Category: Infrastructure and energy

Just over two years after the water crisis in Southeast Brazil, its effects still have repercussions on the concession instruments or programs in effect within the public sanitation services. Even with the normalization of the droughts, the level of concessionaire indebtedness is inversely resilient to the volume of the reservoirs, which leads to further discussions in the tariff review processes conducted by the state regulatory agencies.

In general, the water crisis created a substantial change in the material circumstances in which utilities provided sanitation services due to both the forced reduction of demand (less availability of water) and the increase in water production costs and the need for new investments in more complex capture and adduction processes.

Conformity of the cycle was achieved through emblematic projects. In Minas Gerais, for example, Copasa carried out catchments in the main aquifer supply system of the Metropolitan Region of Belo Horizonte, Paraopeba, in addition to new artesian well drillings. In São Paulo, Sabesp interconnected some of the Cantareira System dams (such as the Jaguari with the Atibainha) and implemented a new schedule for the São Lourenço Project, one of the most successful public-private partnerships in terms of financing. The implementation of dams in the PCJ basin, with funding from multilateral agencies, is in the final phase of environmental licensing and about to be finalized.

This framework reveals not only an increase in current service expenses, but also, and above all, a significant change in the remuneration assumptions (pay back/amortization, risk, and opportunity cost) of the concessionaires' investors and creditors, since new investments (capital expenditures) had to be anticipated or conducted beyond the parameters originally designed and approved by the state regulatory agencies. These entities generally define a Regulatory Remuneration Rate in establishing the methodology for calculating cost recovery and capturing capital opportunities used in the expansion of services.

In the sanitation sector, the Regulatory Remuneration Rate must consider, by virtue of law, factors that, in general, are not mandatory in other regulated industries. As a financial discount rate for the calculation of the net present value of the concession contract (or, as the case may be, the project), the Regulatory Remuneration Rate is a necessary parameter in promoting tariff revision, not a mere readjustment. It is bound by article 46 of Law No. 11,445/07, which states that "in a critical situation of scarcity or contamination of water resources that requires the adoption of rationing, declared by the water resources management authority, the regulator may adopt contingency tariff mechanisms, with the objective of covering additional costs incurred, thereby ensuring a financial balance between service delivery and demand management."

The regulatory decree (No. 7,217/2010) further determines that the regulations should contemplate a tariff model that ensures not only the tariff modality, but also the economic-financial balance of the contracts, it being the responsibility of the agencies to define “system, structure, and tariff levels, as well as procedures and deadlines for setting, readjusting, and revising them." It is also incumbent on the agencies to ensure the participation of owners, users, and service providers, as well as to create mechanisms to induce efficiency, including productivity factors in the new tariff models.

In the tariff revision procedures, after the initial stage of establishing criteria and methods by which the concessionaire's current costs are calculated, one proceeds to an analysis of the elements that should compose the tariff structure and the respective risk matrix, which establishes as parameters remuneration and any events linked to obtaining financial return by the respective shareholders and creditors.

As the cost of capital for each source of financing is differentiated, most of the tariff revisions in the sanitation sector use WACC (Weighted Average Cost of Capital) as the average cost of owned and third-party equity. By this methodology, the financing costs are weighted according to the company’s capital structure, that is, according to the sources of financial resources employed, not considering their tax effects. The following aspects are principally considered in this analysis: (i) remuneration of the investment made by the service provider with its own funds, arising from both the generation of cash and the contribution of new resources by the shareholders (equity); and (ii) funds obtained from sources outside the company, for example, loans from financial institutions, issuance of debentures, promissory notes, and other credit rights (third-party capital). Therefore, more than one Regulatory Remuneration Rate, specific to each source of funding, is allowed.

The main controversies are concentrated, as a rule, in the measurement of the cost of equity. This is due to the fact that third-party capital still comes mainly from the domestic market, in which interest rates (Selic, TJLP, TR, and preferential rate) are directly or indirectly regulated by the monetary authorities, especially the Central Bank. Thus, quantification of the cost of capital is subject to even more objective metrics. Regarding equity, on the other hand, the Regulatory Remuneration Rate, according to some precedents in the sanitation sector, within the purview of the state regulatory agencies, has been following the Capital Asset Pricing Model (CAPM), by which one tries to establish a balancing relationship between the expected return and the risk factor, assuming as parameters of the latter the profitability of an unencumbered asset, the profitability of the market portfolio, and the sensitivity of the company's assets to market returns.

Risk free assets are devoid of volatility in the returns, that is, uncertainties with respect to future gain. Similarly, profitability of the market portfolio relates to the expected return capable of encouraging investors to invest in the stock market. Finally, the sensitivity of the company's assets to market returns is measured by the beta coefficient. This unit of measure symbolizes a systematic risk of an asset (market risk), which reflects possible and future fluctuations in the behavior of macroeconomic variables (inflation, economic growth, external crises, foreign exchange, etc.) that affect the concessionaire.

The CAPM does not automatically introduce, however, a sectorial or microeconomic risk premium, taking into account the specificities of the sanitation sector in a given country or region. In addition to the variables pertaining to the aggregates, captured by the beta coefficient, regulatory risk and now, above all, the risk of water unavailability in Brazil and especially in the Southeast Region, are no longer adequately considered in the calculation of the Regulatory Remuneration Rate.

The lack of attention given by some regulators to these last points has led, even if only for a certain period of time, to an undesirable loss of market value of publicly-held, publicly-traded companies and publicly-traded shares. These market "penalties" have an additional negative factor of increasing the cost of equity of concessionaires, since the perception of regulatory risk increases in direct proportion to the insensitivity of considering and pricing, for the future, further chances of water scarcity. In this sense, the concessionaire's cash flow contingency ends up being the only mechanism to mitigate the financial consequences of the actual occurrence of these risks, which also brings in an implicit loading cost in the business strategy.

There is no other way to deal with this result but to go back and admit that the tariff review procedures must effectively compensate for variation in the cost of executing the contract, including capital costs, taking place in the event of an unpredictable event or, as now, unavailability of water, for the Southeast, a predictable event, but with incalculable consequences.

If the public choice is to preserve moderate tariffs, maintenance of the economic-financial balance of the current concession and project contracts will have no solution except through the institution of state subsidies, which can be contributed through numerous alternatives for structuring or renegotiating the existing arrangements, such as the common concession subsidized pursuant to article 17 of Law No. 8,987/95 or the public-private partnerships governed by Law No. 11,079/04.

The revision procedure symbolizes mutual commitment in the field of responsibilities shared between public and private sectors in an effort for greater transparency and realism with respect to the challenges and perspectives in defining tariffs. In this procedure, the primary and reciprocal commitment should always be to reduce the cost of capital of concessionaires and, as a consequence, at a minimum, preserve their market value, in accordance with the requirements of financeability and bankability of new or ongoing projects.

Category: Infrastructure and energy

"The Brazilian electrical power sector was designed with a model for a developing country. The rules of the sector did not have an answer for the economic crisis"

Paulo Pedrosa, executive secretary of the Ministry of Mines and Energy

The federal government announced in January that it intends to hold a specific auction for reserve power contract divestment this year, a still unprecedented dispute in Brazil, in anticipation of an average structural surplus of 8.4 GW of energy (difference between physical supply and the system load) by 2018 and the expectation that few new power generation projects could break ground. This is yet another move to adapt the rules of the sector to the scenario of economic stagnation, the so-called "sectoral realism."

The general auction rules are in Decree No. 9,019, of March 30, 2017, which amended Decree No. 6,353/2008 to allow the contract divestment of reserve energy through the conducting of a competitive mechanism. The criterion for the definition of the winner(s) of the dispute will take into account the price negotiated in the respective reserve auctions (advantageousness of contract divestment), associated with the payment of the premium.

The premium, in turn, will be deposited in the Reserve Energy Account (Coner) and must be used to pay for the energy that will remain contracted. The details of the rules, however, have not yet been released by the Ministry of Mines and Energy (MME) and should be defined soon by the Brazilian Energy Research Company (EPE), as well as the amount to be divested.

Up to now, it is known that those projects whose energy has been contracted in a reserve energy auction and which meet the following conditions cumulatively at the date of publication of the notice of the divestment mechanism will be eligible for divesting:

• currently have a Reserve Energy Contract (CER); and
• did not start an operation under test.

The winners of the auction will:

• have their energy contracts cancelled, as well as those associated with the use of the transmission and distribution facilities of the undertakings that are part of the winning proposal, subject to any associated costs [subject to any costs arising therefrom]; 
• have their registration with the Special Incentive Regime for the Development of Infrastructure (Reidi) canceled; and 
• be obliged to waive any right to any compensation arising under the rescinded contractual instrument.

The termination of the CER will be automatic for those contracts that relate to a single plant. In the case of a CER with more than one plant, the contract must be amended to cover the reduction of amounts sold in installments equivalent to the projects included in the proposal, without applying a fine for termination.

The guarantee of faithful fulfillment of the divestment projects will also be released and, with regard to the maintenance of the concession, which was doubtful for a good part of the sector, the decree establishes that the concessions of the divestment projects will be automatically extinguished. Nothing is reported about the projects that have their amounts partially reduced. The logic in their case demands the maintenance of the concessions, an indispensable requirement for the validity of the commitments.

The decree brings in an important and controversial provision pertaining to the possibility that the sellers with divestment projects participate in future reserve auctions.

Paragraph 8 of the new Article 7-A of Decree No. 6.353 establishes that "the sellers who have their proposals ratified by Aneel will be unable to participate in the two auctions to contract reserve energy subsequent to the realization of the divestment mechanism." The following paragraph goes further, providing that such prohibition may be extended "to the controllers, subsidiaries and controlled companies of sellers who have their proposals approved by Aneel, pursuant to the notice of the divestment mechanism."

In a first analysis, the restriction seems too severe. On the one hand, according to the executive secretary of the MME, Paulo Pedrosa, the rule seeks to curb "opportunistic" moves to sell the energy of a divested project for a higher amount in a new auction. On the other hand, however, to extend this prohibition to controllers, subsidiaries, and shareholding controlled companies, or even to the seller itself (who may be entitled to rights for other ventures in different stages), imposes a penalty on anyone who voluntarily assents to the divestment, with perhaps a much greater burden than an at-fault unjustified rescission of the CERs.

As the rules are likely to be subject to public discussion between agents and regulator, it is expected that the limitations on future participations in reserve auctions will be adequate for the purpose of the rule, thus avoiding disproportionate restrictions on the exercise of the economic activity of these agents.

The responses given by the regulator to the industry's concerns have been adequate and, when implemented in a timely manner, effective. However, the slow pace of adoption of the measures remains the biggest enemy of the advances expected. It was hoped, for example, that the divestment auction would be held as early as April 2017. So far, not even the public notice has been approved, nor has the amount to be divested been disclosed.

The fear of all is that, due to the delay in implementation, the actions will end up becoming maladapted to Brazil’s constantly evolving reality. This would make it impossible to break the normative-reactive system, which is so damaging to the already shaken legal and regulatory stability of the sector, thereby harming the attraction of new investments and economic growth.

Category: Labor and employment

Both the Federal Constitution (article 8, item VIII) and the Consolidated Labor Laws - CLT (article 543, paragraph 3) grant protection to employees who are union leaders through the benefit of provisional stability, from the time of the employee’s candidacy until one year after the end of employee’s term of office.

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Category: Compliance, investigations and corporate governance

Competition compliance programs are part of the risk management systems of companies that are concerned with possible financial losses resulting from any noncompliance with the Competition Law (Law No. 12529/ 2011), such as fines imposed by the Administrative Council for Economic Defense (Cade), devaluation of shares, termination of contracts, and possible civil, administrative, and criminal liability of the company’s directors and officers.

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Category: Labor and employment

DOWNLOAD THE E-BOOK WITH ALL ASPECTS THAT WILL BE CHANGED ONCE THE LABOR REFORM BECOMES EFFECTIVE

After approximately 2 months and 178 amendment requests, the Brazilian Senate approved the labor reform bill of law last Tuesday (07/11/2017) without any change to the original text submitted by the House of Representatives. There were 50 votes in favor, 26 in opposition, and 1 abstention. As there were no changes suggested by the Senate, bill of law no. 6,787/2017 will now be sent for the sanction of the in-house President Michel Temer.

In a letter sent to the Senate on June 28, 2017, the President reassured his commitment in the sense that any adjustments to the bill of law would be made by himself, either through vetoes to the bill of law or through the execution of Provisional Presidential Decrees.

However, after the approval of the bill of law, the president of the House of Representatives has already stated that he will not  consider any Provisional Presidential Decree aiming at amending said bill of law.

Considering such statement, it is possible then to expect vetoes by President Michel Temer of some points of the labor reform, especially regarding (i) the treatment of the pregnant or breastfeeding employees in the unhealthy workplace environment, (ii) individual agreement that provides for a 12-hours work day for 36 hours of rest and (iii) some points of the intermittent-work agreement.

If the President fully sanctions the bill of law, the law will come into force 120 days after the date of the sanction. However, if the President vetoes part of the bill, only those vetoed matters will return to the Congress, which will decide in a joint session (House of Representatives and Senate), within 30 days, whether to agree or reject the vetoes. The presidential veto, however, can only be rejected by the vote of the absolute majority of the Congress.

If the veto is rejected by the Congress, the President or Senate (in the event of the President's lack of action), shall sanction the content of the previously vetoed law. In this case, more than 100 articles of the Brazilian Labor Code (CLT) will be adjusted.

Category: Infrastructure and energy

Law No. 13,448 (conversion of Provisional Presidential Decree No. 752 or "Concessions MP") governs the procedure for re-bidding projects operated through public concession in the toll road, railway and airport sectors. 

What is re-bidding?

The law defines re-bidding as the procedure that contemplates the amicable termination of existing concession agreements in default or under financial distress and the conduction of a new public tender to delegate the exploration of the project to a new concessionaire, under new contractual conditions.

It is aimed at toll road and airport concessionaires that are facing difficulties in complying with agreements, either because of credit scarcity and restrictions, impacts from Operation Carwash [Lava Jato] or radical change in the country's economic scenario.

The law provides that a new bid for agreements already in force may be held when: (i) they are not being complied with by the contracted parties; or (ii) the contracted parties show an inability to comply with the contractual or financial obligations assumed under the concession agreement.

What is new?

Strictly speaking, in the regulations of the Concessions Law, the system applicable to termination of contracts due the breach by the contracted party is forfeiture. Extinction due to forfeiture involves a complex administrative process, often leading to litigation. It is also common that, via injunction, the contracted parties secure the right to continue to operate, in order to prevent the interruption of the public services.

In the new model, the current contracted party must agree to proceed with the early termination of the agreement. However, it is possible that, at this point, the amount of indemnification due to investments made in the concession and not yet amortized is defined only later in the process. This is an important point, since the concessionaire cannot disengage the amicable termination in the event of a later dispute over the indemnity amount, which usually leads to judicial litigation, extending for years.

As an alternative, the law provides that the parties may submit the indemnity calculation to an arbitral proceeding, carried out in parallel to the new bidding process. In any scenario, the indemnity due must be settled and fully paid to the concessionaire before the winner of the re-bidding process assumes the project. If so determined in the bid notice, the indemnity can be paid by the new contracted party.

In summary, the law seeks to establish more modern forms of conflict resolution (amicable termination and arbitration), especially in relation to property rights, in order to allow the effective termination of the agreement and the undertaken of the project by a new private party, qualified to perform the necessary investments and services. 

What is the procedure for re-bidding?

It is possible divide the re-bidding procedure into three phases. First, the agreement must be included in the Investment Partnerships Program (PPI) of the Federal Government, at the request of the competent ministry and with presidential approval. In a second phase, the concessionaire and the granting authority must negotiate the amicable resettlement. This phase includes the submission of a series of technical information by the concessionaire, as well as an irrevocable and irreversible statement adhering to the re-bidding process.

After qualifying for re-bidding, the agreement cannot be submitted to judicial and extrajudicial recovery schemes. This is a clear-cut provision to shield assets managed by companies that are subject to Operation Car Wash [Lava Jato], which face financial difficulties. In addition, measures intended to initiate or continue forfeiture proceedings against the contracted party will be suspended.

Once the terms of the amicable termination have been agreed upon, the law provides that an amendment to the agreement must be executed together with the current concessionaire. The amendment must provide for: (i) the concessionaire’s adherence to the amicable termination; (ii) the suspension of the original obligations and new conditions for rendering the services until termination; (iii) the indemnity amount (or the arbitration commitment); and (iv) possible direct payment of any indemnities to the sponsors.

In addition, it is the responsibility of the competent agency to prepare feasibility studies regarding the new concession and submit them to public consultation. Subsequently, the studies and the drafts of the bid must be submitted to the Federal Audit Court (TCU) for review. Only then can the new bidding process for the project be formally launched. In case of delay in the re-bidding, the granting authority may order maintenance of the current agreement for up to 24 months to ensure the continuity of the services.

Another relevant provision is the prohibition of participation by some entities in the re-bidding process or in the future capital of the winning bidder. The restriction covers both the current contracted party (Specific Purpose Entity - SPE) as well as shareholders holding 20% or more of the capital of such entities at any time prior to the initiation of the re-bidding process. Even shareholders who did not cause the breach and have financial conditions to manage the concession will be prevented from participating in the new concessionaire.

Relevant claims of the current concessionaires were not contemplated by the law. That is the case of the possibility of renegotiation of existing concessions, in order to maintain the current contracts. This could be an alternative to re-bidding in relation to certain concessions under default. Despite of not being included as public policy in the law, nothing prevents this type of negotiation from being initiated based on the general regulations applicable to Brazilian concessions. 

For more information on Law No. 13,448/2017, see also: Benefits of Law No. 13,448/2017 for the infrastructure sector and Conversion of MP 752 confirms possibility of early extension of railroads and toll road concessions.

Category: Infrastructure and energy

Sanctioned on June 5, as the result of the conversion of Provisional Measure No. 752/2016 (MP 752), Law No. 13,448/2017 regulates the ordinary and early  extension of railway and toll-road concessions. The law provides

Ordinary extension is carried out due to the end of the original term of the concession agreement and depends on an express provision allowing term extension in either the original bid notice or the agreement. The public administration must also demonstrate that the maintenance of the current concession for a longer period is more advantageous than the granting of the concession to a new private party, by means of a public tender.

The law also established rules for early extension of concession agreements. Pursuant to the law, the early extension is conditioned to the performance, by the concessionaire, of new investments not foreseen and not amortizable within the term of the original agreement. The terms of the extension must be formalized by an amendment to the agreement, which must also include an investment plan and investment schedule previously agreed upon. The amendment may also provide for mechanisms to discourage default by the concessionaire, such as an annual discount in the tariffs or an obligation to additional payments to the granting authority. In summary, extension will be conditioned to the performance of new investments with aggressive mechanisms in case of non-compliance. Other particular requirements are also applicable to each toll-road and railway concessions, as summarized below. 

It is worth highlighting that the requirements for railways were more severe in the MP 752 than in the final wording of the law. Still, some concessionaires may face difficulties when requesting a term extension.

The law applies only to the toll-road, airport, and railway sectors, and extension is geared towards toll roads and railroads. The exclusion of other industries was not accidental. The government has chosen to have a separate approach for sectors with different realities and levels of maturity. The port sector, for example, has already had a series of regulations with broad application on contractual extensions and early extensions, such that their inclusion could bring in more questions than answers. A similar situation is experienced by the energy sector, which also faced this issue with greater intensity in 2013, in view of the need to renew the distribution, transmission and generation agreements.

In order to justify the extension, the granting authority must present a technical, economic, and environmental study demonstrating the advantage of the term extension in relation to a new bidding process. This provision is in line with the recent decisions of the Federal Audit Court (TCU), which questioned the lack of criteria and information asymmetry in the analysis of extension and rebalancing of concession contracts. In the same sense, the law requires the submission of the extension process to public consultation and to the TCU.

The amendments inserted in the original text of MP 752 brought in some important changes with regard to what could be negotiated in the extension amendment. According to the law, the early extension may imply a renegotiation of the contractual terms as a whole, in order to resolve operational and logistical issues, including through extensions and partial re-bidding of the projects originally contracted.

Specifically for railways, the law provides for termination of lease agreements and the possibility of reshaping the network and adopting specific measures for lines, including incorporation of new networks, deactivation of assets, short distance transportation by third parties etc. These provisions could help unlock long-standing discussions about the deactivation of routes and assets that are not economically sustainable under the current concessions model.

There is also a tendency to increase the standards for extension, requiring the Public Administration to clearly demonstrate its advantage in relation to a new bidding process, as well as the increase of the control and transparency of the process.

At some point, the proposed wording of the law also provided that the concessionaires could undertake financing and other forms of debt and guarantee the rights arising from the agreement and shares of its capital stock and securities, without the need of prior consent by the granting authority. Operations would be subject to mere notice. This introduced more flexibility to the concession regime, with the clear objective of expanding investment operations and injecting funds into infrastructure. However, this provision was vetoed by the president on the grounds that the free granting of securities could make partnerships more fragile and jeopardize the rendering of services.

Law No. 13,448/17 provides greater regulatory clarity and legal certainty for both public administration and private agents. However, the real impact of its terms will only be known when the law is applied to the sectors it regulates.

For more information on Law No. 13,448/2017, see also: Benefits of Law No. 13,448/2017 for the infrastructure sector and Law No. 13,448/2017: procedure for re-bidding for public service concessions.

Category: Infrastructure and energy

Six months after its publication, Provisional Presidential Decree - MP 752/2016 was officially converted into Law No. 13,448/2017, thereby incorporating the amendments approved by the National Congress, with some presidential vetoes. The text of the law brings in relevant innovations to the extensions of federal agreements in the infrastructure sector and seeks to establish clear rules for what was already practiced in other sectors, but did not have an express provision in the legislation applicable to the matter.

The new law integrates the package of government actions to resume and expand investments in Brazil, in a context of economic and political instability. Although there are limitations, the initiative indicates a federal tendency to standardize early extension procedures, respecting TCU guidelines, and building on successful experiences in securing new investments in infrastructure.

For the private sector, the approved text gives greater predictability and security to the realization of investments at a crucial moment for Brazil. For the public authorities and public agents conducting the process, the law brings more clarity to the procedures and criteria for extension. In our view, the measure can contribute to increase the speed of performance and resumption of investments in infrastructure, which are key to the Brazilian economy, and benefit users, who have interest in the continuity and quality of service.

The law regulates three public policy solutions in the scope of partnership agreements that are entered by the federal public administration or that make use of federal funds: (1) the extension of administrative agreements, carried out near the end of their original term; (2) the possibility of early extension, during the course of agreements, with the aim of expanding and anticipating investments; and, finally, (3) the possibility of amicable contractual termination and subsequent re-bidding of concessions in default or whose concessionaires have lost the necessary financial conditions to perform under the agreement.

The extensions will depend on a demonstration of their advantage in relation to holding new public tenders, through technical feasibility studies (EVTE). The process is subject to the evaluation of the TCU and other requirements set forth in the legislation for each sector.

Similarly, the re-bidding should be preceded by EVTE and public consultation, as well as submission of the documents to the TCU. Another relevant issue is the prohibition on participation by some entities in the re-bidding process or in the future capital of the winning bidder. The restriction covers both the concessionaire and shareholders holding 20% or more of the concessionaire’s capital at any time prior to the commencement of the re-bidding process. Even shareholders who did not cause the breach or who have financial conditions to manage the concession will be prevented from participating in the new bidding and the capital of the new concessionaire.

In order to benefit from the law, companies must be qualified under the Investment Partnerships Program (PPI), upon request of the competent ministry and publication of presidential decree (see Federal Law No. 13,334/2016 and CPPI Resolution No. 1/2016).

The law applies only to agreements entered into by the federal public administration in the road, airport, and railway sectors, and extension is directed towards toll roads and railroads. Both sectors have a number of mature concessions (with more than 50% of the original deadline), the extension of which is possible and has already been discussed in many cases with the agencies governing the sector, although there is no general regulation on the matter. The re-bidding applies to the three sectors, but is mainly focused on highways and airports, where there are cases of difficulties in executing agreements due to different factors, such as widespread frustration of demand resulting from the crisis and loss of capacity on the part of the concessionaires belonging to economic groups investigated in Operation Carwash [Lava Jato].

The enactment of Law No. 13,488/17 indicates that the government is willing to solve the problems which hinder the expansion of infrastructure in strategic sectors for national development. This is an important step in the resumption of investments, signaling the government's willingness to address problematic issues that hinder the expansion of infrastructure in sectors that are strategic for national development. However, its real extent will only be known once the law is applied to the sectors regulated by it.

For more information about early extension and re-bidding, see also: Conversion of MP 752 confirms possibility of early extension of railroads and toll road concessions and Law No. 13,448/2017: procedure for re-bidding for public service concessions.

Category: Restructuring and insolvency

The Judicial Reorganization and Bankruptcy Law (LRF) establishes that, once the request for judicial reorganization is accepted, all lawsuits and enforcements against the debtor will be suspended during the stay period, except for claims that are labor in nature, those that involve illiquid amounts and tax foreclosures.

Because tax debts are not subject to this procedure, the LRF provides that it is necessary to create special tax installment payment procedures for companies in financial distress, which, on the occasion of the approval of the reorganization plan, must submit certificates of good tax standing.

However, in practice, due to the principle of preservation of the company, Courts have not allowed the Tax Authorities, in tax foreclosure proceedings, to satisfy debts via excussion of assets of companies under reorganization when those assets are essential to the development of the debtor’s business.

Moreover, due to the principle of preservation of the company, together with the delay in enacting the law, and its lack of comprehensive treatment of all issues, in order to address tax installment payments, Courts have granted requests for judicial reorganization without requiring submission of certificates of good tax standing.

Specifically regarding the difficulty of the Tax Authorities in attaching assets, this issue also involves a conflict raised in a substantial number of judicial reorganizations – namely, when there is a lien/attachment on the assets of a company in reorganization in tax court – with respect to which court has jurisdiction to decide on the essentiality of the asset, whether the tax execution court or the judicial reorganization court.

These disputes were being referred to the Private Law Section of the Superior Court of Justice (STJ), which has established an understanding that the jurisdiction is that of the reorganization court, regardless of the origin of the attachment order. Based on the principle of preservation of the company, this court generally does not allow excussion of assets essential to the debtor by creditors not subject to the procedure.

However, with the entry into force of Law No. 13,043/14, which instituted federal tax debt installment payments specifically for companies undergoing judicial reorganization, there is an attempt to change the scenario described above that deserves closer review.

A recent decision by Justice Herman Benjamin, member of the Public Law Section of the STJ, calls for a re-reading of the understanding consolidated by the Private Law Section. According to Justice Benjamin, even though tax debts are not subject to judicial reorganization plans, considering that tax foreclosures are not suspended, there may be attachment of assets, even those assets that are essential for the fulfillment of the plan.

In this context, upon deciding Special Appeal REsp No. 1.512.118/SP and Internal Interlocutory Appeal AgRg no REsp No. 1.582.260/PE, Justice Benjamin understood that if the plan was approved with evidence of good tax standing, the tax foreclosure will be stayed on the grounds of the stay of tax debts set forth in article 151 of the National Tax Code. Otherwise, if the plan is approved without demonstrating good tax standing, foreclosure may develop normally, notwithstanding the judicial reorganization. In this case, per the Justice Benjamin’s understanding, it is not necessary to affirm the prevalence of the reorganization court over the tax foreclosure court, since opening a reorganization proceeding does not interfere with tax foreclosure, in which the court is competent to decide on essential assets and interests, subject to the principle of lower burdens to the debtor.

These are isolated decisions, but they must be monitored, especially due to some exceptions observed in the practice of sending conflicts of this nature to the STJ’s Private Law Section. In fact, some of these cases were reassigned to the Public Law Section, as in the cases of Conflict of Jurisdiction No. 116,579/DF and No. 112,646/DF. In the latter, the reporting judge, Justice Benjamin, stated that "the conflicts of jurisdiction decided in the Second Section refer to ordinary enforcements, of a civil or labor nature; while this case is a tax foreclosure that is a special procedure, governed by Law No. 6,830/1980, and whose singularity is recognized in Law No. 11,101/2005".

Still on the situation of the Tax Authorities in judicial reorganizations, on April 27, 2016, in the court records of the judicial reorganization of the GEP Group, the 2nd Court of Bankruptcy and Judicial Reorganization of São Paulo, based on the decision reported by Justice Benjamin, conditioned the maintenance of the decision granting the reorganization to submission of proof within 120 days of the existence of an installment plan for tax debts. It would be up to the debtor to choose among the installment options available and not necessarily follow the provisions of Law No. 13,043/14, which establishes payment terms in 84 months and demands a waiver of claims before courts. In that judge’s opinion, the conditions laid down in the law are not compatible with the situation of a company in economic and financial distress.

Despite these developments, the prevailing understanding is still that, since the conditions for adhering to the installment plan set forth in Law No. 13,043/14 are extremely onerous to companies in reorganization and since the law only deals with federal taxes, judicial approval of the plan and the granting of judicial reorganization can occur regardless of whether certificates of good tax standing are submitted.

Category: Labor and employment

Employers wishing to extend the employee's working day in an environment deemed hazardous must have authorization from the Ministry of Labor (MTB), issued only after inspection and analysis of the application, in addition to complying with a series of requirements imposed by the agency.

The same procedure is necessary for the purposes of whole day compensation, such as Saturdays, and in such cases, the replacement of authorization by collective agreements signed with the trade union representing the professional category is not even accepted. This understanding is consolidated in Precedent No. 85, item VI, of the Superior Labor Court (TST).

If the basic text of the Labor Reform is approved by the Federal Senate and sanctioned approved by the President of the Republic, however, these issues may be changed. In any case, not all companies will be free from the need for authorization of the MTB. The exemption provided for in the basic text concerns only those professions that work a 12-hour work shift per 36 hours of rest, such as caretakers and nurses.

The proposed change is in the item that deals with contracts as against legislation. According to the text, the employer and the trade union representative of the professional category are authorized to enter into collective bargaining agreements or accords to extend the workday in environments deemed hazardous without a prior license from the MTB.

This anticipated change in the Consolidated Labor Laws (CLT) will lead to a forced change in case decisions, considering what is required by Precedent No. 85 regarding the invalidity of compensation arrangements for work in a hazardous environment, even if guaranteed by a collective rule. It is necessary to verify how much of the new rule will be applied to pending cases if and when the amendment enters into force.

Another possible change that the Labor Reform may entail for labor relations in hazardous environments concerns pregnant women and women who are breastfeeding. Currently, the law prohibits them from working in environments with any degree of hazard. With the amendment of the Consolidated Labor Laws (CLT) envisaged in the text approved by the Chamber of Deputies, however, pregnant employees will only be mandatory absent from such environments when the activity is considered hazardous to a maximum degree, as in the case of handling of carcinogenic substances or hydrocarbon derivatives.

In medium or minimum degree hazard conditions, pregnant women must be removed from the hazardous environment if they present the employer with an affidavit issued by a trusted doctor who recommends that she avoid such environments during pregnancy. For breastfeeding mothers, the avoidance of such environments will be mandatory with the presentation of a doctor’s health certificate in any degree of hazard found in the work environment.

When the employer is not able to provide the pregnant employee the ability to work in nonhazardous conditions, the basic text of the Labor Reform foresees that gestation will be considered a risk, thus placing the employee on leave and resulting in a right to maternity leave pay during the whole period she is on leave from the company.

If accepted, the changes envisaged in the proposal approved by the Chamber of Deputies will therefore create new requirements for compliance with work in hazardous environments. While this is not the case, it is up to employers to ask MTB for authorization to extend work hours and to remove pregnant and breastfeeding employees in order to avoid fines and lawsuits.

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.