Publications

Category: Institutional

In view of diverse legislative and regulatory changes published by governments in response to the COVID-19 crisis, we have teamed up with 11 law firms in Latin America and the Iberian Peninsula to prepare a table summing up the relevant changes that have occurred in Brazil, Spain, Portugal, Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela.

You can access the result of the work clicking here.

In addition to Machado Meyer, the participating law firms are: Aguilar Castillo Love (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panamá), BKM | Berkemeyer (Paraguay), Brigard Urrutia (Colombia), Cariola Díez Pérez-Cotapos (Chile), Ferrere Abogados (Bolivia), Guyer & Regules (Uruguay), Nicholson y Cano Abogados (Argentina), Quevedo & Ponce (Ecuador), Rodrigo, Elías & Medrano (Peru), Santamarina + Steta (Mexico), Torres Plaz y Araujo Abogados (Venezuela).

Category: Infrastructure and energy

Alberto Faro and Felipe Baracat

Policies implemented by the federal government since 2016 have redesigned the role of the state in the infrastructure sector, focusing on private initiative as the main agent promoting the expansion of Brazilian infrastructure, both in the implementation and operation of these projects and in their financing.

In this context, the so-called infrastructure debentures or incentivized debentures, which enjoy the tax benefits created by Law No. 12,431/11, have played an important role in promoting the participation of private investments in the financing of the sector. They may be issued to finance projects that are part of the Investment Partnership Program (IPP) or that have been prioritized by the relevant ministries.

Since 2012, the average share of the capital market in the financing of the sector has not exceeded 10%, and it was only from mid 2016 that infrastructure debentures began to gain strength. According to information released by the Economic Policy Bureau of the Ministry of Economy, the issuance of infrastructure debentures reached R$ 23.9 billion in 2018, compared to only R$ 9.1 billion in 2017 and R$ 4.4 billion in 2016. In 2019, the total value of issues reached R$ 34 billion, an increase of 56% in relation to 2018; there were 98 issues, compared to 76 in 2018, with an average value of R$ 350 million.

Already consolidated as an important financing instrument in several other segments of the energy sector, incentivized debentures took time to advance in the case of the biofuels sector, largely because of the instabilities observed in the sugar energy industry in recent years. With the gradual resumption of new investments starting in 2016, however, and given the evolution of macroeconomic conditions since then, these instruments have become an attractive alternative for raising funds by players in the sector.

In this context, the Ministry of Mines and Energy (MME) updated the rules for approval of projects as priorities in the biofuels sector by issuing Ordinance No. 252/19, later amended by Ordinance No. 348/19. In addition to adjusting the regulations to reflect some updates introduced in Law No. 12,431/11 and Decree No. 8,874/16, the ministry also allowed projects aimed at implementing, expanding, maintaining, recovering, adapting, or modernizing the production and storage of biofuels and biomass to be classified as priorities for all purposes of Law No. 12,431/11.

The inclusion of a reference to biomass production and storage in the list of activities that may receive funds raised through incentivized debentures was particularly relevant in the case of the biofuels sector, allowing financing not only for the industrial stages of its production chain, but also production of the corresponding biomass. Another relevant changes concerns the possibility of classification of projects in which the production of biofuels is carried out at the same time as other non-energy products (such as sugar). In such cases, in order to define the amount eligible to raise funds through incentivized debentures, the proportion of biofuel production in relation to the total capacity of the project may be factored in, based on the industrial factors typical of that activity, according to technical parameters published by the Ministry of Agriculture, Livestock, and Supply.

Since then, the MME has already approved as priorities for the issuance of infrastructure debentures six projects in the biofuels sector, which include activities such as soil preparation, planting, sugarcane treatment, soil renewal, and loading and transportation of inputs, in addition to the implementation, maintenance, and expansion of industrial plants dedicated to the production of biofuels. Investments total R$ 9 billion in the sector.

Of the six projects in progress, we serve as legal counsel in three of them, which together exceed R$ 4 billion in expected funding in the capital markets. In this work, we support the issuing companies from the definition of the scope of the projects and their classification as priorities, including during the processing of the application at the MME, to the structuring of the financing transaction, including preparation, negotiation, and formalization of all documentation necessary for the issuance of the debentures.

In general, the documentation required for the classification is relatively simple, and the ministry has responded quickly. The team at the Bureau of Petroleum, Gas, and Biofuels, the body at the MME responsible for approving the classification of projects as priorities in the biofuels sector, has closely monitored these processes, standing out for its good relationship and technical cooperation with the market.

It appears that the new MME regulations represented an important step towards diversifying the sources of financing available for the biofuels sector. It is possible to observe a relevant growth in debenture issuances in the sector since September of 2019.

In addition to this change, there are other initiatives of the ministry on the radar, also directed at the biofuels sector and in the context of the National Biofuels Policy (RenovaBIO), such as the creation of a new financial security issued from the sale of biofuels, the Carbonization Credit (CBIO), which is already being traded on the B3.

Although this movement of sectoral innovations has been temporarily slowed down by the current pandemic, it is certain that the latest changes introduced by the MME for approval of projects as priorities, together with the other novelties, may reconfigure the sector's financing dynamics as soon as the uncertainties resulting from the current crisis are reduced.

Category: Real estate

Roberta Danelon Leonhardt, Ivana Coelho Bomfim, Juan Danniel Torres Y. R. Braga, and Mariana Rodrigues da Silva

In expropriation actions brought by the public authorities for the expropriation of rural properties that have vegetation coverage areas, the amount of fair compensation for expropriation of the environmentally protected area is still subject to questions by the public authorities.

The payment of prior, fair, and cash compensation to the owner or possessor of the property expropriated is a condition for effective expropriation of the property, as established in article 32 of Decree-Law No. 3,365/41 (or the Expropriation Law). Nevertheless, in expropriations of rural properties doubts arise regarding the inclusion of some areas of vegetation coverage in the calculation of compensation for expropriation. Should compensation be calculated based only on the value of the bare land, or should the area of vegetation coverage also be appraised, considering the environmental restrictions that fall on it and that prevent its economic use?

Regarding expropriations for agrarian reform purposes, Law 8,269/93, in its article. 12, exhaustively establishes, when dealing with compensation for expropriation for land reform purposes, that one considers “fair compensation that reflects the current market price of the property in its entirety, including the land and natural access, forests, and woods" and, in its paragraph 2, provides that "natural forests, native forests, and any other type of natural vegetation are included in the price of the land [...]." Therefore, it would be possible to assume that vegetation, forests, and woodlands are susceptible to market economic valuation for the purpose of calculating the compensation due in the expropriation of rural properties for agrarian reform.

However, the Superior Court of Justice (STJ) and the Federal Supreme Court (STF) has expressed diverging opinions regarding compensation for areas of vegetation coverage where there are permanent preservation areas (PPAs). APPs are protected spaces, whether or not covered by native vegetation, with the environmental function of preserving water resources, landscape, geological stability, and biodiversity, facilitating the gene flow of fauna and flora, protecting the soil, and ensuring the well-being of human populations, such as river banks and hilltops.

It is important to emphasize that APPs are covered by a special protection arrangement, provided for in Chapter II, Section II, of the Forest Code (Federal Law No. 12,651/2012). For example, the vegetation in an APA should be maintained by the owner, possessor, or occupier of the area on any account, be it an individual or legal entity, public or private. The intervention or suppression of native vegetation in the area is allowed only in cases of public utility, social interest, or low environmental impact, as provided for in environmental laws and regulations.

The STJ has already decided that the amount of the compensation is decided after a technical expert examination that should appraise the property and its economic exploitation potential, so that the amount to be paid does not cause financial loss to the expropriated party, provided that the exploitation is prior and lawful (REsp 1.298.315 and REsp 443.669) and the values of the compensation relevant to the bare land, improvements, forest cover, and commercial exploitation of the property are appraised. However, when assessing the compensation for land coverage classified as an APA, in REsp 1.732,757 - RO (2018/0009937-9), the Court took a position against the compensation of the vegetation coverage component of the APP, on the argument that "it is not possible to compensate, separately, the area of permanent preservation where it is not possible to have economic exploitation of the plant source by the expropriated party.” The STJ believes that the compensation in such cases should be limited to the bare land.

In turn, the STF, in an en banc session held on December 14, 2011, when deciding on the inclusion of areas of permanent preservation and legal reserve in the calculation of areas expropriated for characterization of the property as unproductive latifundium (without entering into the debate on the price of the compensation), settled the understanding that areas not subject to economic use should in fact be included, based on article 12 of Law No. 8,269/93 (RE 603.862). In addition, in a single judge decision handed down by Justice Gilmar Mendes in October of 2019 in the record of Complaint 34.301, it was held that the lower court decision that ordered the "exclusion of any compensation for forest and woodland coverage in areas of permanent preservation and already existing administrative limitations (...) affronts the decision handed down by this Court when deciding RE 248.052 AgR." Therefore, the current position of the STF is that even plant coverage of APPs should be compensated in expropriation actions.

Another parameter that has been considered by the courts when assessing the compensation due in these cases is the legality of the activity carried out by the expropriated party in the vegetation cover area. The Federal Court of Appeal for the 2nd Circuit, in a case of indirect expropriation brought for the creation of a Conservation Unit (UC),[1] modified a trial decision that ordered the Federal Government and IBAMA to compensate expropriated parties for areas destined for the extraction of hardwood and charcoal, since the practice was forbidden by the Forest Codes of 1934 and 1965, in force before the property was titled to the expropriated parties (Case No. 0257765-78.1900.4.02.5101).

In addition to the applicability of economic use as a requirement for fair compensation for expropriation in specially protected areas, the rules for expropriation for the creation or expansion of UCs impose new challenges, which are still under debate today.

It should be noted that the Expropriation Law provides that expropriation must occur by agreement (direct expropriation) or judicially (indirect expropriation and common practice in cases of creation and expansion of UCs) within five years from the date of issuance of the respective decree, which will expire once this period is over (article 10). Thus, once the declaratory decree has been issued and the expropriation of private properties found in UCs in the public domain has not been implemented after five years, the declaration of public utility becomes invalid.

In view of the debates on the subject,[2] the Federal Public Prosecutor's Office (MPF) issued Technical Note 4 No. 8/2017, which states that UCs are created by the government by virtue of a regulatory act and, therefore, can only be amended by means of a issuance of a law. In this sense, the MPF argues that administrative limitations on the use of private property derive from the law, regardless of any expiry of the declaration of public utility of the area. This fact would not constitute confiscation of the private property, since the private individual could request regularization of the land situation with the Chico Mendes Institute for Biodiversity Conservation (ICMBio).

In addition, the same technical note takes up the arguments raised by the Specialized Prosecutor's Office of ICMBio, which argues that expiry of the declaration of public utility does not extend to the creation of UCs, as follows:

"(i) The restrictions on the enjoyment of property emanate not from the declaration of public utility, but from environmental laws and regulations, lasting in time regardless of its expiry;

(ii) The expiry of the decree of expropriation, in the case of real estate found in conservation units, appears to private parties not as a guarantee, as occurs in expropriations in general, but as a penalty;

(iii) The expropriation of private areas within certain classes of protected areas is not based on an administrative act of convenience and opportunity, but on a legal imposition;

(iv) Article 225, paragraph 1, subsection III, of the Federal Constitution established the principle of the reserve of law for amendment or suppression of a conservation unit;

(v) There is no legal support for tacit extinguishment of a conservation unit; and

(vi) A declaration of public utility is independent of and ancillary to the scope of the act of creation of the conservation unit."

The MPF argues that the Forest Code allows donation to the government of an area located within the UC of a public domain pending land regularization by a private party who wants to offset the legal reserve area of its property (article 66, III and paragraph 5, III). If the scenario provided for in the Forest Code were accepted, by analogy, admissibility of UCs with non-appropriated areas would be demonstrated, regardless of the period or date of creation of the UC.

On the other hand, the STJ's position corroborates the provisions of the Expropriation Law, by understanding that, after the five-year period provided for in the legislation has elapsed without a declaration of public utility having been given effect, it would lapse under article 10 of the Expropriation Law (REsp. No. 191.656, 2nd Panel, opinion drafted by Justice João Otávio Noronha, published in the Electronic Gazette of the Judiciary on February 27, 2009).

From the judgements on gleans that, in order to avoid, on the one hand, the practice of confiscation of assets by the government and, on the other hand, unjust enrichment of the expropriated party, one must essentially inquire into the economic content of the property and the real financial loss suffered by the expropriated party due to the prevention of exploitation of economic activity in line with permitted environmental uses. The law and the case law of the higher courts has repeatedly recognized claims for compensation for expropriation of rural property that economically exploits environmentally protected areas in a lawful manner and prior to the expropriation.

In the face of this scenario, owners who have the public utility of their rural properties decreed must pay attention to the form of composition of the compensation amount to be paid by the expropriating power. The calculation should reflect, among other factors, the market value of the property, including the areas destined for legal reserve, forest areas, vegetation coverage, and other possible areas of environmental protection.

[1] According to the Law on the National System for Nature Conservation Units (SNUC) (Federal Law No. 9,985/2000), conservation units are defined as territorial spaces and their environmental resources, including jurisdictional waters, with relevant natural characteristics, legally established by the government, with conservation objectives and defined limits, under a special administration system, to which adequate protection guarantees apply. UCs are divided into: (i) integral protection units, which include ecological stations, biological reserves, national parks, natural monuments, and wildlife refuges; and (ii) sustainable use units, which include environmental protection areas, areas of relevant ecological interest, national forests, extractive reserves, fauna reserves, sustainable development reserves, and private Natural Heritage reserves.

[2] In 2015, Federal Representative Toninho Pinheiro (PP/MG) drafted Bill No. 3,751/15 to insert in the SNUC Law a provision to mandate expiration of the act of creation of an UC, after five years, when expropriation of private property within public domain UCs has not been applied for.

Category: Infrastructure and energy

ANP Resolution 817/2020, published on April 27, establishes rules for the decommissioning of oil and natural gas exploration and production facilities and procedures for returning areas to ANP (National Agency of Petroleum, Natural Gas, and Biofuels), disposal and reversion of assets.¹

This was an important step by the agency in the broader effort to make the Brazilian regulatory framework more robust and detailed in the final stage of the E&P cycle, which begins with asset disposal and preparation of the activities necessary for decommissioning, goes through investment by companies focused on buying and (re)developing these assets, and culminates in the decommissioning itself. In more mature markets, such as the North Sea and Gulf of Mexico, this stage of the E&P chain is an important segment for the industry, ranging from providing specialized services to transferring mature assets from large producers (IOCs and NOCs) to smaller and/or companies specialized in the acquisition of assets of this profile. In the case of the latter, this process often takes place on the basis of financing raised with the assets themselves as collateral.

One of the most relevant aspects of ANP Resolution 817/20 is the consolidation, into a single regulation, of the main rules regarding the abandonment of fields and decommissioning of facilities. The resolution also establishes detailed roadmaps for the preparation and execution of studies and programs related to decommissioning, setting clearer timeframes for the presentation of these instruments to the ANP.

The resolution represents the first part of a set of two regulations that ANP will publish on the subject. The second part (for which public consultation is currently suspended due to the Covid-19 pandemic) will specifically address the criteria for submission and approval of abandonment guarantees, a relevant issue as it represents an important financial impact for E&P companies, as well as its relevance in the context of M&A transactions involving assets in production.

We highlight below some of the main topics and innovations brought about by ANP Resolution 817/20:

• Facility Decommissioning Program: the resolution initially provides for the presentation of a conceptual Facility Decommissioning Program (PDI), which should provide for the general scope of the decommissioning actions proposed. After this document is approved by ANP, the company must prepare and submit for the approval of the agency an executive PDI, with effective planning of actions, including information, projects, and studies for execution of decommissioning. The resolution mandates that the PDIs must be made publicly available and may, if ANP deems it necessary, be submitted for public consultation.

• Decommissioning Rationale Study: the resolution creates the process for the Decommissioning Rationale Study (EJD), an instrument that must be presented together with the conceptual PDI and contain information that will allow ANP to evaluate the reasons for abandonment and the decommissioning options studied. Among the most relevant information required for this study, the parties should demonstrate that they have analyzed the possibility of increasing the recovery factor in the field by extending the useful life of equipment, replacing it with more modern equipment or implementing other improved recovery techniques. For each possibility studied, a technical and economic feasibility study (EVTE) must be presented. The EJD will only apply to maritime fields, however, it may be required for onshore fields upon formal request from ANP.

• Technical regulation for decommissioning: the resolution approves a technical regulation with instructions for the decommissioning of offshore and onshore facilities, with a series of principles and rules to be observed by parties throughout the planning and execution of activities.

• Decommissioning in the assignment of contracts: one of the main innovations brought about by the resolution is the possibility that, in the course of an E&P contract assignment process, the assignor retains the obligation to decommission part of the facilities, with the consent of ANP. In this way, a clearer timeframe would be established, removing the joint liability of the assignee for activities that have been retained by the assignor.

• Bidding for fields in production: another important innovation brought in by the resolution allows ANP to bid for onshore fields in production that are already close to the decommissioning stage, in order to enable their acquisition by other companies that have an interest in extending their useful life. In this context, should the area be auctioned, ANP would enter into a new concession agreement, and there would be no assignment procedure between the old and the new concessionaires (which would rule out joint liability between assignor and assignee). However, the resolution provides for a negotiation stage between the old and the new concessionaire for the transfer of operations, a procedure that may present significant complexities for the regulation of interests and allocation of risks between the buyer of the assets and the current operator.

ANP Resolution 817/20 entered into force on May 4, 2020. The E&P contracts intended for decommissioning in a period shorter than those established for presentation of a PDI and EJD will be analyzed individually, based on a proposed schedule to be presented by the parties and approved by ANP.

¹ With the entry into force of ANP Resolution 817/20, the former ANP Resolutions 06/25, 06/27, and 06/28, which for many years regulated the procedures related to return of areas and reversion of assets, will be revoked.

Category: Real estate

When transferring real estate in which purchasers have plans to develop future constructions, such as land sold for the construction of buildings, it is common for city governments to calculate the value of the Property Transfer Tax (ITBI) considering as the calculation basis the value corresponding to both the land and the buildings not yet developed. There are judicial discussions regarding these charges in municipalities in the State of São Paulo, Rio de Janeiro, Rio Grande do Norte, and Rio Grande do Sul.

However, the Judiciary has been adopting the position that the calculation basis of the ITBI in these cases would be the assessed value of the ideal fraction of the land, without considering future construction. The understanding is that the ITBI should only be levied on what was actually acquired at the time of the sale, and no improvements that do not exist at the time of transmission, which is the taxable event, may be included.

This understanding is in line with the federal legislation regarding the ITBI - article 156, II, of the Federal Constitution and articles 35 and 38 of the National Tax Code. These provisions establish that the definition of the amount of the ITBI should occur based on the assessed value of the asset actually transferred, as calculated on the date of occurrence of the taxable event.

The Judiciary also bases in its decisions on Precedents 110 and 470 of the Federal Supreme Court (STF), whose rulings establish that the ITBI may only be charged on buildings existing at the time of sale of the land. Therefore, the calculation basis does not include the value of what is built after the purchase and sale transaction.

Precedent 470

The "inter vivos" transfer tax is not levied on the construction, or part of it, carried out, unequivocally, by the committed purchaser, but on the value of what has been built before the promise of sale.

Precedent 110

The “inter vivos" transfer tax is not levied on the construction, or part of it, carried out by the purchaser, but on what was built at the time of the sale of the land.

To try to prevent litigation with municipal tax authorities, it is recommended that the deed of purchase and sale or exchange of real estate expressly state that future construction, if and when it occurs, will be carried out by the purchaser at its own expense. In the case of construction carried out between the signing of the promise of sale and the definitive deed, the recommendation is that the parties make it absolutely clear that the ownership of the property was already in the purchaser's possession since the signing of the initial contract and that the construction was carried out by the committed purchaser.

Thus, in view of the above-mentioned precedents, including from the STJ,¹ it is possible to question in court the value of the ITBI when its calculation basis considers the value of future constructions to be carried out by the purchaser, so that the tax will be calculated based only on the assessed value of the ideal fraction of the land. The objective is to avoid payment of an amount greater than that which is due since, on the date of occurrence of the triggering event, only the ideal fraction of the land is subject to transmission.

^1.Processual civil e tributário [“Civil and tax procedure”]. Appeal per internal rules of court in special appeal. Offense to article 535 of the Code of Civil Procedure. Deficient reasoning.

Precedent 284/STF. ITBI. Calculation basis. Unbuilt land, with subsequent construction. Violation of article 1,227 of the Civil Code of 2002 and article 38 of the National Tax Code. Non-occurrence. Absence of sufficient normative authority to rebut the grounds of the appellate decision subject to appeal. Application of Precedent 284/STF. Definition of the time aspect of the triggering event. Issue not previously raised. Precedent 211/STJ.

(...)

1. Moreover, even if all obstacles are overcome, the Federal Supreme Court consolidated its understanding that the Inter Vivos Transfer Tax (ITBI) is not levied on the construction, or part thereof, carried out by the purchaser, but on what was built at the time of sale of the land, pursuant to Precedents 110 and 470 of the STF.
2. In the case at bar, the factual situation is uncontroversial, consisting of an exchange between a non-built property, for four rooms, later built by the purchaser of the land, and the Municipality seeks to have the value of the ITBI be calculated considering the value of the property with the buildings built after the legal transaction.

VII. Appeal per internal rules of court denied relief.

(AgRg no REsp 1244921/RN, Opinion drafted by Justice Assusete Magalhães, Second Panel, decided on September 18, 2014, published in the Electronic Gazette of the Judiciary on September 30, 2014)

Category: Infrastructure and energy

Alberto Faro and Felipe Baracat

The economic impacts of covid-19 on the infrastructure sector can already be felt in Brazil, especially as relates to demand, considering the slowdown in economic activity caused by social isolation measures, and as relates to the financial stability of projects. At this time especially the availability of investments for the sector is a challenge.

With this in mind, new proposals for legislative changes are being discussed with the aim of combating the short-term economic effects of the pandemic and addressing the recurrent problems of lack of investment in infrastructure that will be accentuated in the post-crisis period. The focus will be on leveraging the participation of private players through access to the capital markets.

Congressmen João Maia and Arnaldo Jardim, respectively chairman and rapporteur for the special committee for the new General Law on Concessions and PPP (LGC), recently released to the market a draft bill which will be presented to the House of Representatives proposing the creation of infrastructure debentures, which should grant tax benefits directly to issuing legal entities, and amending the legislation relating to incentivized debentures and funds for investment in infrastructure and in research, development, and innovation.

The debate initially arose at the end of 2019, under the LGC committee, with the proposal to update the regulatory framework of the infrastructure sector in Brazil. The new LGC bill, which has over 220 articles, was approved by the committee in early 2020, and will proceed for a floor vote.

However, in the last week of April and as an emergency measure to combat the covid-19 pandemic, Congressman Arnaldo Jardim presented the market with a new draft bill, the text of which was highlighted by the LGC and which includes specific provisions on debentures and infrastructure investment funds. This new bill will be presented to the House of Representatives very soon, as a matter of urgency, such that the separate procedure will speed up the debate.

We have had access to the draft of the new bill and we have advanced below some of the main proposals, which will still be debated in Congress:

• Creation of a new kind of debentures, infrastructure debentures, which will grant tax benefits directly to the issuers and which have many similarities with the incentivized debentures, but with which they should not be confused.

• Expansion of the list of infrastructure projects that can be prioritized.

• Independence of a ministerial act for evaluation and classification of the projects, it being sufficient that the ventures be included in the sectors listed. These measures are applicable to both incentivized debentures and infrastructure debentures.

• Express provision for FIP-IE (Infrastructure Investment Funds) and FIP-PD&I (Investment Funds for Participation in Intensive Economic Production in Research, Development, and Innovation) to be able to invest in re-bidded or postponed projects, including those started before Law No. 11,478/07.

• For FIP-IE and FIP-PD&I, (i) extension of the period for payment of shares and the period for classification of the minimum investment percentage to 36 months; and (ii) revocation of the parameters for a minimum stake and maximum concentration of shareholder and/or income earned.

• Extension of the period for demonstration of costs, expenses, or debts repayable, from the public offer of debentures, from the current 24 months in a staggered manner up to 60 months;

• Elimination of the requirement to create segregated projects for the expansion of existing projects, whether already implemented or those in the process of implementation. This should considerably reduce bureaucracy and facilitate fundraising for projects to expand existing infrastructure.

• Possibility of remuneration of debentures per pre-fixed interest rates, including linked to price indexes, foreign exchange rate variation, Interbank Deposit Rate (DI), or the Reference Rate (TR).

Creation of the new infrastructure debentures

The Plan proposes the creation of infrastructure debentures, financial instruments that have similarities with the incentivized debentures, regulated by Law No. 12,431/11, but with which they should not be confused.

We call your attention to the fact that debt instruments deriving from Law No. 12,431/11 are usually known in the market as infrastructure debentures, which requires increased attention given the nomenclature of the different kinds of debentures as of the bill's proposal.

The main innovation of the infrastructure debentures will be to encourage greater participation of corporate investors in infrastructure projects, especially institutional investors. The incentivized debentures of Law No. 12,431/11 centralize their tax benefits in the figure of the individual investor.

As with the incentivized debentures, the concessionaires, permissionaires, or licensors of the public services defined, as well as lessees, incorporated for a specific purpose and in the form of a corporation, or their direct or indirect controlling companies, may issue infrastructure debentures, provided that the allocation of funds complies with the legal guidelines. The funds raised through public distribution of the debentures shall be allocated to investment projects in the area of infrastructure or intensive economic production in research, development, and innovation considered a priority, pursuant to Law No. 11,478/07.

The bill proposes significant changes in article 1 of Law No. 11,478/07, which establishes FIP-IE and FIP-PD&I, considerably expanding the list of infrastructure projects, as indicated below.

According to the congressmen, the most efficient way to attract legal entities and institutional investors would be precisely through the tax incentive to the issuers, which could pass it on through the payment of better remuneration to investors. The result is that infrastructure debentures may be issued with more attractive interest rates than other capital market papers.

Therefore, pursuant to article 3, the bill proposes taxation on income from the issuance of infrastructure debentures by means of withholding income tax at the rates provided for in Law No. 11,033/04, and with the possibility of deduction in the case of legal entities taxed on the basis of actual, presumed, or pre-set profit.

The applicable rates would therefore be 22.5%, 20%, 17.5%, and 15%, considering the maturities of the debentures, respectively: less than 180 days; between 181 and 360 days; between 361 and 720 days; and more than 720 days. Unlike incentivized debentures, there no zero percent rate will apply to income earned on infrastructure debentures.

According to article 6, legal entities that issue infrastructure debentures may deduct, for purposes of calculating net profit, the amount corresponding to the sum of interest paid in a given fiscal year and also exclude from the profit, in calculating the actual profit, and from the calculation basis of the Social Contribution on Net Profit, an amount corresponding to 30% of the sum of interest paid in a given fiscal year. This deduction may be increased to 50% of the amounts raised by the issuer if the debentures are intended to finance sustainable development projects (greenbonds).

Greenbonds, duly certified according to international standards, refer to projects for: (i) sustainable energy, including production of products and supplies; (ii) energy efficiency; (iii) pollution prevention and control; (iv) biodiversity conservation; (v) clean transportation; (vi) sustainable water management, including wastewater treatment and drainage systems; (vi) sewage and solid waste management; (ix) adaptation to climate change; (x) eco-efficient products and technologies; and (xi) green buildings.

The withholding tax rule will also apply to investments in debentures made by FIP-IE, FIP-PD&I, and FI-Infra (Infrastructure Investment Funds). The objective is to encourage investment by capital market player, without, however, granting a double tax benefit to these investors, that is, to the issuer and final investor. This avoids relinquishment of tax by the Brazilian government.

Changes in Law No. 11,478/07

The bill amends article 1, head paragraph, of Law No. 11,478/07 to include, alongside infrastructure projects, social infrastructure projects. It also proposes to include infrastructure projects implemented in the areas of public lighting, energy efficiency, solid waste, prisons, socio-educational units, educational units, health units, oil and natural gas, telecommunications, environmental conservation units, housing, urban mobility and logistics, in addition to energy, transportation, water and basic sanitation, irrigation, and other areas considered a priority by the Federal Executive Branch, already mentioned in the original draft, as amended by Law No. 12,431/11.

Another important change proposed by the bill is removal of the requirement to create segregated projects for the expansion of existing projects, be they those already implemented or those in the process of being implemented, which would considerably reduce bureaucracy and facilitate fundraising for projects to expand existing infrastructure.

There are also other proposals regarding the possibility of FIP-IE and FI-Infra investing in projects subject to re-bidding, extended, or initiated before the enactment of Law No. 11,478/07, regarding extension of the period for payment of shares and classification of funds, and regarding change in the reference value applicable to FI-Infra.

Changes in Law No. 12,431/11

The creation of infrastructure debentures does not prevent the issuance of the incentivized debentures, which remain valid, but the bill proposes the following changes in the rules for issuing incentivized debentures:

• Amend paragraph 1 of article 1 of Law No. 12,431/11 to expressly state the possibility of remuneration of incentivized debentures per pre-fixed interest rates, including linked to price indexes, foreign exchange rate variation, Interbank Deposit Rate (DI), or the Reference Rate (TR). This provision removes legal uncertainties related to the remuneration of debentures, such as those generated by the subsistence of Precedent 176 of the STJ: “Contractual provisions subjecting debtors to the interest rate disclosed by Anbid/Cetip are null and void."

• Paragraph 1-C of Law No. 12,431/11 would now consider all projects listed in article 1 of Law No. 11,478/07 as being priorities. Paragraph 1-D would include in this list partnership agreements that are subject to extension or bidding, pursuant to Law No. 13,488/17. The measure would help to cut the red tape for procedures for financing the expansion of Brazilian infrastructure.

• Still with regard to the classification of infrastructure projects as priorities, article 14 of the bill stipulates that the issuance of incentivized debentures, referred to in article 2 of Law No. 12,431/11, will not require a ministerial act to evaluate the projects, it being sufficient for the venture to be carried out in one of the sectors listed in article 1, paragraph 1, of Law No. 11,478/07.

Other legislative changes

Among other changes, the bill also proposes amendments: (i) in article 8 of Law 11,079/04 (PPP Law), with the possibility of providing security for financing by financial institutions that are controlled by the public authorities, provided that such financial institutions are not dependent on the public budget; and (ii) in article 32 of Law No. 11,712/12, in order to increase the limit of participation of the Federal Government’s guarantee fund to the amount of R$ 16 billion, for coverage of risk from operations dealt with in article 33 of the same law.