The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
Further liberalization – by both industrial and developing countries – is essential to solidify trade’s potential as a driving force for economic growth and development. With the advent of globalization, Brazil followed the – almost universal/global – trend of celebrating bilateral investment treaties, known as TBIs. During this period, Brazil was characterized, above all, as a leading recipient of foreign capital, having the highest record of foreign direct investment between the years 2009 and 2011.
During the following years, there was a slowdown in foreign direct investment in Brazil. However, the Brazilian economy strengthened, favoring the environment for the internationalization of Brazilian companies – especially in countries in South America, Africa and tax haven countries such as the Cayman Islands and Panama. There was a growing movement of direct investment abroad by Brazilian residents, recording financial flows of external assets by participation in capital and intercompany operations. As proof of this new wave of investments, the Central Bank of Brazil (BACEN) stated that the assets of Brazilian companies and individuals abroad reached USD 529.221 billion in 2019 and USD 558.387 billion in 2020. It is also worth mentioning that 80% of the total volume are direct investments in Brazilian companies that have subsidiaries abroad.
In the distribution of resources by invested sectors, financial services companies and ancillary activities should be highlighted, with USD 62.9 billion in oil and natural gas extraction activities, and USD 12 billion in direct Brazilian investment capital.
In line with global trends, Brazil’s deal activity reached a 10-year peak after a strong 2020. Transaction value totaled USD 66 billion in 2021, which is less than the value reached in 2010, but that was a banner year in which the concession of pre-salt to Petrobras and multiple consolidations in the telecom industry pushed the numbers sky-high. The total deal value in 2021 is considered a 10-year record, even if one considers Brazilian Real depreciation against the US dollar.
Despite the recent COVID-19 crisis, Brazil’s business environment is booming with foreign investors confident in the investment climate that the country has cultivated. This success is tied into specific stand-out industries in Brazilian infrastructure. In recent years, the Brazilian government introduced several reforms that have helped to decrease the cost of doing business in Brazil. These included the Sanitation Law, which ended restrictions on private sector investments for sanitary projects, as well as the New Highway Concession Program and Design, which has introduced a strengthened risk sharing and incentives framework for highway development projects specifically. With Brazil’s new legal framework for infrastructure and the creation of a more business-friendly environment, the expectation is that we will see increased M&A activity during the next few years.
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
In the last few years, Brazil has facilitated foreign direct investment. Brazil closed the year 2021 occupying the 7th highest position among countries that attracted the most Foreign Direct Investment (FDI), according to estimates assessed by the United Nations Conference on Trade and Development (UNCTAD). There were USD 58 billion in investments in the country, an increase of more than 100% compared to 2020, with an inflow of USD 28 billion – this shows that Brazil is still attractive for business.
According to BACEN, a direct investment is defined as such by its intention to remain for the long-term in the country and by its acquisition outside stock or over-the-counter markets. Foreign direct investment can be made through the opening or expansion of companies, mergers and acquisitions, reinvestment of profits made in operations abroad, among other means.
Investments of foreign capital in Brazil must be carried out formally, through the traditional banking system. Foreign capital may enter freely, with only minor exceptions and restrictions. All foreign investments must be registered through the Central Bank Information System.
Brazil has taken the lead in the area of investment facilitation, having established a single government institution – the office of the Direct Investments Ombudsman – to facilitate interactions between foreign investors and all other Brazilian government agencies. The Direct Investments Ombudsman (DIO) (see https://oid.economia.gov.br/en/menus/8) is a “single window” for foreign investors, provided by the Executive Secretariat of Chamber of Foreign Trade (CAMEX). It is responsible for receiving requests and inquiries about foreign investments, to be answered jointly with the public agency responsible for the matter (at the Federal, State and Municipal levels) as the case may be (the Focal Points Network). This new structure allows better and more efficient support for the investor.
Among the DIO’s competencies, the following stand out:
- to support and guide investors, recommending solutions to their grievances (Policy Advocacy); and
- to propose to public agencies possible improvements in the legislation or in their administrative procedures.
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
The investment of foreign capital is expressly prohibited in the participation of activities involving:
- nuclear energy (as established in Art. 21, inc. XXIII c/c Art. 177, V of the Brazilian Federal Constitution (CF/88) and Law No. 4.118/1962);
- postal and telegraph services (as established in Art. 21, inc. X, of CF/88 and Law No. 6.538/1978);
- the disposition, concession, or transfer of Union properties to any foreign corporate entity or individual, located on its boundary zone, within 100 meters extending from the coastline or inside a circumference of 1,320 meters of ray around fortifications and military constructions, except when previously authorized by the Brazilian President, pursuant articles 205 and 100 of the Law No. 9.760/1946; and
- newspaper companies, sound broadcasting companies, or sound and image broadcasting companies, which shall be owned exclusively by native Brazilians or those naturalized for more than 10 years, or by legal entities incorporated under Brazilian laws and headquartered in Brazil (pursuant to article 222 of the CF/88).
Alongside those strict regulations, it is worth mentioning there are also restrictions in place for:
- the acquisition of rural land by a foreign individual who does not have regular permission to stay in Brazil and restrictions on the acquisition of rural land by Brazilian companies controlled by foreigners, by a foreigner resident in the country or by a foreign legal entity authorized to operate in Brazil, as they are subject to conditions provided for by law and, in some cases, authorization by the Brazilian Congress (Law No. 5709/1971 and Regulatory Decree No. 74965/1974); and
- the participation of foreign capital in financial institutions, although such restrictions may be waived in the national interest (provision of article 52, items I and II, Act of Transitory Constitutional Provisions (ADCT)).
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
In 2023, significant risks remain in this highly uncertain environment. The global economic backdrop further weighed on Brazil’s recovery, including inflation and rising indexation policy rates – both in Brazil and worldwide – and supply bottlenecks related to the ongoing war in Ukraine are causing commodities prices to soar and thus further reinforcing the inflation pressures.
In Brazil, the inflow of foreign capital decreased by 35.4%, which in absolute terms represents an approximate drop of USD 24 billion in foreign investments, becoming the worst scenario of the last 12 years. It was also observed that even Brazilian companies headquartered abroad lost space, as they began to repatriate resources from their subsidiaries abroad.
As a reversal of this scenario, the federal government issued the Provisional Measure No. 1137/2022, which brought relevant changes to the Brazilian investment scenario, reducing to zero the withholding tax (WHT) levied as of 1 January 2023 on certain income earned by non-resident investors in the Brazilian financial and capital markets.
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
Before the due diligence process begins, it is advisable to have a plan of action in place for the transaction in terms of tax. In Brazil, acquisitions of assets usually burdens sellers with income tax (Imposto de Renda) on the capital gain, understood as the positive difference between the sale value and its previous acquisition cost.
The (legal) due diligence is a must/mandatory to identify business risks and quantify liabilities that may impact on the acquisition price. The most common matters to be investigated in Brazil are labor, tax, compliance, anti-corruption, environmental and civil lawsuits and their impacts must be correctly addressed in the transaction agreements.
Depending on the transaction, an authorization from the Administrative Council for Economic Defense (CADE) might be necessary. In case the transaction involves a regulated activity, authorization may be required from other agencies such as the National Agency of Petroleum, Natural Gas and Biofuels (ANP) and National Electric Energy Agency (ANEEL) among others.
It is also worth pointing out that foreign direct investments in Brazil must be registered, as above mentioned, through the Electronic Declaratory Registration System, in the Foreign Direct Investment Module (RDE-IED), regulated by BACEN. These investments are also subject to the National Monetary Council (CMN) and by the Securities Exchange Commission (CVM) monitoring.
Brazilian companies with foreign investments are subject to periodic obligations before BACEN. As of this year, Brazilian companies receiving foreign investments whose net worth or assets are equal to or greater than BRL 250 million, must prepare an Economic-Financial Statement (DEF) on a quarterly basis.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
Brazilian legislation imposes certain limitations/restrictions on the acquisition of real estate by foreigners. Foreigners must observe the procedures and restrictions regarding the location and extension of the property.
In Brazil, the general rule regarding urban real estate is that there is no restriction on the acquisition of property in any capacity (purchase, donation or inheritance) by a foreigner, whether or not they reside in Brazil. The exception applies to property belonging to the Union, in the cases of the disposition, concession, or transfer of Union properties to any foreign corporate entity or individual, located on its boundary zone, within 100 meters extending from the coastline or inside a circumference of 1,320 meters of ray around fortifications and military constructions, except when previously authorized by the Brazilian President, pursuant to articles 205 and 100 of the Law No. 9.760/1946.
With respect to rural properties, certain restrictions may be applicable. For foreign individuals who do not have regular permission to stay in Brazil, rural property cannot be purchased under any circumstances. However, Law No. 5,709/71 provides an exception for the acquisition of property by foreign legal entities when they have authorization to operate in Brazil. According to Article 5 of such Law, they may only acquire properties that are intended for the implementation of agricultural, livestock, industrial, or colonization projects linked to their objectives, and these must be approved by the Ministry of Agriculture. And, in the case of implementation of an industrial project, the Ministry of Industry and Development will be consulted.
In addition, it should be noted that there is a specific limitation regarding the area that can be acquired by a foreign legal entity, in addition to the prohibitions relating to individuals, given that the sum of rural areas acquired by the legal entity cannot exceed 25% of the surface of the municipalities where they are located.
Finally, besides limitations indicated above, if a foreign investor decides to acquire a property or tangible assets in Brazil, they will be also required to register the foreign investment before the RDE-IED system, as mentioned above.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
The exchange of data and the fundamental rights inherent to privacy are protected in Brazil by Law No. 13709/2018 (LGPD), which sets forth rules for the processing of personal data, including in digital media, by natural persons or legal entities governed by public or private law, in order to protect the fundamental rights of freedom and privacy and the free personality development of the natural person.
The protected data covers not only Brazilians’ but also foreigners’ information in Brazil at the time of collection. The data are processed within the national territory, regardless of the means applied, the operator’s headquarter country or the country where the data is located or if the data is used to provide goods or services. Therefore, there is no challenge for foreign investors in the face of the LGPD. On the contrary, with the advent of this legislation, it is an undisputed fact that the protection of the fundamental rights of freedom and privacy of foreign investors has been guaranteed.
However, it is important to highlight that the LGPD does not apply to data outside Brazil and data which are not subject to international transfer, nor will it apply exclusively for public security purposes, of national defense, state security, investigation and prosecution of criminal offences and private individuals (that is, the law only applies to individuals or legal entities that manage bases for so-called economic purposes).
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
The most common corporate structures used by foreign investors are:
- Sociedade Anônima (corporation). Regulated by Federal Law No. 6,404/76 (Lei das SAs). The Brazilian corporation is the form that most closely resembles US subchapter C corps, and are classified according to capital management: publicly or privately held. Corporations are allowed to issue different classes of shares, such as voting and non-voting shares. The shareholders liability is limited to the payment of the shares to which the shareholders have subscribed.
- Limited Liability Company. Share capital is divided into quotas. The main characteristic of this structure is the limitation of the responsibility of each quotaholder: as per the article 1.052 of the Brazilian Civil Code, the responsibility of each quotaholder is limited to the amount of their quota, however all quotaholders are solidary liable for the payment of the corporate capital.
- A Specific Purpose Company (SCP). The SCP has a determined purpose and the duration of the company will be for the period necessary for fulfilling such purpose. Therefore the SCP limits the risk of loss of capital to a certain project/activity and can be either a Limited Liability Company or a Sociedade Anônima.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
In Brazil, the agribusiness, automotive, electronics manufacturing, technology and information and financial services sectors were responsible for attracting and consequently increasing total Foreign Direct Investment (FDI), according to the “World Investment Report 2022”, but the highlight in relation to receptivity has been in relation to investments in renewable energy. Despite the fact that greenfield projects remain in decline worldwide, Brazil continues to attract foreign investment in this sector.
The infrastructure sector is also an important sector to highlight. The private sector investments in infrastructure in Brazil have increased sharply in recent years, due to regulatory changes at the Federal and State levels and there are several auctions that have been held or implemented.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
Brazil still does not have a specific regulation on the subject. However, it should be noted that in 2015 Brazil signed six Investment Cooperation and Favoring Agreements (ACFIs) to guarantee the protection of foreign investors in Brazil and Brazilians abroad.
It so happens that such agreements lack regulation in some points, which include remedying the absence of a rule on fair and equitable treatment, the application of the most favored nation clause only for benefits unilaterally offered by a party to a third State, and mainly, remedying the absence of an international system of dispute settlement between investor and State.
Thus, in view of the self-execution of the agreements, foreign investors may make use of the material provisions to support claims made in Brazil, but there is no doubt that there are legal gaps for the protection of foreign investors, which are still subject to political and legal uncertainties, dependent on diplomatic protection.