Smith International Legal Consultants, P.A.

- Editor's Note: Olavo Bernardes, a Brazilian attorney studying for his LL.M. at the University of Miami, will be writing a series of articles on some of the basic concepts regarding investment in Brazil. The series will be rolling out in the coming weeks. It promises to be both practical and insightful. Enjoy!

With the world’s attention focused on Brazil, more people want to have a general idea of how to invest in the country. Through a series of articles we intend to enlighten on the general rules and difficulties to invest in the once called “sleeping giant.”

Brazil is a Federal Republic, comprised of 26 states and one federal district, Brasília. Unlike the United States, state rights are more limited and the numbers of topics states can legislate on are more reduced. However, as in the United States the Federal Government has the exclusive jurisdiction to legislate on “foreign exchange (VII); foreign and interstate trade (VIII); nationality, citizenship and naturalization (XIII) and emigration, immigration, entry, extradition and expulsion of foreigners” (XV). Article 22 of Federal Constitution – Constituição Federal – CF.

States on the other hand have so called concurrent jurisdiction to legislate, among others topics, on “tax, financial and economic law” (Article 24, I, Federal Constitution - CF). We shall analyze the tax structure of the country in future essays.

The Brazilian Constitution, although establishing free enterprise as the basis of its economic order (article 170, CF), has a strong social orientation, and in accordance with the dictates of social justice and to ensure a life of dignity to everyone, has the following principles: national sovereignty (I); private property (II); the social function of property (III); free competition (IV); consumer protection (V); and environmental protection (VI).

Those principles create the basis for a stronger interference by the state in matters such as expropriation for the improper use of land – i.g. the growth of illicit drugs –, and “disappropriation” for public use, i.g. for the purposes of agricultural reform or building a road. An important difference is that in expropriation there is no compensation, since the owner of the propriety acted criminally, while in disappropriation compensation is due. Also large projects normally require environmental licenses, products may be deemed harmful to consumers, etc. Finally given national sovereignty, foreigners may have limitation on certain investments, such as land located close to the borders or lands of a sizable amount. Another limitation is that foreign nationals and entities may not maintain a majority (more than 30%) or control broadcasting companies (article 222, Federal Constitution).

Article 172 of the Brazilian Federal Constitution states that “the law shall regulate, based on national interests, foreign capital investments, shall encourage reinvestments, and shall regulate the remittance of profits.” Extracting from these words, a foreign investment may be direct, meaning by the constitution of a type of society in the country, or indirect, by the purchase of stocks and bonds.

Although, Brazilian law does not discriminate between foreign and national capital, we shall see in future works that there has been a strong attempt by the government through different ministerial directives to contain merely speculative capital, the so called “hot money.”

Regarding reinvestment and remittance of profits, in general, currently there are no limitations to remittances of profits abroad. Therefore, a foreign branch duly established in the country wishing to send profits and gain abroad may do so, as long as it register its initial capital.

All foreign capital must be registered before the Brazilian Central Bank that issues a registration certificate reflecting the amount invested in foreign currency and the correspondent amount in national currency. This certificate is necessary for the reinvestment and repatriation of capital and for the registration of reinvestment of profits.

A foreign entity wishing to remit profits abroad may do so, without having to pay income tax, or leave a certain percentage in the country. There are no limitations in the current system for remittance of profits.

However, capital gains in the repatriation of capital are subject to pay corporate income tax of 15%. When the capital to be repatriated is larger than initially invested it shall be considered capital gain (Law nº 9.249, article 10).

Finally, it is worth mentioning that Law n° 4.131, of 1962 required the full equality between national and foreigner capital. There are registration requirements for the last, as we shall discuss in future articles.

To read the Brazil Federal Constitution (Constituição Federativa do Brasil) in English please access http://www.v-brazil.com/government/laws/constitution.html

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