Publications

Category: Real estate

Although not yet regulated in Brazil, the concept of multi-ownership, also known as time-sharing or fractional ownership, challenges the limitations of traditional property rights. By making it possible for several individuals to economically share the ownership of a single property, exercising their right in a specific period during the year, in an exclusive, cyclical, and perpetual manner, the multi-ownership gives dynamism to real estate developments, enables the maintenance of investments in the sector, and highlights the strength of the sharing economy as a global trend.

Four draft laws are currently under way in the Senate and Chambers of Deputies intended to govern multi-ownership. The most complete is Draft Law No. 54/2017, which relied on the collaboration of Secovi-SP and proposes to establish a specific legal regime for this system. It should be emphasized that the draft law does not change Article 1225 of the Civil Code in order to explicitly name multi-ownership in the list of the in rem rights existing under Brazilian law. The text assumes as a premise that the in rem nature is intrinsic to the multi-ownership, considering that it is a subset of property rights. This is also the understanding of the Superior Court of Justice, which, in a recent decision, recognized the in rem nature of the right of multi-owners.

Unlike traditional co-ownership, multi-ownership is the sharing of ownership over time. Each multi-owner exercises his right fully and exclusively, but limited to a predetermined and recurring period. The fraction of the property of each multi-owner is connected to his exclusive time and not only to the physical space of the property.

In this sense, Draft Law No. 54/2017 proposes to establish three subsets for organizing the fractions of time:(i) fixed, in which the quantity of days held by each multi-owner is determined and always in the same period of each year;(ii) floating, where the exact determination of the period of use will be periodic, but according to availability and reserve procedures; and(iii) mixed, in which part of the time will be fixed and part will be floating, given that in any case the period corresponding to each fraction of time will be at least seven days.

Considering that, according to the draft law, multi-ownership would require the formal institution of a condominium among multi-owners, the condominium bylaws would be the document to regulate the relationship between them, especially the criteria to define the dates of the calendar year that will correspond to the period of each property fraction – whatever the adopted subset is (fixed, floating, or mixed), and the conditions of use, maintenance, and liability related to the equipment and furnishings of the shared real estate.

Draft Law No. 54/2017 also reveals other differences between traditional ownership and multi-ownership, as it removes, as a general rule, the right of first refusal among multi-owners of the same real estate. This right will only exist in the acquisition of the fraction of time of the others, if it has been provided for in the document establishing multi-ownership or in the condominium bylaws. Another distinction made in the Draft Law is the limitation of choice in the use and enjoyment of the real estate by the multi-owners, since they are not allowed to make modifications to the equipment, furniture, and facilities.

In addition to the creation of the multi-ownership regime, the Draft Law provides for the amendment of the Public Registers Law so as to provide for the creation of an auxiliary form for the registration of multi-ownership real estate, which would include all information regarding the owners of each fraction and the rules established in the condominium bylaws for the alternation between use of the property.

Multi-ownership is already a reality in Brazil, especially in hotel and leisure real estate projects. However, in the absence of specific regulation, entrepreneurs use various legal structures, which, a priori, do not guarantee that the parties rights and obligations are compatible with the type of investment made, which creates legal uncertainty. Formally, what investors and consumers of this type of product purchase is a purely binding right, which is not enforceable against third parties.

If the purpose of real estate multi-ownership is the acquisition of a fraction of a real estate, even if related to time, it is imperative that the multi-owner be able to use, benefit from, enjoy, and dispose of that fraction and, therefore, benefit of all the attributes of an actual owner. Clarity about the nature of the relationships created on the basis of multi-ownership would relieve the entrepreneur, since it would make the obligations assumed by the multi-owners enforceable against third parties. As example of such obligations, responsibility for the payment of the urban property tax (IPTU) and condominium expenses in proportion to the fraction of the ownership of the real estate stands out.

It is undeniable that the system proposed by Draft Law No. 54/2017 will present practical challenges, especially regarding the adequacy of the registry system and the administration of real estate fractional ownership enterprises. This regulation proposal comes at an extremely convenient moment, in which the sharing economy gives new meaning to the relations of ownership and use of goods and services in general. In this context, legal certainty deriving from regulations can be a decisive factor in establishing this system as an alternative investment in the real estate market.

Category: Infrastructure and energy

The international green bonds market has been developing rapidly since the first issuances by the European Development Bank and the World Bank in 2007 and 2008, respectively. With these "green bonds", companies, investment banks, and governments raise funds to finance or refinance projects or assets with positive environmental or climatic impacts. The bonds issued may take the form of any debt securities, such as debentures, notes, and financial bills. The only difference relates to the allocation of funds.

According to the Climate Bonds Initiative, an international organization that promotes the bond market for investments in climate change solutions, green bond issuances totaled US$ 81 billion in 2016. For this year, the estimate is that they will total US$ 150 billion. Brazil already participates in this market. The first issuance of green bonds by a Brazilian company was done in 2015, when BRF raised 500 million euros. In the local market, the issuance of agribusiness receivables certificates backed by export credit notes issued by Suzano Papel e Celulose in November of 2016 is considered the first transaction. In May of this year, another milestone was the first issuance of green bonds by a Brazilian bank abroad, conducted by BNDES. The funds raised totaled US$ 1 billion, with a demand of US$ 5 billion.

The figures show Brazil's enormous potential for developing green projects and the green bond market. In 2017, some companies, especially in the renewable energy sector, have been preparing certified issuances such as green bonds and climate bonds. These developments are important both for the financial and capital markets and for the evolution of socio-environmental concepts adopted by Brazilian companies. They also create new opportunities for investors to participate in sustainable projects in Brazil.

Improvement of the market

One of the milestones in the evolution of the international market for green bonds was the publication in January of 2014 of the Green Bond Principles, general issuance guidelines (such as transparency and disclosure standards) prepared jointly by a group of financial institutions. One of the objectives of these recommendations is to ensure the actual investment of funds raised in green projects and adequate disclosure.

Because there is no specific regulatory authority (or even specific rules) for classifying an instrument as a green bond, the rules applicable to the issuance of such securities, including their classification, are defined by the issuers themselves. One of the main concerns of investors is, therefore, to confirm the socio-environmental characteristics of the projects and their “green” classification. To achieve this goal, independent companies are engaged to certify the project and monitor the deployment of the funds during the term of the transaction.

Issuers are not required to link funds to a single project. The corresponding risk for investors is to lose control over what they are financing and how much is allocated to each project. As a way of protecting themselves, investors require periodic disclosure with respect to the allocation of funds raised and the progress of projects.

In Brazil, important initiatives have been taken to develop the green bond market. In October of 2016, Febraban (Brazilian Federation of Banks) and CEBDS (Brazilian Business Council for Sustainable Development) published the Guide for the Issuance of Green Securities in Brazil, which provided recommended practices and procedures for Brazilian-issued green bonds.

In December of 2016, BNDES and the Climate Bonds Initiative announced a partnership to create the Sustainable Energy Fund, which will invest in debentures to finance projects in the energy sector, subject to certain sustainability requirements to be defined. In March of this year, BNDES selected Vinci Partners as the fund manager, which will have an equity of R$ 500 million and a term of 15 years.

Another action that is worth highlighting is the bill of law under analysis in the Senate to include projects aimed at sustainable development among the list of those projects considered priority under Law No. 12,431/2011. With this amendment to the text of the law, green projects would be recognized in advance by the competent public authorities as priority and sustainable, and debenture issuances to finance them would enjoy the tax benefits provided by that legislation.

The main challenges in the Brazilian market continues to be low liquidity and concentration of funds/resources in fixed income investments. It is expected that initiatives such as those sponsored by BNDES and the structuring of innovative transactions will lead to a more mature market and help unlock its untapped potential.

Category: Capital markets

It has almost been one year since the decision of the Brazilian Securities Commission (CVM) Board that authorized Inepar to proceed with a private capital increase through the capitalization of unsecured credits and with real state guarantees held against it, by means of an intermediary, the commission agent, as subscriber of the shares to be issued in the process.

The decision by the authority represented an important step forward in order to speed up and, in some cases, enable the restructuring of debts of publicly-held companies, thus allowing creditors to receive payment on debts in a simpler and faster manner.

In the case of Inepar, CVM’s authorization was granted in the context of the judicial recovery plan of the company approved on May 21, 2015. Considering the need to execute the measures deliberated on in the plan, the company consulted the CVM regarding the applicability of CVM Instruction No. 505, of September 27, 2011, as amended (ICVM 505), to capital increases carried out through a commission agent.

ICVM No. 505 establishes rules and procedures to be followed by institutions authorized to act as members of the distribution system, for their own account and/or that of third parties, in securities transactions in regulated markets. Its objective is to improve the systems of registered institutions to avoid registration failures that may create undesirable risks for transactions carried out on regulated securities markets.

The focus of the discussion was the exemption from compliance with article 22 of ICVM 505, which states that the intermediary shall identify the final client in all transactions that it executes or registers within 30 minutes after the registration of the deal. This is because one of the options for converting Inepar's credits, provided for in the plan, established that creditors who expressed timely interest in converting their credits into shares issued by Inepar for subsequent sale on a stock exchange would receive the amounts arising from such payment of the credits to which they are entitled. This whole process would happen through a commission agent, who would act on behalf of the creditors (orclients).

The archetype of the commission agent is supported by the Brazilian Civil Code (Law No. 10,406, of January 10, 2002, as amended), notably in articles 693 et ​​seq. Indirectly, this archetype is also supported by article 1, item III of ICVM 505, which defines clients as the natural person or legal entity, investment fund, investment club, or non-resident investor on behalf of whom transactions with securities are conducted."

The commission agent may be appointed by means of a commission contract concluded between the client and the commission agent, the purpose of which is the acquisition or sale, by the commission agent, on his own behalf, of assets to the account of the client. In Inepar’s capital increase, the express manifestation of acceptance of the option to convert the credits to which they are entitled and the nomination of the commission agent by the creditors is sufficient to characterize the creditors as clients and, therefore, to authorize, as the case may be, the conclusion of a commission contract on their behalf.

The decision by the judicial body was based on the opinion of the Superintendence of Market Relations and Intermediaries (SMI) of the CVM on July 6, 2016. For the technical area, the proposal to conduct the capital increase through a commission agent, as approved in the plan, would have advantages that would justify it, among them:

• allow expediency in the proceeding, especially for creditors who may not make regular investments in the securities market and would need to open accounts with a qualified institution for a single transaction;
• it is the only viable alternative for certain creditors who may, due to legal restrictions or other reasons, not be direct holders of shares issued by Inepar;
• solve a specific case (judicial recovery) in a practical manner that is supported by Brazilian legislation and does not contradict regulations; and
• provide alternatives to attend to the interests of different lenders and ensure the successful recovery of companies in financial difficulty.

In view of these advantages, we believe that the archetype of the commission agent as subscriber could be adopted also in cases of debt restructuring of companies that are not in judicial recovery. This is a consideration for future restructuring.

Category: Tax

Bitcoins have gained increasing prominence in the media. In March, the price of each unit surpassed the value of one ounce of gold for the first time. In addition, some online retailers have begun to accept bitcoin as a means of payment, which has also put the virtual currency in the media. Despite this growing popularity, however, bitcoin is still a mystery to many.

Because they function as a unit of exchange in a system that allows online payments to be sent without the intervention of a financial institution, mechanisms such as bitcoin are popularly called virtual currencies (or crypto-currencies). Currently, there are about six hundred of them in the world. Less well known than the bitcoin, the ether has also appreciated significantly in recent times.

These virtual currencies are decentralized, independent, and stored in electronic addresses created for this purpose, without any government regulations or central bank control. Users are anonymous, and there is no record of the source of payment.

In the case of the bitcoin, its production is carried out with the installation by the user (miner) of a software that solves complex equations and validates the information of third-party transactions with bitcoins (called blockchain). In this system, called mining, the user is remunerated with bitcoins.

The increased popularity of these mechanisms has led the market to begin discussing what they are in fact. Can they be qualified as currencies? Are they financial investments? Should they be reported to government authorities? How does taxation of them work?

There is great concern, mainly on the part of tax authorities, regarding the delimitation of the legal nature of virtual currencies and guidelines for their proper taxation.

• In the United States, the Internal Revenue Service (IRS) has stated that:
• Virtual currencies should be treated as property, not qualifying as foreign currency for tax purposes;
• The receipt of a payment in virtual currency should be submitted for taxation like any other payment made with assets; and
• Remuneration of the activity of virtual coin production (such as mining) qualifies as self-employment income and must be taxed accordingly. In addition, if the taxpayer sells or exchanges virtual currencies, there may be taxable capital gains.

In the European Union, the European Court of Justice has held that the exchange of bitcoins should receive the same tax treatment as the exchange of foreign currencies, which enhances the qualification of these mechanisms as cash equivalents. In this sense, UK and German tax authorities have recognized that virtual currencies are a form of private money and that their creators and users should be properly taxed.

As one can see, the attempt to fit virtual currencies into one or another type of asset is not uniform and is surrounded by doubts. In Brazil, the Questions and Answers on the Individual Income Tax Return (DIRPF), prepared by the Federal Revenue Service (RFB), seek to clarify how virtual currencies should be treated under Brazilian law.

The RFB equates virtual currencies with financial assets, establishing that the individual must report ownership as Other Goods, in the Property and Titles form of the DIRPF, thereby converting the value of the acquisition into Brazilian reais. When disposing of or exchanging for currency, any capital gains must be taxed at progressive rates of 15% to 22.5%, depending on the amount of the gain. However, the guidelines given by the RFB are less comprehensive than those of the IRS, as they do not address the tax treatment that should be applied to the currency mining scenario.

In the coming years, it is expected that study of the nature of virtual currencies will deepen. International institutions such as the Organization for Economic Co-operation and Development (OECD) and the Group of 20 (G-20) have pointed to the existence of virtual currencies as a point of attention. Analysis of digital currencies was assigned to Action 1 of the BEPS (Basic Erosion and Profit Shifting) Project, which addresses the challenges posed by the digital economy and the Financial Action Task Force (FATF), which sets global standards against money laundering and terrorist financing.

The International Monetary Fund (IMF), the World Trade Organization (WTO) and the Bank for International Settlements (BIS) have also published reports on virtual currencies. All of these studies are still preliminary and have not given governments guidance on how these currencies should be handled.

Despite the lack of convergence on the subject, it can be concluded that virtual currencies are a form of wealth, regardless of the qualification that they receive. Therefore, noncompliance with the declaration requirements for governmental and tax authorities may lead to tax, regulatory, or even criminal sanctions, depending on the specific case.

Category: Intellectual property

Normative Instruction No. 70/2017 of the INPI (National Institute of Industrial Property), which comes into force on July 1, should limit the agency's interference in the definition of the percentage of remittance of royalties abroad in technology transfer contracts.

The new regulation repeals Normative Instructions Nos. 16/2013 and 39/2015 and deals with the administrative procedure for registration of license agreements and assignment of industrial property rights and registration of technology transfer and franchise agreements.

The biggest change is in item XI of article 13. It establishes that the certificate of registration of technology contracts shall contain the following informational note: “The INPI did not examine the contract in light of tax legislation, taxation, and remittance of capital abroad."

Currently, even without legislation or a normative instruction by the INPI itself, the agency interferes in contractual issues that involve the payment of royalties. In order to register or enter into industrial license and technology transfer and franchise license agreements, the INPI limits the royalties that may be remitted abroad if such agreements are signed between companies with a corporate relationship in which the transferor of the technology or licensor of the trademarks or patents (among other industrial property rights registered with INPI) is headquartered abroad and the company receiving the technology or license is in Brazil.

In its analysis of the contracts, the INPI uses the tax legislation that deals with the limitation of the tax deductibility of royalties, Ministry of Finance Ordinance No. 436/58, to apply the same rule to the remittance of royalties abroad. The ordinance establishes maximum percentages for deduction of royalties as expenses. These percentages vary according to the type of industry and are set between 1 and 5% of the revenue of the company receiving the technology or industrial property rights license registered with the INPI (revenue obtained through the use of technology or rights).

Our understanding of the new regulations, and what has been stated by representatives of the INPI in events relating to publication of these regulations, is that, as of the entry into force of Normative Instruction No. 70/2017, the agency will no longer interfere in the percentage of royalties to be remitted abroad, leaving that issue to be dealt with only by the tax authorities.

On the other hand, Normative Instruction No. 70/2017 brings in a new requirement in article 10, item I, applicable to persons domiciled abroad, which represents an apparent obstacle: the appointment of a duly qualified attorney-in-fact domiciled in Brazil, "empowered to represent it in administrative and judicial spheres, including to receive service of process." That is, when the company that licenses industrial property rights or the owner of the technology is headquartered abroad, it must appoint an attorney-in-fact in Brazil for the contract to be registered by INPI.

It is worth noting that Normative Instruction No. 70/2017 does not deal with other requirements without legal provisions made by the INPI to register contracts, such as the need for effective and permanent transfer of technology not protected by industrial property rights or software rights, rather than a mere license and fixation of maximum terms for such contracts.

In the coming months, it will be possible to better understand the effects of the new regulation by observing the practices that the INPI comes adopt to comply with it. However, the agency's attempt to simplify and de-bureaucratize the registration of technology transfer contracts, and to reduce the degree of interference in private contracts subject to its registry oversight, is a welcome step forward.

Category: Tax

A specific point of the Special Tax Regularization Program (PERT), instituted by Provisional Presidential Decree No. 783, of May 31, 2017 ("MP"), has been questioned by some companies and will in many cases be essential in reaching a decision on whether to join the program. It is a reduction of the initiation fee from 20% to 7.5% offered in some situations.

As was the case in the installments that were established in Law No. 12,996/14 (Refis da Copa) and Provisional Presidential Decree No. 651/14, later converted into Law No. 13,043/14 (settlement of balance of active installment payments), the PERT conditions many of its benefits on the payment of a initiation fee (toll) in the amount of 20% of the amount of the consolidated debt, without reductions (a requirement that, in practice, can make joining the program financially unfeasible).

In some cases, for debtors with "total debt" equal to or less than R$ 15 million (without reductions), the MP assures a reduction in the initiation fee from 20% to 7.5%, per the terms of the first paragraphs of Articles 2 and 3. However, there are questions about exactly which debtors can use this lower initiation fee percentage.

We have noted at least four possible interpretations for the rule:

1. For debtors with general tax debts in an amount equal to or less than R$ 15 million: the amount will be ascertained based on the sum of the debts contained in the tax status report (current account) of individuals and legal entities.
2. For debtors with tax debts payable in an amount equal to or less than R$ 15 million: the amount will be ascertained based on the sum of the unsecured debts or debts with no suspended enforcement found in the tax status report (current account) of individuals and legal entities.
3. For debtors with tax debts consolidated in the PERT in an amount equal to or less than R$ 15 million: the amount will be ascertained based on the sum of the debts included in the installment program established by the MP.
4. For debtors with tax debts consolidated in the PERT modality in an amount equal to or less than R$ 15 million: the amount will be ascertained based on the sum of the debts included in the installment program modality established by the MP, that is, up to R$ 15 million for debts administered by the Brazilian Federal Revenue Service and up to R$ 15 million for debts administered by the Attorney-General of the National Treasury.

In the Explanatory Memorandum pertaining to the MP, it is indicated that the PERT grants differentiated treatment for taxpayers with debts of less than R$ 15 million, a fact that may lead to a more comprehensive interpretation with respect to these debts. However, it does not appear to us that the Explanatory Memorandum is sufficiently clear in this regard, in addition to its leaving doubts open, even in a broader interpretation, with respect to the computation of non-chargeable debts.

On the other hand, the internal structure of the wording of the first paragraphs of Articles 2 and 3 of the MP, a rule put for all intents and purposes, governs the subject by taking the “modalities" as a starting point, which ends up associating the notion of the total debt to these subsets of debts.

It is expected that the issue will be clarified when the PERT regulations are issued by the Brazilian Federal Revenue Service and by the Attorney-General of the National Treasury. These agencies must regulate the MP by June 30, 2017, without prejudice to any questioning as to its legality, if restrictions are established that were not provided for in the MP.

In our view, it is strongly recommended that those interested in joining the program simulate scenarios and conduct an in-depth analysis of their tax and financial situation in order to develop the best debt structure that should be regularized under the PERT.