Smith International Legal Consultants, P.A.

- Ed. Note: Continuing series from Olavo Bernardes.

In 2010 Brazil received 48.4 billion US dollars in direct foreign direct investment, placing the country in fifth place in terms of direct foreign investment, after the United States, China, Hong Kong and Belgium. That was a growth of 84.6% compared to the previous year, accordingly to a study by the United Nations Conference on Trade and Development ("UNCTAD").

A number of factors have contributed to this massive amount of investment. Some of those factors include the economic stability achieved, growth of the middle class, rating of Brazilian government bonds as “investment grade,” planning and construction of large infrastructure projects (largely due to the upcoming World Cup and Olympics). Also, the volume of remittances has never been higher, reaching US$ 18.768 billion according to statistics from the Brazilian Central Bank.

But what does “foreign capital” mean in the eyes of the Brazilian legal and regulatory regime? And how should foreign investors register their capital when investing in Brazil? Both of these questions are crucial to foreign investment in Brazil.

a) Definition of Foreign Capital

Law 4.131, from September 3, 1962, and its regulatory decree, Decree 55.762, from February 17, 1965, define as foreign capital, “the goods, machinery and equipment entering in the country, without an initial relocation of assets, destined to the production of assets and services, as well as financial or monetary resources entered to be applied to such activities, belonging to individuals or legal entities, residing or headquartered abroad.” These laws pre-date the 1988 Brazilian Constitution, which accepted the above definition.

As mentioned in a previous post, Article 172 of the Brazilian Federal Constitution states that “[t]he law shall regulate, based on national interests, foreign capital investments, shall encourage reinvestments and shall regulate the remittance of profits.” Article 5 of the Constitution further applies to foreign capital by guaranteeing particular rights. Article 5 established the principle of equality, providing equal protection and equal rights to all citizens and foreigners residing inside Brazilian territory; there is no discrimination between foreign and national capital, treating both equally.

This definition and guarantee of treatment is important. Especially concerning laws regarding taxation, any tax that treats foreign capital differently is per se unconstitutional because it violates principles of equal protection under the laws and equality of treatment.

b) Registration of Foreign Capital

All foreign capital in the form of foreign direct investment (investimento estrangeiro direto) must be registered before the Brazilian Central Bank. In order to regulate the capital that enters the country, Law 4.131 of 1962 attributed such function to the Credit and Currency Bureau (Superintendência da Moeda e do Crédito or "SUMOC") until March 31, 1965, when the then recently created Brazilian Central Bank (Banco Central do Brasil or "BACEN") took over such role. The BACEN issues a certificate of registration, reflecting the amount invested in foreign currency and its equivalent in national currency. Such certificate is necessary and obligatory for future remittances of profit abroad, repatriation of capital invested and registration of reinvestment of profits, as we shall see in future works.

Registration includes the following: a) foreign capital that enters the country under the form of direct investment or loans, whether in regular currency, or assets; b) remittance made abroad as capital gain, profits, dividends, interests, as well as royalties for the payment of technical assistance, or of any other title that implies transfer of profits abroad; c) reinvestment of foreign capital profits; e) changes in capital of monetary gain of companies proceeding of agreement with the legislation at stake; and the foreign capital and respective reinvestment of profits already existing in the country on September 27, 1962.

Registration is a simple procedure that can be done electronically using a BACEN registration program (Registro Declaratório Eletrônico or RDE). Given the nature of the registration, the person registering is legally responsible for any incorrect or incomplete information. Non-residents can register through representatives, which is normally the company receiving the foreign investment.

The registration of foreign capital must be in the currency of the country of origin, and when reinvesting the profits from the initial investment of foreign capital, the investor must carry out the same registration process. This registration must be in the Brazilian national currency and in the currency of the country to which it would be remitted. The reinvestment is subject to the exchange rates at the time of the registration of the reinvestment.

If the capital is represented by an asset, registration must use the price of the country of origin, and in the lack of satisfactory proof, according to values estimated based on market price by the recipient company.

c) Exchange rates and Additional Information

In terms of exchange rates (US Dollar-Real/Euro-Real),there are two authorized rates by the BACEN: the commercial/financial rate (câmbio comercial/financeiro) and the tourist rate (câmbio turistico). For foreign investments, the commercial rate normally applies.

Finally, it is important to observe that investments can be made in two ways, either by foreign exchange contracts or by international transfers in the Brazilian national currency (Transferências Internacionais em Moeda Nacional or "TIMN").

The registration process is a fairly easy process that foreign investors should not forget. Failure to register (or register incorrectly) foreign capital and reinvestment can lead to heavy fines and taxes assessed by the relevant agencies. In future posts, we will discuss the remittance and repatriation of foreign investment, equally important topics when investing in Brazil.

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