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Brazzil
- Economy - October 2003
LEGAL GUIDE FOR THE
FOREIGN INVESTOR IN
BRAZIL Introduction
It was a great
satisfaction for
CESA - CENTRO DE ESTUDOS DAS SOCIEDADES DE
After choosing the topics,
defining the chapters and distributing the tasks involved, in
The success attained and
the significant positive feedback on this project made us at CESA
The fifth edition of this
guide was thoroughly updated and expanded by the various CESA
The consolidated success
of the Guide and consequent demand for a more up-to-date
Finally, we should mention
that CESA was founded in January 1982, and today includes
São Paulo, April, 2001
CESA
- Centro de Estudos das Sociedades de Advogados
Clemencia
Beatriz Wolthers - President
Orlando Giacomo Filho
- Council President Moira V. Huggard-Caine - Secretary Director COOPERATORS The CESA Board of Directors would like to thank the following law firms that collaborated in the preparation, updating and translation of each chapter of this Legal Guide for Foreign Investors in Brazil. AMARO, STUBER E ADVOGADOS ASSOCIADOS S/C Av. Paulista, 1499, 18º andar, 01311-928 São Paulo, SP. Fone: 11 3284-9911 Fax: 11 3283-0483 e-mail: lawyers@amarostuber.com.br
Internet: www.amarostuber.com.br ARAÚJO E POLICASTRO ADVOGADOS S/C Av. Brigadeiro Faria Lima, 2894, 11º andar, 01452-002 São Paulo, SP. Fone: 11 3049-5700 Fax: 11 3845-2120/3842-6195
e-mail: arapo@araujopolicastro.com.br AZEVEDO SETTE ADVOGADOS S/C Rua Paraíba, 1000, 14º andar, 30130-141 Belo Horizonte, MG. Fone: 31 3261-6656 Fax: 31 3261-6797
Internet: www.azevedosette.com.br BARBOSA, MÜSSNICH & ARAGÃO Av. Almirante Barroso, 52, 32º andar, 20031-000 Rio de Janeiro, RJ. Fone: 21 3824-5800 Fax: 21 2262-5536/5537
e-mail: mailbox@bmalaw.com.br BATISTELA ADVOGADOS E CONSULTORES JURÍDICOS Rua General Jardim, 770, 8º andar, conjs. C/D, 01223-010 São Paulo, SP. Fone: 11 256-7366 Fax: 11 256-7366
e-mail: jab.adv@terra.com.br BRITO, MERCADANTE & ROCHA ADVOGADOS Rua Profº Antônio Aleixo, 523, 1º andar, 30180-150 Belo Horizonte, MG. Fone: 31 3275-1891/1709 Fax: 31 3275-2003
e-mail: bmradvogados@bmradvogados.com.br CAMARGO, DIAS ADVOGADOS ASSOCIADOS Av. Liberdade, 65, 4º andar, conj. 408, 01503-000 São Paulo, SP. Fone: 11 3107-5551 Fax: 11 3107-5551
e-mail: camargodias@originet.com.br CASILLO - ADVOGADOS Rua Lourenço Pinto, 500, 80010-160 Curitiba, PR. Fone: 41 310-6800 Fax: 41 310-6868
e-mail: casillo.advocacia@lawyer4u.com CASTRO, BARROS, SOBRAL,VIDIGAL, GOMES ADVOGADOS Praia de Botafogo, 228, 15º andar, 22359-900 Botafogo, RJ. Fone: 21 2553-1855 Fax: 21 2552-1796 e-mail: mailrj@cbsvg.com.br
Internet: www.cbsvg.com.br CEGLIA NETO, ADVOGADOS Rua Paula Oliveira, 31, 04530-020 São Paulo, SP. Fone: 11 3845-5244 Fax: 11 3845-6959
e-mail: ceglia@amcham.com.br DEMAREST E ALMEIDA ALMEIDA, ROTENBERG E BOSCOLI - ADVOCACIA Al. Campinas, 1070, 01404-001 São Paulo, SP. Fone: 11 3888-1800 Fax: 11 3888-1700 e-mail: mainbox@demarest.com.br
Internet: www.demarest.com.br FELSBERG,PEDRETTI, MANNRICH E AIDAR ADVOGADOS E CONSULTORES LEGAIS Av. Paulista, 1294, 2º e 3º andares, 01310-915 São Paulo, SP. Fone: 11 3141-9100 Fax: 11 3141-9150 e-mail: mail@felsberg.com.br
Internet: www.felsberg.com.br GOULART PENTEADO, IERVOLINO E LEFOSSE - ADVOGADOS Rua Paes Leme, 524, 6º e 7º andares, 05424-904 São Paulo, SP. Fone: 11 3093-6700 Fax: 11 3031-5008/3819-0364 e-mail: gpilbra@gpilbra.com.br
Internet: www.gpilbra.com.br GREBLER, PINHEIRO, MOURÃO E RASO ADVOGADOS S/C Rua Pernambuco, 353, 7º andar, 30130-150 Belo Horizonte, MG. Fone: 31 3261-1400 Fax: 31 3261-8199 e-mail: gpmr@gpmr.com.br Internet: www.gpmr.com.br MACHADO, MEYER, SENDACZ E ÓPICE - ADVOGADOS Rua da Consolação, 247, 4º andar 01301-903 São Paulo, SP. Fone: 11 3150-7000 Fax: 11 3150-7071 e-mail: mmso@mmso.com.br
Internet: www.machadomeyer.com.br MATTOS FILHO, VEIGA FILHO, MARREY JR. E QUIROGA ADVOGADOS Av. Paulista, 1499, 20º andar, 01311-928 São Paulo, SP. Fone: 11 3147-7600 Fax: 11 3147-7770
e-mail: mflaw@mflaw.com.br NEHRING E ASSOCIADOS - ADVOCACIA Av. Paulista, 1159, 17º andar, conjs. 1701/9, 01311-921 São Paulo, SP. Fone: 11 288-2577 Fax: 11 288-2071
e-mail: nehring@uninet.com.br NORONHA ADVOGADOS Av. Brigadeiro Faria Lima, 1355, 3º andar, 01452-919 São Paulo, SP. Fone: 11 3038-8090 Fax: 11 212-2495/7903 e-mail: noadsao@noronhaadvogados.com.br
Internet: www.noronhaadvogados.com.br NOVAES, PLANTULLI E MORTARI ADVOGADOS Av. Brigadeiro Faria Lima, 2601, 9º andar, conj.94, 01451-001 São Paulo, SP. Fone: 11 3816-1930 Fax: 11 3813-2688 e-mail: novaes@novaesadvs.com.br
Internet: www.novaesadvs.com.br PAULO ROBERTO MURRAY - ADVOGADOS Avenida Paulista, 1499, 13º andar, 01311-928 São Paulo, SP. Fone: 11 3171-3344 Fax: 11 3171-3444 e-mail: murray@prmurray.com.br
Internet: www.prmurray.com.br PINHEIRO NETO ADVOGADOS Rua Boa Vista, 254, 9º andar, 01014-907 São Paulo, SP. Fone: 11 3247-8400 Fax: 11 3247-8600 e-mail: pna@pinheironeto.com.br
Internet: www.pinheironeto.com.br STRAUBE ADVOGADOS Rua Cel. Xavier de Toledo, 316, 5º andar, 01048-000 São Paulo, SP. Fone: 11 255-8744 Fax: 11 214-3553 e-mail: straube@sti.com.br TESS ADVOGADOS Avenida Brasil, 471, 01431-000 São Paulo, SP. Fone: 11 3059-2900 Fax: 11 3059-2901
e-mail: tess@tesslaw.com TOZZINI, FREIRE, TEIXEIRA E SILVA - ADVOGADOS Rua Líbero Badaró, 293, 21º andar, 01095-900 São Paulo, SP. Fone: 11 3291-1000 Fax: 11 3291-1111 e-mail: mail@tozzini.com.br
Internet: www.tozzini.com.br TRENCH, ROSSI E WATANABE - ADVOGADOS Av. Dr. Chucri Zaidan, 920, 8º andar, Market Place Tower, 04583-904 São Paulo, SP. Fone: 11 3048-6800 Fax: 11 5506-3455 e-mail: sergio.caiuby@bakernet.com
Internet: www.bakernet.com ULHÔA CANTO, REZENDE E GUERRA - ADVOGADOS Av. Pres. Antonio Carlos, 51, 12º andar, 20020-010 Rio de Janeiro, RJ. Fone: 21 3824-3265 Fax: 21 2240-7360
e-mail: ucrgrj@amcham.com.br VEIRANO E ADVOGADOS ASSOCIADOS Av. Presidente Wilson, 231, 23º andar, 20030-021 Rio de Janeiro, RJ. Fone: 21 3824-4747 Fax: 21 2262-4247 e-mail: rjoffice@veirano.com.br
Internet: www.veirano.com.br XAVIER, BERNARDES, BRAGANÇA, SOCIEDADE DE ADVOGADOS Av. Brasil, 1.008, 01430-000 São Paulo, SP. Fone: 11 3069-4300 Fax: 11 3069-4301
e-mail: xbblawsaopaulo@xbb.com.br YARSHELL, MATEUCCI E CAMARGO ADVOGADOS Av. Paulista, 1499, 3º andar, conj. 301, 01311-200 São Paulo, SP. Fone: 11 288-4322 Fax: 11 284-1644
e-mail: ymcadvs@amcham.com.br Secretária Executiva: Rua Boa Vista, 254, 4º, sala 413, 01014-907 São Paulo, SP. Fone: (11) 3104-8402 Fax: (11) 3104-3352 Silvia Miranda Naufal
LEGAL GUIDE FOR THE
FOREIGN INVESTOR IN
BRAZIL CONTENTS
1. THE BRAZILIAN LEGAL SYSTEM
Brazil
is organized as a federative republic, constituting the
indissoluble union of the states, municipalities and the Federal
District.
The legal system adopted
in
Brazil is codified,
and laws are issued by the federal government, the states and
municipalities, with due regard for their individual spheres of
authority. Court decisions are based on the correct application of
the laws prevailing in
Brazil.
When there is no specific legal provision, the court decides on
the basis of analogy, customs and general legal principles.
Judicial precedents do not bear the force of law in
Brazil,
although they do exercise an important role supporting the court's
decision.
The Federal Constitution
establishes the legislative authority of the federal government,
the states and the municipalities, thereby avoiding the issuance
of laws that are redundant or conflicting with those in the other
spheres. The legislative authority of the federal government, with
due regard for the principles of the Federal Constitution, is
hierarchically superior to the authority of the states and
municipalities.
The federal government is
therefore vested with exclusive authority to legislate on civil,
commercial, penal, procedural, electoral, agrarian, maritime,
aeronautical, space and labor law; expropriation, bodies of water,
power, computer science, telecommunications, radio broadcasting,
the monetary system, exchange, credit policy, insurance, foreign
trade,
mining deposits, nationality, citizenship, and other matters.
The Federal Constitution
allows the federal government, states and the Federal District to
legislate concurrently regarding certain matters, such as, tax,
financial, economic and prison law; production and consumption;
liability for damages to the environment and the consumer;
education and teaching; and social security, protection and
defense of health. In this case, the authority of the federal
government is limited to the issuance of general guidelines on
these matters, with the states and the Federal District being
charged with supplementary legislation on these matters, with due
regard for the general guidelines of federal legislation.
The legislative authority
of the municipalities is restricted to matters of local interest.
The Federal Constitution
is at the head of the Brazilian legislative system, and ensures
the fundamental rights and guarantees of the citizen; governs the
political/administrative organization of the Federative Republic
of
Brazil; defines the
individual spheres of authority of the Executive, Legislative and
Judicial Branches; regulates the tax system; and provides for
socioeconomic and financial policy. The states are organized and
governed by their own constitutions and laws, with due regard for
the principles mentioned in the Federal Constitution.
The main legal documents
in
Brazil are the codes,
which contain the basic legislation on the matters dealt with
thereunder. Some of the more important of these codes are the
Civil Code, the Tax Code, the Penal Code, and the Commercial Code.
None of these codes supersedes the Federal Constitution, which is
the supreme law of
Brazil. 2. INSTITUTIONS FOR ECONOMIC DEVELOPMENT2.1. Government Ministries and Secretaries
The Statute for
Administrative Reform (Decree-Law No. 200/67 and its subsequent
alterations), classified the Federal Administration into two
categories, Direct and Indirect Administration. The first deals
with services which are integrated with the administrative
structure of the Presidency of the Republic and its Ministries.
The Indirect Administration deals with matters relating to the
diverse entities, public (Autarchies) or private (Societies of
Mixed Economy, Public Firms and Foundations), linked to a
Ministry, but administratively and financially independent.
The Federal Public
Administration is directed by the President of the Republic and
aided by Ministers of State.
The Ministries are
independent organs at the top of the Federal Administration
subordinate only to the Presidency and outlined by the 1967
Administrative Reform with later alterations (the last reform was
implemented by Provisional Remedy No 2.123-28 de 26/01/2001), to
wit:
2.2. National Monetary Council
One of the diverse organs
of the Ministry of Finance, the National Monetary Council (NMC) is
presided over by the Minister of Finance, with the objective of
elaborating currency and credit policies, with a view to the
economic and social progress of the country. The functions of the National Monetary Council are to: supervise the application of resources of public or private financial institutions with the intent of providing, in different regions of the country, favorable conditions to the harmonious development of the national economy, coordinate monetary, creditary, budgetary and fiscal policies, regulate the foreign value of the currency and the balance of payment, strive for the liquidity and solvency of financial institutions, etc... 2.3. Central Bank of Brazil The Central Bank of Brazil (BACEN) is also linked to the Ministry of Finance and its principle functions are: fulfill the norms expedited by the National Monetary Council, be a depository of official gold reserves and foreign currency reserves, control credit of all forms, control foreign capital under the Law, control check payments and other papers, represent the Brazilian Government with international financial institutions, carry out the inspection of financial institutions, put into effect buying and selling operations of federal public titles as an instrument of monetary policy, etc... 2.4. Chambers of Commerce
With a view to
approximating
Brazil
economically to other countries, increasing the commercial and
financial flow between countries, there are a series of Chambers
of Commerce. Among them are the American Chamber of Commerce, the
Japanese Chamber of Commerce and Industry, and the
Italian-Brazilian Chamber of Commerce and Industry, Chamber of
Foreign Commerce (CAMEX) 3. FOREIGN CAPITAL3.1. General Features
Foreign capital in
Brazil
is governed by Laws Nos. 4131 (the Foreign Capital Law) and 4390
of September 3, 1962 and August 29, 1964, respectively. Both laws
are regulated by Decree No. 55762 of February 17, 1965, and have
been amended.
According to Law No. 4131,
"foreign capital is considered to be any goods, machinery and
equipment that enter
Brazil
with no initial disbursement of foreign exchange, and are intended
for the production of goods and services, as well as any funds
brought into the country to be used in economic activities,
provided that they belong to individuals or companies resident or
headquartered abroad".
There are two official
exchange markets in
Brazil,
both of which are subject to Central Bank regulations:
Both markets operate at
floating rates freely negotiated between the parties, and the key
distinctions between them are that (i) the commercial/financial
exchange market, as a rule, is restricted to transactions that in
certain cases require preliminary approval from the monetary
authorities; and (ii) the tourism exchange market is open to
transactions that do not require any preliminary approval from
Brazilian monetary authorities. Exchange operations are effected by means of exchange contracts entailing an inflow or outflow of foreign currency. 3.2. Registration of Foreign Capital
Circular No. 2997 of
August 15, 2000, issued by the Central Bank of
Brazil,
introduced the electronic registration system for foreign direct
investment in
Brazil.
This circular took effect on September 4, 2000 and brought some
changes in foreign direct investment registration in
Brazil
and the obtaining of information on these transactions.
Since then, registration
of foreign investments has been made through the RDE-IED (Registro
Declaratório Eletrônico - Investimento Externo Direto) Mode, which
is part of the Central Bank Information System (Sistema de
Informações do Banco Central - SISBACEN).
For electronic
registration purposes, foreign direct investment is defined as the
permanent ownership interest held in the Brazilian investee, or,
according to common market practices, the ownership interest
intended to be permanently held by nonresident investors, whether
individuals or legal entities, residing, domiciled or
headquartered abroad, through the ownership of shares or quotas
representing the corporate capital of Brazilian companies, as well
as the allocated capital of foreign companies authorized to
operate in
Brazil.
The party responsible for
the foreign direct investment must first enroll in SISBACEN,
according to the rules currently in effect. When registered
through the RDE-IED, foreign direct investments will be given a
permanent number for the investor-investee case, and all
subsequent changes and additions will be made under this same
registration.
The major changes
introduced by Circular 2997/00 are the following: (i) registration
of foreign direct investments is now made through a statement,
which means that the Brazilian investee and/or the representative
of the foreign investor are responsible for registration of
foreign investments, which will no longer be subject to
preliminary review and verification by the Central Bank; and (ii)
registration of foreign investments will also be made in Brazilian
currency. All foreign investments must be registered with the Central Bank of Brazil. This registration is essential for offshore remittances, capital repatriation and registration of profit reinvestment. 3.3. Currency Investments
No preliminary official
authorization is required for investment in currency. The
investment to subscribe for capital or to buy a stake in an
existing Brazilian company can be remitted to
Brazil
through any banking establishment authorized to deal in foreign
exchange. However, closing of the exchange contract is conditional
on the existence of a RDE-IED registration number for the foreign
investor and the Brazilian investee.
Registration of the
investment is made through the RDE-IED System by the Brazilian
company receiving the investment within 30 days of closing of the
exchange contract for the remittance, together with documents
reflecting capitalization of the funds. Foreign currency investments must be registered in the original currency or, upon express request of the investor, in another currency, maintaining the exchange parity, in addition to the registration in Brazilian currency, as mentioned above. 3.4. Investment by Conversion of Foreign Credits
If the transaction is not
registered in the RDE-IED System, investment by foreign credit
conversion will be subject to preliminary authorization from the
Department of Foreign Capital Control and Registration (Fiscalização
e Registro de Capitais Estrangeiros - FIRCE). After authorization,
a token exchange transaction must be performed, representing the
purchase and sale of the foreign currency.
Pursuant to article 8 of
the Annex to Circular 2997/00, conversion into foreign direct
investment is defined as �the transaction whereby credits eligible
for offshore transfer based on prevailing rules are used by
nonresident creditors to acquire or pay in an ownership interest
in the capital of a company in
Brazil.�
Registration of foreign
direct investment resulting from conversion, however, depends on
receipt by the Brazilian investee of (i) a statement from the
creditor and committed investor, defining exactly the due dates of
the installments and respective amounts to be converted, and in
the event of interest and other charges, also the period to which
they refer and the respective rates and calculations, and (ii) a
binding statement from the creditor, agreeing to the conversion. The Brazilian company has 30 days to capitalize these funds and apply for registration with the Central Bank of Brazil. 3.5. Investment by Import of Goods without Exchange Cover
Investment by import of
goods without exchange cover requires the preliminary approval of
FIRCE and SISCOMEX.
Registration through the
RDE-IED Mode requires that both tangible and intangible assets be
exclusively intended for paying-up of capital.
Registration of foreign
direct investments resulting from the import of intangible assets
without coverage by an exchange contract requires preliminary
approval of FIRCE. For tangible assets, registration requires (i)
the value of the registration made through the ROF (Registro de
Operações Financeiras - Registration of Financial Transactions)
Mode of the RDE System linked to the Import Declaration (DI); and
(ii) the currency stated on the corresponding ROF.
Registration of foreign
capital that enters
Brazil
in the form of assets must be made in the currency of the
investor�s country or, upon express request of the investor, in
another currency, maintaining the exchange parity.
Foreign capital is
considered to be any goods, machinery or equipment that enter
Brazil
with no initial disbursement of foreign currency, and are intended
for the production or marketing of goods or rendering of services.
The import of used goods or under tax incentives is conditional on
the absence of similar goods in
Brazil.
Used goods must be used in projects that foster the country�s
economic development. Once the imported goods have been cleared by customs, the Brazilian company has 180 days to incorporate them into its capital and another 30 days to apply for registration of the investment with the Central Bank of Brazil. 3.6. Investment on the Capital Market
On January 26, 2000, the
Brazilian Monetary Council approved Resolution 2689, whereby any
nonresident investors, whether individuals or legal entities,
individually or collectively, are allowed to invest on the
Brazilian financial and capital markets.
Investment Companies -
Foreign Capital, Investment Funds - Foreign Capital, Annex IV
Portfolios (mechanisms created by Annexes I, II and IV) and
Fixed-income Funds - Foreign Capital, were replaced by a single
investment mechanism through which foreign funds flowed into
Brazil
by nonresident investors may be invested in fixed- or
variable-income instruments and investment modes offered on the
financial and capital markets to resident investors.
Nonresident investors will
now use the same registration to invest in the fixed- and
variable-income markets, and may migrate freely from one type of
investment to the other. To access these markets, the foreign
investor must appoint a representative in
Brazil,
who will be responsible for registration of the transactions, fill
out the form attached to Resolution 2689/00 and obtain a
registration with the Brazilian Securities Commission (Comissão de
Valores Mobiliários - CVM).
Pursuant to Article 6, I
of Resolution 2689/00, securities belonging to foreign investors
must be kept in custody by entities authorized by CVM or by the
Central Bank to provide such service, or registered, if
applicable, with the Special Settlement and Custody System (Sistema
Especial de Liqüidação e Custódia - SELIC) or with a registration
and financial settlement system supervised by the Central Agency
for Custody and Financial Settlement of Securities (Central de
Custódia e de Liquidação Financeira de Títulos - CETIP). In all transactions carried out in the name of a nonresident investor, the exchange contract must state the RDE registration number in the appropriate blank. 3.7. Remittance of Profits
There are normally no
restrictions on the distribution and remittance of profits abroad.
Profits as from January 1, 1996 are exempt from income tax
withholding.
Profit remittances must be
registered as such through the RDE-IED Mode, considering the
ownership interest held by the investor in the total shares or
quotas that make up the paid-up corporate capital of the investee. Brazil has signed double-taxation treaties with the following countries: Sweden, Japan, Norway, Portugal, Belgium, Denmark, Spain, Germany, Austria, Luxembourg, Italy, Argentina, Canada, Ecuador, the Netherlands, the Philippines, France, South Korea, the Czech Republic and Slovakia, Finland, Hungary, India and China. 3.8. Reinvestment of Profits
According to the Foreign
Capital Law, reinvestments are �profits made by companies
established in
Brazil
and allocated to persons or companies resident or domiciled
abroad, which have been reinvested in the company that produced
them or in another sector of the domestic economy".
Reinvested earnings are
registered in the currency of the country to which such earnings
could have been remitted, and reinvestments derived from
investments made in Brazilian currency will be registered in
Brazilian currency (Article 20 of Circular 2997).
Earnings obtained by a
foreign investor and further reinvested in Brazilian investees
(even if such investees are different from the companies in which
the earnings were obtained) for the purpose of paying up or
purchasing shares and/or quotas, may be registered under
Investment in the RDE-IED System. These earning to be reinvested
are registered as foreign capital (in the same manner as the
original investment) thus increasing the tax base for tax
assessment on any future repatriation of capital.
In the cases of reinvestment by profit capitalization, interest on net equity and profit reserves, the ownership interest held by the foreign investor vis-à-vis the total number of paid-in shares or quotas in the corporate capital of the investee in which the earnings were originated will be observed. 3.9. Repatriation
Foreign capital registered
with the Central Bank of
Brazil
may be repatriated to its country of origin at any time without
preliminary authorization.
According to article 690,
II of the 1999 Income Tax Regulations, foreign currency amounts
registered with the Central Bank of
Brazil
as nonresident investments may be repatriated without income tax
assessment. In this case, the foreign currency amounts, which
proportionally exceed the original investment (capital gain) will
be subject to 15% withholding income tax.
Notwithstanding such
provision, after enactment of Law 9249/95 and Normative Ruling
73/98, the tax authorities have questioned calculation of the
capital gains earned by a nonresident based on such nonresident�s
original investment in reais rather than on the foreign currency
amount registered with the Central Bank.
In the specific case of repatriation of capital, it should be noted that the Central Bank of Brazil will normally examine the net worth of the company involved, as shown on its balance sheet. If the net worth is negative, the Central Bank of Brazil may decide that there was dilution of the investment, and may thus deny authorization for repatriation of a part of the investment in proportion to such negative result. 3.10. Transfer Abroad of Investments in Brazil The ownership interest owned in a Brazilian company by a foreign investor may be sold, assigned or otherwise transferred abroad, with no tax implications in Brazil, irrespective of the price paid. The foreign purchaser will be entitled to register capital in the same amount as the registration previously held by the selling company, once again regardless of the price paid for the investment abroad. In this case, the registration number in the RDE-IED Mode of the Central Bank of Brazil should be changed to reflect the name of the new foreign investor, which is essential to allow the new investor to remit/reinvest profits and to repatriate capital. 3.11. Restrictions on Remittances Abroad Remittance of funds abroad is restricted when such funds are not registered in the RDE-IED System, since remittance of profits, repatriation of capital, and registration of reinvestment are all based on the amount of foreign investment registered. 3.12. Restrictions on Foreign Investment According to article 52 of the Temporary Provisions Act of the Federal Constitution, the participation of foreign capital in financial institutions is subject to the approval of the Brazilian Government, which will determine if such participation is in the country�s best interests.
Participation of foreign
capital is prohibited or, in some cases, restricted in the
following activities:
Brazilian companies, even
when under foreign control, may request and obtain permission to
operate in the mining sector. 4. The Brazilian Foreign Exchange Markets
Although the Brazilian
Foreign Exchange Markets are not totally free, due to the controls
imposed by the Brazilian Central Bank (�BACEN�), in recent years
they have been deregulated, leading to a present situation in
which almost every type of transfer from/to
Brazil
are permitted to be performed and find a definition in the
regulation.
Under the Brazilian
regulation there are two different foreign exchange markets: (i)
the Free Rate Exchange Market and (ii) the Floating Rate Exchange
Market. There is a third way of performing transfers from/to the
country, which consists in the international transfers of reais.
The Free Rate Exchange
Market (also known as �Commercial Market�) is the foreign exchange
market in which the majority of exchange transactions related to
export and import are performed. It is also in this market that
transactions related to foreign investments registered with the
BACEN are performed. The registration of foreign capital with the
BACEN is a service established in the early 60�s that allows non
residents to register their capital invested in the country with
the BACEN. There is a registration certificate granted to those
non-resident investors that register their capital, that allows
them to remit profits, dividends and the principal invested
through the same market the capital has entered.
A recent innovation in the
foreign exchange and foreign investment regulation, is the
electronic system of registration of transactions. Such system
allows some transactions (equity and debt) investments), performed
in the Free Rate Exchange Market, to be registered by means of an
electronic system that can be accessed by the Internet, waiving
the prior authorization requested for certain transactions.
With the growth and
sophistication of transfers of funds made between different
countries, there were many types of transfers of funds from/to the
country not regulated by the Free Rate Exchange Market. It was
under that context that the Floating Rate Exchange Market has been
created. In this market, the majority of transactions that cannot
be made under the Free Rate Exchange Market are regulated.
Payments of services rendered abroad or acquisition of real estate
property in
Brazil
by non-residents are examples of these transactions. Even
transfers with a very broad definition, as transfers for
constitution of �cash funds�, are defined by the Floating Rate
Exchange Market�s regulation. Almost all investments made through
an exchange transaction performed in this market cannot be
registered with the BACEN.
The third possibility for
performing transfers of funds from/to
Brazil
is through international transfers of reais. It is not necessary
to have an exchange transaction in order to perform such
transfers. The vehicle used in order to make international
transfers of reais possible are non-residents accounts is reais
maintained with a Brazilian financial institution (former �CC5
accounts�). Each debt and/or credit made on such accounts are
considered an entrance of funds in the country or its remittance
abroad. 5. FORMS OF ASSOCIATION5.1. Types of Companies
Brazilian Commercial Law
provides for several types of companies: Unlimited Partnership "Sociedade
em Nome Coletivo", General Partnership "Sociedade em Comandita
Simples", Unlimited Partnership between Capital and Labor "Sociedade
de Capital e Indústria", Limited Partnership "Sociedade em
Comandita por Ações", Limited Liability Companies by Quotas "Sociedade
por Quotas de Responsabilidade Limitada" and Corporations "Sociedades
Anônimas".
The Law gives corporate
status to such companies, which thus become legal entities
separate from their participants. Apart from such company
structures, Brazilian Commercial Law also foresees other forms of
association such as joint ventures and consortiums which, under
the law, do not have a legal status separate from their
participants; the participants of such associations do not merge
into one legal entity, but rather continue to contract rights and
obligations individually, although for the common benefit of the
group.
Brazilian Law also
provides for the formation of civil societies, associations,
foundations and co-operatives, forms of association which, either
due to their charitable nature or because of the particular
characteristics of their formation or objectives, are different
from commercial organisations and accordingly receive different
legal treatment.
We should mention at this
point that, apart from Corporations (Sociedades Anônimas), all the
corporate types foreseen under Brazilian Commercial Law may
function as civil societies, insofar as this is permitted under
the Brazilian Civil Code. In Brazil the most used forms of enterprises are the "Sociedade Anônima" (S/A) and the "Sociedade por Quotas de Responsabilidade Limitada"(LTDA.). This is due to the fact that in both cases the participants have limited liability. The other forms of company are rarely used, but, sometimes, they can fulfil specific purposes. 5.1.1. Sociedade Anônima (Corporation) - S/A
An S/A or Corporation,
governed by Law N. 6.404 of December 15, 1976, amended by Law N.
9.457 of June 5, 1997, is fundamentally a commercial corporation
by legal definition, with its capital represented by shares. It
could therefore be defined as a business corporation having as its
objective the earning of profits to be distributed to the
shareholders.
The S/A receives a
corporate name adding the expression �Sociedade Anônima�, before
or after the chosen name, extended or abridged (S/A), or by either
adding the word �Companhia� or �Cia.�. It can be used in the
corporate name, the name of the founder or a �fantasy� name. The
corporate name can describe the corporate aims or the activity
carried out, but this description is not mandatory.
There are two kinds of
S/A: a publicly held company which obtains funds through public
offers and subscriptions and is supervised by the Securities
Commission, and a closed company which obtains capital from its
own shareholders or subscribers, having a simple accounting and
administration system.
The capital of an S/A is
divided into shares which represent part or fractions of such
share capital. Depending on the rights or advantages conferred to
its holders, the shares may be common, preferred or fruition
shares.
Common shares entitle the
holder to the rights of common or essential shareholders.
Preferred shares have special rights of a financial or policy
nature, and fruition shares result from the paying off of common
or preferred shares.
By means of a
Shareholders� Agreement, the shareholders can enter into an
agreement between themselves as regards the purchase and sale of
their shares, to establish pre-emptive rights for their
acquisition, and also as to the manner in which they exercise
their voting rights. The obligations set forth in the Shareholders
Agreement are enforceable by specific performance.
The S/A may be managed by
a Board of Officers and by an Administrative Council or only by a
Board of Officers, depending on that which the By-laws determines.
The Administrative Council
is a body which set the general policy for the company�s business
but is not vested with executive powers. Its existence is
mandatory in publicly held and authorised capital S/As and
optional in closed S.A.s. Its members must be shareholders,
individuals residing or not in the country. It must be composed
of, at least, three members.
The Board of Officers is
the executive body of the S/A. Its responsibility is to represent
the company and to practice all such acts as are necessary for its
operation. It is composed of at least two officers, who may or may
not be shareholders, and who must be individuals residing in the
country, and who may be elected for a tenure of three years at the
most. The Fiscal Council is the body which polices the company�s administration. Its operation may be permanent or temporary. Its installation is based on the need of the company to establish a rigorous control over the actions of the administration. Whenever installed, it is composed of at least three and, at most, five members, with an equal number of substitutes. 5.1.2. Sociedade por Quotas de Responsabilidade Limitada (Limited Liability Company by Quotas) - LTDA
The LTDA, which is
governed by Decree N. 3.708 of January 10, 1919, is a hybrid
between a partnership and a company by shares, with aspects of
each type of entity.
The LTDA. can be organised
as a civil or commercial company, depending on the definition of
its objectives set forth in the Articles of Incorporation.
The LTDA is established by
a contract and it has only one class of partner, the limited
liability quotaholders. Each quotaholder is liable for the
totality of the capital and not only for his quotas, until the
capital is fully paid-up. From there on, the quotaholders will
have no further liability to the company or third parties.
As there is only one kind
of partner, any quotaholder is able to manage the company. The
partners may delegate their managing powers.
The capital of the LTDA is
divided into quotas. The quota represents the amount in money,
credits, rights or assets by which the quotaholder contributes for
the formation of the company. The quotas must be registered and
are not represented by securities or certificates. As the
ownership and the number of quotas are written in the Articles of
Association any transfer of title over the quotas will require an
amendment to such Articles, under signature of all of the
quotaholders or, at least, of the quotaholders who represent the
majority of the capital, but necessarily with the assignor�s and
the assignee�s signatures. If Decree N. 3708/19 or the Articles of Association are silent on a given matter, the rules of S/A law compatible with the LTDA. may be applied. 5.1.3. Rules Common to S.A.s and LTDA.s .
Although foreseen in the
Law which governs S/As, the operations involving the
transformation, merger, consolidation or splitting of companies
can also can be performed by LTDAs. or even by any other kind of
company so permitted under Brazilian Law.
The transformation is the
transaction which a given company, without dissolving it, has its
corporate type transformed into another.
The merger is the
transaction through which one or more companies are absorbed by
another, succeeding them in all rights and liabilities.
The consolidation, in its turn, is the transaction through which two or more companies amalgamate, with a view to forming a new company which will succeed them in all rights and liabilities. Finally, the split up is the transaction by which the company transfers parts or the totality of its net equity to one or more companies, established for this purpose or otherwise, resulting in the extinction of the divided company, if it has passed on all of its net equity, or dividing its capital, if it has passed on only part of its net equity. 5.1.4. Other Types of Companies As noted before, the other company types are not commonly used but may become attractive under certain circumstances. Thus, we will briefly comment on those which are sometimes used. 5.1.5. Sociedade em Nome Coletivo (General Partnership)
The relevant corporate
feature of the General Partnership is the partners� unlimited
liability vis-à-vis the company�s debts.
Thus, all partners are
jointly liable with the company for its liabilities before third
parties. However, the partners� assets cannot be executed until
all the company�s assets have been exhausted.
Responsibility for the
management of the company falls on all of the partners, as long as
the Articles of Association does not specifically determine which
partner will have this responsibility. If such delegation exists,
this partner will have the exclusive right to represent it before
third parties. The company�s name may be the full name of one or more partners, adding the expression �& Cia.� if other partners� names should be omitted. 5.1.6. Sociedade em Conta de Participação (Partnership with One Ostensible and One �Hidden� Partner) - SCP
Although designated "sociedade"
(company), the law does not confer upon the SCP the legal entity
status. The SCP is a joint venture agreement composed of two or
more persons, one of them being a merchant, the so-called
ostensible partner, who shall perform in his own name all
necessary acts to achieve the goals set forth in the Agreement for
the formation of the SCP.
On many occasions the SCP
is founded for a specific period of time, with the aim of
executing certain specific transactions, such as exploiting a
given commercial opportunity or to construct a building for
resale, being liquidated subsequently. Its remarkable feature is that it does not reveal to the third parties the majority of its partners, as only the ostensible partner appears and does business in his own name.
The ostensible partner is
liable for the business, but the �hidden� partners, in their turn,
assume responsibilities towards him as set forth in the relevant
agreement for the formation of the SCP.
There are few formalities
needed in order to establish an SCP and its existence may be
substantiated by the same kind of proof admitted in the
substantiation of a commercial contract. It is, therefore, a
company existing only between the parties, but not in relation to
third parties who deal exclusively with the ostensible partner. The SCP has no corporate or trade name, as the ostensible partner deals with third parties using his own name, trade name or denomination. 5.1.7. Consórcio (Consortium)
The consortium is a form
of association of companies aiming for the development of a
specific project. It is governed by Law 6.404 of December 15,
1976.
The consortium is formed
by means of an agreement between two or more companies, but its
formation does not bring a new legal entity into existence. The
parties preserve, therefore, their corporate identity, pooling
their efforts to achieve certain objectives.
The parties only bind
themselves under the terms of the consortium agreement made, each
party being liable for its specific obligations as established
therein, without any assumption of joint liability before third
parties, except if agreed otherwise. The consortium agreement must contain the following basic covenants:
The agreement and its subsequent amendments must be filed before the Commercial Registry with jurisdiction over the territory in which its head office is located. When the documents are filed, the Commercial Registry issues a certificate which must be published in the Official Gazette, and in a widely circulated newspaper. 5.2. Registration Process Brazil has two kinds of public registers for companies: the commercial registry service performed by the 27 Brazilian States Commercial Registries and the Civil Registries service which is performed by the Civil Registries of Deeds dna Documents usually found in the Brazilian cities. In the most developed regions of Brazil, these registries are usually well organised with highly trained personnel and modern equipment, which contribute to making the registry service efficient and cheap. 5.2.1. The Commercial Registry
To determine if a company
should be registered with the Commercial or Civil Registries, one
must examine its type and its objectives. Should the objectives
indicate a commercial activity, the corporate type must be one of
those available to commercial companies.
Since it is legally
defined as a commercial company, an S/A must have its acts of
incorporation submitted for filing to the Commercial Registry.
Such filing should be requested to the Commercial Registry in the
Brazilian State where the company is headquartered, through a
request dated and signed by any company�s manager or attorney in
fact.
The request for the filing
of the Articles of Association of the S/A must be accompanied, by
the following documents:
The filing of the
Incorporation documents and subsequent amendments of other
commercial companies must, in the same manner, be presented to the
President of the Commercial Registry with jurisdiction over the
place of the company�s head office, by way of a petition signed
and dated by any partner, by an attorney or a person duly
authorised.
Generally the request to
file the acts of incorporation of other commercial companies must
be accompanied by the following documents:
5.2.2. The Civil Registry
The Civil company, defined
as that company which has not adopted the structure of an S.A. and
does not engage in commercial activities, comes into existence
upon the registration of its Articles of Association or By-Laws at
the Civil Registry with jurisdiction over the place of the
company�s head office.
To accomplish its
registration, the civil company, duly represented by its managing
partner, or attorney-in-fact or manager, must file a petition with
the Civil Registry accompanied by the following documents:
The civil companies�
contracts, Articles of Association or By-laws may only be filed at
the Civil Registry, if they have been certified by a lawyer and
the signatures of all the partners have been notarised.
The actual act of
registration of a civil company consists of a declaration by a
public officer, registered in a proper book at the Civil Registry,
of the presentation and registration of the incorporation act. 6. PUBLICLY-HELD COMPANIES6.1. General
The Law no. 6.404/76
(�Brazilian Corporations Law�) makes a distinction between
�closed� and �open� companies. Open (or publicly-held) companies
must necessarily take the form of a corporation and their
securities are traded on stock exchanges or the over-the-counter
market.
Because publicly-held
companies are permitted to raise funds through public offerings of
their securities, they are subject to a series of specific
obligations imposed by law and by regulations issued principally
by the Brazilian Securities Exchange Commission, aimed at
protecting the investor. The Brazilian Securities Exchange
Commission (Commissão de Valores Mobiliários - the �CVM�), which
was created by Law no. 6.385 of December 7, 1986, is a federal
agency linked to the Ministry of Revenue. The purpose of the CVM
is to regulate, develop, control and supervise securities markets
in
Brazil.
Thus, while in closed
companies there is great freedom to establish rules for the
operation of the company that will best serve the shareholders�
interests, publicly-held companies are subject to a number of
restrictions that reduce the shareholders� flexibility in
establishing the bylaws that will govern the company.
In addition to complying
with the provisions of the Brazilian Corporations Law,
publicly-held companies must also fulfill various registration
requirements in order to have their securities traded on the stock
exchange or on the over-the-counter market. It is also worth noting that only publicly-held companies may issue depositary receipts (DRs), which are certificates representing shares in the company. DRs are traded on foreign markets, enabling the company to raise funds outside Brazil. 6.2. Securities Market
The sector of the
Brazilian financial system referred to as the �Securities Market�
encompasses a variety of transactions involving securities issued
by publicly-held companies, such as shares, debentures,
subscription bonuses, promissory notes for distribution and
founder�s shares (partes beneficiárias).
As mentioned above,
transactions involving securities issued by publicly-held
companies may be carried out on the stock exchanges or in the
over-the-counter markets, and are regulated principally by the CVM. Stock exchanges, which are governed by the Resolution no. 2.690/00 of the National Monetary Counsel, may be formed as association or corporations and shall, as a principal purpose, establish a place or system appropriate for the buying and selling of bonds and/or securities in a free and open market, especially organized and supervised by the stock exchange itself, its members and regulatory authorities.
Over-the-counter markets
trade
in securities issued by publicly-held companies that are not
registered on the stock exchanges.
Although the members of
the organized over-the-counter market are subject to supervision
and inspection by the CVM, they are considered to be
self-regulating and must, as agents of the CVM, monitor market
participants and transactions carried out in the market.
CVM Instruction no. 243/96, which governs the operation of the organized over-the-counter market, establishes, between other related activities, as a principal purpose for the organized over-the-counter market, the establishment of a system appropriate for the buying and selling of variable income bonds and/or securities, as defined in applicable regulations, in a free and open market, especially formed and supervised by the over-the-counter market itself, brokers, participants and regulatory authorities. 6.3. Administration
Publicly-held companies
are required to have a two-tiered management structure, composed
of an executive committee and a board of directors, unlike closed
companies, in which a board of directors is optional.
The board of directors,
which has a decision-making function, must have at least three
members, all elected at the general annual meeting of the
shareholders of the company. Directors may be non-residents, but
must be shareholders of the company.
The officers of the
company, who have executive and representative functions, need not
be shareholders but must be residents in
Brazil. In order to register securities with the CVM for trading on the stock exchanges or over-the-counter market, publicly-held companies must have, in addition to a board of directors, an investor relations officer who is responsible for providing information to investors, the CVM and to the stock exchanges, if applicable, in accordance with CVM Instruction no. 202 of December, 1993. The requirement for an investor relations officer is related to publicly-held companies� obligations to disclose and/or communication various information related to their business. 6.4. Periodic Filing Requirements and Other Information
In addition to the
publication requirements applicable to all corporations under the
Brazilian Corporations Law, once a publicly-held company�s
securities have been registered with the CVM, the company must
provide information on a periodic basis to the CVM, the stock
exchange on which its securities were first admitted for trading,
the stock exchange on which its securities were most traded in the
last fiscal year and to any other stock exchange that requests
such information (CVM Instruction 202). The information that must be submitted on a regular basis, at the times and in the form established by regulation, consists mainly in:
In addition to the
information listed above, certain events or facts can trigger an
obligation to submit information, again at the times and in the
form established by regulation, such as:
With respect to item (vi)
above, an act or fact related to the business of a company will be
considered to be material if it could influence (i) the quoted
price of securities issued by the company; (ii) the decision by
investors to
trade
in the company�s securities; (iii) the decision by investors to
exercise any rights attached to their ownership of the company�s
securities.
Material acts and facts
must also be disclosed through publication in the same
widely-circulated newspaper in which the company generally
publishes other required information.
Under CVM Instruction no.
69 issued in September, 1987, any natural or legal person, or
group of persons acting jointly or representing the same interest,
that attains a shareholding in a publicly-held group equal to or
greater than ten percent of any type or class of voting shares,
must disclose the following information: (i) name and particulars
of the shareholder(s); (ii) the reason for acquiring the
shareholding and the number of shares expected to be acquired;
(iii) the number of shares, as well as rights to subscribe for
voting shares of any type or class, already held directly or
indirectly by the shareholder(s) or related person(s); (iv) the
number of debentures convertible into voting shares already held
directly or indirectly by the shareholder(s) or related person(s);
(v) information on any contract(s) or agreement(s) regarding the
exercise of voting rights, purchase and sale of shares or of
debentures convertible into common or preferred shares, even if
such contracts or agreements have not been filed at the
headquarters of the company.
Likewise, any time the
persons or group of persons referred to in the preceding paragraph
increase their shareholdings by five percent or more, they must
disclose the information listed above. Initially, the information
must be submitted to the CVM and, if applicable, published in the
press and submitted to the stock exchanges.
In addition to any
requirement to publish a statement of material fact or disclose
the information under CVM Instruction no. 69 that may be
applicable, the following transactions must also be communicated
to the CVM and to the stock markets or brokers in the
over-the-counter market through which the company�s shares are
traded (CVM Instruction no. 299 of February, 1999):
Furthermore, the basic
information contained in the company�s registration with the CVM
must be kept up to date and the CVM must be informed of any change
in that information.
Such information must not
only be submitted to the CVM but also be kept available to
security holders at the investor relations department of the
company. The CVM also makes the information available to the
public, with the exception of information classified as
confidential by the company.
However, if disclosure of
periodical or transaction-related information would affect the
legitimate interests of the company, the company may elect not to
disclose such information, provided that it submits to the CVM the
reasons that lead it to believe the disclosure would place the
company�s interests at risk.
The means of publication
of required information by publicly-held companies are also
regulated. The information must be published in a
widely-circulated newspaper issued either in the same city as the
stock market on which the securities of the company were most
traded in the last two fiscal years, or in the city in which the
headquarters of the company is located. The company must use the
same newspaper for all publications. 7. REGULATORY FRAMEWORK OF LOCAL CAPITAL MARKETS7.1. Relevant Laws Affecting Local Capital Markets
The key law dealing with
securities markets in
Brazil
is Law No. 6,385 (the "Securities Law"). Additionally, Law No.
6,404 (the �Corporation Law�) contains relevant provisions for the
regulation of the capital markets.
The Securities Law creates
the Brazilian securities and exchange commission (Comissão de
Valores Mobiliários - �CVM�) and regulates the overall operation
of the capital markets, the public distribution of securities, the
listing of securities on exchanges, disclosure requirements,
activities of brokers and intermediaries, types of securities
negotiated and the types of companies which can be traded on the
capital markets. The Securities Law grants regulatory and police
powers to CVM.
The regulation of the Securities Law is made through resolutions, circulars, instructions, opinions, deliberations and other administrative rules issued from time to time by the National Monetary Council (�CMN�), the Central Bank of Brazil (the �Central Bank�), CVM, the stock exchanges and the organized over-the-counter markets (�Organized OTC�). 7.2. Local Regulatory and Supervisory Authorities7.2.1. The National Monetary Council Pursuant to the Securities Law, CMN has the following powers with respect to the securities market: (i) to define the general policy relating to the organization and operation of the capital markets, (ii) to issue regulations on the extension of credit in the market, and (iii) to determine general rules to be followed by CVM for the performance of its functions; and (iv) to define the activities which CVM must perform in cooperation with the Central Bank. 7.2.2. The CVM
CVM is the governmental
agency responsible for regulating and supervising compliance with
the Securities Law and all other aspects of the local capital
markets.
CVM is governed by a
president and four board members appointed for an indefinite
period by the President of
Brazil,
each of whom must have expertise in the securities market.
CVM also has police powers
over all participants in the local security markets. These
participants include brokers, dealers, financial institutions,
stock exchanges, Organized OTC, publicly-held companies,
investment funds and companies, portfolios and custodians,
independent auditors, consultants and market analysts.
CVM may take actions and
impose administrative sanctions on any persons and entities which
fail to comply with the Securities Law, the Corporations Law and
with other regulations which CVM is responsible for enforcing. The
primary sanctions that CVM may impose include: (i) issuance of
warnings; (ii) pecuniary penalties; (iii) suspension of the
registration or authorization to participate in the securities
market; (iv) temporary prohibition to participate in the
securities market; and (v) suspension and removal of directors and
officers of breaching companies, including companies participants
of the securities distribution system.
Civil and criminal
liabilities of the breaching party of the securities regulation is
not affect due to the imposition of any penalty on such breaching
party.
Brazil
has been a member of the Council of Securities Regulators of the
Americas (COSRA), International Organization of Securities
Commissioners (IOSCO) and Mercosul since the execution of these
agreements. To date CVM has entered into memoranda of understanding concerning information-sharing and legal assistance with the securities regulators in the following countries: United States (the SEC and the Commodities Future Trading Corporation), Germany, Argentina, Australia, Bolivia, Canada/Quebec, Chile, China, Equator, Spain, France, Hong Kong, Italy, Malaysia, Mexico, Paraguay, Peru, Portugal, Thailand and Taiwan. 7.2.3. The Central Bank
According to Law Nr.
4.595, the Central Bank is responsible for implementing policies
of CMN related to monetary policy, exchange controls, regulations
of financial institutions (including brokers and dealers), control
of foreign investment (including investment in the securities
markets) and such other matters regarding the securities markets
which CMN determines that fall under Central Bank regulatory
powers. The President of the Central Bank is appointed by the President of Brazil for an indefinite term and this appointment is subject to ratification by the National Congress. 7.2.4. Self-Regulation Self-regulatory organizations in the Brazilian securities markets, typically stock exchanges and the Organized OTC, act as ancillary institutions to CVM, being subject to the supervision of such agency. It is incumbent on such entities to police their members and to ensure compliance with applicable rules and regulations. There are, as well, pure self-regulatory entities, which are not subject to any scrutiny by CVM, as the Brazilian association of investment banks (Associação Nacional dos Bancos de Investimento - ANBID). 7.2.4.1. The Stock Exchanges
The main Brazilian stock
exchanges are located in São Paulo (�Bovespa�) and Rio de Janeiro
(�BVRJ�).
Securities, such as
shares, commercial papers, debentures and derivatives, are traded
on Bovespa. Government bonds are traded on BVRJ.
The functions of the stock
exchanges are to organize, maintain, register and supervise the
transactions of securities. For such purposes, the stock exchanges
may issue a regulation to complement the one enacted by CVM.
Currently, the following
negotiable instruments may be traded on
Brazil's
stock exchanges (i) securities duly registered with CVM, (ii)
rights arising therefrom, (iii) stock indexes and (iv) derivative
instruments and, (v) upon previous authorization of the Central
Bank and CVM, government bonds and other negotiable instruments
issued by private entities.
Recently, Bovespa
implemented the �home-broker� system, whereby investors can
deliver orders to their brokers through the internet, which, in
turn, are linked to the electronic systems of Bovespa.
On December 11, 2000,
Bovespa launched a new trading market (the "New Market") designed
exclusively for the listing and trading of shares issued by
companies, which accepts to be bound by corporate governance and
disclosure standards higher than those imposed by Brazilian law.
On the New Market, the
company must (i) issue common shares only; (ii) keep a free float
of at least 25% of its outstanding shares; (iii) extend to all
shareholders the same terms and conditions obtained by the
controlling shareholders in the event of a sale of control (tag
along rights); and (iv) disclose any self-dealing transactions.
Clearance for and
settlement of securities transactions are carried out by a local
clearing entity controlled by the stock exchanges and are done, as
a general rule, on the 2nd and on the 3rd business days following
the relevant closing date (financial and physical settlement,
respectively).
There is currently one clearing house in Brazil: Companhia Brasileira de Liquidação e Custódia (�CBLC�), a private company based in São Paulo, which provides custody and settlement services to Bovespa, BVRJ and SOMA (Organized OTC entity). 7.2.4.2. The Organized OTC1
The Organized OTC
comprises partnerships or commercial companies specifically
incorporated with the purpose of trading securities, in accordance
with CVM rules and subject to CVM�s prior approval.
The following securities
may be traded on the Organized OTC: (i) securities registered with
CVM for
trade in the Organized
OTC; (ii) certificates of investments in film production (certificado
de audiovisual); (iii) quotas of closed-end investment funds,
which were subject to a public distribution (such as, e.g., stock
mutual investment funds, real estate mutual investment funds and
others); and (iv) other securities expressly permitted by CVM.
Currently, there is only
one Organized OTC operating in
Brazil:
the Sociedade Operadora do Mercado de Ativos (�SOMA�), in Rio de
Janeiro. Central de Custódia e Liqüidação Financeira de Títulos (�CETIP�),
a clearing system, has also received an authorization to operate
as an Organized OTC, but has not started to operate under this
authorization yet. For the admission of a specific security in SOMA, a market maker specialized in the trading with such security must be appointed. 7.2.4.3. Associação Nacional dos Bancos de Investimento - ANBID
On December 09, 1998, the
National Association of Investment Banks (Associação Nacional dos
Bancos de Investimentos - ANBID) approved a self-regulatory code
(the �ANBID Code�), establishing certain disclosure standards
which should be followed by the members of ANDIB while
coordinating public offerings of securities in the Brazilian
market.
The ANBID Code sets forth disclosure rules for the public distribution of both debt and equity securities in the primary and the secondary market in Brazil. Pursuant to its provisions, the financial institutions acting as coordinators of the underwriting syndicate (�underwriters�) are responsible for the preparation of the prospectus. Such entities shall conduct independent due diligence to obtain all material information concerning the issuer's business, properties and financial conditions, the relevant securities and other facts which may have a bearing on the investor's decision with regard to the offered or solicited investment. The ANBID Code also establishes comprehensive rules for the minimum content of the offering prospectus., which must contain, at least, (i) information regarding the risk factors, (ii) description of the business of the issuer, (iii) management�s discussion and analysis of financial condition and results of operations of the issuer based on the three preceding fiscal years, (iv) information about outstanding securities of the issuer, and (v) relevant litigation affecting the issuer and transactions with related parties. 7.3. Definition of Securities
In
Brazil,
the concept of securities is formal and is statutorily defined.
According to the Securities Law and regulations thereof issued
from time to time, the following are deemed as securities: (i)
shares, founders shares (partes beneficiárias), debentures,
warrants and coupons of the aforesaid securities; (ii) stock
indexes; (iii) commercial papers; (iv) subscription rights; (v)
subscription receipts; (vi) options; (vii) share deposit
certificates; (viii) certificates of investments in film
production; (ix) certificates representing mercantile contracts
for deferred purchase of energy; (x) collective investment
contracts; and (xi) real estate receivable certificates. The CMN
is vested in powers to create other securities. The following negotiable instruments are expressly excluded by the Securities Law from the definition of securities: (i) federal, state and municipal public bills; and (ii) negotiable instruments issued by financial institutions. Negotiable instruments that are not deemed as securities are subject to the control and monitoring of the Central Bank of Brazil. 7.4. Offer and Distribution of Securities in Brazil7.4.1. Concept of Public and Private Offer and Distribution of Securities
The offering and
distribution of securities in
Brazil
are subject to the restrictions imposed by the Securities Law. Any
offering or distribution of securities to the public at large is
subject to prior registration with CVM.
The Securities Law defines
public offerings as those conducted by means of (i) the use of
lists or bulletins of sales or subscription, offering circulars,
prospectuses or advertisements made to the public; (ii) the search
for subscribers or buyers for the securities, by means of
employees, agents or brokers; and (iii) the negotiation in stores,
offices or any other places accessible to the public, or through
the use of any instrument of public communication.
Registration is intended
to provide adequate and accurate disclosure of facts concerning
the issuer and the securities it proposes to sell. The
registration, however, does not judge the risk inherent in
investing in the securities. Therefore, it does not preclude the
sale of securities in poorly managed or unprofitable companies. Issuance and distribution of debt securities outside Brazil by Brazilian companies are not subject to registration with CVM. 7.4.2. Registration Process The public distribution of securities in Brazil may only be made by companies which are registered with CVM as publicly-held companies. In addition to the registration with CVM prior to their distribution to the public, the company must also be accepted for trading on a stock exchange or on the Organized OTC where the relevant securities will be traded. 7.4.2.1. Registration of the Issuer as a Publicly-Held Company The documents and information required for the registration with CVM include by-laws, minutes of the meeting appointing an investor relations officer and audited financial statements of the three preceding fiscal years. The registration of a company with CVM usually takes from 30 to 120 days. The stock exchanges and the Organized OTC usually require the filing of the same documentation submitted to CVM in order to approve the trading of securities on such entities. 7.4.2.2. Requirements for a Public Distribution of Securities
The public offer or
distribution of securities, either on the primary or on the
secondary market, must be previously authorized by CVM. For such
purposes, the coordinator of the transaction shall file with CVM
the documentation required in the applicable regulations, which
includes: (i) minutes of the meetings of the corporate body,
approving the issuance of the securities; (ii) a copy of the
agreement for the distribution or underwriting of the securities;
(iii) a draft of the agreement entered into between the members of
the syndicate for the distribution of the securities; (iv) a copy
of the stabilization contract, if any (stabilization is not
permitted without such contract); (v) a draft of the prospectus,
in accordance with the guidelines of the ANBID Code; The registration for public distribution has the same characteristics of the one related to the securities� distribution by publicly-held companies. 7.4.3. Issue of Depositary Receipts: Access to the Foreign Capital Markets Brazilian companies may access foreign capital markets to raise funds through the issuance of equity securities by establishing a depositary receipt program.
Depositary Receipts (�DRs�)
are certificates evidencing shares or other stock-related
securities issued by a Brazilian publicly-held company.
The implementation of such
program requires the appointment of a non-Brazilian depositary,
which will issue the depositary receipts abroad based on the
shares custodied in its name in
Brazil,
in another Brazilian custodian, which will be designated by the
depositary to custody the shares underlying the DR.
The DR program may or may
not be sponsored by the Brazilian issuer of the underlying
securities.
The establishment and
operation of a DR program requires the prior approval of CVM and
the Central Bank. Registration with CVM is required to ensure the
same level of disclosure to the holders of both DRs and the
underlying securities. Registration with the Central Bank is
required for the transfer of funds from and to
Brazil.
After the registration of the program with CVM and the Central Bank, shares held by Brazilians or foreigners may be at any time deposited with the custodian for the issuance of the corresponding DRs abroad. Foreign investors may sell the DRs abroad or request the cancellation of the DR and sell the underlying shares in Brazil. 7.4.4. Access to the Brazilian market by Foreign Companies through BDR Programs
Foreign corporations may
trade
their securities in the Brazilian stock markets through the
issuance of securities deposit certificates issued by Brazilian
institutions, representing securities issued by foreign
publicly-held companies (�BDRs�). The establishment of BDR
Programs must be previously approved by CVM and the Central Bank. BDRs may be issued either in a sponsored program, which has three different levels, or in a non-sponsored program. In either case, the issuer of the underlying securities must be subject, in its country of origin, to the supervision of an agency with function similar to that of CVM and which has executed a cooperation agreement with CVM. 7.5. Tender Offers for Shares of Brazilian Companies7.5.1. Take-Overs through Tender Offer According to the Corporation Law, the acquisition of control of a Brazilian publicly-held company by means of a tender offer may be made in cash or through exchange with shares.
The offer must be made for
a number of voting shares sufficient to ensure the control of the
company and must be made through, and guaranteed by, a financial
institution.
The tender notice (edital) shall disclose, among others, the identity of the acquirer, the number of shares it proposes to acquire, the price and other payment conditions, the procedure for the tendering of the shares, and other terms and conditions of the tender offer. 7.5.2. Going Private - Delisting Tender Offer
The controlling
shareholder may at any time make a tender offer for the
acquisition of all voting and non-voting shares held by minority
shareholders, for the purpose of delisting the corporation.
Under a delisting tender
offer, the minority shareholders are called to (i) sell their
shares to the controlling shareholder; and (ii) express their
opinion in favor of or against the delisting.
The delisting is subject
to the cumulative fulfillment of two conditions, namely: (i)
shareholders representing at least 51% of all outstanding shares
of the corporation (voting and non voting shares) must approve the
delisting in a shareholders' meeting called for such purpose; and
(ii) shareholders representing at least 67% among the shareholders
who had agreed to sell shares, vote in favor of or against the
delisting must either sell their shares at the offer or approve
the delisting.
If the 67% limit is not reached, the company is not delisted, the controlling shareholder (i) may acquire only up to 1/3 of the free float and (ii) may not launch a new tender offer during the two years following the settlement of the first offer.. 7.5.3. Voluntary Tender Offer
The acquisition of shares
by a controlling shareholder of a Brazilian publicly-held company,
without making a tender offer, is limited to 10 % of each class or
type of shares.
The tender offer must be
approved in advanced by CVM and may be conditioned upon the
acceptance of a maximum or minimum number of shares. The tender
notice (edital) must contain the following information, among
others: (i) terms and conditions of the offer, (ii) if the tender
offer is a condition of any transfer of control transaction and
the kind of such condition, (iii) reasons and goals of the offer
and (v) if the controlling shareholder has the intention to delist
the company.
Furthermore, if the
controlling shareholder makes a new purchase offer within two
years at a price higher than the one paid to those who accepted
the first offer, such earlier sellers must be reimbursed for the
balance of the prices.
Lastly, if within one year
of the offer any event occurs that leads to exercise of the
withdrawal right, the shareholders who sold their shares in the
tender offer, but would have the right to withdrawal, if they had
not sold their shares, will be entitled to any positive difference
between the withdrawal price and the price paid at the time of
acceptance of the offer. In the event the tender offer has the purpose of acquiring more than 1/3 of the free float or result on the acquisition of more than 1/3 of the free float, the rules established for delisting tender offer must be followed. 7.6. Investor Protection Rules7.6.1. Disclosure by Publicly-Traded Companies
Publicly held companies
must divulge quarterly financial statements (Informações
Trimestrais - ITRs) and annual reports (Demonstrações Financeiras
Padronizadas - DFP and Informações Anuais - IAN, which is
equivalent to an SEC F-20 form). The reporting company must also publish notices of certain facts (Fato Relevante) whenever any act of fact which may materially affect the trading of securities takes place. 7.6.2. Disclosure by Shareholders of Publicly-Traded Companies
Controlling shareholders,
officers, and managers of a publicly-traded company must notify
CVM and the stock exchange or Organized OTC where the securities
of such company are traded whenever there is a 5% increase in
their holdings of any class or type of shares in the company. The
information to be furnished includes the number of shares
purchased, the price at which the securities were acquired, the
reasons and the objectives related to the acquisition and a
statement by the purchaser regarding the existence of any
agreement related to the exercise of voting right or to the
transfer of securities issued by the company. Non-controlling shareholders are required to inform to CVM and to disclose to the market whenever their direct or indirect participation in the voting capital of publicly-held companies increases by 10%. Such information must contain, at least, the identity of the acquirer, the purpose of the acquisition(s), the number of shares acquired, the total participation in the voting capital of the company, if the acquirer owns debentures convertible into voting shares and the existence of any agreement related to the exercise of voting rights or to the transfer of securities issued by the company. Thereafter, any increase of 5% in the voting capital must be equally informed and disclosed. 7.6.3. Market Manipulation and other Fraudulent Practices in the Securities Market
CVM rules also addresses
(a) market manipulation, (b) creation of artificial demand, supply
or price conditions, (c) adoption of unfair practices and (d)
fraudulent transactions.
Price Manipulation in the
securities market is the use of any process or means to, directly
or indirectly, increase, maintain or decrease prices of
securities, inducing third parties to buy or sell such securities.
Artificial demand, supply
or price conditions, in the securities market, are created by
transactions in which the participants or broker, by willful
misconduct or omission, alter, directly or indirectly, the flow of
purchasing and selling orders.
Fraudulent transactions in
the securities market are those transactions which use any
mechanism or device intended to mislead third parties, aimed at
obtaining illicit economic advantages for the parties involved in
the transaction or for any other party.
Unfair practices, in the
securities market, are those which result in an unfair dominant
position of one party vis-à-vis the other market participants in
the trading with securities
Breach of such rules is
deemed a serious offense by CVM regulations, and may subject the
participants to penalties ranging from admonition to 20-year
suspension of the license to operate in the capital markets.
Furthermore, an investor who is damaged by such prohibited conduct
has the right to an indemnification for losses and damages
suffered. There have been few cases brought before the courts and, therefore, it is not possible to establish a definite trend of judicial interpretation with respect to market manipulation. 7.6.4. Insider Trading �Insiders� are defined as controlling shareholders and managers (directors and officers) of the company. Pursuant to CVM rules, insiders may not use information relating to a material act or fact to which they had privileged access due to their position to obtain for themselves or other persons any advantage through the trading of securities.
Although not defined as
insiders, the following persons are subject to the same
restrictions: brokers, dealers and other members of the
distribution system and whoever, due to his/her position or
function or for any other reason, has knowledge of material
information prior to its disclosure to the market. Family
relationships are taken into account in determining insider
status. Insider trading is also considered a serious offense by CVM regulations, subjecting the participants to penalties. Furthermore, where an investor has been injured by insider trading in the purchase or sale of securities, such investor has the right to indemnification for the losses and damages suffered. 7.7. Money Laundering Law
Law No. 9,613 of March 3,
1998, provides for criminal offenses of money laundering or
concealment of assets, rights and valuables (the �Money Laundering
Law�).
The Money Laundering Law
presents several obligations for legal entities engaged in the
securities industry, including stock and commodities exchanges,
Organized OTCs, banks, brokers, dealers, asset management
companies, branches and representatives of foreign financial
institutions. The obligations imposed on such entities by the Money Laundering Law include: (a) to identify and maintain data on all clients; (b) to keep for a 5-year period a file on all transactions performed by such clients which exceed certain established limits; (c) to comply with all requests of the Financial Activities Controlling Council ("COAF"), as determined by the relevant courts; and (d) to develop and implement internal controlling systems to monitor and detect transactions which may constitute money laundering such as operations involving amounts not in consistency with the financial situation of the parties, tradings which repeatedly cause losses or profits to one of the involved parties and negotiations involving amounts substantially above market conditions. 7.8. Civil Remedies7.8.1. Securities sold in Violation of the Registration and/or Prospectus Requirements
Where an investor has
purchased a security which was sold in violation of the
registration and/or prospectus requirements of the Securities Law,
the following remedies are available: (i) an action for the
recovery of damages based on the Corporations Law which may be
commenced by the Office of the Public Prosecutor ex officio or
upon the request of CVM; and (ii) an action for the recovery of
damages based on Article 159 of the Brazilian Civil Code which may
be commenced by a person who has been injured by any action or
omission of an individual or company.
Investors may also recover
damages against anyone who has been engaged in fraudulent
transactions or transactions involving artificial conditions of
demand, price manipulation or inequitable practices.
Derivative actions for
misleading information or omissions may be brought against the
issuer's administrators (directors and officers) based on Articles
155 and 157 of the Corporations Law. Any shareholder may initiate
a derivative action if the board remains inactive for more than
three months after a decision taken by the shareholders' meeting.
Shareholders representing 5% or more of the company's capital may
initiate a derivative action, despite a decision of the
shareholders' meeting to the contrary. Any investor may also sue issuers, underwriters and intermediaries if their concurrence in the act which inflicted damage on, such investor can be proven. 7.8.2. Insider Trading Where an investor has been injured by insider trading in the purchase or sale of securities, the remedy available is an action based on. CVM Instruction No. 8 and Article 94, 158 e 159 of the Civil Code. 7.8.3. Fraudulent Brokerage Activities and Handling of Brokerage Accounts7.8.3.1. Excessive or Unfair Profits or Commission Where an investor has been injured by fraudulent brokerage practices in the purchase or sale of securities, such as the undertaking of excessive or unfair profits or commissions, the remedies available include an action for injuries based on Article 159 of the Civil Code or Articles 18 et. seq. of the Brazilian Consumer Protection Code. While actions under the Civil Code are nominally subject to a statute of limitations period of 20 years, actions under the Consumer Protection Code are normally subject to a period of 5 years. 7.8.3.2. Operating While Insolvent or Not in Sound Financial Condition and Other Losses Caused by Intermediaries If an investor has been injured by a broker who was operating while insolvent or otherwise not in sound financial condition and other losses caused by intermediaries, the remedies available include an ordinary action under Article 159 of the Civil Code. 7.8.4. Class Actions Class actions in Brazil are restricted to environmental matters and certain other specific situations which do not include securities matters. However, the Public Prosecutor may commence actions on behalf of and for the benefit of investors under Law No. 7913. 7.8.5. Waiver of Rights Investors acquiring a security may, in principle, waive their rights under the securities laws, rules and regulations. However, such waivers may be disregarded by a judge if not conspicuously communicated to investors or if such waiver is deemed to contravene fundamental principles of investor protection. Consumer protection provisions are considered a matter of public order and, accordingly, nominally may not be waived. For the same reasons, private agreements will not preclude actions brought by CVM or any stock exchange. 7.8.6. Procedural Requirements7.8.6.1. Jurisdiction The state courts generally have jurisdiction over civil suits seeking a remedy for a securities violation. The statutory basis of jurisdiction is found in the Brazilian Code of Civil Procedure. 7.8.6.2. Venue Except as otherwise provided by the parties, the courts of the domicile of the defendant are competent to hear any case. 7.8.6.3. Statute of Limitations on Actions and When It Begins to Run
Under Article 177 of the
Brazilian Civil Code an action in personan (against a person
involving personal rights) is subject to a 20-year statute, of
limitation and an action in rem (against, property) to a period of
10 years. There are various exceptions to this basic rule. 8. TAX SYSTEM8.1. General Features
8.1.1. The current
Federal Constitution, which was promulgated on October 5, 1988,
allocates taxing power between the Union, the States and
Municipalities, granting unto each of them the power to levy
tributes.
8.1.2. Tributes in
Brazil
are divided into taxes, betterment fees, social contributions,
other contributions and compulsory loans. Each level of
government is alloted specific taxes which are listed in the
Constitution.
8.1.3. Fees are levied
based on police power (regulatory fees) or they are the
counterpart of specific and divisible public services actually
rendered or made available to the citizens (service fees).
8.1.4. Betterment fees
(which are not commonly levied) are collected from the owners of
real state that benefits from public works.
8.1.5. Contributions can
only be levied by the Federal government. These contributions
are: (a) social contributions; (b) to intervene in the economic
domain, (c) in the interest of professional or economic
categories and (d) to finance social security.
8.1.6. Compulsory loans
can also be levied, but only by the Federal government.
Compulsory loans can only be collected in case of urgent public
investment and in case of relevant national interest or to
defray extraordinary expenses resulting from public calamity,
war or imminence thereof.
8.1.7. Unless otherwise
expressly specified in the Constitution, the creation and
collection of tributes must obey some fundamental constitutional
rules, among which deserve to be mentioned:
8.2. Federal Taxes The following taxes may only be levied by the Federal government: Import duties; Export duties; Income and capital gains tax; Tax on industrialized goods; Tax on credit and exchange transactions, on insurance and on securities; Tax on rural land and Tax on large fortunes. 8.2.1. Income Tax:
(a) Income tax is
assessed on income and capital gains earned by resident
individuals from domestic or foreign sources at the rates of 15%
and 25% (depending on the level of income); corporate income tax
is assessed on profits and capital gains generated by operations
carried out within
Brazil
or abroad.
(b) corporate income tax
is normally assessed on
net
profits generated by operations carried out by the company.
Taxable income is equal to
net
profits (ascertained in quarterly or annual balance sheets)
adjusted by additions and deductions set forth in income tax
legislation.
(c) Corporations
required to calculate their income tax on
net
profits adjusted by additions and deductions set forth in income
tax legislation may opt to estimate it in accordance with
special rules set forth in income tax law.
(d) Current corporate
income tax rate is 15% regardless of the corporation�s business.
There is a 10% supplementary tax on the portion of
net
profits which exceeds R$ 20.000,00 per month.
(e) Dividends based on
profits ascertained as of January 1, 1996 paid out or credited
by corporations are no longer subject to income tax (either at
the source or as part of the taxpayer�s return), whether paid
out to individuals or corporations domiciled in
Brazil
or abroad.
(f) Withholding income
tax (IRF) is imposed on income paid, credited, remitted or
delivered to non-residents, at the rate of 15% or 25% according
to the nature of the income (as of 01.01.2001, a regulatory fee
will be also imposed on the remittances of royalties or any
compensation deriving from transfer of technology, at the rate
of 10%, cases in which the withholding income tax rate is 15%).
As noted above, dividends are not taxed.
(g) As of January 1,
1997 a number of rules were introduced in income tax law to
regulate transfer pricing in deals carried out by resident
individuals or corporations with non-resident parties regarding
importation and exportation, and payment of interest abroad.
These rules apply to deals which involve the following
situations: (i) a domiciled corporation that carries out
business with non-domiciled related parties; (ii) a domiciled
individual or corporation which carries out business with a
related or unrelated party domiciled in a country where income
tax is assessed at a rate lower than 20% or non-existent.
8.2.2. The tax on
industrialized goods (IPI) is levied on the output and on the
importation of industrialized goods. IPI is a value-added tax;
the amount of tax due may be off- set by the credits arising
from the tax imposed on the purchase of raw materials,
intermediary products and packaging materials. However, such
mechanism is not applicable to credits related to fixed assets.
Rates are assessed on the value of industrialized goods as they
are imported or output from domestic plants, and vary in
accordance with the nature of goods; the average rate is 10%
which may be increased or lowered by the tax administration. IPI
is not levied on exports.
8.2.3. The Tax on credit
and exchange transactions, insurance and securities (IOF) is
assessed on the amount of bank loans and similar transactions,
on the amount of foreign currency purchased or sold, on
insurance premiums and the price of securities sold or
purchased. The Tax rate depends on the kind of the operation. 8.2.4. The Tax on large fortunes (IGF) has not been created yet. 8.3. State and the Federal District Taxes
States and the Federal
District are allocated the following taxes:
8.3.1. ICMS is the main State tax and is imposed on operations regarding the circulation of goods, including importation, and on interstate and intermunicipal transportation and on communications services. ICMS is a value-added tax which allows the taxpayer to record input tax credits from the ICMS paid on the purchase of raw materials, intermediary products, packaging materials. Credits related to fixed assets are admitted with restrictions. Interstate rates vary from 7% to 25% (average rates are 18% for RJ, SP, MG and RS and 17% for other states and DF); in interstate operations applicable rates are 7% or 12% depending on destination. ICMS is not levied on exports. 8.4. Municipal Taxes
8.4.1. Municipalities
and the Federal District are granted the following taxes:
8.4.2. ISS is levied on the rendering of certain services listed in federal law. As a rule, the average rate is 5%. 8.5. Social Contributions
8.5.1. The Federal
government may levy the following social contributions to fund
social programs:
9. ANTI-TRUST LEGISLATION
For almost thirty years,
Brazil
had an antitrust law that although greatly inspired by the U.S.
regulatory model was in fact inoperative. The mechanisms created
to enforce Law no. 4,137, of September 10, 1962, were swept in the
bureaucratic system of the government.
In 1990 and 1991, however,
Laws nos. 8,002 and 8,158 helped to focus on a new set of issues
such as the establishment of a new economic order, as well as the
protection of free competition and of the consumers� rights. It
was in this scenario that Law no. 8,884 was enacted on June 11,
1994.
The powers of the
antitrust enforcement agency CADE (Administrative Council of the
Economic Defense), formed in 1962, were strengthened. As a
government agency under the Ministry of Justice, CADE is now
better equipped to carry out its constitutional duties. CADE,
assisted by the Secretary of Economic (SDE) and the Secretary of
Economical Follow-up (SEAE) Law of the same Ministry of Justice,
exerts its powers on behalf of the community, and as such
considers to have jurisdiction over any acts performed outside the
country which may have any consequences in
Brazil.
The Law deems it a domestic company any foreign company which has
any subsidiary, branch, agency, office, representative or the like
in
Brazil (article 2, §
1o , modified by Law no. 10.149, dated 21/12/00). Therefore, as
provided in § 2o of the same article, the foreign company shall be
notified of all procedural acts, independently of any power of
attorney or any contractual or statutory provisions, in the person
responsible for its branch, agency, subsidiary or any other
establishment in
Brazil.
Law no. 8,884/94
specifically states these authorities� jurisdiction over any and
all individuals and legal entities, whether public or private,
organizations and joint ventures, including those of a temporary
nature, or without legal personality. The new antitrust Law also
sets forth the instances where there will be individual liability
of the officers, severally or jointly with the company itself. In
addition, Section 18 admits, under limited circumstances, the
theory of disregard of the legal entity (piercing the corporate
veil).
Among those acts contrary
to the economic order and therefore prohibited by the antitrust
law are, for instance, to limit or impair any free competition; to
control any relevant market of goods and services; arbitrary
increase of profits and the abusive exercise of economic power.
Furthermore, the following acts are contrary to the Brazilian
legal system now in force: any price fixing agreements between
competitors; market sharing covenants; any obstacles created to
new competitors attempting to enter the market; dumping;
restraints on the
trade
of certain goods to increase prices; and fixing of any excessive
prices. The Law also lists at least twenty-four different kinds of
infringement to be carefully examined, whenever considering any
business association or combination of efforts. The penalties can
be, based on the nature of the infringement, the number of times
it has occurred, and the economic situation of the infringer. They
may reach thirty percent of the company�s total gross sales in the
preceding year, together with fines ranging from 10% to 50% of the
amount of the transactions, that can be charged in double in case
of recurrence. Moreover, it is worth mentioning that there are
other penalties which could be imposed such as prohibition to do
business, to enter contracts or request fiscal or legal incentives
from government-owned companies.
The unexcused non
appearance of the defendant or third parties, when notified to
render oral explanations, in the course of preliminary
investigations or of administrative procedures, shall subject the
absentee to a fine from R$ 500,00 (five hundred reais) to
10.700,00, (ten thousand and seven hundred reais), taking into
consideration his financial situation (article 26, § 5o, wording
given by Law no. 10.149/2000). Moreover, the defendant may be
subject to a penalty from R$ 21.200,00 (twenty-one thousand and
two hundred reais) to R$ 425.700,00, (four hundred and twenty five
thousand and seven hundred reais), taking into consideration his
financial situation, in case he may impede, obstruct or in any
other way raise difficulties to the accomplishment of any
investigation, be it in the administrative procedure or in its
preliminary phase (article 26 - A, introduced by Law no.
10.149/2000).
Another innovation created
by Law no. 10.149/2000, relating to the above mentioned penalties,
is the possibility to obtain and execute a lenient settlement with
authorities, through which individuals or the legal entities
responsible for the violation to the economic order will be
exonerated from any punitive action by the public administration
or at least obtain a reduction from one to two thirds of
applicable fine, should they decide to collaborate with the
investigations and the administrative procedure (article 35-B).
We should also note that
CADE, SDE and SEAE procedures may be initiated based on any
third-party claim. CADE�s decisions are, from an administrative
standpoint, unappealable, which means that the aggrieved party may
refer only to the judiciary power if it wishes to pursue further
legal actions.
Law no. 8.884/94 also
provides for the obligation to submit to CADE�s approval any
transactions that may hinder any free competition or result in
dominance of a certain market. Submission may be effected prior to
completion of the transaction or within a maximum term of 15
(fifteen) working days immediately thereafter (from January 1st
the fee shall be R$ 45.000,00)2. CADE�s prior approval is usually
preferable if we take into account the complexities and
undesirable consequences of an �a posteriori� submission,
including a potential unwind of an action or series of actions
already implemented. It is important to note that, for article 54 purposes, one must consider acts that may prejudice free competition or result in market domination, and so must be submitted to CADE for approval, the amalgamation of companies or group of companies resulting in a market share of over twenty percent, or if any of its participants has registered an annual gross invoicing equivalent to R$ 400.000,003 (four hundred thousand reais).
Article 54 evidences that
many acts of amalgamation may be approved, once certain
circumstances of fact and law are duly justified (increase of
productivity, better quality, technology improvement, no direct
damage to the existing competition, and above all, clear benefits
to consumers as a result of price reduction). At last, CADE may
condition its consent to certain undertakings by the interested
parties which shall otherwise incur penalties for non-compliance.
On August 19, 1998, CADE
issued Resolution no. 15, which details the information and
documents required to be attached to an application, be it made
before or after the judicial act. The list of required data is
very comprehensive and may present some difficulties to the
submitting party, since some documents refer to international
levels.
On its final part, Law no.
8884/94 provides for, under certain circumstances, the possibility
of taking over violating companies, by means of a judicial order,
and thereafter nominating an intervenor to manage them.
At last, we wish to point
out the existence of a draft law, which foresees the creation of
the National Agency of Consumers and Competition Defense (ANC),
which shall substitute CADE, SDE and SEAE. The main changes
suggested by this draft law, which shall still be approved by the
National Congress, are the following: (a) the general director of
ANC shall have powers to take decisions without submitting them to
the Competition Court (CADE´s substitute), (b) there shall be a
reduction in relation to the level of companies ´s invoicing
obliging them to submit any acts to CADE´s consent, from annual R$
400.000.000,00 (four hundred million reais) to annual R$
150.000.000,00 (one hundred and fifty million reais), (c) the term
for acts presentation to CADE shall be reduced. 10. LABOR LAW IN BRAZIL
Labor Law in
Brazil
was influenced by transformations in Europe, the various countries
concern in creating law to protect workers, and particularly the
commitment made by the country with the International Work
Organization, which combined with important domestic factors -
such as the government labor policy and the industrial upsurge -
triggered the creation of a series of laws.
Only in 1943, the
Consolidation of the Brazilian Labor Laws (CLT) was created to
group the few laws existing at that time in addition to the
institutes developed by legal scholars.
The Consolidation of the
Brazilian Labor Laws (CLT), the primary legal system that rules
labor relationships, accounts for more than 900 articles.
Among the chapters forming
this system there are important norms relating to: Labor Safety General Norms, Working Hours Duration, Minimal Salary and Vacations Norms, Medicine and Occupational Safety Norms, Special Work Tutorship Norms, Work Nationalization Norms, Woman Work Protection Norms, Underage Work Protection Norms, Individual Employment Contract Norms, Workers �Union and Trade Association Norms and Classification,
Workers� Union and
Trade Association
Contribution Norms.
Besides, the CLT has the
whole legal system concerning Labor Court, such as applications
and related agencies, also stating the norms that rule labor
proceedings in
Brazil.
Although the CLT was
enacted in 1943, with the passing of time the Brazilian legal
system was modernized with the creation of a number of laws ruling
certain issues such as the Law concerning Strikes, or the laws
that brought new wording to CLT�s articles.
With the enactment of the
Federal Constituition in 1988, in addition to the labor norms duly
consolidated, new labor rights were created or improved in the
body of the final version.
The labor rights provided
for by labor laws stemming from either the CLT, specific laws or
from the Federal Constitution are the following: (1) minimal salary; (2) 44-hour weekly working hours; (3) salaries not decreased; (4) unemployment insurance; (5) 13th salary; (6) profit sharing; (7) additional pay for overtime; (8) annual vacations; (9) maternity leave; (10) paternity leave; (11) prior notice; (12) retirement; (13) approval of collective norms; (14) employment-related accident insurance; (15) Workers � Compensation Fund; (16) right to strike; (17) provisional tenure for members of Internal Commission for Accident Prevention, employees victims of employment-related accident and the pregnant employee; (18) tips; (19) commission; (20) family allowance; (21) education allowance; (22) transport pass; (23) food pass; (24) children�s aid; (25) unhealth premium; (26) risk premium; (27) night premium; (28) transference premium; (29) funeral aid; (30) weekly paid rest; (31) unemployment insurance;
(32) signed social
card.
Finally it is important to
emphasize other sources of law existing and which are respected by
the Brazilian legal system.
(a) Collective Bargaining
and Collective Labor Agreements;
(b) Superior Labor Court
Jurisprudence Statements;
(c) Norms issued by the
Ministry of Labor; and
(d) some Agreements
developed by the International Employment Organization.
As a consequence of the
high cost borne by companies related to the so-called labor
charges, the number of companies adopting outsourcing and the
flexibilization of labor rights resulting Collective
Bargaining/Agreement grew substantially.
There is a clear tendency
in recent decisions rendered by the Superior Labor Court towards
accepting flexibility as an important fact in the current phase of
development of employment relationships.
In fact,
Brazil
has been undergoing an important historic moment where large
changes are expected to occur.
11. FOREIGN WORK IN BRAZIL
The Ministry of Labor,
through the Immigration General Coordination (CGIg), has the
specific competence of being responsible for the work
authorization for foreign nationals, to issue a concession of
visas, according to the Law NR. 6.815 dated of 19 August of 1980.
There are different sorts
of visas defined by the Brazilian Laws, whose eligibility depends
on each specific situation and purpose of the trip. Therefore, not
all of them allow foreigners to work in
Brazil.
Generally, there are no restrictions about the nationality of the
applicant and spouse or children under 21 years old.
The law establishes 7
(seven) categories of visas:
The most commonly used types of visas are the tourist, temporary and permanent visas. 11.1. Visas for Short-Term Business Visitors and Tourists
Persons from some
countries will require a visa to travel to
Brazil
on short-term business or for tourism. Business visitors or
tourists traveling on these types of visas must not work or render
any kind of technical assistance, nor receive remuneration for
services from any source in
Brazil.
The Business visa may be
obtained at the Brazilian Consulate having jurisdiction over the
place of residence of the applicant, and the application generally
consists of the following:
The Business visa allows
the foreigner to participate in meetings, conferences, fairs, and
seminars, to visit potential clients, to research the market and
to perform similar activities. Foreigners holding this visa shall
not work in
Brazil,
subject to the application of a fine to the company employing
foreigners bearer of the inappropriate visa, as well as to
deportation of the foreigner.
Tourists� visa
applications usually only requires a round-trip airline ticket.
This type of visa only supports tourism purpose trips, subjecting
the company that employs foreigners holding this visa to the
application of a fine and to the deportation of the foreigner.
If a visa is required for
the country to which the applicant is going after
Brazil,
that visa must already be included in the passport, prior to
requesting the Brazilian visa. The visa is generally issued within 24 hours. This type of visa may be valid for a period up to 90 (ninety) days from the date of first arrival in Brazil. It may be utilized for multiple entries during that period. An extension for a further period up to three months may be obtained from the Immigration Authorities in Brazil, prior to expiration of the visa. In any case, the foreigner may only remain in the country for 180 days within a 365-day period (not calendar year). 11.2. Temporary Work Visas
For persons coming to
Brazil
on a temporary basis for working purposes, there are other
categories of visas:
The applicant for any of these types of visa shall previously obtain a Work Authorization from the Brazilian authorities. It is an administrative act, which comes under the competence of the Ministry of Labor, as an exigency of the Brazilian Consular Authorities, according to the national legislation, to obtain a concession of permanent and/or temporary visas, for foreign nationals wishing to work in Brazil. Upon approval, the work authorization shall be published on the Federal Official Gazette, and the designated Consulate shall be notified, so that the foreign national may apply for the visa issuance. 11.3 Other Temporary Visas
The visas listed below do
not allow its bearer to work in
Brazil
or receive any remuneration from a Brazilian source:
(1) Mission of Studies
and Religious Mission: The candidate must not receive any
compensation in
Brazil.
This visa may be granted to religious persons for specific
mission in
Brazil
for up to one year.
(3) Trainees. This visa
is eligible to foreigners who intend to come to
Brazil
for a trainee program during the 12 month period after
graduation, with no labor relation to any Brazilian entity. Visa
application requires proof of graduation within the last 12
months, as well as proof that any kind of remuneration shall be
paid exclusively from abroad. This visa may be granted for a
maximum period of 1 year.
(4) Internship Programs.
This visa is eligible to foreign individuals admitted to an
internship program, including employees of foreign companies in
internship program in the Brazilian subsidiary, with no labor
relation to any Brazilian entity. Visa application requires
Commitment Term executed between the intern, the Brazilian
institution and responsible control entity. This visa may be
granted for a maximum period of 1 year. (5) Health Treatment. This visa is eligible to foreign individuals who intend to come to Brazil for health treatment purposes. Visa application requires medical recommendation and proof of the means for payment of the health treatment 11.4. Permanent Employment Visa
The Permanent visa may be
issued, basically, under two circumstances: (i) family relation to
a Brazilian national (marriage, children); or (ii) appointment to
the representation and managing position of a Brazilian company
(Statutory Director).
In case the candidate is
married to a Brazilian citizen or has a Brazilian child he/she
shall be eligible for applying for a permanent visa at the
Brazilian Consulate abroad, before coming into the country, or at
the Ministry of Justice if the candidate is already in the
country. In this case, the candidate shall be allowed to work in
Brazil.
The permanent visa may
also be issued in the case of a foreign company that has a branch
or subsidiary in
Brazil,
and wishes to transfer a statutory director or manager to the
Brazilian company. Therefore, individuals who will be permanently
transferred to
Brazil
to work for a subsidiary or branch of a foreign-owned company in
the capacity of director or manager may apply for a permanent
employment visa. To apply for a permanent visa for its director or
manager, the company must have, at least, US$ 200,000 invested in
Brazil
and registered within Central Bank of
Brazil. In addition, persons who have been employed in Brazil in a temporary capacity (regardless of whether the company is Brazilian or foreign owned) for a period of four years, may apply to convert their status to permanent. To obtain permanent employment authorization for an individual working in Brazil on a temporary basis for four years, application must first be made to the Ministry of Justice at least 30 (thirty) days prior to the completion of the four year term. 11.5. Registration upon Entry into Brazil
All foreign who enter in
Brazil
holding a Temporary Work visa or a Permanent visa must register
with the Federal Police/Ministry of Justice and obtain the
foreigners ID card within 30 (thirty) days of arriving in
Brazil.
This rule applies only to alien residents in
Brazil,
immigrants, and temporary residents coming for employment.
Artists, sportspersons, tourists or short-term businesspersons are
not required to register.
Temporary work visa and
permanent visa holders shall also register before the taxpayer
registry office (Federal Revenue) for taxation purposes, provided
that the worldwide remuneration shall be taxed according to the
Brazilian tax legislation. Upon definitive exit from
Brazil
and repatriation, the foreigner shall present to the Federal
Revenue the so-called �Declaration of Final Departure� and request
the cancellation of the taxpayer registration in order to cease
levy on the individual remuneration. Furthermore, professionals employed by a Brazilian company shall also obtain the so-called �Labor Card� in order to comply with Brazilian labor legislation. 11.6. Travel in Advance of Permanent or Temporary Employment Persons needing to conduct business in Brazil prior to obtaining employment authorization and the appropriate visa, may do so by obtaining a short-term business visa. However, they shall not work in Brazil or receive any remuneration locally until the employment authorization and visa are issued. Furthermore, the individual must obtain the permanent or temporary visa outside of Brazil. 11.7. Employment of Spouses/Children
Accompanying spouses and
children are allowed to remain in the country as a dependent of
the visa holder for as long as his/her visa is valid. However,
spouses and children are not permitted to engage in employment or
any work activity while residing temporarily in
Brazil,
but they shall be authorized for employment if converted to
permanent resident status. 12. ACQUISITION OF REAL ESTATE IN BRAZIL12.1. Introduction
Under Brazilian law,
questions relating to property are governed by the law of the
place where the property is located. Thus, issues regarding real
estate property situated in
Brazil
are governed primarily by the Brazilian Civil Code (�BCC�).
Pursuant to the Brazilian
Civil Code, assets are divided into two broad categories: movable
and immovable. Movable are those assets which can be moved by
external forces or by themselves, without causing their own
destruction or devaluation.
Immovable assets are those
which are by nature immovable or fixed in the land, and can not be
partially or totally removed without causing their own destruction
or devaluation. The category of immovable property comprises land
together with its surface, and all things attached to or forming
part of the land, the air space above the land and the subsoil,
except for the mines and products from the subsoil, as well as
waterfalls, which constitute, for the purposes of exploitation and
usage, separate assets from the land. In this sense, according to
the Brazilian Federal Constitution (�Federal Constitution�), the
exploitation of mineral resources and hydroelectric power requires
federal authorization or license. Some assets, however physically
movable, are considered immovable by the law, by reason of the use
to which they are put by the owner, i.e., industrial machines and
equipments. Likewise, property rights are also treated as
immovable property, such as rights in rem over immovable property,
government stock incorporating an inalienability clause, and the
right of an heir to inherit property. Foreigners individuals or foreign-owned companies can acquire real estate property in Brazil in the same conditions applied to national individuals or companies. However, special conditions may apply to foreigners or to foreign-owned companies, referring to the purchase of property located near the coast or frontiers or certain specific areas designated as being of national security. Rural areas can be acquired by foreigners or foreign-owned companies, according to specific law dispositions, which will be discussed in item 3.2. Foreigners or foreign-owned companies can also acquire rights in rem related to immovable property. 12.2. Possession and Ownership
With respect to real
estate properties, two broad categories of rights emerge: the
right of possession and the right of ownership:
(i) The right of
possession is a personal right to exercise certain powers of
ownership such as: the right to claim, maintain or recover the
possession of property; the right to receive its fruits
(including rents and other income from the property), the right
to be indemnified for necessary improvements carried out, and
the right to retain the object.
The possession of property
is forfeited by abandonment, by transference, by the loss or
destruction of the property, by its becoming ineligible for
purchase or sale, by a third party taking possession of the
property, by the non institution, in due time, by the possessor,
of the applicable claim to maintain or reinstate the possession,
and by constituto possessorio.
(ii) The right of
ownership is the most important of all property rights and is
defined by the Brazilian Civil Code as the right of an
individual to use, enjoy and dispose of his goods, and to
recover them from whoever may have taken possession of them
unlawfully. It is an absolute and exclusive right, which may,
however, belong to several persons at the same time, in relation
to the same property, as in a co-ownership or condominium, which
is when each of the co-owners of an asset has all the property
rights in relation to an ideal part of such asset. The right of ownership may be restricted in view of public interest or in respect for the property rights of third parties, as in the following situations: (i) the expropriation of real estate properties by the government (ownership of private property is transferred to the expropriating authority against payment of an indemnity); (ii) the restrictions relating to the division of urban land as, for example, those restrictions to buildings construction, establishing of industrial plants in critical pollution zones, etc, imposed by the law of the municipality where the property is located; (iii) the restrictions imposed in the interest of national security, such as the restrictions on the sale of private land in the coast or within 150 kilometers of the national frontier; and (iv) the restrictions to the right of the proprietor to freely dispose of his goods, arising from the status of insolvency, bankruptcy or �concordata� of the proprietor, in order to protect the creditor�s rights. 12.3. Acquisition and Loss of Ownership12.3.1. General Provisions
According to Brazilian
law, ownership of real estate property is constituted upon the
registration of the public or private instrument through which the
sale was accomplished at the appropriate Real Estate Registry of
the location where the property is situated. The execution of an
instrument involving real estate property that was not registered
at the respective Real Estate Registry will only become a binding
instrument between the parties involved in the sale agreement and,
thus, will not be enforceable against third parties. Real estate
property is acquired by the registration of the act which have
transferred the property, due to any cause, such as: (i) by the
sale and purchase agreement signed by the parties; (ii) by
accession (which is the enlargement of the land caused by the
incorporation of parcel of the soil, dislocated by natural
forces); (iii) by prescription (which is the acquisition of
ownership by the possessor who, although not being the owner, has
had the possession of the property during a certain period of
time, stipulated by law); and (iv) by inheritance.
Likewise, any act which
modifies, extinguishes, transmit or create rights related to
immovable properties must be registered with the competent Real
Estate Registry, such as: (i) court orders by which undivided land
is divided among different owners; (ii) court orders in the
winding-up of an estate of a deceased person or the division of
property, awarding immovable property to creditors in payment of
the debt of the estate; (iii) public auctions and adjudications;
and (iv) orders of separation, divorce and nullity which involves
the settlement of property or rights in rem related to immovable
properties. The main grounds for extinguishing real estate ownership are: (i) expropriation, which is the unilateral act of public law by which individual ownership is transferred to the relevant government authority, upon payment of fair compensation by said authority, due to public interest; (ii) transfer; (iii) waiver (for example, when the heir renounces his rights of inheritance); and (iv) abandonment or destruction of the property. 12.3.2. Acquisition of Rural Property by Foreign Person or Foreign Legal Entity
The acquisition of rural
property by foreigners who have permanent residence in
Brazil
or by foreign companies authorized to operate in
Brazil
is regulated by Law No. 5.709(�Law No. 5.709/72�). This law
provides that individual foreigners with residence in
Brazil
cannot acquire more than an area equivalent to 50 (fifty) units of
rural property called �módulos rurais�. The area of each �módulo
rural� is determined by the law of the unit of the Federation
where the land is located, according to the specific economics and
environmental characteristics of the region where the property is
situated and to the kind of agricultural activity to be developed
in such area. Foreigners who do not have permanent residence in
Brazil
cannot acquire rural properties in
Brazil,
except if such acquisition is due to inheritance rights. On the
other hand, the restrictions to the acquisition of rural
properties by Brazilian companies with foreign equity control are
now being questioned because of the 1995 amendment to the Federal
Constitution which removed the distinction between Brazilian
companies and Brazilian companies with foreign equity control.
However, the restrictions on foreign individuals and foreign
corporate entities authorized to operate in
Brazil
remain in force. According to Law No. 5.709/72 foreign companies can only acquire rural property if the purpose is the implementation of agricultural, cattle-raising, industrialization or colonization projects, and that such projects must be linked to their respective statutes. Such projects must be approved by either the Brazilian Agriculture Ministry or the Department of Trade and Industry, as the case may be. The President of Brazil may, upon specific decree, authorize the acquisition of rural property beyond the provisions of the current law, in cases where such property is the object of priority projects involving the country�s development plans. 12.3.3. General Remarks and Requirements Upon Purchase The acquisition of a real estate property in Brazil due to inter vivos transactions is generally agreed between the purchaser and the seller by means of a sale agreement. If a property is acquired by a single buyer (not in a condominium situation), than the buyer has absolute title to that area of ground. In case of multiple ownership (as it is the case of condominium), each owner can exercise all the rights of ownership, except those incompatible with the indivisibility of the property (for example, the property can not be sold without the approval of all owners, and the price paid must be divided among them). Besides the specific requirements related to transactions involving immovable property, Brazilian law requires, as for any other type of contract, that the parties of a sale and purchase contract be capable to perform such a transaction. They must have full legal age (majority), be mentally healthy, or, if not capable, they must be duly represented to perform such a transaction. 12.4. Taxation12.4.1. Inter-Vivos Transfer Tax - ITBI
Inter-Vivos Transfer Tax
(�ITBI�) is a tax assessed by the municipalities which is due when
real estate property or rights in rem to any real estate property
(except those in guarantee), and also assignment of rights for the
acquisition of property is transferred, for any reason whatsoever,
and on a remunerated basis. For example, the rate established to
the Municipality of São Paulo, according to São Paulo Municipal
Law No. 11.154, varies from 2% to 6%, depending on the property�s
value. ITBI is not assessed when the transfer of real estate property or rights to any such property takes place to pay up the capital of a company or when resulting from any merger, consolidation, spin-off or liquidation of the legal entity, except if in any of the above mentioned cases, the acquirer�s chief activity is the purchase and sale of such assets and rights, lease or commercial lease of real estate property. 12.5. Real Estate Investment Funds - Financial Instrument
Real Estate Investment
Funds were established to provide funds for developing real estate
ventures for subsequent sale, letting or leasing. The Brazilian
Securities Exchange Commission must authorize, regulate and
inspect Real Estate Investment Funds operations and
administration.
Property Investment funds
are currently being used for the purposes of raising funds for the
construction of several Shopping Centers throughout
Brazil.
Previously, pension funds were direct investors of real estate
projects but currently they are investing indirectly, by
purchasing shares of property investment funds.
Both individuals and
corporations resident or domiciled abroad are entitled to acquire
such shares, provided that the funds resulting from the investment
are duly registered with the Central Bank of
Brazil,
thereby enabling the return abroad of the respective investment
and the gains resulting therefrom. Capital gains resulting from
investments on property investment funds are subject to
withholding tax (IR) at a rate of up to 20% upon disposal or
drawing of Real Estate Investment Funds quotas. 13. ENVIRONMENTAL LAW IN BRAZIL13.1. Constitutional Basis
Environmental protection
in
Brazil is foreseen in
the Federal Constitution, Article 225, which states that �every
person has the right to an ecologically well-balanced
environment.�
The federal, state and
municipal governments have competence on environmental matters in
Brazil.
The common material competence to protect the environment, combat
pollution and preserve forests, animal and plant life is
established in Article 23 of the Constitution.
The competence to
legislate on environmental matters in
Brazil
is established by Article 24 of the Constitution. It sets forth
the concurrent legislative competence of the federal government,
the states and Federal District. The federal government is
competent to issue general rules and the states and the Federal
District have complementary legislative competence.
Therefore, the states and
Federal District can legislate on environmental protection aspects
through specific laws and take measures to apply federal
environmental laws.
In the absence of a
general federal law, the states and the Federal District have full
legislative competence. The supervenience of a general federal law
suspends the effects of state law in case of a discrepancy since
these must not oppose federal laws.
On the other hand, in
cases where general federal law already exists, states, Federal
District and municipalities only have competence to supplement the
federal law.
Municipalities only have
competence to supplement federal and state legislation if they
have local interest. This means that the municipalities cannot
abolish the federal and state requirements, but can demand
additional measures focusing on local interest.
In short, the states and
the Federal District are allowed to create more severe laws than
those established by the federal government. Municipalities,
despite not being able to legislate on environmental protection,
are entitled to issue supplementary laws and rules establishing
penalties to polluters.
There are many laws
regarding the environment under constitutional previsions. Federal
Law 6.938/81, which established the National Environmental Policy
in
Brazil, is the most
important law on this matter, bringing many legal instruments,
such as: environmental standards; environmental zoning;
environmental licensing, environmental impact evaluation, among
others.
Considering that the environmental licensing process may cause delay or block the establishment and operation of a new enterprise, the environmental licensing is the first legal instrument that we will comment on. 13.2. Licensing of effectively or potentially polluting activities
Environmental licensing is
an administrative process through the competent environmental body
that grants licenses for the location/design, construction (or
expansion) and operation of undertakings and activities which use
environmental resources considered effective or potential
polluters, and enterprises which may cause environmental damages,
according to Article 10 of Federal Law no 6.938/81.
In the environmental
licenses, the environmental bodies establish the conditions,
restrictions and standard controls that the venture must obey.
The following licenses
must be obtained:
According to Article 225,
IV, of the Federal Constitution, in order to obtain the first
license for projects or activities considered to be potentially or
effectively polluting, an environmental impact study and
associated report must be carried out. This is further described
in CONAMA (National Environmental Council) Resolution no. 001/86
and is part of the environmental licensing process. Granting of
the referred license depends on its approval. CONAMA Resolution no. 237/97 amended and complemented some aspects of CONAMA Resolution no. 001/86, and also describes the licensing process. 13.3. Liabilities for environmental damages
Article 225, Paragraph 3
of the Federal Constitution, establishes that �conduct and
activities considered harmful to the environment shall subject
infractors, whether natural persons or legal entities, to penal
and administrative penalties, notwithstanding the obligation to
repair any damage caused.�
Thus, the Brazilian
Constitution foreseen three types of environmental liabilities:
civil, administrative and criminal, each one with its respective
penalties.
13.3.1. Civil liability
for environmental damages - In Brazilian law, civil liability
for environmental damages is a strict liability, based on the
risk of the activity, regardless of the existence of
culpability, not being necessary to prove any intention or
guilt. This strict liability is also set forth in Article 14 of
Federal Law no 6938/81.
It is only necessary to
impose to the one who carries out the activity to repair the
damages caused if the existing link between the activity and the
environmental damage brought on has been proved.
This means that the risk
involved in the exercise of the activity, whether or not
outwardly dangerous, and whether or not for profit, is the basis
for assessing responsibility for repairing the damage caused,
regardless of blame.
Aiming to reestablish
the situation closest possible to the existing prior to the
damage, measures capable of recomposing the damages brought on
are frequently prioritized. Only the damages which are not
capable of been repaired shall be converted on the payment of
damages
13.3.2. Administrative
Liability - Administrative liability occurs when by action or
omission, there is a violation of the rules regarding use,
enjoyment, promotion, protection or recovery of the environment.
The administrative
penalties, at the federal sphere, are set forth in Chapter VI of
Federal Law no. 9.605, which took effect on February 12 1998,
and in Decree no. 3.179, which took effect on September 21 1999.
Administrative penalties
are foreseen in case of non compliance with the mentioned
legislation, such as: fine (once or ongoing daily), temporary
interdiction of the establishment or activity, forbiddance to
contract with the Public Authority; loss or suspension of
eligibility for credit lines from official financing
institutions, and total or partial suspension of the activity
that resulted in the damage.
13.3.3. Criminal
Liability - In accordance with Article 3 of Federal Law no.
9.605/98, the penalties stipulated are applicable to natural
persons and legal entities.
The penalties can be
applied separately, together or alternatively, to legal entities
are: pecuniary fines,restriction rights and service rendered to
the community, in accordance with Article 21 of Federal Law no.
9.605/98, depending on the criterion of the jurisdictional body.
Penalties applicable to
natural persons are: incarceration, house arrest, service
rendered to the community, temporary loss of rights, total or
partial suspension of the activity, pecuniary installment and/or
fine.
It is important to
consider that as per Federal Law no. 9.605/98, it is possible to
disregard a corporate entity if the personality of the
corporation will represent an obstacle to recovery of the
damages caused to the environment.
14. PRIVATIZATION14.1. National Privatization Program
The Brazilian
privatization program favors the transfer of activities which
could be better handled by the private sector out of the hands of
government and into that sector. Such a reorganization frees the
State from the burden of losses incurred by these business
ventures and enables public administrators to focus on other
issues important to the Brazilian economy. Brazil�s national privatization program was instituted by Law No. 8.031, of April 12, 1990 (replaced by Law No. 9.491, of September 9, 1997 and subsequent amendments thereof) and is regulated by Decree No. 2.594, of May 15, 1998 (as amended). The statute applies to the sale of certain assets owned and/or companies controlled by the federal government. The concession of public services to private entities was also defined by Law 9.491 as one type of privatization. The National Privatization Board (�Conselho Nacional de Desestatização - CND�, formed by State Ministers), which reports directly to the President of Republic, is the highest authority responsible for conducting the privatization process according to said statute. The National Bank for Economic and Social Development (BNDES) also has an active role as the Privatization Fund Manager, supplying administrative and operational support to the CND, retaining consultants and specialized services as necessary for carrying out the privatization, contact the securities systems and stock exchanges, among others. Recent measures have given new impulse to the program and brought within its framework concessions of government-controlled enterprises. 14.2. Public Services Concession
Law No. 8.987, of February
13, 1995, regulates Article 175 of the Federal Constitution of
1988 and establishes the rules for concessions of public services.
This so-called Concessions Act expressly excluded radio and
television transmission services. This statute was later amended
by Law No. 9.074, of July 7, 1995, and regulated (among others) by
Decree No. 2003, of September 10, 1996, and Decree No. 1.717, of
November 24, 1995, which established new rules and regulations for
the approval and extension of public service concessions,
including the extension of certain electrical energy concessions.
Law 8.987 expressly requires that concessions be granted after a
public bidding process. Law No. 9.074 makes it clear that, with
certain exceptions, federal, state and municipal governments are
forbidden to perform public services by means of concessions or
licenses in the absence of a law specifically authorizing and
defining such services.
Nevertheless, prior laws
limiting the areas of economic activity eligible for privatization
have now been replaced by laws that more broadly define the types
of entities, regardless of activity, that may be privatized. For
instance, above-mentioned Law No. 9.491 defines most of the
companies, including financial institutions, directly or
indirectly controlled by the federal government, as well as most
public services concessionaires, as being eligible for
privatization. Meanwhile, various industry-specific pieces of
legislation have been adopted or proposed to eliminate or limit
the government monopolies over certain industries. For instance,
the General Telecommunications Act (Law No. 9.472, of July 16,
1997) regulates Constitutional Amendment No. 8, of August 15,
1995, to allow private sector competition in the
telecommunications industry. Also by way of Constitutional Amendment No. 8, the Brazilian Congress approved Law No. 9.295/96, which stated that concessions for the exploitation of cellular telephony, classified as a �restricted public service�, must be granted, through a public bidding procedure, to Brazilian companies, with at least 51% of their voting capital belonging, directly or indirectly, to Brazilian nationals. The public bidding procedure was aimed at the granting of the so-called �B Band� license, for which a secret bid equal to or above a certain minimum amount was offered by the bidders. 14.3. Sectors Subject to Privatization
Economic activities that
were first authorized to be conceded to the private sector and are
either already privatized or currently undergoing privatization in
Brazil
include the following:
14.4. Evolution and Results of the Privatization Program Since the enactment of Law No. 8.031, in 1990, as many as 128 State-controlled companies have been privatized by federal and state governments through September 2000, totaling more than US$ 95 billion. Among them are CSN (the national steel mill); Mafersa (a manufacturer of railroad equipment); Escelsa, Light, CERJ, CEEE (partial), CPFL, Eletropaulo, Gerasul, COELBA, CESP (partial)(major companies in the electricity sector); CRT (the state telephone company of Rio Grande do Sul); COMGÁS, CEG (gas distribution companies) and RFF (the national railway line). In addition, all of the major steel (i.e. Usiminas, Cosipa, Acesita and CST), petrochemical (i.e. Poliotelinas) and fertilizer (i.e. Ultrafertil) companies have also been privatized. The most controversial privatization was that of the Federal Government�s sale of its controlling stake in Brazil�s largest mining and transportation company, Companhia Vale do Rio Doce (�CVRD�).
Until now, most
privatizations have been achieved through auctions on the
Brazilian stock exchanges. Law No. 8.666, of June 21, 1993,
regulates Article 37, XXI, of the Federal Constitution and
establishes the rules for the public bidding process. This federal
act was later amended by Law No. 8.883, of June 8, 1994, and Law
No. 9.648, of May 27, 1998, which established requirements for,
inter alia, bid invitations, methods, payment, and guarantee
forms. The Administration has already submitted for public
comment, prior to sending it to Congress, a new Bill (�Preliminary
Proposal for New Bidding Law�) which would reform the bidding
process, including new requirements for bidding entities to post a
surety bond in connection with bids.
The privatization program
has been extended not only concessions for public services
controlled by the Federal Government, but those of states and
municipalities as well. Each state and municipality has powers to
establish the rules for its own program and, therefore, the
privatization of state- or city-owned companies is made pursuant
to specific local rules. In this regard, the State of São Paulo
has carried out one of the most successful privatization programs
in
Brazil. Since the
publication of the state privatization act, São Paulo has
transferred to the private investors, among others, the
exploration of public services of distribution of piped gas (both
in the metropolitan, performed by COMGÁS, and country areas,
performed by recently created Gas Brasiliano and Gas Natural), as
well as generation (Paranapanema and Tietê, which resulted from
CESP�s partial spin-off) and distribution of electricity (CPFL and
Eletropaulo, two of the largest Brazilian distributors). Following
such trend, the State of Paraná is about to transfer to private
investors the controlling interest of COPEL, deemed to be the
Brazilian best state-owned electricity company. Other States, such
as Bahia, intend to privatize their water treatment/sanitation and
gas distribution companies.
Finally, there have been
amendments to other areas of Brazilian law to facilitate the
privatization process and attract foreign participation. The
Brazilian Company Law (No. 6.404/76) has been amended to alter
dissenter rights of minority shareholders to allow more
flexibility in cases of mergers or split-ups commonly deployed in
connection with privatizations. In addition, President Cardoso has
signed Decree No. 2.233/97, allowing companies directly or
indirectly controlled by foreign capital to have access to
financing from public financial institutions. This decree defines
those priority areas of economic activity within the meaning of
Law No. 4.131/62 to be allowed such financing, thus benefiting
recently privatized companies in such sectors.
Despite inevitable delays
and obstacles, the privatization program in
Brazil
has had a good decade. The Cardoso Administration estimates that
the federal government has received as much as US$ 70 billion in
the past three years through privatizations in the electricity and
telecommunications industries alone. The participation of foreign
capital has reached approximately 40% of such amount. In summary,
the Brazilian privatization program, including the sell-off of
mining and transportation giant CVRD and, in 1998, that of
Telebrás, the holding of the telecommunications system, the
largest privatizations ever in Latin America, has attracted
worldwide interest and has significantly contributed to boost
foreign investment in
Brazil. 15. PUBLIC BIDDING AT CONCESSION AND PERMISSION FOR PUBLIC WORKS AND SERVICES15.1. Introduction
The Brazilian Federal
Constitution, in article 37, insert XXI and article 175
establishes that apart from exceptions foreseen by law, works,
services, purchases and alienations, will be contracted by direct,
indirect or foundational public administration of any of the
Departments of the Union, the States, Federal District and
Municipalities, through process of public bidding - by one of
these manners: competition, price inquirying, invitation, contest,
auction and recently, by a form denominated �bid� promoted
exclusively for the Union and regulated by provisional order n.
2026 of 21.12.2000.
As a rule, for the adequate choice of each modality of bid, the value of the contract has to be considered, however it is important to recall that there are hypotheses in which due to the complexity of the object the value of contracting isn�t predominant. Whatever modality is adopted, the supremacy of the public interest will rule over the private interest in order to obtain the most efficient result for the public administration.
15.2. Modalities
The Bid is the adequate
modality for purchases or alienation of realty, usage grantee,
rendering of services or construction of public work. Normally it
is destined for transactions of great sums, while the Price
Inquiry is for medium prices; the Invitation, on all of the
bidding modalities involves services of lesser amounts.
The Contest is destined to
select technical and artistic works, while the Auction is reserved
for the alienation of goods for, the best price for the
administration to whoever offers the best bid after the minimum
value of evaluation.
The bid was established to
regulate the contracting that involves the supply of goods or
common services, done in a public session, by the means of written
and verbal proposals, attempting to make the most economic, safe
and efficient purchase. However, for this modality the contracting
of works and engineering services, rentals or alienation are
excluded by law.
Whatever the procedure of
bidding, the principles of isonomy, legality, impersonality,
morality, publicity, administrative probity, objective judgement
must be obeyed in order to choose the proposal which is most
advantageous to Public Administration to assure equal conditions
to all the participants before the calling instrument, as well as
fixing demands of technical and economic qualification, and
maintaining the bidding conditions effective. In this context, with the intention of regularizing the constitutional provisions, instituting norms for public bidden and Public Administration contracts and other measures, the Federal Laws n. 8666 of 21.06.1993 and n. 8883 of 08.06.1994 and also the Federal Law n. 8987 of 13.02.1995 recently updated by the laws n. 9648/98 and 9791/99 were published, which specifically deal with the system of concession and permission for the rendering of public services, as well as Constitutional Amendments n. 8/95 and 19/98 which altered respectively the inserts XI and XII of the article 21 and insert XXVII of article 22 of the Brazilian Federal Constitution. 15.3. Concession and Permission for Public Service
At Federal level, article
21, XII of the Federal Constitution foresees the sectors which can
be exploited by the Federal Union, directly or through
authorization, concession or permission, which are: services of
radiodiffusion, of sounds and images and other telecommunication
services; services and installation of electric energy and the
energetic use of water courses in articulation with the States
where the potential hydroenergetic stations are situated; air and
space navigation and airport infrastructure; the services of rail
and water transport between Brazilian ports and national frontiers
or which transpose the limits of the State or Territory;
interstate and international road passenger transport services;
and sea, river and lacustrine ports.
The concession of public
service is basically the formal administrative contract, signed
through public bid through competition. The objective is the
legalization of the delegation of the execution of a service of
the Public Authority to the private which will assume risks for
the period of the contract. It aims primarily to satisfy the
conditions of regulation in the rendering of services, its
continuity, efficiency, the modernity of equipment and
installation, the expansion of the range of coverage, and mainly,
the courtesy in the rendering and market fees. On the other hand, the Permission for public service is a simple, discretionary and precarious act of unilateral delegation of Public Authority, made by an adhesion contract which may, at any time, revoke or establish new conditions to the permitee. 15.4. Enabling
The Public Authority, with
a view to triggering the process which has as its objective the
concession or permission, will publish a deed justifying the
respective granting and defining the objective, field and time
period. Subsequently, it will publish the invitation to the bid,
being that in case of concession, this is through competition.
To those interested in
taking part of any bidding modality, besides having to achieve the
specific requirements for each modality, the documentation
required by law which looks for guarantees in the judicial,
economical, financial application and tax regulation, must be
presented, except legal exceptions for some modalities which are
exempt from presenting such documentation.
With the presentation of
the documentation relative to judicial application, technical and
economic-financial qualification and tax regularity, and if the
bid´s invitation so permits, the formation of consortium for
participation in the public bidding will be allowed.
Being qualified, the bidders will present their proposals attending the requirements pre-established in the bid´s invitation and any person can obtain certificates as to the contracts, acts, decisions or reports related to the public bidding or to the actual concessions or permissions. Judgement will adopt the criteria of the smallest price for the tariff of the service to be rendered or the biggest offer, for the granting of concession, in the cases of payment to the conceding power or both criteria jointly. When there is equality of conditions between the participants, preference will be given to the Brazilian company, exclusiveness in the rendering of services, except in impracticable technical and economic cases, will not be conceded. 15.5. Dispensing and Ineligibility of Public Bidding
There are three situations
in which the law concedes the exemption of the discharge of the
public bidding process: when the object represents a small sum, in
case of emergency to solve public calamity, war or intense
disorder, or, for the purchase or rental of real estate, which for
relevant reasons in its selection - for example the geography
positioning of the estate - would remove the need for a bidding;
these reasons are expressly listed in article 24 of the Law
8666/93. The cases where bidding is not obligatory occur when there is the impossibility to fulfill a public bidding due to the incapacity of having competition among the competitors due to the nature of the professionals or companies with notorious specialization among other circumstances described in the article 25 of the Law 8666/93 as, acquisition of equipments or such things that may only be supplied by producers, companies or exclusive commercial representative or even, for the reinstatement of artistic pieces or objects of historical value (Law n. 8666, article 13). 15.6. Administrative Contract
The concession will be
formalized through a contract which will contain clauses which
define the parts, the objective, area and period; manner, form and
conditions for the rendering of the services; criteria,
indicators, formulas and parameters which define the quality of
the service; the price of the service and criteria for
readjustment; rights, guarantees and obligations of the users;
future projections for amplification and modernization; form of
inspection; contractual penalties and others. Building and
financial schedules can be demanded of the execution of the work
connected to the concession and guarantee of the true fulfillment
of the obligation related to the concession, in contracts related
to the concession of public service preceding the execution of
public work. The concessionaire will be able to contract third parties for the development of activities which are inherent, accessory or complementary to the conceded services, being that this relationship will be ruled by private law and will not affect the responsibility of the first for all damage caused to the conceding power, to users or to third parties. Subconcession is also permitted providing it is foreseen in the contract and authorized by the conceding authority and preceded by competition. 15.7. Guarantees If foreseen in the invitation to bid, the existence of guarantee as to the fulfillment of the contract is common. Except where foreseen by law, the guarantee will be by check bond, insurance or bail to be chosen by the contractee as long as the corresponding value of the insurance does not exceed 5% of the contract value. 15.8. Inspection and Extinction of Concession or Permission
Every concession or
permission presupposes the rendering of adequate service to the
full attendance to users, in a form that satisfies the conditions
of regularity, continuity, efficiency, security, presently,
generality, courtesy in the rendering and reasonableness of
tariffs.
The concession and
permission will be extinguished at the end the contractual term,
expropriation (the taking back of the service by the conceding
part for motive of public interest), or in case of incompliance of
the basic fundamentals of the administrative bids forfeiture
(declaration in the case of total or partial non execution of the
service), rescission, annulment, bankruptcy or extinction of the
company which is the concessionaire or decease or incapacity of
the incumbent, in the case of an individual company.
In this process it is the
responsibility of the grantor, with basis on the interest of
defense of the consumers, the inspection power of the activities
formed by commissions, which will have access to the data relative
to the administration, accounting, technical, economical and
financial resources of the grantee, being able to intervene in the
concession.
In the case of non fulfillment of any contractual clause, on the party of the grantor, a special judicial action can be applied for the dissolution of the contract. 15.9. Online Auction
With a view to optimizing
the public budget and the agility in the administrative contract
procedures, the Government of São Paulo authorizes the direct
administration offices, governmental agencies of the State, by the
Decree n. 45085/2000 the use of online system of hiring or
purchasing of equipments and services needed for the State. The
electronic auction is allowed to any company that is enrolled in
the system and providing it is within the limit of up to eight
thousand Reais, which waives the need for a bidding, as
established in the insert II of the Article 24, of the Federal Law
of Bidding.
The procedure is an
electronic auction, in which wins whoever presents the best offer.
It may also be applied to the modality of public invitation, in
which the object will be purchased with immediate delivery.
The objective is to
improve the quality of information in the State through a system
in which anyone interested has access to the governmental
procedures.
16. TELECOMMUNICATIONS16.1. Telecommunications in Brazil - Brief Overview
Law 4117/62 edited the
Brazilian Telecommunication Code which, for more than 35 years,
regulated telecommunications services throughout the country and
authorized the constitution of the Brazilian Telecommunications
Company Empresa Brasileira de Telecomunicações S.A., known as
EMBRATEL.
In 1972, Law 5792
established the policy for the exploitation of public
telecommunications services and created the public company
TELEBRÁS (Telecomunicações Brasileiras S.A.) to promote, among
other activities, through its subsidiaries and associated
companies, the exploitation of public telecommunication services
in
Brazil and abroad.
TELEBRÁS was named a
�general concessionaire� for exploiting public telecommunications
services, and its subsidiaries and associated companies were
designated �delegate concessionaires�. Thus, TELEBRÁS, its
subsidiaries and associated companies formed the TELEBRÁS System
which eventually included EMBRATEL as well.
In mid-1998, the TELEBRÁS
System underwent a complete restructuring process that included
the privatization of the companies that were part of the group.
The great investment flow was steered toward expanding
telecommunications services in light of new technologies.
The telecommunications
sector - today basically under private enterprise - is investing
heavily against the accumulated lag brought by nearly two decades
of state monopoly, represented by the old TELEBRÁS System.
Currently, the main targets of the sector are to: (i) expand and
universalize the nation�s telecommunications network; (ii)
technologically modernize the structure and operation of the
system; (iii) diversify and multiply the number of products and
services and (iv) increase competition to attract and maintain
customers.
Much criticism has been
made about the quality of the services rendered to customers
following privatization. This criticism that can be attributed,
among other reasons, to: (i) the massive investments that have
been required to modernize the technical systems and which have
yet to produce all the results initially expected, as well as (ii)
the lack of qualified personnel since the offer of employment in
this sector has practically doubled in
Brazil
in the last three years following privatization.
In point, this apparent
delay in promoting changes in the telecommunications sector has
brought losses and wear to the system. On the other hand, it
provided the country with the opportunity to carry out an
ambitious and well-planned project, conceived through the
observation of the privatization experiences of the sector in
other nations and of
Brazil�s
own experience with privatizations in other sectors. The
Government was able to avoid many of the mistakes that occurred in
other countries. In Mexico, for example, the privatization model
was concentrated and one sole company took over the whole market.
In Chile, in a diametrically opposed experience, the market was
opened to so many separate companies that it, together with a
total lack of restrictions, caused a price war that led to many
companies going bankrupt and generating a tremendous drop in the
quality of the services. The compromise model adopted by
Brazil
sought, instead, to stimulate gradual transition with the intent
of having the consumer, and the market itself, become used to the
new system and adapt to the competition.
A marked characteristic of
the first phase of the opening of the telecommunications sector
was the creation of duopolies in the area of telephony in order to
grant companies time to establish and consolidate themselves in
the market before free competition begins to be permitted, in the
year 2002. For the time being, competition can be said to be
restricted to the dispute between concessionaire companies and
mirror-companies in the fixed telephony market and between Band A
and Band B in mobile telephony. The duopoly proved that it is
possible to implement a mechanism of competition in a short time
whereby the consumer benefits and the operators are preserved from
market uncertainties.
The year 2002 shall be the
year of the second phase for Brazilian telecommunications. With
the sector completely deregulated, new companies may join the
market while the existing companies shall be permitted to operate
in any region, in any service and in any band as well as acquire
equity interest in other companies, thus making the market
conditions even more advantageous for the consumer. However,
considering the marked trend in Europe and the United States
toward the formation of oligopolies in this sector, ANATEL shall
certainly have difficulties in avoiding the increase of
concentration in the Brazilian market. In the long term, the
greatest challenges for the restructuring process of Brazilian
telecommunications shall be to avoid as much as possible the
possibility of concentration and protect the competitive
environment.
Considering the
deregulation expected as of January, 2002, fixed telephony
companies will only be permitted to exploit new services if they
are able to meet, by December, 2001, the universalization
commitments established by ANATEL. Applicable legislation has
determined December, 2003, as the target date for completion of
these commitments but companies have been working to make
themselves ready earlier so as to accelerate their entry into the
free market, since ANATEL will grant new services to be exploited
as soon as the referred targets have been duly met. Hence, and in spite of the delay in completing the reforms, the magnitude of the expansion and improvement goals reached so far is quite astonishing. The average premium obtained with the privatization of the extinct TELEBRÁS System and the concessions for exploitation of Band B cellular telephony carried out in 1998 were nothing short of spectacular. The total amount collected was approximately US$ 28 billion, equivalent to a fifth of the amount collected in all the privatizations that took place in the sector between 1984 and 1996 - worldwide - according to data of the International Telecommunications Union - ITU. Truly, this comparison with the past is impressive: in the last four years of privatization, more telephones have been installed then in all of the previous 25 years. With regard to cellular telephony, the expected growth will be even higher. While the fixed telephony network has grown more than 60% since 1998, the expansion of cellular telephony reached 80.2% between June, 1999 and June, 2000. 16.2. Development of Cellular Telephony
Currently
Brazil
operates bands A and B. However, bands C, D and E that constitute
the Personal Mobile Service - SMP, are today being licensed and
will compete with the providers of mobile cellular telephony
service - SMC that operate in bands A and B.
Sales growth and the
development of the cellular telephony sector in
Brazil
has been impressive. The original goals were exceeded by far.
While the number of cellular phones grows at a rate of 51%
worldwide, growth in Latin America has been 105% on average, and
the accelerated growth of cellular telephony services has
contributed to the ever-increasing expansion of the supplementary
market of telephone accessories. Further, the development of the
roaming national network in
Brazil
represents, today, one of the highest in the world. Though the majority of existing cellular services are still within the traditional system, sales of pre-paid cellular calls, which began more recently, already represent, according to ANATEL, more than 50% of the market. 16.3. Regulatory Agency for Telecommunications (ANATEL)
The regulatory agency for
telecommunications is the National Telecommunications Agency -
ANATEL, which has administrative independence, absence of
hierarchical subordination and financial autonomy. Basically, ANATEL is empowered to: (i) issue rules on the licensing, rendering and use of the telecommunication services in the public sector; (ii) establish, control and follow the rate structure regarding each type of service rendered in the public sector; (iii) sign and manage concession contracts; (iv) issue rules of procedure for providing telecommunications services in the private sector; (v) monitor, advise of and repress legal infractions against the economic order regarding telecommunications, without prejudice to the competence of the Administrative Council for Economic Defense (CADE); (vi) administrate the field of radio broadcasting and the use of satellite orbits; (vii) define the types of services based on their objectives, scope of rendering, form, means of transmission, technology employed and other attributes; (viii) inspect the rendering of the services and apply administrative sanctions to transgressors of the telecommunications rules and regulations. 16.4. General Telecommunications Law
The Telecommunications
Code was revoked by General Telecommunications Law no. 9472 of
July 16, 1997 (LGT) which provides, basically, on the following
institutional aspects: (i) fundamental principles that regulate
the exploitation of telecommunications in
Brazil;
(ii) creation, operation and competence of the regulatory agency;
and (iii) general organization of telecommunications services.
Telecommunications
services are organized to provide free, wide and fair competition
among companies exploiting such services, being subject to the
general protection rules of economic order. Acts carried out by
the service provider that can affect, in any way or form, free
competition and free initiative are prohibited, pursuant to the
provisions of article 19, XIX of LGT and according to the
regulation established by Resolution no. 195 and its Annex. With
this purpose, ANATEL set forth in said law a defined set of rules
for interconnection, infra-structure sharing and unbundling that
the agency considered necessary.
Under the LGT,
interconnection is the link between telecommunications networks
that are operationally compatible, whereby users of the services
of one network may communicate with the users of the services of
another or access available services. The LGT deems the
interconnection - implemented as of January, 1999 - a legal
obligation reciprocal between providers of services of public
interest. As a consequence, the sharing of the available assets
for purposes of interconnection is mandatory in
Brazil,
and is carried out through freely negotiated contracts, provided
that applicable regulation is observed.
Infra-structure sharing is
basically regulated by article 73 of the LGT, whereby �providers
of telecommunications services of public interest shall be
entitled to use the posts, ducts, conduits and rights of way
belonging or controlled by providers of telecommunications
services.� Furthermore, Public Consultation no. 239 set forth the
rules on the time frame for the installation, customers'
requirements, environmental protection, optimization of resources
and social purpose of the property. Unbundling, in turn, under the General Regulation for Interconnection - RGI, consists of untwining pairs of copper wires or their respective functions, that make up the external network of local access of the Local Switched Fixed Telephony (�STFC-L�) thus allowing a third party to use such wires for independent access to the customer. In Brazil, the juridical problem of unbundling is the non-existence of express legal provision that imposes on the operators - owners of the twined pair - the obligation to negotiate the assignment of the use of the elements or functions separated from the twined pair. 16.5. Use of Revenues from the Telecommunications Sector
Law no. 9.998 of August
17, 2000 created the Fund for Universalization of
Telecommunications Services - �FUST�, the purpose of which is to
provide funds to defray the portion of costs that are attributed
exclusively for meeting the obligations of universalization of
telecommunications services that cannot be recovered with the
efficient exploitation of the service. As of the year 2001, the
operators began paying over 1% of their gross revenues to finance
said fund. The resources of FUST shall also serve to exempt or
subsidize rates for certain users such as schools, libraries and
hospitals. Furthermore, the funds shall be used to install
telecommunications services in isolated places and establishments
which operators are usually not interested in for commercial
reasons. Law no. 10.052 of November 28, 2000, instituted, in its turn, the Fund for Technological Development of Telecommunications (�Funttel�). This fund was created with an initial budget of R$ 100 million originating from the earlier Fund for Inspection of Telecommunications (�Fistel�). FUNTTEL shall be allocated 0.5% of the gross revenues of the providers of telecommunications services plus 1% of the amount collected for services rendered through telephony. Its purpose is to finance technological research in the areas of telecommunications developed by small and average-size companies so as to increase the competitiveness of the Brazilian telecommunications industry. 16.6. Brazilian Telecommunications Sector vis-à-vis the Foreign Investor
The transfer of the
controlling interest in companies that are providers of
telecommunications services in
Brazil
is strictly regulated by ANATEL, in accordance with articles 202
and 98 of the LGT and other later applicable rules.
One of the most important
rules issued, of relevant interest to the foreign investor in
Brazil,
is Resolution 101/99 of ANATEL. Intending to avoid infractions to
the economic order in the telecommunications sector, ANATEL adopts
certain concepts and criteria to verify transfers of controlling
interest that could incur in prohibition, restriction, limitation
or condition.
In this sense, under the
terms of said legal provision, controlling interest is the
individual or legal entity who, directly or indirectly: (i)
participates in, or appoints a person or member to, the Board of
Directors, Board of Officers or other body with equivalent
attribution, of another company or of its own controlling
shareholder, (ii) holds statutory or contractual veto over any
matter or decision of the other; (iii) is sufficiently empowered
to block the installation of a qualified quorum or decision
required by force of statutory or contractual provision, with
regard to the decisions of the other, (iv) holds shares of the
other, of a class which grants separate voting right.
Furthermore, this legal
provision deems a company to be an affiliate of another if it
holds, directly or indirectly, at least 20% of the voting capital
of such other, or if at least 20% of the voting securities of both
companies are held, directly or indirectly, by one same individual
or legal entity.
Said Resolution also
establishes that the juridical transaction resulting from the
partial or total assignment by the controlling interest of the
control over the provider of the telecommunication services shall
represent a transfer of control.
Finally, any changes to
the corporate structure of the company that could represent a
transfer of control must first be submitted to ANATEL, especially
when: (i) the controlling interest or one of the member of its
group withdraws or comes to hold less than 5% of the voting
capital of the provider or of its controlling interest, (ii) when
the controlling interest ceases to hold the majority of the voting
capital of the company and (iii) when the controlling interest,
through any form of agreement, totally or partially assigns to a
third party the powers to direct, in effect, the company�s
activities. With regard to the market balance of the telecommunications sector, one can state that development has been extremely positive: between 1995 and 2000 the Gross Domestic Product increased by 15% while the telecommunications sector showed an expansion of 130%. In the year 2000, the sector concentrated 33% of all the foreign investments made in the country, with Brazil being, according to ANATEL, the country that invested by far the most, worldwide, in increasing is telecommunications base. The repressed demand for telephony has practically disappeared in Brazil and the cost of a telephone line has dropped from US$ 2 thousand to less that US$ 500. 16.7. Telecommunications Services Legal System
The Law differentiates
between two systems for the rendering of telecommunications
services: the public and the private.
The public system
presupposes the rendering of a service of collective public
interest. Its existence, universality and continuity shall be
ensured by the Federal Government itself. Such services are
exploited by the providers derived from the privatization of the
old TELEBRÁS System, through concession.
The concession of services
was granted by ANATEL through competitive bidding, without
exclusivity. Concessionaires are subject to the business risks and
their revenues come from billings. The maximum term of the
concession is of 20 years with the possibility of a one-time-only
renewal or extension for an equal period.
After three years from the
signing of the concession contract, and should there be true and
general competition among the providers of the respective
telecommunications services, ANATEL may submit the concessionaries
to the unrestricted rate system. |
