Brazil Commercial Guide - Foreign Capital

1.1 Restrictions on Foreign Investment
1.2 Registration of Foreign Capital
1.3 Currency Investments
1.4 Investment by Conversion of Foreign Credits
1.5 Investment by Import of Goods without Exchange Cover

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1. - FOREIGN CAPITAL IN BRAZIL

Foreign capital in Brazil is governed by Laws Nos. 4131 (the Foreign Capital Law) and 4390 of September 3, 1962 and August 29, 1964, respectively. Both laws are regulated by Decree No. 55762 of February 17, 1965, and have been amended.

According to Law 4131/62, "foreign capital is considered to be any goods, machinery and equipment that enter Brazil with no initial disbursement of foreign exchange, and are intended for the production of goods and services, as well as any funds brought into the country to be used in economic activities, provided that they belong to individuals or legal entities resident or headquartered abroad."

There are two official exchange markets in Brazil, both of which are subject to Central Bank regulation, and operate at floating exchange rates:

(a) the free commercial/financial exchange rate market, which is reserved basically for (i)trade-related transactions (import and export); (ii) foreign currency investments in Brazil;(iii) foreign currency loans to residents in Brazil; and (iv) other transactions involving remittances abroad that are subject to preliminary approval from the Brazilian monetary authorities; and (b) the tourism exchange rate market, which was initially developed for the tourism industry, and was later expanded to cover certain other transactions. Applicable regulations indicate the types of transactions that qualify for this market.
While both markets operate at floating rates negotiated between the parties, the key distinction between them is that (i) the commercial/financial exchange market is restricted to transactions that in certain cases require preliminary approval from the Central Bank of Brazil; and (ii) the tourism exchange market is open to transactions that do not require such approval.

Exchange operations are effected by means of exchange contracts, and may be divided into transactions entailing the entry of foreign capital, and transactions entailing an outflow of foreign exchange.

Effective from February 1, 1999, the exchange positions on the free and floating exchange rate markets were unified for financial institutions, according to Central Bank Resolution No. 2588 of January 25, 1999. Resolution 2588/99 may be viewed as the first step taken by the Central Bank of Brazil towards unification of the free and floating exchange rate markets.

1.1 Restrictions on Foreign Investment

Participation of foreign capital in the following activities is prohibited:
• nuclear energy;
• health services;
• the ownership and management of newspapers, magazines and other publications, and of television and radio networks;
• the ownership of property in rural areas and of businesses abutting on international borders;
• post office and telegraph services;
• domestic airline concessions; and
• the aerospace industry.


There are still certain restrictions on participation of foreign capital in financial institutions, which can however be circumvented if in the national interest. Supplementary legislation must still be enacted to regulate this matter, including for insurance companies.

As a result of the constitutional reform mentioned below, Brazilian companies, even when controlled by aliens, can acquire, commercially exploit and lease rural land.

Effective from March 31, 2000, foreign investments in the domestic securities market are channeled through one single fixed or floating income investment vehicle, by which foreign funds brought into Brazil by a non-resident investor may be invested in securities and equities that were only available to resident investors until then.

The 1995 constitutional reform had the following main effects in relation to the economic sector:

(a) it eliminated the concept of a Brazilian company with domestic capital, and reestablished the traditional concept of a Brazilian company as a company that is organized pursuant to Brazilian law, and headquartered and managed in Brazil; (b) it allowed private telecommunications companies to commercially offer sound or sound/image broadcasting services either directly or through concession, authorization or licensing; (c) it eased the government monopoly, allowing
private capital to be contracted to prospect for, research, refine, trade or transport petroleum and explore gas pipelines; (d) the various Brazilian states were allowed to directly or via concession offer commercial piped gas services; and (e) constitutional restrictions on offshore companies' engaging in cabotage (coastal navigation) services were lifted. Ordinary law must now be enacted to regulate these various areas.


Brazilian companies may request and obtain a permit to operate in the mining sector, even when controlled by a foreign company.


Law 9074/95 provided that the Concessions Law (Law 8987/95) applies to the participation of private companies in the generation and transmission of electric power and commercial running of customs posts and terminals, highways and barriers.


1.2 Registration of Foreign Capital


Foreign capital should be registered with the Central Bank of Brazil, through the Electronic Registration System – Foreign Direct Investments (Registro Declaratório Eletrônico – Investimento Externo Direto – RDE-IED).

1 A Constitutional Amendment bill is under way at the Federal Senate to approve foreign ownership interests of up to 30% in the capital of newspapers and radio broadcasting companies (Constitutional Amendment Bill 455/97).

The registration of foreign capital is required when the commercial/financial exchange rate is to be used for the remittance of profits abroad, the repatriation of capital, and the registration of the reinvestments.


Investments will always be registered in the foreign currency in which they are actually made, or in Brazilian currency, when they originate from a non-resident account duly maintained in Brazil.


1.3 Currency Investments


No preliminary official authorization is required for investment in currency. The investment to subscribe for capital or to buy a stake in an existing Brazilian company will be remitted to Brazil through any banking establishment authorized to deal in foreign exchange. However, the closing of currency exchange is conditional on registration of the foreign investor-Brazilian investee code at RDE-IED.
Registration of the investments is carried out by way of statements made by the representative of the Brazilian investee and/or by the representative of the foreign investor, through RDE-IED, within thirty days after the respective event.


For foreign investments originated from a non-resident account duly maintained in Brazil, the respective registration will be made in Brazilian currency. Any changes in the investment status must be effected via the respective non-resident account, and registration of said investment must be updated at the RDE-IED.

1.4 Investment by Conversion of Foreign Credits

If the foreign credits to be converted into investments are duly registered at RDE, no preliminary from the Central Bank of Brazil is required. After receipt by the investee of the credit characteristics, and of a statement from the creditor consenting to the conversion, then a token exchange transaction must be performed, representing the purchase and sale of the foreign currency.
As for the credits not entered at RDE, a preliminary authorization from the Central Bank of Brazil is required for their conversion into investment.


1.5 Investment by Import of Goods without Exchange Cover


Investment by import of goods without exchange cover (to pay up corporate capital) does not require a preliminary approval from the Central Bank of Brazil.

The goods, machinery and equipment must be intended for production of goods or rendering of services. In the cases of both imports of used goods and imports backed by tax incentives, such goods must have no Brazilian counterpart. Second-hand goods must be used in projects fostering the economic development of Brazil.


Once the imported tangible goods have been cleared by customs, the Brazilian company has 90 days to make the respective investment registration at RDE-IED.
As for intangible goods, the respective foreign direct investment will be conditioned to the Central Bank preliminary approval.

1.6 Remittance of Profits and Treaties to Avoid Double Taxation

There are usually no restrictions on the distribution and remittance of profits abroad. Profits and dividends posted and distributed as from 1996 are exempt from income tax.

Brazil has signed double-taxation avoidance treaties with the following countries: Germany, Argentina, Austria, Belgium, Canada, China, South Korea, Denmark, Ecuador, Spain, the Philippines, Finland, France, the Netherlands, Hungary, India, Italy, Japan, Luxembourg, Norway, Portugal, the Czech Republic, Slovakia and Sweden.


1.7 Reinvestment of Profits


According to the Foreign Capital Law, reinvestments are profits "made by companies established in Brazil and assigned to persons or companies resident or domiciled abroad, which have been reinvested in the company that produced them or in another sector of the domestic economy."
Should the foreign investor decide to reinvest rather than remit profits, such profits are eligible for registration as foreign capital along with the original investment, through the RDE-IED system.


1.8 Repatriation

Foreign capital registered with the Central Bank may be repatriated to its country of origin at any time without authorization. Remittances in excess of the registered amount will be considered capital gains for the foreign investor, and are thus subject to 15% withholding income tax.

1.9 Remittances Abroad

Remittance of funds abroad in foreign currency using the commercial/financial exchange rate is restricted when such funds are not registered with the Central Bank, since the remittance of profits, repatriation of capital, and registration of reinvestment are all based on the amount of foreign investment registered.

The international transfer of funds in Brazilian currency between residents (including subsidiaries of foreign companies) and nonresidents, provided that the transactions are carried out through banks authorized to deal in foreign exchange in Brazil, is expressly free and does not require prior approval.

Local currency transferred abroad is converted into foreign currency through a number of mechanisms, one of them being interbank transactions on the tourism exchange market.
The remittance of foreign currency abroad for investment purposes (up to US$ 5 million per year) is entirely free. Transactions in excess of such value require preliminary approval from the Central Bank of Brazil. In any event, it is required that the remittances be made on the tourism exchange market, and carried out through banks authorized to deal in foreign exchange in Brazil.


1.10 Transfer Abroad of Investments in Brazil

The equity interest owned in a Brazilian company by a foreign investor may be sold abroad, with no tax implications in Brazil, irrespective of the price paid. The foreign purchaser will be entitled to register foreign capital in the same amount as the registration previously held by the selling company, regardless of the price paid for the investment abroad. In this case, the foreign purchaser—through its representative resident in Brazil—must enroll at RDE-IED and then enter its purchase. At the same time, the foreign seller must update its registration at the Central Bank of Brazil, also through RDE-IED, so as to account for cancellation of the values referring to the portion then disposed of. This registration is necessary for the new investor to remit/reinvest profits and to repatriate capital based on the commercial/financial exchange rate.

1.11 Offshore Loans

Pursuant to Central Bank Resolution No. 2770 of August 30, 2000, the financial conditions underling an offshore loan transaction between Brazilian-based and foreign-based persons must be submitted to and registered with the Central Bank within 10 business days after settlement of the respective currency exchange transaction. The Central Bank will review the respective application through FIRCE, and will then issue a certificate of registration for the corresponding transaction.


Such registration will enable the borrower to make remittances of loan principal and charges.
A certificate of registration issued by FIRCE is valid for up to 120 calendar days counted from each maturity date stated on the respective certificate. After such deadline, no payment may be made under such certificate, whether for closing of currency exchange transactions or for payment in Brazilian currency. The parties interested in making any payment after such period (or in changing the terms and conditions originally agreed on) must apply to FIRCE for revalidation of such certificate.


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