Publications

Category: Tax

Aiming at counteracting tax planning used by multinationals that take advantage of the heterogeneity of the international system to reduce their overall global tax burden, the Organization for Economic Co-operation and Development (OECD) and the Group of 20 (the so-called G-20, which includes the 19 largest economies in the world and the European Union) started in 2013 the Base Erosion and Profit Shifting (BEPS) Project. As a member of the G-20, Brazil participated in the discussions and implemented some of the measures envisaged, but it still needs to move ahead in specific areas that are crucial to ensure legal certainty for taxpayers operating in Brazil and alignment with international practices.

The current stage of implementation of the measures proposed by the BEPS Project was the topic of the 71st Congress of the International Fiscal Association (IFA), held in Rio de Janeiro at the end of August.

The actions to be developed as part of the BEPS Project are organized into three pillars: (i) introducing coherence into domestic rules dealing with cross-border activities that affect the definition of taxable basis; (ii) reinforcing substantive requirements for structures implemented to follow existing international standards; and (iii) improving transparency, certainty, and predictability of the international system, with due collaboration between tax authorities.

OECD member countries supported the project because they are the most affected by tax base erosion practices. In the case of Brazil, however, the main motivation to cooperate with the BEPS Project is transparency and international exchange of information, given its different investment profile, more focused on attracting foreign capital, not exportation.

In addition, since the mid-1990s, the federal government has implemented Specific Anti-Avoidance Rules (SAARs), which are considered by the Brazilian Federal Revenue Service (RFB) as enough to mitigate the effects of the international tax planning that motivated the BEPS Project. These rules have been implemented in Brazil through legislative changes since 1998, based on the OECD’s recommendations in the Harmful Tax Competition Report.

Examples of SAARs adopted by Brazil are: taxation on worldwide income, transfer pricing rules, a list of low-tax jurisdictions (black list) and privileged tax regimes (grey list), increased rate of income tax on payments to low-tax jurisdictions, limitation on the deductibility of such payments, and thin capitalization rules, among others.

In the context of actions aimed at promoting transparency and the international exchange of information, the RFB issued rules to implement the following measures: (i) Country-by-Country Declaration (RFB Normative Ruling No. 1681/16); (ii) exchange of information regarding rulings (RFB Normative Ruling No. 1,689/17); and (iii) mandatory declaration of the beneficial owner of Brazilian legal entities (RFB Normative Ruling No. 1.634/16). Also focusing on international transparency, two agreements regarding the automatic exchange of financial information were signed by Brazil: the Foreign Account Tax Compliance Act (FATCA) with the United States and the Common Reporting Standard (CRS), within the framework of the Global Forum on Transparency and Exchange of Information for Tax Purposes.

With the above measures, the RFB will receive a substantial amount of information on the international structure of Brazilian taxpayers, which will change tax inspection proceedings. From this, the need to introduce measures that seek to align Brazilian rules with international standards will become even more evident, in order to avoid having international information and concepts used in inspections merely for tax collection purposes.

With regard to the pillars of substance and coherence, Brazil has hardly evolved, which may make it difficult for it to join the OECD in order to attract foreign investment. Unlike the RFB, the National Congress did not follow the developments of the BEPS Project and the need to undertake legislative changes in tax matters aiming at coherence and legal certainty.

Refinement of the rules on taxation of worldwide income, on the legal definition of substantive criteria, and on the possible introduction of a general anti-avoidance rule (internationally known as GAAR) are examples of legislative changes necessary for legal certainty in international tax matters.

The success of the BEPS Project in Brazil and the acceptance of Brazil by the select group of OECD members do not depend only on the RFB's efforts with respect to transparency and effective cooperation between tax authorities. For investors and Brazilian taxpayers, the OECD petition highlights Brazil’s need for aligning with international taxation standards, which should occur through legislative changes preceded by a broad debate with the private sector, aiming at legal certainty and greater competitiveness of Brazilian companies in the global context.

Category: Labor and employment

The new Outsourcing Law (13,429/2017) allowed for the hiring of third parties for all types of services, including those related to a company’s core business activity,[i] but application of the law is raising questions. For example, does it apply to contracts in force and concluded in the past? Can the new law be applied in lawsuits discussing the legality or not of this type of outsourcing?

In August, Subsection 1 – the Panel Specialized in Individual Disputes (SDI-1) of the Superior Labor Court (TST) decided that the Outsourcing Law should not be applied to discussions regarding the legality of service contracts signed and terminated before the enactment of the new rules.

The TST understood that hiring workers through an intermediate company before the enactment of the new law should be considered illegal, thus establishing an employment relationship directly with the recipient of the services, according to the understanding embodied in Precedent No. 331 of the TST.[ii]

The reporting judge in that decision, Justice João Oreste Dalazen, understood that: "The entry into force of the new law, which has a profound impact on the consolidated case law of the TST, where it substantially altered the Temporary Worker Law, does not apply to employment relations governed and extinguished under the aegis of the old law, under penalty of affront to the acquired right of the employee to much more advantageous working conditions.”

The SDI-1's decision runs in a diametrically opposite direction from decisions rendered by lower courts. Recently, the judge of the 1st Labor Court of São Luiz (in the Brazilian State of Maranhão), in the record of Public Civil Action No. 0017582-53.2014.5.16.0001, understood that, with the advent of Law No. 13,429/2017, there is no longer any legal impediment to companies’ outsourcing their activities. The São Luiz labor judge based his decision on the grounds that, before the new law was in force, there was no legal rule to govern outsourcing. For that reason, the decisions rendered were based on Precedent No. 331 of the TST.

The judge of the 1st Labor Court of Uberlândia (in the Brazilian State of Minas Gerais) followed this same line of reasoning in Labor Claim No. 0011609-17.2015.5.03.0043, which applied the provisions of the Outsourcing Law on the argument that it governed in full the rules relating to outsourcing of services, and for this reason the provisions of Precedent No. 331 of the TST should not be applied any longer, including for cases prior to the advent of the new law.

Although the decision of the SDI-1 of the TST reveals a tendency of the court to settle the issue along these lines, the decisions issued by other judges and courts show that the debate is far from over, which still causes legal uncertainty for businesses.

Probably, the position on the subject will be consolidated and modulated by the Federal Supreme Court (STF), which has been receiving numerous questions about the constitutionality of the Outsourcing Law and of the TST's own Precedent No. 331. As an example, in the record of Action Against the Violation of a Constitutional Right (ADPF) No. 324, brought by the Brazilian Agribusiness Association (ABAG), many associations have joined as amici curiae, requesting that the STF modulate the effects of the application of the new Outsourcing Law in cases already in progress at the time of its enactment.

If the decision on ADPF No. 324 ultimately declares that Precedent No. 331 of the TST is unconstitutional, there is a good chance that the understanding regarding modulation of the new Outsourcing Law will be applied in cases that relate to events that occurred in the past.

For legal practitioners, there will be challenging work ahead for the new law to also be applied in cases initiated before the law regulated the matter.

Category: Environmental

The Environmental Company of the State of São Paulo (Companhia Ambiental do Estado de São Paulo or “Cetesb”) has already been demanding the payment of the charge for the issuance of technical advice on intervention plans for the reuse of contaminated areas. The charge starts at 750 São Paulo State Fiscal Units (UFESPs), which is currently equivalent to R$ 18,802.50. Such amount must be added to the result of a formula that involves the factor of complexity of the sources of pollution provided for in State Decree No. 8.468/1976, and the total area of ​​the undertaking.

For other requests for technical opinions, a charge of 70 UFESPs is set, which is currently equivalent to R$ 1,754.90. However, Cetesb has already submitted a proposal for revision of these amounts to the Governor of the State, which is still under review.

The new required amounts are the result of the modifications brought in by Board of Officers Decision No. 038/2017/C, published on February 10, 2017, which updated the procedures and guidelines for the management of contaminated areas within its competence. The new regulation repeals Board of Officers Decision No. 103/2007/C /E, published almost 10 years ago, but validated the actions related to the stages of management of contaminated areas that were still in force under the old regulation.

Adaptation of the procedures adopted by Cetesb had been expected since State Law No. 13,577/2009 and State Decree No. 59.263/2013 entered into force and currently govern the management of contaminated areas in the State.

Under the new regulation, Cetesb has transferred greater responsibility and autonomy to legal officers and consultants conducting the management of contaminated areas. In this sense, the technical opinions that were previously issued by the body for each new update in the process, which contemplated a detailed analysis of the procedures adopted, in addition to approvals and detailed recommendations, were replaced by simpler procedures of communication that were limited to the information of approval or disapproval of the measures presented. In case of non-approval, the response must be accompanied by a fine notice detailing all the non-compliances that led to the application of the penalty in order to allow the defendant to present an administrative defense or correct the non-compliances.

Requests for technical opinions became mandatory only at specific stages of the process, such as in the approval stage for an Intervention Plan for Reuse of Contaminated Areas or a Deactivation Plan.

Technical opinions may be requested by those responsible at other times in the process, however, in all cases, the request is subject to the payment of charges. In addition, as a result of the request for an opinion, if inconsistencies in the management of the contaminated area are identified, Cetesb's guideline is to fine the petitioner, which should also discourage the practice of consulting the body for each step of the procedure adopted, thereby incentivizing the hiring of additional consultants to give a second opinions on the technical measures taken. Cetesb’s board stated that it is in the process of publishing a technical instruction to regulate the administrative procedures for the application of administrative sanctions.

Board of Officers Decision No. 038/2017/C is divided into 3 annexes: (i) Procedure for the Protection of Soil and Groundwater Quality; (ii) Procedure for the Management of Contaminated Areas, which was already included in the previous board decision; and (iii) Guidelines for the Management of Contaminated Areas in the Scope of Environmental Licensing. The main aspects of each of these annexes are briefly explained below.

The first annex establishes that certain potentially polluting activities should implement a Preventive Monitoring Program for Soil and Groundwater Quality. This program must be submitted to Cetesb on the occasion of the application for the installation license or renewal of the operating license.

With regard to the second annex, Procedure for the Management of Contaminated Areas, that document brings in a series of modifications and a greater degree of detail when compared to the content of Board of Officers Decision No. 103/2007/C/E. According to Cetesb, this greater detail in the procedures should substantially reduce doubts on the part of technicians on how to conduct the processes of management of contaminated areas.

The Guidelines for the Management of Contaminated Areas in the Scope of Environmental Licensing (third annex) establish that the licensing of enterprises in suspected or potential areas of contamination should be preceded by a preliminary assessment and confirmatory investigation to be submitted to Cetesb. In turn, the concession of an installation license for expansion of activities located in areas with suspected or confirmed contamination is conditioned on compliance with the requirements established by Cetesb.

Also with regard to environmental licensing, the new board decision also established specific procedures for the management of contaminated areas in linear undertakings, such as highways, railroad transportation, pipelines in general, transmission lines, etc. In such cases, the environmental license applicant will be responsible for identifying and rehabilitating contaminated areas found in the course of the undertaking. Authorization for starting construction works and the issuance of the respective environmental licenses may be conditioned on meeting requirements determined by Cetesb.

In addition, in line with the changes promoted in the regulations related to contaminated areas, the State Secretariat for the Environment of São Paulo (SMA) has also issued two resolutions on the subject.

Resolution No. 10, of February 10, 2017, provides a list of potentially contaminating activities, which includes activities related to the chemical, textile, and oil sectors. Pursuant to Board of Officers Decision No. 038/2017/C, total or partial decommissioning and vacating of undertaking where these types of activities were carried out should be preceded by prior communication with Cetesb. In addition, conducting new activities in these areas should be preceded by a preliminary assessment and confirmatory investigation.

In turn, SMA Resolution No. 11, also of February 10, 2017, established the regions identified and delimited as a priority for the purpose of identifying contaminated areas. Currently, all four priority regions are located in the City of São Paulo. They are: Priority Region 1 - Barra Funda; Priority Region 2 - Mooca; Priority Region 3 - Chácara Santo Antônio; and Priority Region 4 - Jurubatuba. In these regions, active enterprises, if they are classified as potentially contaminating activities must carry out preliminary assessments and confirmatory investigations within 180 days from the notice by Cetesb. According to the Agency, this notice began in June through the call of 300 companies.

Category: Infrastructure and energy

The São Paulo State Government forwarded to the State Legislature Draft Bill No. 659/2017, which provides for the corporate reorganization of Companhia de Saneamento Básico de São Paulo – SABESP (São Paulo Basic Sanitation Company).

Sent on August 3, 2017, the bill provides authorization for the state government to organize, pursuant to Law No. 6,404/1976 (the Brazilian Corporation Law) and Law No. 13,303/2016 (State-Owned Company´s Law), a corporation (controlling company) for the purpose of joining basic sanitation assets with other assets whose exploration is related to its principal purpose, namely, to:

• exercise shareholding control of SABESP, pursuant to article 116 of the Brazilian Corporation Law;

• hold ownership, manage, and explore assets of any nature, seeking to extend the reach and efficiency of basic sanitation services in the State of São Paulo;

• structure and implement fundraising operations to strengthen its capacity to execute strategies and actions;

• assist, by any appropriate legal means, the State of São Paulo and other states in the implementation of public policies;

• explore other business opportunities, inside and outside the State of São Paulo, with support from SABESP;

• use legally appropriate contractual and corporate arrangements to fulfill its corporate purpose, including the creation of wholly-owned subsidiaries, formation of consortia, and participation in the capital of other public or private companies.

If approved, Draft Bill 659/2017 will allow the state government to perform two administrative acts whose validity is, in principle, subordinated to prior discipline by specific law.

The first of these administrative acts consists of transferring ownership of the shares issued by SABESP. Basically, the state government is authorized to pay its shareholding in the capital of the controlling company by transferring the shares (issued by SABESP) that it holds, subject to the specific procedures set forth in the Brazilian Corporation Law. Approval of the acquisition of control of SABESP by the controlling company, however, requires execution of a management contract, in accordance with article 37, paragraph 8, of the Brazilian Constitution.

Under the management contract, the controlling company, SABESP, and the state government, represented by the Ministry of Finance, together with the Department of Sanitation and Water Resources, will reciprocally assume basic obligations that ensure the controlled companies efficient performance, based on principles of corporate governance that favor pragmatic, rather than merely bureaucratic, controls. In addition, the controlled companies are allowed a greater degree of managerial autonomy in consideration for the establishment of performance targets and evaluation and control criteria.

The second of those administrative acts, of greater regulatory complexity, relates to the sale or encumbrance, whatever the appropriate legal form, of the shares of the controlling company, or of the respective subscription rights, as well as the implementation of a corporate or business reorganization through merger or take-over involving other state or private companies. These transactions are subordinated to the requirement that the state government maintain ownership of the majority of the common shares issued by the controlling company.

Under the draft law, therefore, other shareholders, including private companies and state-owned companies from other spheres of government, may participate in the controlling company in a minority stake. Considering these requirements, the by-laws should observe the conditions and corporate structure set forth in article 13 of the State Owned Company´s Law.

The procedure for the admission of shareholders into the ownership structure of the controlling company, according to article 5, paragraph 1, of Draft Bill 659/2017, may occur by any legally applicable means, including through subscription of a capital increase, debt conversion, acquisition of shares, or subscription rights owned by the state government. In addition, it will be preceded by an economic evaluation that considers the peculiarities of the contractual and corporate arrangement, especially liquidity constraints. The selection of shareholders will take into account personal characteristics of potential minority shareholders, especially those arising from their economic potential, their business reputation, and their management capacity or knowledge of the basic sanitation sector.

A question that will arise relates to the prior bidding process among those potential minority shareholders of the controlling company. On that subject, article 28, paragraphs 3 and 4 of the State Owned Company´s Law provides that the bidding procedure is not applied to state-owned enterprises (i) when they carry out direct marketing, delivery, or execution of products or works specifically related to their respective corporate purpose, (ii) when the choice of the partner is associated with its individual characteristics, linked to business opportunities (training, acquisition or sale of shares, and extinction of partnerships and other forms of associations, corporations, and contractual relationships, and operations carried out in the capital markets, subject to the regulations by the respective competent authority) defined and specific, when the impossibility of a competitive procedure is justified. In principle, therefore, private and state-owned companies from other spheres of government, when the above scenarios are demonstrated and justified, could execute directly, that is, regardless of a bidding procedure, legal transactions that are intended to be included in the controlling company's corporate structure.

This inclusion will tend to be linked to the provision of capital, incorporation of funds into the business of the controlling company and SABESP itself, as well as compliance with other conditions for admission into the company, which will be approved by the Board of Directors of the State Privatization Program established by State Law No. 9,361/1996. The procedural rules provided for therein shall be applied, where applicable.

In order to strengthen corporate governance, the participation of private shareholders, pursuant to article 2, paragraph 4, of Draft Bill 659/2017, may involve the assignment of special economic or voting rights, by means of provisions in the by-laws or execution of agreements among the shareholders within the controlling company or SABESP. These corporate instruments may not restrict the controlling shareholder's ability to guide the controlling company in the pursuit of the interests that justified its creation.

In summary, Draft Bill 659/2017 can be understood as an alternative to the privatization processes that are being tested at the federal level, especially in the Investment Partnerships Program (PPI), invariably based on models of privatization in the strict sense (sale of shareholding control), and long-term management contracts (concessions, sub-concessions, and public-private partnerships). The joint effort of the state government and SABESP in the quest for widespread public access, efficiency, and expansion of the quality of services has the chance to be tested by a corporate structure that positions minority shareholders at a greater distance from cash flow generation, at the level of state-enterprise holding company, which would represent a true novelty in the basic sanitation sector.

Category: Litigation

The 1973 Brazilian Code of Civil Procedure (“1973 CCP”) adopted as a general rule the service of process via mail, according to article 224, as amended by Law No. 8,710/93. This rule resulted from a change made in the previous system for communicating procedural acts, which provided for service of process through court official.

At the time of such change, the legislator was already concerned with the search for a more expeditious and effective form of procedure, considering that the service of process through a court official increased court costs, was slow, and gave way to abusive conduct on the part of the defendant.

However, on the grounds of guaranteeing greater certainty to the service of process procedure, the 1973 CCP expressly forbade the issuance of summons by mail in some scenarios set forth in article 222, including in collection suits (article 222, d). Thus, summons of debtors in collection suits founded on extrajudicially enforceable instruments could only happen through a court official, under penalty of nullity.

With the advent of the 2015 Brazilian Code of Civil Procedure (“2015 CCP”), this prohibition was excluded. According to article 247, service by mail will not be possible only in suits bought by the State; when the person to be served is incapable, an entity governed by public law, or resides in a place not reachable by regular mail; or when the plaintiff justifiably requests the summons in a different manner.

The absence of an express prohibition, however, was not sufficient to confirm the correctness of case-law authorizing service by mail in collection proceedings, insofar as paragraph 1 of article 889 of the 2015 CPP expressly refers to the writ of summons and to acts for attachment and appraisal of assets, which presuppose the participation of a court official at the time of service. This gives room for the understanding that article 889 provides for a specific type of service for collection suits, as an exception to the rule of article 247. In this regard, we cite the decision rendered by the Court of Appeals of São Paulo in interlocutory appeal No. 2175777-09.2016.8.26.0000.

More recently, the same court has held that service of process by mail is possible for collection suits, in view of the absence of a legal prohibition and because it is a measure aimed at protecting creditors. In addition, acts such as attachment and appraisal of assets can be performed at a later stage, after service (Interlocutory Appeal No. 2111105-55.2017.8.26.0000).

New restatement of law by the Federal Justice Council

The matter was the object of a deliberation by the First Working Committee on Civil Procedural Law, held by the Federal Justice Council on August 24 and 25, opportunity when it approved the Restatement of Law No. 85: "In collection suits grounded on extrajudicial or judicial instruments (article 515, Paragraph 1, of the CPC) summons by mail is acceptable.”

This solution to the issue seems to be the most suitable to the 2015 CPP, mainly because the new Code does not set forth an express prohibition on summons by mail in collection proceedings and values speed and efficiency in actions taken by the Judiciary. Effectiveness of judicial relief is guaranteed only when the winner receives everything to which it is entitled to under the law in the shortest possible time and at the lowest possible expense.

It is clear that summons by a court official, in addition to being more onerous on the party and the Judiciary, does not guarantee the desired speediness, especially when the opposing party resides in a different district. It is not uncommon to have delays of two weeks to one month for completing such acts as typing, sending, and completing a summons.

The modernization of the judicial procedural system also made the presence of a court official to cease a debtor’s asset unnecessary whereas online attachment is being widely used in collection proceedings. Electronic proceedings, in turn, allow for immediate knowledge of the entire content of the suit, without the need to explain to the debtor the consequences of not complying with the judicial order. In this sense, there is no obstacle to a full exercise of the defense rights by the defendant.

Organization in order not to miss deadlines

The new procedural rule, however, requires maximum attention to the receipt of judicial correspondence, especially by companies that receive a considerable volume of summonses and subpoenas for court proceedings at their headquarters and branches every day. Indeed, although many companies have established systems for receiving summonses and subpoenas by mail, this type of court correspondence is not immediately referred to the company’s legal department, even when measures relating to collection proceedings are urgently required.

As per article 829 of the 2015 CCP, debtors will be served and notified to pay the owned amounts within three days counted from the service. When this period has elapsed without payment, the debtor’s assets (financial, movable, non-movable) will be subject to attachment. In addition, a 50% reduction in the amount of the attorneys’ fees will only occur if this payment is made within such three-day period (article 827, Paragraph 1).

In this context, although the possibility of service by mail in collection proceedings is an improvement brought by the new Code aimed at ensuring the creditor’s payment , this change will require an even higher level of organization on the part of companies in receiving court correspondence in order to avoid asset attachments without them even being aware of the collection suit, and, in the cases where there is an intent to pay the debt, in order to secure that the companies do so within the legal timeframe that allows for the reduction of fees set forth in paragraph 1 of article 827 of the CPC.

Category: Infrastructure and energy

The recovery of the Brazilian economy necessarily requires resumption of industrial activities and investments in large infrastructure projects. It is not difficult to conclude that an essential condition for this goal is the agile and direct access to financial resources, both in the traditional debt markets, led mainly by the National Economic and Social Development Bank (Banco Nacional de Desenvolvimento Econômico e Social) (BNDES), and in the capital market, which was essentially marked by issuances of infrastructure debentures (a type of notes or bonds) (Law No. 12.431/2011) over the last years.

It is precisely in this context, in which credit suppliers should be able to rely on the full support of the legal system to receive assets in security and extend credit to business, that an old debate has once again gained the market’s attention and caused concern: to what extent is a fiduciary security interest (specially a fiduciary assignment of credit rights) in fact protected and excluded from the judicial administration regulation? Wasn’t the purpose of these security interests to provide the creditor with a quick and secure means of recovering on the debt, thereby avoiding disputes and competition with debtors’ other creditors? So why is the system for these security interests being relativized, creating uncertainties for the creditors who should benefit from it as a result?

These questions arise from recent judicial decisions in which, instead of recognizing to the fiduciary creditor the right to fully foreclose on the assets received as collateral, even when the debtor is under judicial administration (as per paragraph 3 of article 49 of Law No. 11,101/05), some courts (including higher courts) have imposed limits on these claims.

In the case of fiduciary assignments of credit rights, which have become one of the most important forms of security interest in infrastructure projects in Brazil, the theory is that an increasing number of credits fiduciarily assigned should not, at least in their entirety, be given in security to satisfy creditors if, at the time of enforcement and foreclosure, the debtor is under judicial administration. The concern underlying this view is that the success of the debtors’ judicial administration will only be ensured, aiming to continue business and favor the interests of all other beneficiaries (including non-adjusting creditors), if the debtor can directly manage its assets and revenues. The enhancement of the full enforcement and foreclosure proceedings of the fiduciary assignment of credit rights would create, therefore, obstacles for debtors’ successful judicial administration.

This dispute between the interests of fiduciary creditors, on the one hand, and entrepreneurs and their respective projects and business, on the other, is more evident in cases of fiduciary assignment of credits (in market jargon, "bank account lock-in"), but that raises similar concerns in any type of fiduciary security interest. After all, the clear majority of the infrastructure projects developed in Brazil have all their assets and rights granted in fiduciary security interest to creditors. It is not for other reason that the first studies carried out by the Ministry of Finance in proposing reforms to Law No. 11,101/05 were aimed at extending the restrictions on fiduciary security interests in cases of debtor’s judicial administration, while not excluding essential prerogatives (such as the special foreclosure proceedings and order of priority in relation to other creditors) that place creditors in a favorable position in the event of actual liquidation of the debtor’s assets.

The topic is particularly relevant if considered the current changes in the credit policies of financial institutions, such as BNDES and the Investment Fund of the Compensation for Time of Service Fund (FI-FGTS), which actively participated in the financing and expansion of infrastructure projects in recent years, whether through the granting of long-term incentive financing, in the case of the former, or through investments through shareholdings or debentures, in the case of the latter.

Particularly with respect to BNDES, two points deserve special mention. The first concerns the new operating rules of the bank, which reduced the limits of subsidized participation (TJLP - Tax on Long-term Interest) and instituted criteria and qualifiers for concession of credit that were no longer supported by a sectoral development logic, but rather by the benefits that the projects funded would bring to society.

The second point is related to the replacement of the TJLP interest rate (historically adopted by BNDES) with the TLP (Long-Term Rate), recently created by Provisional Presidential Decree No. 777/2017 and which tends to approximate the interest rates used by BNDES to those applied elsewhere in the market.

These measures not only reinforce the original institutional role of BNDES as an inducer of sustainable development and reduce its high level of indebtedness, but also tend to provide greater opportunities for commercial banks and other financial instruments, which will act as alternative sources of financing for infrastructure projects in Brazil.

However, reforms in BNDES’s credit policies may fail to generate the desired results if other financial institutions are uncomfortable with the legislative and judicial direction of the fiduciary security interest system. The lack of certainty as to the manner of foreclosure and, above all, as to the moment of satisfaction of the debt (whether before or after judicial administration) may increase the risks that the much-needed financing for the structuring of infrastructure projects is not extended to entrepreneurs up to its full potential.

On the other hand, it is unfair not to recognize that relevant infrastructure projects to the national economy also need mechanisms to be protected from financial volatilities in order to ensure the continuity of their operations when the difficulties are merely fleeting rather than structural. In this context, at least in matters of public services, there are legal provisions in force pursuant to which foreclosure on security interests cannot jeopardize the continuity of the service. Some courts have even interpreted this provision as limiting the fiduciary assignment or the pledge of receivables to 30% of debtor’s revenues, on the assumption that the debtor needs at least 70% of its revenues to meet operating and maintenance expenses.

Because of the market concerns, legislative reform initiatives (and, consequently, judicial interpretations arising therefrom) should strike a balance between full satisfaction of debts and recovery of companies in financial distress. Excessive favoring of just one side will certainly not be beneficial to any of them in the long run, in addition to weakening the legal environment that could support the Brazilian economic development.

The questions that remain at this point should not therefore be whether we must regulate the fiduciary security interest system in a more balanced manner, but rather how we can do so.