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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
ADVOGADOS
to sponsor and collaborate with the first Legal Guide for the Foreign
Investor in São Paulo. This project was launched in the second half of 1991 at
the request of the Special Assistance Office for International Affairs of the
State of São Paulo Government, and all CESA associates were invited to partake.
 
 

After choosing the topics, defining the chapters and distributing the tasks involved, in
September 1992 we concluded the first edition of the guide, in both Portuguese and English.
This was then printed and distributed by the State Government whenever possible at official
events with international ramifications. Our members throughout
Brazil received copies of
the guide, which was distributed at various group meetings in São Paulo, Rio de Janeiro
and Belo Horizonte.
 
 

The success attained and the significant positive feedback on this project made us at CESA
think of expanding and improving both its structure and scope. This was the seed for a second
edition, a Portuguese/English domestic and international project, undertaken by CESA
for exclusive distribution among its members, class entities and Brazilian development
and promotional organizations abroad. In August 1994 a new edition was prepared at the
request of the Department of Commercial Promotion of the Ministry of Foreign Affairs.
This guide was distributed at all international events sponsored by the Ministry. Starting in
1996, this guide was attached to the Ministry of Foreign Affairs page on Internet, and can
be accessed by all bodies on diplomatic missions interested in foreign investment
in
Brazil (http://www.mre.gov.br).
 
 

The fifth edition of this guide was thoroughly updated and expanded by the various CESA
law firms that participated in this project. From December 1998, all of the 1000 copies of
this edition were distributed and therefore we decided to review and republish the same
edition to meet the ongoing demand of our members, other entities and interested parties.
 
 

The consolidated success of the Guide and consequent demand for a more up-to-date
version made us at CESA to start the sixth edition publication process at the begining of 2001.
Once again, we counted on the contribution of several CESA law firms for updating the chapters
 
 

Finally, we should mention that CESA was founded in January 1982, and today includes
some 410 Brazilian law firms, with the objectives of furtherance of legal careers,
professional betterment, and institutionalization of law firms throughout
Brazil.
 
 

      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

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

AZEVEDO  SETTE  ADVOGADOS  S/C

        Rua Paraíba, 1000, 14º andar,

        30130-141 Belo Horizonte, MG.

        Fone: 31 3261-6656

        Fax: 31 3261-6797

BARBOSA,   MÜSSNICH   &   ARAGÃO

        Av. Almirante Barroso, 52, 32º andar,

        20031-000 Rio de Janeiro, RJ.

        Fone: 21 3824-5800

        Fax: 21 2262-5536/5537

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

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

        CASILLO   -   ADVOGADOS

        Rua Lourenço Pinto, 500,

        80010-160 Curitiba, PR.

        Fone: 41 310-6800

        Fax: 41 310-6868

CASTRO, BARROS, SOBRAL,VIDIGAL, GOMES ADVOGADOS

        Praia de Botafogo, 228, 15º andar,

        22359-900 Botafogo, RJ.

        Fone: 21 2553-1855

        Fax: 21 2552-1796

        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

DEMAREST E ALMEIDA ALMEIDA, ROTENBERG E BOSCOLI - ADVOCACIA

        Al. Campinas, 1070,

        01404-001 São Paulo, SP.

        Fone: 11 3888-1800

        Fax: 11 3888-1700

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

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

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

        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

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

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

        NORONHA   ADVOGADOS

        Av. Brigadeiro Faria Lima, 1355, 3º andar,

        01452-919 São Paulo, SP.

        Fone: 11 3038-8090

        Fax: 11 212-2495/7903

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

PAULO ROBERTO MURRAY - ADVOGADOS

        Avenida Paulista, 1499, 13º andar,

        01311-928 São Paulo, SP.

        Fone: 11 3171-3344

        Fax: 11 3171-3444

PINHEIRO   NETO   ADVOGADOS

        Rua Boa Vista, 254, 9º andar,

        01014-907 São Paulo, SP.

        Fone: 11 3247-8400

        Fax: 11 3247-8600

        STRAUBE   ADVOGADOS

        Rua Cel. Xavier de Toledo, 316, 5º andar,

        01048-000 São Paulo, SP.

        Fone: 11 255-8744

        Fax: 11 214-3553

        TESS  ADVOGADOS

        Avenida Brasil, 471,

        01431-000 São Paulo, SP.

        Fone: 11 3059-2900

        Fax: 11 3059-2901

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

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

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

VEIRANO E ADVOGADOS ASSOCIADOS

        Av. Presidente Wilson, 231, 23º andar,

        20030-021 Rio de Janeiro, RJ.

        Fone: 21 3824-4747

        Fax: 21 2262-4247

XAVIER, BERNARDES, BRAGANÇA, SOCIEDADE DE ADVOGADOS

        Av. Brasil, 1.008,

        01430-000 São Paulo, SP.

        Fone: 11 3069-4300

        Fax: 11 3069-4301

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

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 DEVELOPMENT

2.1. 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: 
 

  • Ministry of Justice - deals with the following matters: defense of legal system; political rights and constitutional guarantees; judicial politics; nationality; immigration and foreigner; citizenship; narcotics; public security; traffic; federal police; prison administration; foreigners; defense of economic rules and consumer rights, children and adolescent, Indians, bearer of deficiency and minorities; publication, documentation and record of the official acts; legal aid to the pours.

 
 

  • Ministry of Foreign Affairs - acts in the field of international politics, diplomatic relations, programs of international cooperation, also in charge of participating in bilateral commercial, financial and technical negotiations with foreign countries and entities; assistance to Brazilian committees and representation before international and multinational agencies.

 
 

  • Ministry of Transportation - deals with matters related to rail, road and water transport; merchant navy, ports and shipping routes; participation in the coordination of air transportation.

 
 

  • Ministry of Agriculture and Proveyance - deals with matters related to: agricultural policy, such as production, commerce, supply, storage, and minimum price guarantee; agropecuary production and promotion; animal and vegetable sanitary inspection; technological research; meteorology; rural development; co-operativism, technical assistance and rural extension; coffee, sugar and alcohol policies.

 
 

  • Ministry of Education - is in charge of the national directives: national policy for education, such as elementary education, high-school, university, technical schools, special schools and distance teaching.

 
 

  • Ministry of Culture - deals with cultural policy, protection of Brazilian historic and cultural patrimony, etc.

 
 

  • Ministry of Labor and Employment - deals with policy of labor creation, policy of earnings and assistance to employee; policies of employment relationship modernization; labor inspection and penalties application; salary policies, immigration policies, formation and professional development; security and health conditions at work.

 
 

  • Ministry of Social Security and Assistant Social - is in charge of matters related to social security and complementary pension plans; and social assistant.

 
 

  • Ministry of Health - is in charge of national health policies; medical and paramedical matters; supervision, immunization, epidemic control, medication, drugs and food, sanitary research, and formation of human resources at the health area.

 
 

  • Ministry of Development, Industry and Foreign Commerce - is in charge of policy of development of industry, commerce and services; industrial property and transfer of technology; metrology, normalization and industrial quality; foreign commerce; support to micro, small and craftsmanship companies and register of commerce.

 
 

  • Ministry of Mining and Energy - is in charge of matters relating to geology, mineral and energy resources; improvement of hydraulic energy sources; mining and steelworks, the oil, fuel and electrical industry, including nuclear energy.

 
 

  • ANP - is responsible for implementation of the national oil and natural gas policy, in relation with supplying of oil derivative in national territory and with the protection of consumers and users regarding price, products quality offering, etc.

 
 

  • CNPE - is in charge to promote a logical improvement of Brazilian energy resources; insure the supplying of energetic raw material to the remotest areas in the country, etc.

 
 

  • ANEEL - is in charge of declaring the public utility, for expropriation or creation of public easement in the areas where is need to be install concessionaire and representatives of electrical energy, etc.

 
 

  • Ministry of Communications - has the incumbency of national policies of telecommunications, postal services and radio frequency spectrum; regulation, grant and inspection of telecommunications services; control and administration of use of postal and radio frequency spectrum.

 
 

  • ANATEL - Promote the development of modern and efficient telecommunications, able to offer adequate services to users, diversified and in a fair price, in the national territory.

 
 

  • Ministry of Science and Technology - is in charge of preparing and implementing scientific and technologic research; planning, coordination, supervision and control of all scientific and technological activities, as well as the preparation of a development policy for informatics and automation; national politic and biosecurity; spatial and nuclear policy, and control the export of sensible asset and services.

 
 

  • Ministry of Environment - is in charge of planning, coordinating, supervising and controlling all actions relative to the environment and all hydric resources; preparation and execution of a national policy for environment and hydric resources; preservation and rational use of renewable material resources; implementation of international agreements in the environmental area; politic integration to the Legal Amazon; ecological-economic zoning.

 
 

  • Ministry of Defense - deal with the following matters: national defense policy, administration of the Brazilian Navy, the Army and practice the control and coordination of the activities of the Civil Aviation.

 
 

  • Ministry of Finance - is in charge of matters pertaining to currency, credit, financial institutions, capitalization, private insurance and savings; tributary, budgetary, financial and patrimonial administration; public accounting and auditing; administration of public internal and external debts; supervision and control of foreign trade; economic and financial negotiations with international and multilateral entities and governmental agencies; prices and taxes publics and administrative; and control of international commerce.

 
 

  • Ministry of Planning, Budget and Management - is in charge of the national strategic planning; evaluation and impacts social and economics of the policies and programs of the Federal Govern; elaboration of especial studies for the reformulation of the policies, etc.

 
 
 

  • Ministry of Agrarian Development - is in charge of the agrarian reform and the promotion of supportable development of the rural segment formed by the agricultural families.

 
 

  • Ministry of National Integration - deal with the following matters: formulation and conduction of national development policy; formulation and conduction of the plans and regional programs of development; fix the strategies of integration of the regional economies, etc.

 
 

  • Ministry of Sport and Tourism - is in charge of the national policy of the development of tourism and sports, etc.

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 CAPITAL

3.1. 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: 
 

  • the commercial/financial rate market, which is reserved basically for (i) trade-related transactions (import and export); (ii) foreign currency investments in Brazil; (iii) foreign currency loans to residents of Brazil; and (iv) certain other transactions involving remittances abroad that are subject to preliminary approval by the monetary authorities; and

 
 

  • the tourism rate market, which was initially developed for the tourism industry, and was later expanded to cover certain other transactions, such as inbound and outbound transactions. Applicable regulations indicate the types of transactions that qualify for this market.

 
 

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: 
 

  • the development of activities involving nuclear energy;
  • the ownership and management of newspapers, magazines and other publications, and of television and radio networks;
  • health services;
  • ownership of rural areas and businesses on frontier zones;
  • post office and telegraph services;
  • airlines with domestic flight concessions; and
  • the aerospace industry.

 
 

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 ASSOCIATION

5.1. 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 name of the consortium, if any;

 
 

  • the objectives of the consortium;

 
 

  • the duration, address and venue of the agreement;

 
 

  • a determination of the participating companies liabilities, and obligations;

 
 

  • the rules for the receipt and distribution of results;

 
 

  • the management and accounting policies, as well as a representation of the participating companies and administrative charges, if applicable;

 
 

  • the manner in which the parties� decisions will be taken, as well as the number of votes each participant will have; and

 
 

  • the contribution each participant will make towards the expenses of the project, if applicable.

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: 
 

  • Acts of Incorporation (Public Deed or the Minutes of a General Incorporation Meeting), listing the particulars of the subscribers.

 
 

  • the bank (Banco do Brasil S.A.) deposit slip proving that an amount equivalent to at least 10% of the capital to be paid in cash has been paid by the subscribers.

 
 

  • By-Laws signed by every subscriber. If the By-Laws are included in the Minutes of the General Meeting for the Incorporation the presence of all of the subscribers is mandatory.

 
 

  • a Subscription Chart certified by the founders or by the Secretary of the General Meeting, mentioning full name, nationality, marital status, profession, residence and the place of domicile of subscribers, in addition to the number of subscribed shares and the amount paid.

 
 

  • a power-of-attorney granted by a foreign resident shareholder, signed before a Public Notary in his country of origin, legalised at the Brazilian Consulate, translated by a public translator and registered at the Public Notary�s Office.

 
 

  • documents proving the existence of the partners resident or headquartered abroad, duly legalised at the Brazilian Consulate with jurisdiction;

 
 

  • a photocopy of the Identity documents of the directors and council members.

 
 

  • forms with data on the company and its shareholders, duly filled out, accompanied by proof of payment of filing fees.

 
 

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: 
 

  • three original counterparts of the Articles of Association signed by all the partners and two witnesses. If the document consists of more than one page, each page should be initialled by the partners.

 
 

  • a photocopy of each partner�s identity card. In the case of a partner who is a foreign individual, a copy of his/her foreign identification document issued by the competent authority in his/her country of origin, duly legalised by the Brazilian Consulate with jurisdiction.

 
 

  • a power-of-attorney granted by the foreign resident partners signed before a Public Notary in their country of origin, legalised at the Brazilian Consulate, translated by a public translator in Brazil and registered at any Brazilian Deeds and Documents Registry Office.

 
 

  • a document as a proof of existence of the foreign legal entity partner in its country of origin duly legalised at the Brazilian Consulate;

 
 

  • a personal declaration by each partner or manager of the society that he is not prevented from engaging in commercial activities in Brazil.

 
 

  • forms with data on the company and its partners, duly filled out, accompanied by proof of payment of filing fees.

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 Articles of Association or By-Laws duly signed by its founding partners.

 
 

  • photocopies of the Identity documents of the partners.

 
 

  • a proxy granted by foreign resident partners, signed before the Public Notary of his country of origin, legalised at the Brazilian Consulate, translated by a public translator and registered at the Public Notary�s Office.

 
 

  • documents proving the existence of the partners domiciled or headquartered abroad, duly legalized at the Brazilian Consulate with jurisdiction;

 
 

  • a copy of the full or summarised official publication of the Articles of Association, contract or By-laws.

 
 

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 COMPANIES

6.1. 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:

  1. financial statements and, if applicable, consolidated financial statements, drawn up in accordance with the Brazilian Corporations Law and CVM regulations, together with a report by the management of the company and the opinion of an independent auditor;

 
 

  1. Standardized Financial Statements (�DFP�) form;

 
 

  1. notice of the call to the annual general shareholders� meeting;

 
 

  1. Annual Information (�IAN�) form;

 
 

  1. summary of decisions taken at the annual general shareholders� meeting;

 
 

  1. minutes of the annual general shareholders� meeting;

 
 

  1. facsimile of the securities certificates issued by the company, if there has been any change in the certificates; and

 
 

  1. Quarterly Information form, together with a Special Review Report issued by the independent auditor.

 
 

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: 
 

  1. notice of the call to an extraordinary general shareholders� meeting;

 
 

  1. summary of decisions taken at the extraordinary general shareholders� meeting;

 
 

  1. minutes of the extraordinary general shareholders� meeting;

 
 

  1. shareholders� agreement;

 
 

  1. Corporate Group convention (agreement to form a Corporate Group);

 
 

  1. statement of material fact or act;

 
 

  1. information regarding any petition for protection from creditors, including the grounds for the petition, the financial statements drawn up especially for the purpose of obtaining protection from creditors and, if applicable, the situation of debenture holders with respect to recovery of their investment;

 
 

  1. judgment granting protection from creditors;

 
 

  1. information on any petition or confession of bankruptcy;

 
 

  1. judgment declaring bankruptcy; and
  2. any other information that may be requested by CVM.

 
 

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):  
 

  1. transactions resulting in the sale of control of a publicly-traded company, which must be communicated by the party acquiring control and disclosed to the press;

 
 

  1. the execution of an agreement or contract that contemplates the transfer of control of the company or the grant of an option or powers to that end, which must be communicated and disclosed by the controlling shareholders;

 
 

  1. any increase, either actual or potential, by five percent or more in the holdings of any class or type of share of a controlling shareholder of a publicly-traded company, which must be communicated by the controlling shareholder; the CVM may disclose the acquisition to the press;
  2. any increase, either actual or potential, by five percent or more in the holdings of any class or type of share of the directors, officers or members of the audit committee of a publicly-traded company, which must be communicated by the controlling shareholder; the CVM may disclose the acquisition to the press.

 
 

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 MARKETS

7.1. 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 Authorities

7.2.1. 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 Brazil

7.4.1. 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 Companies

7.5.1. 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 Rules

7.6.1. 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 Remedies

7.8.1. 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 Accounts

7.8.3.1. 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 Requirements

7.8.6.1. 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 SYSTEM

8.1. 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: 
     

  • the rule of legality - (in accordance with which a tribute may only be levied or have its rate increased by a law voted by Congress);

 
 

  • the rule of equality - (in accordance with which taxpayers who are in an equivalent situation must be treated on the same footing taxwise);

 
 

  • the rule of irretroactivity - (in accordance with which tributes cannot be levied on events that occurred before enactment of the law that created new tributes or increased the rates or base of computation of existing ones.

 
 

  • the rule of previousness - (in accordance with which tributes cannot be collected in the same fiscal year in which the law that created them or increased their rates was published);

 
 

  • the rule of non-confiscation - (in accordance with which tributes cannot be confiscatory).

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: 
 

  • inheritance and gifts tax (ITD);

 
 

  • tax on transactions related to the circulation of goods, interstate and intermunicipal transportation, and on communication (ICMS);

 
 

  • tax on the ownership of motor vehicles (IPVA);

 
 

    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: 
     

  • urban property tax (IPTU);

 
 

  • tax on disposal of real state (ITBI);

 
 

  • services tax (ISS)

 
 

    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: 
     

  • Contribution for the Social Integration Program - PIS (it is levied monthly on the gross operational revenue of corporations at the rate of 0,65%;

 
 

  • Social contribution on corporate profits - CSL (it is levied on profits before income tax ascertained in accordance with commercial law, adjusted as set forth in the law); current rate is 8%; however, until December 31, 2002, there is an additional of 1% over this rate, adding up to 9%.

 
 

  • Social security contribution - COFINS (it is levied monthly on the gross income from the sale of goods and services; current rate is 3%).

 
 

  • Social security contribution on payroll - CINSS (employees are subject to it at the rates of 8% and 10%, self-employed workers pay 20%; in both cases the basis for computation of this Contribution is limited to 10 minimum wages. Corporations pay it at the rate of 20% on payments made to individuals for services rendered with no ceiling).

 
 

  • The Provisional Contribution on Financial Operations (CPMF) was established in accordance with Constitutional Amendment no. 3/93 is collected as from January 1997 to January 1999 and was extended to June 2002 by Constitutional Amendment no. 21/99. The rate is 0,3%.

 
 

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: 
 

  • Transit
  • Tourist
  • Temporary
  • Permanent
  • Courtesy
  • Official and
  • Diplomat

 
 

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: 
 

  • Letter from the company that is requesting the business trips (either the foreign or the Brazilian company) stating the following:
  • The purpose of the trip

 
 

  • Names, addresses and telephone numbers of business contacts in Brazil

 
 

  • Date of arrival and anticipated departure

 
 

  • Guarantee of financial and moral responsibility for the applicant for the duration of the visit

 
 

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:  
 

  1. Professionals. This visa is eligible to individuals coming to Brazil to work for a temporary period no longer than 2 years initially, and may be renewed for an additional 2 year period. This type of visa is available to foreign nationals who will be temporarily employed at a Brazilian company in a position requiring special knowledge. The candidate shall receive at least part of his/her salary in Brazil. This type of visa will also require proof that the candidate has at least a 2 year experience in the activity he/she will perform in Brazil, if he/she has a college degree, or 3 year experience if he/she does not have a college degree. The company shall present also information regarding the Brazilian company's salary structure, as well as regarding the candidate's salary abroad and in Brazil, which shall be approximately 25% higher than his/her last salary abroad.

 
 

  1. Technicians. This visa is eligible to individuals coming to Brazil to render technical assistance according to a Technical Assistance Agreement executed by a foreign company and a Brazilian company. This Agreement shall be registered before the INPI - Industrial Property National Institute prior to the visa applications. In this case, the technicians shall not be employed by the Brazilian company and shall receive his/her entire remuneration exclusively from a source abroad,

 
 

  1. Artist and Sports persons. The request for this visa must be submitted to the Brazilian Labor Ministry by the Brazilian organization, which is sponsoring the event for which the individual�s services will be required. Visa application requires information about the event and respective labor contract.

 
 

  1. Foreign Journalist. This visa is eligible for foreign journalist working on a temporary basis in Brazil as the correspondent of a foreign communication company, which will support the visa application. The candidate must not receive his/her salary in Brazil.

 
 

  1. Crew Members under charter, service rendering contracts and lease agreements. Visa application requires authorization of the ship to operate under national waters, and report from the Marine Department. Copy of the respective contract. Part of the crew shall be Brazilian nationals

 
 

  1. Research Scientists: This visa is eligible to foreign professors, technicians, scientists and researchers that intend to perform its activities in a public or private school or university or a research entity. A letter of support from the entity who is sponsoring the visa will be required upon application. Visa application requires Admission Term or Labor Contract with the school, university or research entity

 
 

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.  
     

  1. Student. This visa is obtained by students at the Brazilian Consulate having jurisdiction over the place of residence of the applicant. The student must not work or receive any compensation in Brazil. Foreign students under exchange program are required to present documents from the school and foreign exchange students program.

 
 

    (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 BRAZIL

12.1. 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 Ownership

12.3.1. 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. Taxation

12.4.1. 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 BRAZIL

13.1. 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: 
 

  • Previous License - LP, necessary for the preliminary phase of planning of the activity, containing prescriptions to be followed during location, construction and operational phases, according to federal, state and municipal standards;

 
 

  • Installation License - LI, authorizing the beginning of implantation of the enterprise, according to specifications of the approved Previous License;

 
 

  • Operational License - LO, authorizing, after due inspections, the beginning of licensed activity and the functioning of the pollution control equipment, according to the Previous and Installation licenses.

 
 

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. PRIVATIZATION

14.1. 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: 
 

  • the generation, transmission and distribution of electrical energy and gas;

 
 

  • petrochemicals;

 
 

  • municipal, highway, railroad, sea and air transportation;

 
 

  • telecommunications;

 
 

  • ports, airports, aerospace infrastructure, road construction, dams, canal locks, dry docks and containers;

 
 

  • sanitation, water treatment and supply, and waste treatment; and

 
 

  • mining and metallurgy.

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 SERVICES

15.1. 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. TELECOMMUNICATIONS

16.1. 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. 
 
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