Highlights of Brazil

Authors: Esther M. Flesch/Fátima Carr/Mônica Leite/Mariana Freitas de Souza -
Trench, Rossi e Watanabe Advogados

9.1. The Brazilian exchange market

In the last few years, the Brazilian Government has been systematically simplifying and flexibilizing the Country's exchange control rules.

As of March 4, 2005, all exchange transactions are processed through one sole market, called Exchange Market. According to article 1, sole paragraph, of Resolution of the National Monetary Council ("CMN") No. 3.265 of March 4th, 2005, "The Exchange Market encompasses transactions referring to the purchase and sale of foreign currency, the local currency transactions in local currency between persons residing, domiciled or with headquarters in the Country, residing, domiciled or with headquarters abroad and the transactions with gold - exchange instrument, performed through institutions authorized by the Brazilian Central Bank to operate in the Exchange Market ".

On August 3rd, 2006, the Presidency of the Republic issued Provisional Measure No. 315, which was converted into Law No. 11.371/2006, providing on exchange transactions, registration of foreign capital, payment in free shops and taxation of the commercial lease of Aircraft, among other issues.

9.2. The foreign capital in Brazil

Law No. 4.131 of September 3rd, 1962 (the "Foreign Capital Law"), and its amendments, rule the foreign investments in Brazil. According to this Law, the foreign investments in Brazil shall be registered with the Central Bank to allow the remittance of profits and/or interests on equity to the foreign investors, as well as the repatriation of the capital expressed in foreign currency invested in the Country, as well as the recording with the Central Bank of the reinvestment of profits and/or interest on equity.

Article 1 of Law No. 4.131/1962 considers foreign capitals: (i) the goods, machinery and equipment held by individuals or companies residing or domiciled abroad, which entered Brazil without initial expenditure of hard currency, destined to the production of assets or services, as well as (ii) financial or monetary resources held by individuals or companies residing or domiciled abroad, introduced in Brazil to be invested in economic activities. Therefore, foreign investment, for the Brazilian legislation, includes: (i) assets imported by companies headquartered in the Country, as capital contribution (for instance, machinery and equipment); (ii) capitalization of foreign credits qualified for remittance and (iii) the actual remittance of funds to Brazil, as capital contribution.

For the purpose of stimulating the foreign investments in the Country, the Brazilian Government has been eliminating the restrictions for such investments in certain areas of the national economy. We give below some of the economic activity areas which are still subject to certain restrictions regarding foreign capital:

• Exploitation and use of ore deposits, mines and other mineral resources and electric power potentialities;
• Coastal navigation for the transportation of goods, except for certain specific cases;
• Ownership and administration of newspapers and radio broadcasting companies as well as of sound and image (limited to 30% of the voting capital, being the participation of foreigners in such companies only allowed indirectly, by means of legal entity constituted under the Brazilian laws and with headquarters in Brazil).
• Investment in Cable TV (limited to 49% of the voting capital);
• Implementation of industries of interest to the national security and performance of certain activities in the country's border areas;
• Acquisition of rural real estate property by foreigner, if located in area deemed mandatory for national security;
• Investment in airlines (the concession will only be given to a Brazilian legal entity with headquarters in Brazil, which may have up to 1/5 of the voting capital held by foreigners);
• Health Assistance, except in certain specific cases, and
• Constitution or acquisition of financial institutions in Brazil.

9.3. Tax on Financial Operations ("IOF")

As defined by the IOF Regulation , such tax is assessed on different types of events: foreign exchange, credit and related to securities and insurance.

Generally, the IOF-Exchange is assessed on the foreign currency exchange transactions for inflow and outflow of funds into and from Brazil, at the rate of 0.38%. Such rate, however, may vary depending on the nature of the foreign exchange transaction. There are cases of higher IOF-Exchange tax rates and, conversely, some situations when a 0% IOF-Exchange tax may apply.

The Brazilian party is the IOF taxpayer; however, the commercial bank in charge of the closing of the foreign currency exchange transaction is responsible for paying such tax.

The IOF-Exchange is a type of tax over which the Executive Branch has broad powers to change the triggering events and the applicable rates. Thus, it is very important to review the IOF legislation at the time of the actual inflow and outflow of funds, as applicable, to confirm the current rules in force.

9.4. Registration of foreign investment with the Central Bank

The registration of foreign investment in Brazilian companies is done electronically, through a computerized information system of the Central Bank ("SISBACEN"), by means of an electronic declaration record (known as RDE-IED - "Electronic Registration Statement - Direct Foreign Investment"). In order to enable the implementation of such registration, the Brazilian company shall, initially, obtain a SISBACEN access password.

The registration of foreign investment with SISBACEN shall be done by the representative of the Brazilian company receiving the foreign investment or by the representative of the foreign investor, within thirty (30) days counted as of the date of the event object to registration, observing the provisions of the Central Bank Circular Ruling (Circular) No. 2.997/2000 and other rules applicable to the issue.

The companies receiving foreign investments shall maintain the documents evidencing the statements made through SISBACEN at the disposal of the Central Bank, for five (5) years counted as of the date of each registration.

As mentioned above, the registration of the foreign investment is provided by Law No. 4.131/1962, to allow the remittance of interests and other amounts to the foreign investors, in respect of the investments made thereby in Brazilian companies.

The registration of the investment will be done in the foreign currency sent by the foreign investor and in the corresponding value in local currency. In case of investment done through free import of assets (item 9.5.1 below), the registration will be done by the value of the price shown in the commercial invoice issued by the exporter and corresponding value in local currency, calculated as per the specific rules of the Central Bank.

The rules established by the Central Bank also allow the registration with the RDE-IED of investments made by foreign investors in local currency, provided such values are originated from bank account held in Brazil by the investor domiciled or with headquarters abroad, according to the current rules. In this case, the foreign investment will be only registered in local currency. The dividends, interests on equity, reinvestment and capital repatriation attributed to the quotas/shares originated from foreign investment in local currency can be remitted abroad, according to the applicable legislation.

Resolution CMN No. 2.883 of August 30th, 2001, establishes that the failure to comply with the term for the registration of investments with the Central Bank subjects the Brazilian company to monetary fines which may total up to R$125.000,00 (article 1, IV, of the corresponding Resolution) per transaction.

9.5. "Tainted capital"

One of the major innovations brought by Law No. 11.371/2006 was the obligation of the Brazilian companies receiving foreign capital to regularize, before the Central Bank, their "tainted capital".

The so-called "Tainted Capital" refers to foreign investments made in Brazilian companies which, due to several reasons, were not made according to Law No. 4.131/1962 and correspondent foreign exchange regulations, resulting in the impossibility of being registered as foreign capital with the Central Bank. Thus, dividends, interests on equity and other values originated from such investments could not be remitted abroad.

According to the new provisions, by means of the effective registration of the foreign investment not recognized by the Central Bank up to then, the foreign investors will no longer have part of their distributed dividends, interest on equity, or any other amounts related thereto, held in the Country, as a consequence of the lack of registration.

It is important to emphasize that the ownership of the tainted capital shall be evidenced by documents, including the accounting records of the Brazilian company receiving the investment.

The value of the tainted capital will be registered with the RDE-IED exclusively in local currency, as "Local Currency - Law No. 11.371/2006" separated from the foreign investment registered according to Law No. 4.131/1962.

According to Law No. 11.371/2006, the registration of the tainted capital is an obligation and the failure to do so may trigger the imposition of fines by the Central Bank, which may vary from R$ 25.000,00 to R$ 250.000,00, limited to the amount of the tainted capital subject to registration.

CMN and the Central Bank established that the registration of the tainted capital accounted in a given year shall be done up to the last business day of the subsequent calendar year.

9.6. Direct foreign investment

The remittance of funds into Brazil as capital contribution does not require prior authorization by the Brazilian authorities and the resources may be transferred to Brazil whenever necessary. In order to have access to the funds, the Brazilian company shall convert the funds received from the foreign investor into Brazilian currency. For such purpose, the Brazilian company must have previously obtained access to the SISBACEN and, through such system, be duly registered with the Central Bank's Corporate Registries ("CADEMP"). The foreign investor shall also be duly enrolled with CADEMP, as well as with the General Taxpayers' Registry ("CNPJ") in case of companies or with the Individual Taxpayers' Registry ("CPF") in case of individuals. The registrations with the CNPJ and CADEMP are done simultaneously, through SISBACEN.

The remittances to the direct foreign investor shall be done for (i) payment of shares/quotas subscribed by the non resident investor in the corporate capital of companies headquartered in the Country or (ii) the payment of the acquisition price, by the non resident, of shares/quotas paid-in, held by residents. In both cases, the amounts remitted will be registered with the RDE-IED, through SISBACEN, as foreign investment in the corresponding Brazilian company.

9.6.1. Investment through the Import of Assets without Exchange Coverage

The import of goods destined to the payment of the corporate capital of a Brazilian company is done without exchange coverage, and, therefore, does not provide for the payment of the goods by the importer. This type of import is subject to registration with the Foreign Trade Integrated System ("SISCOMEX"). SISCOMEX is comprised by governmental authorities directly involved with foreign trade transactions, the Federal Revenue Secretariat, SECEX and the Central Bank. After the registration with SISCOMEX, the transaction shall be registered with SISBACEN, under module ROF ("Registration of Financial Operation").

Article 33 of Ruling (Circular)No. 2.731, of December 13th, 1996, establishes that the registration of import of goods with the ROF implies commitment of incorporation of the asset to the fixed assets of the company for a minimum period of five (5) years.

Additionally, the payment of the foreign interest with the imported good shall be registered with the RDE-IED as foreign investment, within ninety (90) days counted from the customs clearance of such import.

The above rules apply only to the import of new goods. The import of used goods is subject to more restrictive exchange control rules imposed by the Central Bank and by the Ministry of Development, Industry and Foreign Trade. For such cases, usually, a prior authorization of SECEX is required and the process demands the presentation of reports obtained abroad evidencing the remaining useful life of the good, among other documents.

The payment of the capital by means of import of intangible assets, when accepted by the current rules, is subject to the prior authorization of the Central Bank.

9.6.2. Investment through the Conversion of Credits Remittable Abroad

Amounts due by the Brazilian company, which, according to the applicable legislation, can be remitted abroad, may be converted by the foreign creditor into investment in the Brazilian company responsible for the debt. Under the terms of the Central Bank Ruling (Circular) No. 2.997/2000, "it is considered conversion into direct foreign investment, for the purposes of this Regulation, the transaction through which credits able of generating transfers abroad, based in the current rules, are used by the non-resident creditor to acquire or pay-in capital interest in the corporate capital of the company in the Country."
Supported by an irrevocable statement executed by the creditor abroad, consenting with the conversion of the credit into investment, the Brazilian company shall contract with a commercial bank the closing of symbolic/simultaneous exchange transactions. Through such transactions, the hard currency is symbolically sent abroad to pay the debt and the same value of currency enters symbolically into the Country as capital contribution.
In case of conversion of values subject to tax, such as interest accrued on loans, the evidence of payment of the taxes due shall be submitted to the commercial bank hired to implement the symbolic/simultaneous exchange transactions. Depending on the date of the granting of the loan, the symbolic transaction which reflects the payment of the loan abroad might be subject to Tax on Financial Transactions (IOF) at a rate of 0.38%. The external credits, converted into investments, shall be registered as foreign investment in module RDE-IED of SISBACEN, within thirty (30) days.
9.6.3. Reinvestment of dividends and/or interest on equity
The dividends and/or interests on equity due to the foreign investor may be (i) remitted to the foreign investor or (ii) reinvested in the same Brazilian company or in another Brazilian company. The reinvestment is registered with RDE-IED in local currency and at the corresponding value, in the legal currency of the investor's country. In case of investment in local currency, the reinvestment record will be done exclusively in local currency.
In order to calculate the foreign currency value to be recorded as reinvestment, the Central Bank applies the average of the exchange rates in force on the date of the corporate act consigning the capitalization of the profits and/or interests on equity.
9.6.4. Remittance of dividends and/or interest on equity

The remittance of dividends to investors domiciled abroad is conditional to two conditions precedent: (i) the foreign investments made by the partners/shareholders shall be duly recorded with the RDE-IED; and (ii) the Brazilian company shall evidence profits.

After resolution of the partners/shareholders, the remittance of dividends shall have its destination recorded with the RDE-IED. As established by Law No. 9.249/1995, dividends generated by Brazilian companies as of January 1st, 1996, are not subject to the payment of withholding income tax upon their remittance abroad. The distribution of dividends generated up to January 1st, 1996, however it is taxed by withholding income tax.

Law No. 9.249/1995 also provides for the allocation of interest on equity to the investors, provided the Brazilian company evidences accrued profits or profits on the current fiscal year. The total value of interest on equity payable or credited to the partners shall not exceed 50% of the accrued profits or fiscal year, whatever is greater.

The interest on equity has the purpose of compensating the investments based in the net equity of the Brazilian company. Differently from the dividends, the value resolved by the partners/shareholders to pay interest on equity is treated by the Brazilian law as deductible expense. The payment or credit of interest on equity to the partner/shareholder is taxed by withholding income tax.
9.6.5. Capital repatriation
The expression "capital repatriation" traditionally names, in exchange terms, the remittance abroad of values originated of the disposal of direct foreign investments in companies domiciled in the Country, or the reduction of capital to be returned to the foreign partner or yet the liquidation of the company in the Country holding foreign equity participation. The foreign currency value indicated in the RDE-IED, observing the par value of the quotas/shares of the Brazilian company and, yet, when applicable, the proportionality rule, is used by the tax authorities as base to verify the capital gain in such transactions.
The amount to be repatriated exceeding the value registered in foreign currency observing the proportionality rule, represents capital gain and is taxed by the withholding income tax.
Also, in the case of sale of the interest, the equity value of the Brazilian company shall be taken into consideration at the time of the repatriation of the foreign investment. An evaluation report of the company sold may be demanded, should the sales value exceed the equity value of the Brazilian company, even if it is inferior to the amount shown in the foreign capital registration.

9.7. Foreign investment in the Brazilian capital market

The Brazilian legislation allows the investment in the capital market, by individuals or legal entities, residing or domiciled abroad, by means of the acquisition of shares and other securities. Such investments, called "portfolio investments", when performed by non residents are subject to registration with the Central Bank and the Securities Exchange Commission ("CVM").

According to the current regulations, individual or collective non resident investors are the individuals or legal entities, funds and other collective investment entities with residence, headquarters or domicile abroad.

Currently, the non resident investors are allowed entrance and free transit to all products available in the local market. Before starting its operations, the non resident investor shall appoint one or more representatives in the Country, who will be responsible, among other features, for providing information and implementing the registrations with the Central Bank and CVM. This representative is not the same individual required by the tax law, although in practice he/she tends to also undertake such function.

The non resident investor shall, through its representative, obtain registration with the CVM. Such registration is done by electronic means. Additionally, the resources entering the Country as "portfolio investments" are subject to registration with the Central Bank, made in a declaratory manner by electronic means, through SISBACEN. The initial electronic registration ("RDE -Portfolio") and its updating constitute mandatory requirement for any transactions abroad and shall be provided before they occur.

In the remittances abroad of interest, capital repatriation and capital gains, the intervening bank is responsible for checking the documents to be submitted, which shall evidence the distribution of interests, the title and sale of the assets generating such interest or which were disposed, as well as the taxes due.
Observing the applicable legislation, the investments in the Brazilian capital market are subject to a special taxation system, except for certain exceptions.

Recently, the Brazilian government increased the rate of the IOF levied on the foreign currency exchange transaction necessary for bringing foreign investments in the Brazilian financial and capital markets from zero to 2%. The return of the funds abroad resulting from such investments remains subject to a zero percent rate of IOF-Exchange.

9.8. Cross-border loans

Loans granted by companies or individuals domiciled abroad to individuals or legal entities in Brazil, shall be electronically recorded with the Central Bank, through SISBACEN, under module RDE-ROF. The payment conditions of the principal and interest rates cannot be deemed excessive, according to the policies of the Central Bank in force at the time when the loan is contracted.
The borrower shall make an electronic registration with the ROF of the financial terms and conditions of the loan, before the resources enter the Country. The registration with the ROF shall be done based in a statement of the foreign creditor, defining the terms and conditions of the loan.
Currently, the remittance of the principal amount of the loan to Brazil is subject to the IOF at the rate of zero percent. Should the loan be paid or fall due within a minimum average time of up to ninety (90) days, the IOF will apply at a 5.38% rate.
The payment of interests on such loans is subject to the payment of withholding income tax at the rate of 15%. The 15% rate applies to the majority of the countries, except for Japan, which is subject to the reduced rate of 12,5%. In the case of beneficiaries residing in Tax Heavens, this tax rate will be 25%. Both the Brazilian borrower and the creditor domiciled abroad may bear of tax payment burden. If the withholding income tax lies under the responsibility of the borrower, the tax calculation base shall be increased to 17,65% (in the case of taxation at 15%) and 33,33% (in the case of Tax Heavens). Generally, foreign governmental entities enjoy better tax treatment.
Currently, the prepayment of foreign obligations is accepted, such as, for instance, foreign loans. For this purpose, it is no longer necessary to give a prior notice to the Central Bank in order to perform a prepayment, but only to reflect the such prepayment through the SISBACEN.
Additionally, the prepayment shall only be done upon consent of the foreign creditor, which must execute a statement agreeing to receive the corresponding payment before the originally agreed due date.

9.7.1. Loans in Local Currency
The local currency loans are made by means of international transfer of reais. The remittances and entries of capital related to such loans shall be done by means of a non resident account maintained in local currency by the foreign creditor in a Brazilian bank.
Resolution CMN No. 3.265/2005 allows the payment of any obligations expressed in local currency, at the corresponding foreign currency value. This way, it is possible to pay in foreign currency loans originally contracted in local currency.
9.7.2. Loans granted by Brazilian entities to foreign entities

It is currently possible for Brazilian individuals or legal entities to grant foreign currency loans to a foreign entity, without requiring the approval or registration with the Brazilian Central Bank. In order to implement such transaction, the parties shall execute an agreement establishing the terms and conditions of the loan. No open due date is allowed, and the applicable tax rules shall be observed (including, but not limited to the transfer pricing rules).
9.8. Brazilian investment abroad

The local individuals or legal entities are authorized to acquire interest in foreign companies or subscribe shares/quotas representing their capital, without requiring authorization of the Central Bank of Brazil.

The Brazilian investment abroad shall be done based in documents evidencing the legality and economic grounds of the transaction, as well as the observance of the applicable tax aspects, being the commercial bank responsible for the observance of the compliance with such conditions.

Additionally, the investors residing, domiciled or with headquarters in the Country shall maintain documents supporting the remittances made at the disposal of the Brazilian Central Bank for up to five (5) years, duly vested in the legal formalities and with perfect identification of all signatories.

The reinvestment of resources transferred as investment is allowed, as well as the income earned abroad also in other assets, provided they observe the purposes allowed in the regulation applicable to the matter.

It is possible to deliver shares or assets held in Brazil by Brazilian companies as capital contribution in foreign companies. Likewise, foreign investors are authorized by the Central Bank to contribute shares held in foreign companies or assets held abroad to increase the capital of Brazilian companies, provided the applicable legislation is duly observed.

9.9. Exchange control in the remittance abroad to pay services

The service import transactions involving transfer of technology, license of intellectual property rights and production of scientific knowledge are subject to registration with the Brazilian Trademark & Patent Office ("INPI") and with the Central Bank (through ROF), to allow: (i) the remittance of payments abroad; and (ii) the use of the amounts paid as deductible expense for income tax purposes.

On the other hand, the agreements of professional services provided by foreign companies which do not involve the above mentioned services are not subject to registration with the INPI and with the Central Bank. The remittances related to payments based in such contracts shall be converted by a commercial bank authorized to operate in the Exchange Market. To close the exchange transaction, the Brazilian client of the services shall submit to the commercial bank the services agreement executed between the parties, accompanied by translation to the national language, the corresponding commercial invoice and the evidence of payment of taxes assessed on such payments. It is important to emphasize that the commercial bank may also request the submission of any other documents deemed necessary to analyze the legality and economic grounds of the transaction.

9.10. Exchange control in the import and export transactions

9.10.1. Imports

The Central Bank constantly amends the regulations applicable to the imports of assets and equipment. Currently, the import transactions, financial and operational leasing of equipment, with payment terms exceeding 360 days are subject to registration with the Central Bank, under the ROF module.

Before the enactment of Law No. 11.371/2006, importers failing to pay their imports within 180 days counted as of the first day of the month subsequent to the due date of the imports, would be subject to a fine of 0,5% on the amount pending payment. Such Law cancelled the imposition of such fine, regarding imports with due dates as of August 04th, 2006 and those which, on the same date, were not due for over 180 days.

9.10.2. Exports

As a rule, the exports shall be done with exchange coverage (i.e., with the actual payment to the Brazilian exporter). The applicable legislation lists some exceptions, under which the exporter may perform exports free of charge as capital contribution and under the temporary export system.

However, Law No. 11.371/2006 introduced important flexibilization regarding the necessity of exchange coverage mentioned above, authorizing the Brazilian exporters to maintain abroad values received as payment for the products and services exported thereby. Such values shall only be used by the Brazilian exporter for investments, financial investments or payment of its own obligations, and cannot be used to make loans of whatever nature.

According to the amendments implemented by the CMN Resolution No. 3.548 enacted on March 12th, 2008, and related rules, the Brazilian exporters may maintain abroad the totality of the income of their exports (the limit established may be amended anytime by the CMN and, up to recently, was 30% of the amount of such income).

Such privilege also applies to the exports registered with SISCOMEX and services provided to persons residing aborad as of March 1st, 2007.

9.10.2.1. Statement on the Use of Foreign Currency Resources originated from the Receipt of Exports ("DEREX")

The destination of the resources maintained abroad by the Brazilian exporter shall be declared to the Federal Revenue by means of the statement instituted by the Ruling (Instrução Normativa)of the Federal Revenue No. 726, of February 28th, 2007. The exporters maintaining or using the resources abroad in disagreement with the applicable legislation, or which fail to inform the Federal Revenue about the existence of such resources, will be subject to a fine to be imposed by that entity.

DEREX, which program was approved by means of the SRF Ruling (Instrução Normativa) No. 737/2007, available in the Federal Revenue website is a statement to be submitted, annually, by the exporting individuals and legal entities to the Federal Revenue, within the term defined thereby, as per Ruling (Instrução Normativa)of the Federal Revenue No. 726/2007.

The term for submission of the DEREX expires in the last business day of the month of June, based in the resources maintained on abroad during the calendar year immediately preceding the year of the statement.

9.11. Declaration of assets maintained abroad

The individuals (Brazilian or expatriates equivalent to residents for tax purposes) or legal entities residing, domiciled or with headquarters in the Country shall prepare and submit to the Central Bank a list of amounts of whatever nature, assets in currency and assets held outside the national territory which, added, correspond to or exceed a given value, annually established by the Central Bank (which usually is US$100.000,00).

The following types of assets maintained abroad shall be informed to the Central Bank: (i) deposits in foreign bank accounts; (ii) loans; (iii) finance (export of assets and/or services); (iv) financial and commercial leasing; (v) direct investments; (vi) "portfolio investments"; (vii) investments in financial derivatives and (viii) other investments, including investments in real estate properties and other assets.

The declaration of assets abroad shall be prepared and submitted to the Central Bank annually, up to July 31st, in relation to the immediately preceding calendar year. The individuals and legal entities failing to submit the information requested or which submit false information will be subject to the penalties established by the Central Bank, which can include a fine of up to R$ 250,000.00.

9.12. Enrollment of individuals and foreign companies with the CPF and CNPJ

According to the Brazilian Federal Revenue Ruling (Instrução Normativa) No. 748, dated June 28th, 2007, the individuals and legal entities domiciled abroad, which have in Brazil assets and rights subject to public registration, are obliged to enroll with the CPF (Individual Taxpayers Registry) and CNPJ (General Taxpayers' Registry), respectively.

The procedure referring to the enrollment with the Individual Taxpayers Registry (CPF) will be performed through the Brazilian Federal Revenue, whilst the one related to the enrollment of foreign legal entities (CNPJ) will be done exclusively through the Electronic Information System of the Central Bank (SISBACEN).