QUICK GUIDE TO INVESTING IN BRAZIL
By Adler Martins
Lawyer - Federal University of Minas Gerais - Brazil Specialized in international law MBA by FGV University firstname.lastname@example.org
Images extracted from the website of the Brazilian Embassy in Washington, DC. Available at: http://www.brasilemb.org/index.php?option=com_frontpage&Itemid=41 * This Guide is merely informative and shall not be considered either as legal or commercial advice.
BRAZIL - KEY INDICATORS
Area: 8.547.403 km Capital: Brasília
White Black Pardo black) Other
53,7% 6,2% (mixed white 38,5% 1,6%
GDP Per Capita: US$10,531 (2008 est.) and GDP Composition Sector: Agriculture: 5,5% Industry: 28,7% Services: 65,8% (2007) Major Agricultural Products: Coffee, soybeans, wheat, rice, corn, sugarcane, cocoa, citrus; beef Main Industries: Iron ore, coal; machine building; armaments; textiles and apparel; petroleum; cement; chemicals; fertilizers; consumer products, including footwear, toys, and electronics; food processing; transportation equipment, including automobiles, rail cars and locomotives, ships, and aircraft; electronics; telecommunications equipment Exports US$ 160.6 billions (2007) Export goods: transport equipment, iron ore, soybeans, footwear, coffee, autos Main export partners: US 15.8%, Argentina 9.0%, China 6.7%, Netherlands 5.5%, Germany 4.5% (2006) Imports: US$ 140.7 billion (2007) Import goods: machinery, electrical and transport equipment, chemical products, oil, automotive parts, electronics Main import partners: US 15.7%, China 10.5%, Argentina 8,6%, Germany 7,2%, Nigeria 4.4%, Japan 3.8% (2007) by
Life expectancy at birth: Govt: Federal Republic Adm. Divisions: 26 states (divided into 5.507 districts) and 1 National Capital Territory. The country may be divided in 5 geopolitical regions: North, Northeast, Middle-West, Southeast and South. Official language: Portuguese Currency: Real (R$) Exchange Rates: Literacy Rate: 86,4%
Foreign Currency R$: (2008 est.)
General: Male: Female: Religion:
Roman Catholic Protestant Spiritualist Bantu/voodoo Other Unspecified None
72.51 years 68.57 years 76.64 years
73.6% 15.4%, 1.3% 0.3%, 1.8%, 0.2%, 7.4%
US Dollar: Great Britain Pound: EURO: Indian Rupee: Japanese 100 Yen: Chinese Yuan:
1,606 R$ 3,184 R$ 2,539 R$ 0,037 R$ 1,511 R$ 0,23 R$
Unemployment rate: 9.3% (2007 est.) TimeZone: Standard time zone is GMT -3 Hours. (Brasília time) Climate: The predominant weather is tropical with high temperatures most of the year (about 25ºC).There are two well defined seasons, with a dry winter and a rainy summer. Major International AirPorts: São Paulo, Rio de Janeiro, Brasília Business hours: Normal business hours in most sectors are between 8am to 6pm during the weekdays. The bank sector works from 10am to 4pm. Saturday and Sunday are not work days. GDP(PPP): US$1.964 trillion (2008 est.) GDP Growth Rate: (2008 est.) - IMF 4%
Rates as on 03/07/2008
Major Cities: São Paulo, Rio de Janeiro, Salvador, Brasília, Fortaleza, Belo Horizonte, Curitiba, Manaus, Recife and Porto Alegre. Population: 183,9 million as per 2007 census Urban: Rural: 81,2% 18,8%
Population Density: 21,51 / Sq Km Pop. Growth (2008)
*As per 2000 Census
Pop. Composition: The Brazilian population is diversified, composed principally by the mixture of Europeans, native indians and Africans.
Sources: Instituto Brasileiro de Geografia e Estatística – IBGE (www.ibge.gov.br) ; CIA – World Factbook
Brazil - Government and Administration: Brazil is a federal republic divided into member states and a federal district, which localizes the national capital. The states have some legislative autonomy, passing their own laws, but submitted to the National Constitution. The country adopts the presidentialist government system. The President is elected by universal suffrage for a 4 year mandate, and acts as the head of both Government and State. The Federal Legislative branch follows the bicameral system, composed by the Federal Senate (Senado Federal, 81 seats; 3 members from each state and federal district elected according to the principle of majority to serve eight-year terms) and the Chamber of Deputies (Câmara dos Deputados, 513 seats; members are elected by proportional representation to serve four-year terms). Brazil: Economic overview Brazil has expanded its presence in the world market with large and well-developed agricultural, mining, manufacturing and service sectors. From 2003 to 2007, Brazil ran record trade surpluses and recorded its first current account surpluses since 1992. The current government defends an economic program based on 3 pillars: A floating exchange rate, an inflation-targeting regime and a tight fiscal policy. The reforms enacted over the last 15 years have, according to an article published by Financial Times on July 8, 2008, “the most fashionable of the so-called Bric group of large emerging 3 markets”. Brazils has also recently reached the Investment Grade rating from Standard & Poor`s and Fitch, in recognition for its great economic achievements. According to the Brazilian Government :
Brazil accounts for three fifths of the South American economy’s industrial production and integrates various economic groups, such as Mercosur, G-22 and the Cairns Group. The country’s scientific and technological development, together with a dynamic and diversified industrial sector, is attractive to foreign enterprise: direct investment was in the region of US$ 20 billion /year on average, compared to US$ 2 billion/year last decade.
Brazil trades regularly with over one hundred nations, with 74% of exports represented by manufactured or semimanufactured goods. Its main partners are: the EEC (representing 26% of the balance), the US (24%), Mercosur and Latin America (21%) and Asia (12%). One of the most dynamic sectors in this trade scenery is the socalled “agrobusiness” sector, which for two decades has kept Brazil amongst the most highly productive countries in areas related to the rural sector. The owner of a sophisticated technological sector, Brazil develops projects that range from submarines to aircraft and is involved in space research: the country possesses a Launching Center for Light Vehicles and was the only country in the Southern Hemisphere to integrate the team responsible for the construction of the International Space Stationthe ISS. A pioneer in the field of deep water oil research, from where 73% of its reserves are extracted, Brazil was the first capitalist country to bring together the ten largest car assembly companies inside its national territory.
Financial system Brazil has a solid and independent financial system, counting on a network of trustworthy public and private banks. The bank sector has been opened to foreign investments during the 90's. In consequence, large international financial groups, such as Citibank and Santander, have started operations in the country. Over the last years, the stock market has grown in importance , as many Brazilian companies issued Initial Public Offers, most ot which achieved great success. Foreign investments in the Brazilian stock market have also shown continuous increase in the last decade (impulsionated by advantajeous tax benefits, as explained later). The Brazilian financial system is regulated and supervised by the following entities: National Monetary Council (CMN) Central Bank of Brazil (Bacen) Securities and Exchange Commission (CVM) Private Insurance Superintendence (SUSEP) Complementary Pension Secretary (SPC)
http://www.ft.com/cms/s/0/3eb2654a-4a45-11dd-891a000077b07658.html 4 ttp://www.brasil.gov.br/ingles/about_brazil/
The National Monetary Council is responsible for issuing general rules and to watch for the good conditions of the financial system. The Minister of Finance himself is part of the Council.
The Central Bank of Brazil (Bacen) is a federal autarchy created in 1964. Its mains purposes are to maintain the financial system solid, by supervising the other private and public banks, issuing currency and passing specific regulations. The Bacen is also responsible for regulating the international currency exchange, despite having no direct power to determine the exchange rate. The CVM was created to normalize disciplines and inspects the performance of several players on the stock market. Its main functions are: To assure a regular and efficient functions of the stock market To protect the stock investors
The Common Market of the South (MERCOSUR or MERCOSUL) - "Mercado Comum do Sul" is a multilateral agreement on trade, including agricultural trade, between Argentina, Brazil, Paraguay and 6 Uruguay. Its main goal is to eventually promote free trade and the fluid movements of goods, people and currency withing the bloc. In 2006, Venezuela applied for membership in the MERCOSUR. Approval is still pending, but is all likely to take place. The addition of new members is in accordance to the project of increasing economic cooperation in South America. The bloc comprises a population of more than 263 million people, and the combined Gross Domestic Product of the full-member nations is in excess of US$2.78 trillion a year (Purchasing power parity, PPP) according to International Monetary Fund (IMF) numbers, making Mercosur the fifth largest economy in 7 the World. In December 2004 it signed a cooperation agreement with the Andean Community trade bloc (CAN) and they published a joint letter of intention for a future negotiations 8 towards integrating all of South America. On the international scenario, Mercosul has entered into agreements of free/preferential trade with many countries, among them Israel, Mexico, Egypt and, more recently, 9 India.
BNDES5 - Development Bank
The Brazilian Development Bank (BNDES) is a federal public company associated with the Ministry of Development, Industry and Foreign Trade. Its goal is to provide long-term financing for endeavors that contribute to the country's development. The financial support lines and programs offered by BNDES serve the investment needs of companies of any size and sector that have been set up in the country. The partnership with financial institutions and with agencies established around the country facilitates the dissemination of credit, enabling greater access to BNDES's resources.
The B in BRIC MERCOSUL The BRIC term was created to designate the four largest emerging countries in the world. It is an acronym for Brazil, Russia, India and China. Although not an economic or political bloc in the strict sense, these countries represent a powerful global strength together. According to Goldman-Sachs, by the year 2040 The BRIC Countries (Brazil, Russia, India, China) will have surpassed the combined GDP of the G-6 (US, UK, Italy, France, Germany, Japan):10
Source: www.oecd.org http://en.wikipedia.org/wiki/Mercosur 8 Mercosur official home page 9 Ministry of External Relations of Brazil 10 Source: GS. Global Economics Paper No. 99
In 1996 the member states were included in the privatization process, now centered on the electric, canalized gas and basic sanitation sectors. Many highway explortion concessions have been granted to private groups during this period. In 1997 the biggest national mining company (Companhia Vale do Rio Doce) was privatized. The privatization process of telecommunication companies was concluded in 1998. Foreign investors participated on the process contributing with significant amounts of capital. Nowadays, there is only a small number of public companies, in most cases providing sanitation services or supplying electricity. (Petrobras is a remarkable exception). The Brazilian market, generally speaking, has absorbed the Privatization process very well, becoming more competitive and efficient.
Image source: The Goldman Sachs Group - GS. Global Economics Paper No. 99
Although the above growth projection has been criticized for being too optimistic, it certainly reflects a major economic tendency, which cannot be disregarded. "The Economist" magazine, in its special report on Brazil11, expressed the following view: "In some ways Brazil is the steadiest of the BRICs. Unlike China and Russia it is a full-blooded democracy; unlike India it has no serious disputes with its neighbors. It is the only BRIC without a nuclear bomb." The Heritage Foundation's "Economic Freedom Index"12, which measures factors such as protection of property rights and free trade ranks Brazil ("moderately free") above the other BRICs ("mostly unfree").
According to the DNPM Guide to Foreign Investments in the Mineral Sector:13 "In the fiscal year of 2005, the value of the Mineral production, including oil and natural gas, reached, an amount of US$ 84.25 billion representing 4.35% of GDP. This performance is due mainly to the high prices of the mineral commodities, and is very impressive when compared to the growth of others types of industries, like the agriculture and services. The GNP of the mineral sector in the period 2004-2006, being included the petroleum and GNP, shows a continuous movement of growth: -0.7% (2004), 10.9 %(2005), 9.7%(2005-expected). Nevertheless, the real contribution of the Mineral Sector to theBrazilian economy may be broadly measured taking into account the multiplying effect achieved through the value addition of mineral raw-materials derived from industrial processes. To this, it is used the product of the mineral-extraction industry, that in 2004, reached US$ 69.9 billions, representing 10.5% of GNP. The interest of trans-national corporations in Brazilian Mineral Sector is closely associated to the Country’s Geo-diversity, to the potential
Privatization The privatization of public companies was part of the economic reforms adopted in order to reduce the public debt. The National Program of Privatization (PND) started in 1990. Between 1991 and 1994 many private companies belonging to industrial sectors, such as, siderurgy, petro chemistry and fertilizing products have been totally or partially privatized.
"Land of promise"; The Economist print edition; Apr 12th 2007 12 http://www.heritage.org/Index/
Availble at: http://www.dnpm.gov.br/assets/minebusiness/pdf/livro.pd f
for growth of the demand for mineral commodities, on the domestic and foreign markets, as well as to the growth of Brazil’s comparative advantages as an export platform for Latin America and Africa. The comparative advantages of Brazil’s international-class deposits, deriving from the combination of quality (volume and content), operational cost and availability of energy, account for the Country’s basic conditions of competitiveness on the foreign market, such as in the case of aluminium, kaolin, copper, tin, iron, niobium, nickel, tantalum etc. Furthermore, the movement of mining corporations due to globalisation and the need for increasing production scales, associated to requirements related to innovation and technological integration, goes beyond the geographical borders and consolidate in trans-national concerns, mainly by means of mergers, joint ventures, and take-overs. Globally these operations have grown by 30% in the first semester of 2005, having attained US$ 1.2 billion." According to public note issued on September 10, 2008, the Brazilian Mining Association expects investments on the nation's mining industry to reach US$57 billion in the next four years. The group predicts the iron ore sector will see an estimated US$37 billion in investments, or 65 percent of the total. About US$5.5 billion is anticipated for nickel exploration.
competitive price and also in a high energy balance (output energy/input energy), which varies from 8.3 for average conditions to 10.2 for best practice production. The Brazilian ethanol program provided nearly one million jobs in 2007, and cut 1975–2002 oil imports by a cumulative undiscounted total of US$50 billion. The production of ethanol is concentrated in the Central and Southeast regions of the country, which includes the main producer, São Paulo State. These two regions were responsible for almost 90% of Brazil's ethanol production in 2004. There are no longer light vehicles in Brazil running on pure gasoline. Since 1977 the government made it mandatory to blend 20% of ethanol (E20) with gasoline (gasohol), requiring just a minor adjustment on regular gasoline motors. Today the mandatory blend is allowed to vary nationwide between 20% to 25% ethanol (E25) and it is used by all regular gasoline vehicles, plus 3 million cars running on 100% hydrous ethanol, and 6 million dual or flexible-fuel vehicles."14 Given the high oil prices, the environmental limitations of the planet and the unsurmountable problem of the pending oil scarcity, the Braizilan Ethanol rises as a logic an feasible solution. Therefore, massive amounts of capital are expected to be invested in the Ethanol production during the next decade. Biodiesel
Ethanol Production "Brazil is the world's second largest producer of ethanol and the world's largest exporter, and it is considered to have the world's first sustainable biofuels economy and the biofuel industry leader. Together, Brazil and the United States lead the industrial world in global ethanol production, accounting together for 70% of the world's production and nearly 90% of ethanol used for fuel. In 2006 Brazil produced 16.3 billion litres (4.3 billion U.S. liquid gallons), which represents 33.3% of the world's total ethanol production and 42% of the world's ethanol used as fuel. Total production is predicted to reach at least 26.4 billion litres (6.97 billion U.S. liquid gallons) for 2008. Brazil’s 30-year-old ethanol fuel program uses modern equipment and cheap sugar cane as feedstock, the residual cane-waste (bagasse) is used to process heat and power, which results in a very
"The Brazilian Government has just authorized the commercial use of a new fuel.
Extracted from: http://en.wikipedia.org/wiki/Ethanol_fuel_in_Brazil 15 Image from the Brazilian Association for Agriculture Engineering, available at http://www.sbea.org.br/
Brazil will now begin commercial production of biodiesel, a fuel obtained from raw materials such as castorbeans, soybeans and oilpalm. The introduction of biodiesel to the domestic market will generate significant hard-currency savings for Brazil by reducing imports of petroleum-derived diesel fuel, as well as helping to protect the environment and promoting the social inclusion of thousands of Brazilians. This authorization is the result of joint efforts by the Government in collaboration with the automotive and fuel industries, as well as the agricultural sector and research and development, financing and regulatory bodies. In just 12 months the Government organized the production chain, established lines of credit, structured the technological base and issued a regulatory framework for biodiesel. Brazil can now produce yet another renewable fuel on a commercial scale. With biodiesel, Brazil embarks on a new cycle in the energy sector, reinforcing the promotion of renewable sources and of the diversification energy matrix. Renewable sources currently account for 43.8% of Brazil’s total energy consumption, compared with a world average of 13.6%. In the developed countries renewable energy accounts for only 6% of the total on average.
received requests for 150 million reals (US$62 million) in financing. The government estimates that biodiesel production will receive more than US$390 million in investments by 2008 and in the subsequent five years before the B5 (Diesel + 5% Biodiesel) mandate comes into force, US$1.5 billion will be needed."17
Private-Public Partnerships Público Privadas) - PPP
In the latest years, the public sector found in the public-private partnership an efficient mechanism for the public services provision. In this context, the Brazilian federal law on Public-Private partnership (Law 11.079, December 30, 2004), was conceived as an essential instrument to enhance the private investments in public resources-dependent sectors. Its main objective is to have the State planning capacity together with the private sector efficiency to offer the population quality public services with low prices. The main PPP's characteristics in Brazil are:
Brazil pioneered the development of biodiesel production technologies, granting a patent to researcher Expedito Parente in 1980. The research did not continue because at that time biodiesel was not competitive with petrodiesel. Commercial use of biodiesel will drive further technological development, speeding up the learning curve."16 At presente, Brazil has made the use of B2 (Diesel containing 2% of Biodiesel) mandatory. This alone has created a huge demand for the Biofuel.
The private partner will be responsible for the concession’s establishment, operation and maintenance; Long term contract (5 to 35 years); The tariff can be complemented through public order actions, conditioned to performance patterns. The public compensation will be ensured through the Public-Private Partnership pay fund (FGP), with private nature and created only for 18 that.
"One of the main challenges at present is creating a national logistic and infrastructure network to produce, store and distribute the biodiesel. Brazil's government-run National Development Bank, the BNDES, which set up a credit support program for the biodiesel plants launched in late 2004, has already
According to a lecture presented by Mr. Guido Mantega (former Minister of Planning, Budget and Management and currently the Brazilian Minister of Treasury) in 2003: "The Public-Private Partnership is one of the most important projects of the Brazilian Government." 19
Texto from the Brazilian Agency for Biodiesel
Source: The Biodiesel Magazine Source: Brazilian Agency for Exports Promotion APEX 19 www.planejamento.gov.br/arquivos_down/palestras/Pu blic_private_031204.pdf -
"PPPs open great investment opportunities for the national and international private sectors" [such as:] • Electricity • Oil
• Transportation • Communications • Water resources The general concept of the PPP's under the Brazilian Law can be seen in the chart below:
Image source: www.planejamento.gov.br/arquivos_down/palestras/Public_private_031204.pdf -
Transportation "The infrastructure of transportation is very deficient in Brazil. Most roads are old and have poor maintenaince; ports are old and operated under obsolete management techniques; railroads are few and uncompetitive. Roads - and trucks - are the most used method of transportation in Brazil; despite of the existance of several rivers, wateways are very rarely used (the exception is the Amazon region, where rivers are usually the only way of access to many isolated villages); the use of trains for long distance transportation of passengers is restricted to a few touristic routes (urban trains exist in a few cities), while the cargo transportation (mostly restricted to minerals; much of the production of grains is transported by trucks) has been having not much official support. Despite the efforts of President Fernando Henrique Cardoso (1995-2002), the matrix of transportation has been changing little. In 1993, 62% of the cargoes in Brazil were transported via roads, 23% via railroads, 11% via waterways and 4% via airways. In 1999, the distribution was: 2% roads, 20% railroads, 14% waterways, 4% airways. Several projects aiming at straightening the several bottlenecks were proposed and included in the long term planifications of the country. During his government, FHC took many initiaves: privatization of railroads; modernization of the ports (physical structure and related legislation); investment in waterways; chartering of roads to private parties; descentralization of the road maintenaince, assigned to the States governments. The Lula government is persisting in many of them."20 Needles to say, infra estructure investments are a very interesting target for foreign investors, specially given the favourable conditions presented by the especial Public Private Partnership system, explained above. For more detailed information on Brazilian railroads and remedies that can be used by foreign investor to assure the transportation of its cargo, please check the additional material at the end of this Guide.
Extracted from: http://www.v-brazil.com/
FOREIGN DIRECT INVESTMENT REGULATION IN BRAZIL
According to Law 4.131, dated 09.03.1962, foreign capitals are defined as Art. 1 – FOREIGN CAPITALS are the goods, machines and equipments introduced in Brazil without initial payment, designated to the production of goods and services; as well as the financial or monetary resources introduced in the country for the use in economic activities; since, in both cases, they belong to companies or individuals with permanent residence or headquarters in foreign countries.
Foreign capitals are assured identical juridical treatment to that of national capitals, under the Constitutional principle of equality. The legal path for a foreign company to start operations in Brazil can be outlined as below:
1 - Incorporate a company in Brazil (or acquire / merge with a local company)
2 - Remit capital, either as money, machines, know-how, etc.
3 - Register the investment before Brazilian Central Bank
4 - Request permanent visa for foreign directors
In the next pages, those issues will be addressed in details. Moreover, this guide will present a short introduction to the Brazilian taxation system and to the attractive special regulations concerning foreign investments in the capital market. 9
Incorporating a company in Brazil Investors may choose, basically, between two kinds of legal entities: the Limited Liability Company, which resembles the Limited Liabitly society from the American law, and the Corporation (or Anonymous Society, as per the Brazilian Law). The basic difference among them is that only the latter is able to become listed in stock exchanges and sell stocks and bonds to the public. Nevertheless, the basic procedures for incorporation of both kinds of companies follow the same general lines. In case or mergers or acquisitions, the procedure would be simplified, given that only the registration of the new corporate composition before the Commercial Comission would be necessary.
Registration in a Commercial Comission -The company must be registere in the commercial comission of the State; -Documents required: Articles of association, ID of the Partners, CPF (Brazilian federal ID number), -Foreign partners shall indicate a local representative, with powers of attorney (objective: notification about court proceedings); If the partner is a foreign company: articles of association and copy of the board decision, dully consularized under the Brazilian embassy of the country of origin
To acquire a CNPJ After the registration, the company must ask for a Tax register number (CNPJ) before the local Federal Revenue Agency offices
Registration under other Tax Agencies The company must register itself under the State Tax Revenue agency and City Tax Revenue Agency
Operation License This license is issued by the City Hall and allows the establhisment of offices, stores, warehouses, etc.
Social Security The company must register itself before the Social Security Agency (INSS).
Foreign investors The individuals or or legal entities that owns shares in a Brazilian company and have residence / head office abroad must maintain two legal representatives in Brazil: The first one to represent the capital. His only duty is to serve as a legal representative in case court orders need to be delivered to the foreign investor. The second one is the Director of the company. The Director must either be a Brazilian citizen or have a permanent visa. The Director is responsible for managing the company. The individuals that own corporate shares in Brazil must register themselves under the CPF (Individual's Tax Registration Number). In case of foreign companies, the registration shall bemade under CNPJ (Company's Tax Registration Number). The articles of association of the incorporated company in Brazil must contain the following information: Headquarters of the foreign partner; Name of the legal representative of the foreign partner, resident in Brazil and bearing powers of attorney; Enclose the legal representative's Power of Attorney; Indication of how is the capital going to be entered into Brazil (currency, goods, rights, machines, etc.).
Another determinant condition for the granting of the visa is the amount invested in Brazil: The foreign investor as an indivudual, must invest US$50.000,00, or the equivalent in another currency, at least, in a local company. The visa might be granted if the investment is below this value in case the investor agrees to employ at least 10 employees within a 5 year period. For companies, the investment must be equal or above US$50.000,00, or the equivalent in another currency, and there is a legal obligation of generatig at least 10 new jobs during the 2 subsequent years after the installation of the company. Legal entities can also obtain a permanent visa for administrators, managers, directors or foreign executives, without the mandatory commitment of generating new jobs if the invested amount is, at least, US$200.000,00, or the equivalent in another currency. This value corresponds to one permanent visa. Extra ones may be granted, upon evaluation of the case. Temporary Visa The temporary visa is granted for foreign employees with proportionality regulation of, at most, 1/3 of foreign working in the company. For those with an employment contract, the visa is granted for a maximum of 2 years, extensible for equal period. If there is no employment agreement (e.g. specific services) the limit time is1 year, renewable for 1 more year. The bearer of a temporary visa is not authorized to occupy direction or management positions in the company.
Permanent Visa Only foreigners bearing a permanent visa are allowed to establish themselves in the country as business men, either by himself or as a director of a local comany. The permanent visa is granted after approval by the Ministry of Labor, Ministry of Foreign Relations and the Federal Police. The applicant shall present documents that demonstrate: That he is partner of Brazilian company; and/or has been designated as the local Director of a Brazilian company, and depends on the visa to fulfil his duties.
Capital admission - Categories Foreign capital is admitted in Brazil by means of: Direct invest in money; Importation of goods without exchange coverage (goods imported without payment. Tangible or intangible); Reinvestment of profits, “profits over equity” or profits reserves;
Conversion of debts due to foreigners; Distribution of equity reserves (e.g. real estate reevaluation); Reorganization of companies caused by incorporation, merger, acquisition, inter alia; Exchange of stocks or share between companies;
registration, as well as financial operations with foreign countries. The registration is the only formality imposed to the investors. There is no previous analysis of the investment. The Brazilian government also does not impose mandatory licensing procedures for foreign investments. The registration os made through an online system called Electronic Registration of Foreign Direct Investment (RDE-IED). which is part of the Central Bank Information System (SISBACEN). This system can be acessed through Bacen's website, using a previously requested password and registration number. The investor shall declare: The amount of capital entering the country; The source of the resources; If the capital is being entered as currency or as goods. In the last case, the value of the goods. The repatriaion of capital or profits, as well as the payment of royalties, or reimbursement of technical expenses; The reinvestment of profits.
Any changes in the investment ownership or valued must be informed for both the Commercial Commission and the Central Bank of Brazil. Those changes include: Transference of shares to a Brazilian resident; Equity reduction; Company liquidation; Partners leaving the company; Profits, profits remittance and profist reserves;
Every year, the companies must report its economic situation to the government. The obligation to register modifications in the investment ownership or value lies upon the Brazilian company receiving the investment. Real Estate acquisition Foreign direct ownership of real estate properties is limited in Brazil. Although, any incorporated company in Brazil is considered to be a Brazilian legal entity, with the same rights of any other national company. Thus, even a 100% foreign owned company may purchase or lease any kind of real estate property, including mining sites, farms and buildings. There are no limitations, except for specific limitations also applied to Brazilian companies, such as coast areas or environmental reserves. Foreign individuals investing in Brazil directly (i.e. without incorporting company), on the other hand, would face severe restrictions as to the maximun extension of the properties.
IMPORTANT NOTICE: The registration is of essential importance. Only after the registration the capital becomes legalized. Also, the registration warrants the investor the free disposal of the money/shares/stocks, allowing its immediate repatriation, liquidation or transference. The Lack of registration may also give cause to heavy monetary penalties.
Investment Currency The investments shall always be registered in its original currency. However, if the resources come from non-resident account properly maintained in Brazil, they will be registered in reais.
FDI Registration The Central Bank of Brazil (Bacen) controls the foreign capital admission and
Remittance of Profits
The remittance and repatriation of profits is free and unlimited. The profits reinvested in the company shall be registered under the Bacen. Capital repatriation The repatriation of the investment may be made at any time. However, it may depend on the previous liquidation of the company, which shall be processed according to the Brazilian Civil Code. Restricted Areas Foreign investment is either prohibited or partially restricted on the following areas:
and remains in the country for at lest 183 days within a year. Tax competence21 UNION Responsible for the following taxes: On foreign trade – on imports (II) and exports (IE) of goods and services On income and earnings (IR) On industrialized products (IPI), a value added tax levied on manufactured goods On financial operations (IOF) On rural land property (ITR)
Health care Rural areas (restriction applicable to foreign individuals) Property and administration of newspapers, magazines and other public media, such as radio and tv networks Business established near national borders and port areas Domestic Airliners
Nuclear Energy Mail Services (for correspondences only. Cargo transportation is allowed) Aerospace Industry
STATES AND THE FEDERAL DISTRICT Responsible for the following taxes: On inheritance and gifts (ITCD) On circulation of goods and transportation and communication services (ICMS), a value added tax levied on goods in general and some services On motor vehicles (IPVA)
MUNICIPALITIES AND THE FEDERAL DISTRICT BRAZILIAN TAX SYSTEM - OVERVIEW Responsible for the following taxes: The Brazilian taxation system is outlined by the Brazilian constitutiona, that divides the competence of collecting taxes among the Union, the States, the Federal District and the Municipalities. However, most of the taxes and feesare collected by the Federal Government and the States. The main place of business is the primary condition for tax collection in Brazil. Individuals are considered residents in Brazil if they have permanent visa or temporary visa with a employment contract On urban land and property (IPTU) On real estate conveyance (ITBI) On services (ISS), except those subject to ICMS
All the taxes collected by the government have, as a primary goal, the purpose of financing the government activities. The
main social contributions are collected by the Union: Contribution for the Financing of Social Security (COFINS) Social Integration Program/Civil Servants Savings Program Contribution (PIS/PASEP) Contribution on Net Profit (CSLL) Provisional Contribution on Financial Movement (CPMF), a bank debits tax Social Security Contribution, a contribution on payroll and selfemployment earnings
(Gains on the sale of real state properties, assets, shares or quotas.) Tax: 15% over the gain OBS: Real State property values are not indexed in Brazil. Thus, there may be taxable capital gain even when the operation is made with loss in terms of indexed value. Interest paid companies to foreign
Tax: 15% over the gain Brazil has no rules against Thin Capitalization. Interests paid to the controlling company can be deducted as Business Expenses, without limitations. Loans from the matrix to the subsidiary may be made before the permanent transference of assets, in order to test the market. Payment of royalties to foreign companies
FEDERAL TAXES Income Tax (IR) The income tax is levied over the income of resident individuals with national or foreign sources. The percentage charged can be of 15% or 27,5%, depending on the income level of the individual. Corporate IR The income tax levied on legal entities includes all the profits, income and capital gains and the tax year is the calendar year. The corporate income tax can be calculated based on the actual profit or trhough an estimation process. In both cases, the rates stands in 15% ICMS ICMS is a valued added tax imposed on transactions to the circulation of goods and on services (interstate and intermunicipal transport, and on communication).
Tax: 25% of the total payment Tax over services provided by foreign companies in Brazil
Tax: 25% over the values paid to the foreign company (the Brazilian company is responsible for the tax collection)
IOF The IOF (Tax Over Financial Operations) is a federal tax levied on credit, currency exchange, insurance and securities transactions. Every investment admission or profits repatriation demands an currency exchange contract under Brazilian Law (e.g Brazilian Reais to Dollars). So, it can be said that, indirectly, the foreign direct investment and the remittance of profits abroad are subject to IOF tax at the rate of 0,38% of the operation. Portfolio investments are exempted from the IOF tax. With the exception of fixed
Foreign Investments related taxation
Distribution or repatriation of net profits (earned after 1996)
income funds, including public bonds (1,5% IOF).
Double Taxation Agreements Brazil has entered into Agreements to avoid double taxation with the following countries: South Africa , Argentina, Austria, Belgium, Canada, Chile, China, Korea, Denmark,
Ecuador, Spain, Philippines, Finland, France, Netherlands, Hungary, India, Israel, Italy, Japan, Luxemburg, Mexico, Norway, Portugal, Czech Republic, Slovak Republic, Sweden, Ukraine and Russia (the last one still depends on approval by the Brazilian government)
FOREIGN INVESTMENT ON THE BRAZILIAN STOCK MARKET The Brazilian Stock Market "The BM&F Bovespa "Bolsa de Valores de São Paulo" is a São Paulo-based stock exchange. 22 It is the second largest stock exchange in The Americas and the third largest in the world. On May 8, 2008, the São Paulo Stock Exchange (Bovespa) and the Brazilian Mercantile and Futures Exchange (BM&F) merged, creating the new BM&F Bovespa. The BM&F Bovespa is linked to all Brazilian stock exchanges, including Rio de Janeiro's Boverj (BVRJ), where only government bonds are traded. The benchmark indicator of Bovespa is the 50-stock Índice .23 Bovespa. There were 450 companies traded at Bovespa as of April 30, 2008 On May 20, 2008 the iBovespa index reached its 10 consecutive record mark closing at 24 73,516 points, with a traded volume of USD 4.2 billion. "
IBOVESPA INDEX EVOLUTION OVER THE LAST 5 YEARS:
Chart extracted from Yahoo.Finance.
http://www.bmfbovespa.com.br/english/home.asp http://www.bmfbovespa.com.br/english/home.asp 24 http://en.wikipedia.org/wiki/Bovespa
Special regulation for foreign investmens on the Brazilian stock market The resources of a nonresident that enter in Brazil on the capital and financial market as a free tax exchange market are regulated by the CVM resolution 2.689 of 2000. The nonresident must establish one or more legal representative and a custodian in Brazil before the beginning of the operations. If the representative is not a financial corporation, the investor must also name a financial institution authorized by BACEN. This representative may or may not be responsible for tax issues. In case he is not given this responsibility, another representative shall be appointed for this purpose The custodian may be either an financial institution or a brokerage firm authorized by BACEN. The custodian is responsible for guarding the financial assets and the stocks/titles negotiated. According to the official foreign investment gateway:
"In Brazil, the access of non-resident investors (or foreigners) to the financial and capital markets are based on the Resolutions 2689 and 2687, dated 01/26/2000, of the National Monetary Council. Even though both relate to non-resident investors, they strongly diverge on both the operational aspect and the applicability. Generally, the Resolution 2689 provides for the access of the non-resident investor to the same markets available to the resident investor requiring therefore that the investor would internalize resources in Brazil, in local currency, through the hiring of currency exchange operations. As for the Resolution 2687, it establishes that non-resident investors clear their operations abroad in the accounts of the commodities and futures market in which they operate, but are restricted to the operation in the farming and cattle raising markets contemplated in this Resolution. It is worth highlighting that non-resident investors may benefit from agreements that protect them from double taxation. On the other hand, in case the percentage of the income tax applied in his country of origin would be inferior to 20%, the applicable percentage of the income tax will be the resident's percentage. Finally, if the income tax applies, it will be applied with the same percentage and at the same time of the
one applicable to resident investors' operations, given that, in case of investments on investment funds, the application of the tax will only happen when the shares are sold."25
LEGAL PATH FOR INVESTMENTS IN THE BRAZILIAN STOCK MARKET
Simplified registration for Foreign Investors - CVM Rule N. 419/2005 "The Securities and Exchange Commission, through its Rule 419/2005, created the simplified registration of the non-resident investor. Generally, based on this Rule, the brokerage firms (and the custodians) may perform the simplified registration of its non-resident clients given that the following prerequisites are complied with: the non-resident investor must be a client of a foreign intermediary institution, before which he is duly registered under the applicable country of origin legislation; the referred intermediary institution would take before the brokerage firm the obligation to present, whenever requested, all the information required by the CVM Rules that deal with investor registration within the ambit of the securities market, duly authorized, as well as other information required by Brazilian public bodies with inspection powers; and the capital market regulating body of the foreign intermediary institution's country of origin would have signed with the CVM a mutual cooperation agreement that would allow the exchange of investors' financial information.
TAXATION AND EXEMPTIONS Percentage of the tax rate applicable upon non-resident investors operations carried out based on CMN Resolution 2689/2000 According to CVM:
"It is worth highlighting that the applicability or non-applicability of the taxation, as well as its percentage tax rate depends upon the origin of the investment, being different for those arising from countries or dependencies that do not tax income or that do tax income at a percentage below 20%. Greater details as to this subject may be obtained through the Normative Ruling of the Internal Revenue Service (SRF) 188/2002, which presents the list of countries that are framed in such distinct taxation situation.28 Such countries are labeled as "favored taxation" by the Brazilian legislation and the remaining countries as "non-favored taxation". Percentage of tax rate applicable upon non-resident investors originated from “non-favored taxation” localities. Stocks or Stock Other Fixed Index Derivatives Income Outside Outside Tax In the In the the the Stock Stock Stock Stock Market Market Market Market Capital 0% or Exempt 15% Exempt 10% Gains 15% ** Currency Exchange Exempt 0.38% 0.38% 0.38% 0.38% Flow*
* Entry in Brazil or remittance to a foreign country of financial resources. (The taxation occurs according to the destination of the resources.) ** The fixed income capital gains (named "rendimentos" [earnings] in Brazil) referent to Federal public stock possess zero tax rate percentage and the remaining cases, 15% percentage of tax rate.
Furthermore, the country in which the foreign intermediary institution is located should not be considered high risk as regards money laundering and terrorism financing, and should not be classified as non-cooperative by international organs, in relation to the fight against illicit actions of that nature. This Rule simplified and sped up the access of non-resident investors to the 27 Brazilian domestic market."
(This Ruling is available in the websitehttp://www.receita.fazenda.gov.br/Legislacao/i ns/2002/in1882002.htm.)
Percentage of tax rate applicable upon non-resident investors originated from “favored taxation” localities. Stocks or Stock Other Fixed Index Derivatives Income Outsid In the Outsid Tax In the e the Stock e the Stock Stock Marke Stock Market Market t Market Depend Capital s upon 15% 15% 15% 10% Gains due date** Currency Exchang Exempt 0.38% 0.38% 0.38% 0.38% e Flow* Investme Exempt 0.38% 0.38% 0.38% 0.38% nts
* Entry in Brazil or remittance to a foreign country of financial resources. (The taxation occurs according to the destination of the resources.) ** The percentage of tax rate referent to fixed income capital gains (named "rendimentos" [earnings] in Brazil) are:
22.5% for operations up to 180 days; 20% for operations from 181 days to 360 days; 17.5% for operations from 361 days to 720 days;
and 15% for operations above 720 29 days.
São Paulo Stock Exchange http://www.bovespa.com.br
www.brasil.gov.br (Official Government Page)
Foreign Investors Gateway http://www.portaldoinvestidor.gov.br
CVM (Securities and Exchange Commission of Brazil) www.cvm.gov.br
Ministry of Finance www.fazenda.gov.br
Central Bank of Brazil www.bcb.gov.br
BNDES - The Brazilian Development Bank www.bndes.gov.br
Authors Information: Adler Martins
Lawyer, graduated by the Federal University of Minas Gerais - Brazil Specialized in international law MBA by FGV University email@example.com
Tomás Levi Moreira Alves
Attending Law School at Faculdades Milton Campos - Brazil firstname.lastname@example.org
RAILROAD LOGISTICS IN BRAZIL USEFULL INFORMATION FOR FOREIGN INVESTORS
Foreword Brazil has a great territorial extension and an increasing economic relevance in the world. Its GDP and exports have been growing consistently in the last decade, pushed particularly by the international demand for iron ore and agricultural products. Brazil is also one of the main destinies for foreign investments in the world, having received over 34 billion dollars in direct investments in 2007. To any company interested in investing in Brazil, knowledge about the intricate logistic network is invaluable. Even more if the target activities are logisticsdependent, such as mineral extraction. This brief article aims at providing broader and safer data on the subject, in order to support strategic business decisions. History The Brazilian railroads cover 28.5 thousand km (177 thousand miles) and are responsible for about 20% of the Brazilian cargo transportation matrix30. The Brazilian railroads have been basically built between 1850 and 1953. Its primary goals included the transportation of commodities such as sugar, coffee, iron ore and coal. On the beginning of the 20th century, many Brazilian railroads systems started presenting operational losses, which lead some of them to bankruptcy. Among the reasons to this scenario, it is possible to point out the technologic obsolescence, the end of economic circles of certain products, as coffee, which demanded most part of the railroad services and the political preference for the Road transportation, which was largely stimulated by the federal government at the time. To prevent the vicious consequences that would follow the extinction of too many railroad systems, the federal government decided to centralize and take control over the national railroad operations. Consequently, the Federal Railroad Network Corporation (RFFSA in the Portuguese acronym) was founded in 1957, with the purpose of making the railroad exploration the more efficient as possible, reducing the operational deficits. This new company absorbed most of the pre-existent Brazilian railroads.
Despite the initiative, there were no substantial investments in renovation or expansions of the railroad system since the middle of the 20th century. The demand for transportation services, however, has grown almost exponentially ever since. As a result, the national railroad system is, nowadays, a real obstacle to the efficiency of the Brazilian transportation infrastructure. The railroads currently operating are incapable of supplying the demand. That is especially true when it comes to mining activities. In the early 90s, the Federal Government realized that it could not obtain the resources demanded by the railroads improvement program on the pace required by the national industry. Shortly after, a privatization program was launched as an option to handle the problem, or at least alleviate it. The RFFSA was included on the National Denationalization Program through the Federal Decree n. 473 from 1992. The Decree established that the railroad exploration would be granted to private groups for 30 years, which could be extended for another 30. Given the complexity and extension of RFFSA’s assets, the company has not been sold as a sole enterprise. Instead of that, a special commission divided the company in several smaller routes, each one being auctioned independently to. Vale do Rio Doce – CVRD (nowadays Vale) is one of the companies that obtained public concessions to operate the system. The group became responsible for exploring two important tracks: the Carajas railroad and the Vitoria-Minas railroad. Those roads connect the Carajas and Minas Gerais mineral deposits to the Sao Luiz and Tubarao ports, respectively. It should be stressed that Carajas is one of the richest mineral provinces in the world. Moreover, the so called “Iron Square”, in the Minas Gerais State, is the major mining region in Brazil. Therefore, the two railroad tracks controlled by Vale are crucial for the proper distribution and exportation of the Brazilian iron ore. The Middle West and Sao Paulo tracks (Operated by Novo Oeste, Ferronorte and Ferroban railroads) have been granted to a group composed by CVRD, Previ (a pension fund owned by Banco do Brasil, an important Brazilian bank), Funcef (another pension fund), LAIF(Latin American Investment Fund) and JP Morgan Partners. America Latina Logística (known as ALL) obtained control of the south track, which comprises Rio Grande do Sul, Santa Catarina and Parana states, what is to say, the whole south of Brazil. All railroad concessions to private companies have been auctioned according to the proceedings established by the bill n. 8.987, from 1995. The public auctions took place between 1996 and 1998.
The seven tracks described on the table below derived from the denationalization of the RFFSA, and have had its exploration rights granted for a 30-year period. These companies, however, do not own the railroad physic assets. Only Vale and Ferronorte effectively own the rails, terminals and locomotives from the tracks they explore. Initial Regional Auction Extension Concessionaires date of tracks date (miles) operation Ferrovia West 03.05.96 01.07.96 1,013 Novoeste S.A. MiddleFerrovia Centro06.14.96 01.09.96 4,425 East Atlântica S.A. MRS Logística Southeast 09.20.96 01.12.96 1,046 S.A. Tereza Ferrovia Tereza 11.26.96 01.02.97 102.5 Cristina Cristina S.A. ALL-América South 12.13.96 Latina Logística 01.03.97 4,116 do Brasil S.A Companhia Northeast 07.18.97 Ferroviária do 01.01.98 2,648 Nordeste Ferrovias Paulista 11.10.98 Bandeirantes 01.01.99 2,647 S.A. Total 15,999
Source: ANTT. Available at http://www.antt.gov.br/concessaofer/apresentacaofer.asp
The ANTT (Agência Nacional de Transportes Terrestres) is the government agency responsible for regulating terrestrial transportation in Brazil. Apart from previous RFFSA’s tracks and Vale’s railroads (which have been portrayed above), ANTT also rules the following concessions: Ferrovias Norte Brasil S.A. - FERRONORTE. Estrada de Ferro Mineração Rio do Norte; Estrada de Ferro Jarí; Estrada de Ferro Trombeta; Estrada de Ferro Votorantim; Estrada de Ferro Paraná Oeste S.A. - FERROESTE
The map below displays the current situation of the railroad concessions in Brazil:
Source: ANTT. Available at http://www.antt.gov.br/mapas/mapas.asp
Important information for foreign investors: In the last years, Brazil has received huge amounts of direct foreign investments, mostly on metallurgy, mining and agriculture. In 2007 alone, foreign resources on the amount of US$4,699 billion have been invested in metallurgy and US$3,249 billion in the mining section. The situation in mirrored in Ethanol and Biodiesel sectors, which have also attracted the interest of international investors. In common, all these sectors share an accented dependence on the railroad logistics for its economic feasibility. It is, therefore, natural that the foreign investor be worried about the transportation of its products. At this point, many doubts about the Brazilian railroad system may appear. Brazil adopted a sui generis system of railroad regulation. Here, the company that controls the most important railroad lines for mining exploration (the Carajás railroad, on north, and the Vitória Minas railroad, linking Minas Gerais to Vitória port) is, itself, a great mining company (Vale) and uses almost all the
current capacity of the track it controls. In fact, the railroads controlled by Vale do not have enough capacity to supply its own demand. The same is true in the case of others concessionaires that also depend on the railroads to fulfill their own commercial objectives. (The southeast track, for instance, is controlled by MBR and CSN, companies from mining and steel sectors). The current situation reflects a truly impasse. In one side, the current situation favors almost monopolistic market control by Vale and CSN, since those private groups have control over a transportation modal which is vital for their competitors’ activities. In such situation, it’s clear that only companies that control railroads tracks will be able to survive. On the off side, small companies will become completely vulnerable and dependent on the bigger companies. On the other hand, it’s important to consider that, without the denationalization program, it is probable that not even the big companies would have conditions to operate competitively on the international market. In fact, the deficiencies caused by the lack of governmental investments on the railroads have been almost catastrophic to Brazil. Sector regulation and legal alternatives to secure the use of railroads Despite being apparently disheartening, the logistics obstacle is not an insuperable problem for those who whish to invest on highly logistics-dependent sectors. In given situations, there are legal instruments that can ensure the use the railroads. Moreover, there are also other solutions that will be explored later on this text. As for the use of the railroads, it must be said that, despite the popular opinion, the logistic operators cannot freely establish the freight prices. The concession contracts entered into among the government and the concessionaries clearly establish, on its seventh clause, that the maximums prices practiced by the concessionaries will be established by ANTT. Indeed, the ANTT establishes different prices for each class of goods, such as coal, ore, grains, etc. Thus, it is possible to accurately calculate the final freight cost for virtually any product. Still, experience has demonstrated that the freight prices are not the only problems when it comes to analyzing investment opportunities in logisticsdependent sectors. Rather, it is the lack of available wagons for the transportation of the goods that causes most of the insecurity. More often than not, the concessionaires are so overloaded with their own cargo that they cannot supply continuous services to other users.
However, it is possible to appeal to ANTT protection to force the logistic operators to reserve a certain number of wagons for the transportation of goods belonging to companies with extreme dependence on public railroad services. The legal concept of “user with high dependence on public railroad services” has been described on the railroad concession contracts entered into from 1996 on. However, only as for 2004 has ANTT decisions been favorable to this kind of user. The recognition of the high dependence is able to obligate the operator to charge lower prices when dealing with that specific user. The recognition may also include a transportation warranty, although restricted. Some successful cases based on this legal remedy include agreements between users and operators, according to which the user company shall donate the wagons that will be utilized for transporting its products. This possibility, however, should not be considered as a panacea. The high dependence recognition is subject to prior and strict analysis by ANTT. Moreover, railroad capacity limitations may make it impossible for the concessionaries to secure transportation in the level required by the claimant company. The Brazilian market has recently watched a bold and creative initiative, aiming at overcoming the logistic limitations imposed to mining activities. MMX Minas Rio, a Brazilian mining corporation, has started the construction of a 530 km (331 miles) mining pipeline, connecting a mine in the city of Conceição do Mato Dentro, in Minas Gerais state (center of Brazil), to the coast. The company is also building an exclusive port in Rio de Janeiro state to handle the exportation of its production. This very ambitious project, with total cost estimated in US$2.3 billion dollars revealed the existence of feasible solutions to overcome the knot on Brazilian logistics. Final word Brazil has countless investment opportunities on logistics dependant sectors. To efficiently explore those activities, any project shall be carefully analyzed, taking in account all legal and economic alternatives. Through the wise utilization of the available legal resources, the obstacles that trouble many companies may be turned into a competitive advantage to the prepared ones. Adler Martins Lawyer, specialized in international law; MBA by FGV University Nayara Gonçalves Bachelor of Arts in International Relations by the Catholic University of Minas Gerais - PUC-MG