Publications

Category: Agribusiness

A new development in the judgment of two relevant lawsuits concerning the acquisition of rural properties by foreigners generated significant repercussions: the voting to decide about the entry of the OAB, through its Federal Council (CFOAB), in the Claim for Noncompliance with Fundamental Precept 342 (ADPF 342) and in the Original Civil Lawsuit 2,463  (ACO 2,463).

The cases refer to the same theme: the validity and constitutionality of paragraph 1 of article 1 of Law 5,709/71 (rule that regulates the acquisition and lease of rural properties by foreigners). This provision determines that, for the purpose of land acquisition by foreigners, the Brazilian company considered "controlled" by foreigners, whether by individuals or legal entities, will be subject to the same rules as a foreign legal entity.

The Brazilian Rural Society (SRB) proposed ADPF 342, arguing that the promulgation of the Federal Constitution (CF) of 1988 repealed article 1, paragraph 1, of Law 5,709/71 and, therefore, the interpretation of the Attorney General of the Union (AGU) expressed  in Opinion LA/01 –  currently in force – is erroneous and does not comply with a fundamental precept.

According to Opinion LA/01, by repealing article 171 of the CF, the Constitutional Amendment 6 of 1995 extinguished the unconstitutionality of Law 5,709/71. Thus, the equalization of Brazilian companies to foreign companies can be considered constitutional, as determined by this law (since article 171 of the CF considered as "Brazilian company the one constituted under Brazilian laws and that has its headquarters and administration in the country").

This opinion, endorsed by the Union and the National Institute of Colonization and Agrarian Reform (Incra), is still the object of ACO 2,463. The action was brought by these same authorities against the Internal Affairs of Justice of the State of São Paulo (Corregedoria-Geral de Justiça do Estado de São Paulo), which adopted in its rules regulating the performance of notaries and registration officers the understanding that Law 5,709/71 is repealed – there would be, therefore, no impediment for Brazilian companies controlled by foreigners to acquire or lease rural properties.

Because of the similarity in the controversies, these two actions are being jointly tried by the Brazilian Supreme Court.

In this context, on March 29 of this year, the CFOAB petitioned in the files of ADPF 342 and ACO 2,463 to request its entry as amicus curiae. It was argued that the matter is key for the defense of national sovereignty and the constitutional order and, therefore, the manifestation of the Council would be relevant.

In addition, because it is a sensitive issue with complex implications, the CFOAB also requested, on a preliminary basis, the suspension:

• of all court cases that have a dispute on the same subject as ACO 2,463 and ADPF 342; and
• of transactions that apply, in any form, paragraph 1 of article 1 of Law 5,709/1971.

Minister André Mendonça, in a monocratic decision published on April 26 of this year, had partially granted the injunction request made by the CFOAB. The minister determined that, until the final judgment of these processes by the STF, all actions involving the equalization to foreigners of Brazilian companies controlled by foreigners, individuals or legal entities, for the purpose of acquiring rural properties, would be suspended. In addition, it granted the CFOAB's request to join the case as amicus curiae.

The request for suspension of transactions was considered unnecessary and, therefore, rejected, pursuant to the decision of Minister André Mendonça, who partially accepted the CFOAB's requests.

This preliminary decision, however, was not endorsed by the plenary of the STF. In a vote that ended in a 5-5 tie, the plenary, bereft of Minister Ricardo Lewandowski, due to his retirement, chose not to endorse the decision of Minister André Mendonça.

The confirmation of the minister's decision depended on the approval of the absolute majority of the plenary, which did not occur. In view of the tie, under the terms of its bylaws, the Supreme Court could:

• suspend the trial until the arrival of a new minister to untie;
• have a tie-breaking vote by the casting vote of the president of the Supreme Court; or
• Apply article 146 of the Supreme Court Internal Bylaws and decide that, in case of a tie, the request will be denied.

The Court, following the trend of the most recent judgments, decided for the third alternative. As a result, the CFOAB's preliminary injunctions were denied.

Although this was the outcome, the CFOAB's requests did not address the merits of the lawsuits and, therefore, ACO 2,463 and ADPF 342 remain on the agenda for final judgment.

The monitoring of the trial of these two lawsuits is key to understand the directions of foreign investments in Brazilian rural properties. If a decision overturns the equalization of Brazilian companies to foreign ones, the process of acquisition of rural properties by foreigners in Brazil may be simplified.

Category: Succession planning

The slowness of the Judiciary and the bureaucratization of its procedures makes the search for the extrajudicial route an interesting alternative to resolve conflicts, especially in matters related to family and succession.

In order to use the extrajudicial route, however, it is necessary to comply with requirements. For probate proceedings, the Code of Civil Procedure of 2015 is categorical by providing, in its article 610, that: "If there is a will or interested party legally incapable, the judicial probate shall be carried out."

That is, the requirements determined by the legislation for the realization of probate through public deed are: absence of a will and absence of an legally incapable interested party.

Although the norm is clear, there is a tendency to relativize these impositions, superseding the autonomy of the will and the tendency of seeking alternative resolutions for conflicts.

For some time now, both laws and jurisprudence have been moving towards reducing bureaucracy in processes and procedures as a way to effectively hand over jurisdiction to the jurisdictional parties and allow the rapid resolution of certain issues.

The Superior Court of Justice (STJ) has already decided that it is possible to carry out extrajudicial probate and partition when the deceased has left a will, provided that all heirs are in agreement and are capable of performing acts of civil life.

There is also a mobilization to make the possibility of carrying out a more flexible probate, even if there are legally incapable heirs.

There are several decisions from São Paulo’s courts that authorized the drafting of a public deed for cases in which the heir is incapable as long as the division takes place in an ideal way, that is, with equal division of the assets among the heirs.^[1]

Acre’s Court of Justice has issued the Ordinance 5.914-12, of September 8, 2021, regarding the Court of Public Records, Orphans and Successions of the District of Rio Branco, which provides for the possibility of extrajudicial probate in case of incapable interested heirs, provided that the final draft is previously authorized by the court, in a simple and unbureaucratic procedure, with no costs.

In addition, in February 2023, Rio de Janeiro’s Code of Rules of the Corregedoria-Geral da Justiça  provided, in its chapter XII, section III, the regulation of probate through public deed, even when there is an incapable interested party and unequal division of assets, as long as subjected to prior judicial authorization, under issuance of a permit.

It is important to mention the recent understanding of the state of Santa Catarina, which, in February 2023,  began to authorize the carrying out of probate involving minors, provided that the division is ideal, according to Circular 51, of February 24, 2023, of the Corregedoria-Geral da Justiça do Estado de Santa Catarina.

Among the reasons presented for the flexibilization and possibility of carrying out probate with incapable heirs in the application submitted by the Notarial College of Brazil – Section of Santa Catarina (CNB-SC), is:

"The extrajudicial route has singular importance in the realization of this facet of access to justice. This scenario, unless better judged, should also contemplate the legally incapable people, who have an equal right to a multi-door, efficient, fast and safe justice. Depriving them of this possibility could be interpreted as an unjustified restriction of the possibilities to access and achieve their own rights."

The Brazilian Institute of Family Law (IBDFAM) sent a request for measures to the  National Council of Justice (CNJ) to regulate on a federal scale the extrajudicial performance of marital dissolution and probate proceedings, when there are incapable heirs and wills, provided that the act is consensual.

The institute reinforces the notion that, since the division is ideal, there is no harm in opting for the extrajudicial route.

It is concluded, therefore, that the corregedorias, judges and courts of Justice themselves are solely taking all the efforts to relativize the requirements and obstacles imposed by the legislation for the use of the extrajudicial route. To date, there is no federal law on the subject, and, consequently, there is a lack of uniformity in the application of the rules by the federative entities.

^[1] Examples: processes  1016082-28.2021.8.26.0625  and 0000691-27.2021.8.26.0374.

Category: Infrastructure and energy

The importance of priority projects in the Brazilian capital market has grown exponentially in recent years, as indicated by the data regarding the issuance of incentivized debentures.

According to the December 2022 Incentive Debentures Report (109th edition) published by the Brazilian Ministry of Finance, the volume of incentivized debentures (i.e., debentures entitled to the tax benefits of  Law 12,431/11) was approximately R$ 42.8 billion in 2022. During the same year, 249 authorizing ordinances were published by the Brazilian Government Ministries approving projects as priorities,^[1] a higher number than the authorizing ordinances of 2021 (236) and 2020 (179).

According to the Report, the incentivized debentures correspond to 28.9% of the total volume of debentures traded between the beginning of 2021 and the end of 2022. This demonstrates how crucial it is to raise funds through incentivized debentures in the Brazilian capital market.

Data from the March 2023 Capital Market Report published by the Brazilian Association of Financial and Capital Markets Entities (Anbima) shows that the total volume of debentures from the beginning of January to the end of March reached R$ 36.6 billion, through 74 issuances. Of this amount, about R$ 4.4 billion refers to the incentivized debentures, through nine issuances.

In this regard, the Decree 11,498/23 on incentive to priority projects –1 of the 13 measures of the federal government to boost the Brazilian economy – brings important changes to the infrastructure field and the capital market.

The new decree is relevant both for sectors that traditionally have projects considered priorities (such as logistics and transport, urban mobility, energy, telecommunications, broadcasting, basic sanitation and irrigation) and for new categories that it defines.

Decree 11,498/23 amends the Decree 8,874/16, which had regulated Law 12,431/11, and establishes the following measures:

• expands the list of sectors that may have investment projects considered priority projects and, consequently, eligible for the tax benefits of Law 12,431/11;
• establishes a new mechanism of maximum annual volume for the issuance of securities for priority projects, to be determined annually by the Ministry of Finance; and
• Determines that ministerial ordinances approving priority projects must inform the maximum amount that can be raised through the issuance of securities with tax benefits for the approved priority project.

Expansion of the list of sectors

Decree 11,498/23 increases the number of sectors that may have projects considered priority projects. The new sectors are:

• education;
• health;
• public safety and the prison system;
• urban parks and conservation areas;
• cultural and sports facilities; and
• social housing and urban requalification.

According to the Decree 11,498/23, projects developed in these sectors may be considered priority projects because they provide relevant environmental or social benefits.

In addition to this possibility, by the new decree, if projects of these new sectors and traditional sectors are carried out in subnormal agglomerations or isolated urban areas – as defined by the IBGE – they can also be considered projects that provide relevant environmental or social benefits.

In these two scenarios, the need for an ordinance of the competent ministry to approve the project as a priority and make it eligible for the tax incentives of Law 12,431/11 remains in force.

The expansion of the list of projects that provide environmental or social benefits is a fundamental step to give more clarity to this concept and increase the number of projects considered priority projects.

It is, therefore, a positive measure for the project submission process. When promoting environmental or social benefits already recognized by the Brazilian legal system, projects in the sectors mentioned above and/or projects located in subnormal agglomerations or isolated urban areas should be classified as priorities by the competent ministry.

In the case of projects in the new sectors, the amount that may be raised by the issuance of securities with tax incentives is limited to the capital expenditure calculated for the project, with the exception of financial expenses. Also in relation to projects in the new sectors, the benefits of Law 12,431/11 will apply to papers issued from the beginning of 2024.

Maximum annual volume raised by securities issues with tax benefits

Law 12,431/11 defines that priority projects will be granted tax incentives in the case of issuance of incentivized debentures or incentivized certificates. The incentives are:

• reduction to 0% of the Personal Income Tax rate; and
• reduction to 15% of the Corporate Income Tax rate.

There was no form of direct control over the total volume that could be captured through the issuance of securities with these tax incentives. Decree 11,498/23 establishes that the Ministry of Finance may define, by ministerial ordinance, the maximum annual volume that may be raised by issuing securities with tax incentives. The volume can even be broken down by sector.

Although there is still no ordinance published in this sense, by Decree 11,498/23, when the maximum annual volume of issuances is reached, securities with tax incentives in general or for certain sector(s) may no longer be issued until:

• the ordinance in question ceases to have effect – which would occur annually; or
• New ordinance expands the maximum annual volume of emissions for the year in question.

As Decree 11,498/23 is already in force, an ordinance of the Ministry of Finance stipulating the maximum annual volume of emissions with tax may be published still in 2023.

Maximum amount raised by the issuance of securities

As already explained, for a project to enjoy the tax benefits of Law 12,431/11, it is necessary that it be recognized and approved as a priority project through a ministerial ordinance. This must be done by the competent ministry in relation to a specific sector, after the company proposes the project to the ministry.

In addition to the requirements already mentioned, Decree 11,498/23 defines that the maximum amount to be raised by the issuance of securities with tax benefits must be defined in the ministerial ordinance that recognizes the project as a priority project.

This requirement is also already in force and should be followed by the next ministerial ordinances that analyze the possibility of projects being considered a priority project or not.

As it turned out, the changes are relevant and impact both the traditional sectors related to priority projects, by establishing new requirements, and the new sectors, which previously did not benefit from the incentives of Law 12,431/11.

Despite the changes, article 1 of Law 12,431/11 did not suffer any impact. Thus, incentives for foreign investments in the Brazilian capital market proposed by the law can still be used, including in infrastructure projects not covered by Decree 8,874/16 – despite the important sectoral expansion promoted by Decree 11,498/23.

^[1] The number of 249 authorizing ordinances encompasses all projects approved as priorities in 2022, including projects that issued and did not issue incentivized debentures.

Category: Competition

The Tribunal of the Administrative Council for Economic Defense (Cade) sanctioned, in April of this year and for the first time, a hub-and-spoke cartel for defrauding competition in public tenders and private sales in the market for distribution and resale of digital whiteboards. Fines were imposed on 18 companies and 20 individuals in the total amount of approximately R$ 7.9 million. There are at least three other hub-and-spoke cartel investigations ongoing at CADE.

Such antitrust violation consists of the indirect alignment of prices among competitors, facilitated by a common business partner that operates in a different but related market. Usually, the business partner is a supplier or distributor (hub) that has a supply contract with several resellers (spokes) that compete with each other.

It is a type of cartel with a façade of  a legitimate commercial relationship between vertically related agents, under which commercial decisions among competitors are made without a direct exchange of information between them.

In the case recently ruled by CADE, the practice occurred as follows: a reseller identified a potential client that would buy whiteboards and projectors and informed the distributor that it has mapped such client, along with the value above which the other resellers should submit coverage proposals to the same client. The distributor informed the other resellers, requesting the presentation of coverage proposals in the bidding of the mapped client. With such arrangement, which lasted for years, there seemed to be effective dispute when, in practice, prices were kept artificially high.

This practice has been the subject of concerns by competition authorities in several countries. For example, in Portugal the competition authority has issued, since December 2020, at least ten decisions condemning hub-and-spoke cartels in the retail distribution market for food products, with fines amounting to a total of more than 675 million euros (approximately R$ 3.7 billion).

In such precedents, the distributors fixed the resale price in supermarkets, reducing competition among their stores, through contacts established through a common supplier. With this, they stipulated prices to final consumers at artificially higher levels than in a free competition scenario.

To prevent and detect practices of this nature, it is important that companies address the issue in their competitive compliance training, highlighting risk situations for the specific activities of the company, both in the hub (instrumental partner) and in spoke (competitor) positions.

Category: M&A and private equity

The entry into force of CVM Resolution 175/22, the new regulatory framework applicable to investment funds in general, was scheduled to enter into force on April 3, 2023. However, the Securities and Exchange Commission of Brazil (CVM) extended the effective date to October 2 of this year, through the publication of CVM Resolution 181/23.

The purpose of the extension was to meet the demand from market participants for a longer adaptation schedule. The authority has also used the new resolution to correct clerical and formal errors and implement other drafting improvements in the standard.

The deadline for the adaptation of Credit Rights Investment Funds (FIDCs) that are in operation on the date the new regulation goes into effect has also been extended, from December 31 of this year to April 1, 2024. The deadline for the entire investment fund industry to adapt, however, continues to be December 31, 2024.

The change was relevant to allow the market to adapt to the new regulatory framework, which has generated doubts among participants in the fund industry.

In order to clarify them, Joint Circular Letter 1/2023/CVM/SIN/SSE was recently released, from two technical areas of the CVM, the Bureau of Supervision of Institutional Investors (SIN) and the Bureau of Supervision of Securitization (SSE). The document contains 84 answers to specific questions asked by market participants about the new regulatory framework. The answers are divided into 24 topics:

• Timeline of entry into force
• Classes and subclasses
• Calculation of net equity of the class
• Periodic reports
• CVM's website and systems
• Remuneration/Rebate/Charges/Financial Statements
• Adequacy of funds by unilateral act vs meeting
• Documents that must be kept at the service providers' site
• Engagement of service providers
• Distribution of units of a class on an open basis
• Valuation report required
• Establishment and registration of the fund
• Accounting records and financial statements
• Communication with shareholders
• Trading using improper privileged information (Insider trading)
• Supplement A: consent for acknowledgement and assumption of unlimited liability
• Distribution to the account and at the order - bookkeeping license
• Liquidity management
• Sending the administrator a copy of the document signed by the manager
• Financial statements for transfer of management
• General adaptations of other rules (Cofi and Res. CVM 21)
• Related-party voting at a meeting
• Social and environmental funds
• Investment by funds with limited liability

The initiative of the CVM's technical areas is salutary, as it helps market participants and essential service providers to adequately interpret the regulatory framework, which significantly impacts on the investment fund industry in Brazil. These guidelines contribute to bringing legal certainty and mitigating the regulatory risks involved in the sector’s adaptation process.

Category: Tax

The House of Representatives approved, on March 30, Executive Order 1,152/22, which amends the legislation of the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profits (CSLL) to provide for transfer pricing rules. The approval tally was 369 votes in favor of the final wording and 10 against.

In the Joint Committee's opinion delivered en banc by the rapporteur, Representative Da Vitória (PP-ES), 15 of the 107 amendments presented were approved, summarized below:

The matter will now go to the Federal Senate as a Conversion Bill.

We will continue to monitor its progress and will publish updates on developments.