociedade anônima). The incorporation process of 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.
In addition, 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 (for Brazilian corporations, the attorney-in-fact may also be a member of company’s management).
Finally, operating companies in Brazil must submit to the RFB a statement identifying their ultimate beneficial owner. Failure to comply with this obligation may lead to the suspension of their corporate taxpayer registration, which can hinder the ability of such companies to issue invoices or transact with local financial institutions.
Some restrictions to FDI are based on national interest, security and strategy. These restrictions involve a state monopoly over certain activities, prohibitions with respect to ownership or control by non-Brazilians of certain Brazilian assets, or the limitation of FDI in certain types of businesses not to exceed a specific amount.
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, Brazil’s regulation contains limitations on foreign ownership of certain financial institutions (foreign financial institutions need governmental 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 the foreign ownership of Brazilian airline companies was removed; foreigners may now own 100 per cent of these companies. In addition, new legislation was proposed in 2021 to lift restrictions on foreign ownership of rural properties. There have been no recent developments on this matter as the legislative agenda primarily prioritised post-pandemic recovery efforts throughout 2021, and, more recently, the focus has shifted towards fiscal targets and the new tax rules.
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 install, 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 nuclear energy, are still under state monopoly, so entities engaged in such 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 identifying 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, FDI must follow public bidding legislation, when applicable. 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) will remain in force until December 2023, and the government can choose whether Laws No. 14,133/2021 or 8,663/1993 will apply to public procurement procedures until 1 January 2024, when Law No. 14,133/2021 will become the legislation governing public procurement procedures. Law No. 8,666/1993 imposes certain restrictions on foreign capital (e.g., foreign companies can participate in a public consortium, but a Brazilian company must lead the consortium) that will no longer exist as of 1 January 2024.
Although not an intrinsic aspect of the FDI, the investment may also be subject to scrutiny by the Brazilian Competition Authority (CADE) if the transaction (e.g., merger, acquisition or joint venture) meets certain thresholds for merger control.
Merger control encompasses a prior review of transactions that may lead to some degree of economic concentration, including mergers and acquisitions, acquisitions of tangible and intangible assets, joint ventures and associative agreements. Transactions that meet the thresholds provided by the Brazilian Antitrust Law (Law No 12,529/2011) must be filed with CADE for their review and cannot be closed until clearance. Although this type of control is reasonably equivalent to merger review regimes in other jurisdictions, the Brazilian regime also includes contracts that create some degree of cooperation between companies while preserving their independence in all other spheres (called associative agreements).
The jurisdictional thresholds for merger control review are set forth as a two-prong test, based on the following criteria: (1) at least one of the economic groups involved had a gross turnover (revenues) in the latest financial statements (balance sheet), or a volume of business, in Brazil, in the calendar year before the transaction, greater than 750 million reais; and (2) another economic group had a gross turnover (revenues) in the latest financial statements (balance sheet), or a volume of business, in Brazil, in the calendar year before the transaction, greater than 75 million reais.
The ‘economic group’ criterion considers companies’ turnover subject to the same corporate control, which is considered by CADE for cases involving corporate interests higher than 20 per cent, regardless of whether these interests amount to actual relevant influence over certain party commercial or competitive decisions. For these same purposes, CADE adopts a ‘fund-based’ approach in cases involving investment funds. Therefore, for investment funds created under Brazilian securities regulations, annual gross revenues should be calculated, including (1) the (direct or indirect) holders of at least 50 per cent of the quotas of the fund directly involved in the transaction (directly or by means of a shareholders agreement), and their respective economic groups, as well as (2) all companies controlled by the fund and those in which it holds (directly or indirectly) at least 20 per cent of the voting stock or equity.
There is no legal framework for screening FDIs in Brazil by CADE and, in general, FDIs are reviewed by CADE under the same rules, principles and procedures as any other transaction. CADE is a very technical public authority and only focuses on antitrust aspects as part of its merger reviews.
Practical insights and strategic guidance for investors
Brazil has strict employment, anti-corruption, antitrust, 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 regarding FDI.
1 Isabel Costa Carvalho is the head partner of and Felipe Lacerda is a senior associate at Hogan Lovells São Paulo.