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Country Commercial Guides for FY 2000:
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CHAPTER VII. INVESTMENT CLIMATE
Openness to Foreign Investment
Brazil welcomes foreign investment and has lifted many restrictions in the past several years in order to encourage the entry of foreign investors. The Brazilian Congress approved constitutional amendments in 1995 to eliminate the distinction between foreign and national capital, although some restrictions may return as part of ordinary legislation. The 1962 Foreign Capital law and subsequent amendments govern most foreign investment. Foreign investors have been permitted to invest in the Brazilian stock market since 1991. Gross foreign portfolio investment inflow (Annexes I and IV) increased significantly from $760 million in 1991 to $30 billion in 1997 before falling back to $21 billion in 1998 due to growing investor unease with respect to emerging markets. Gross foreign direct investment annual inflow during the same period increased from $700 million to almost $28.7 billion. Overall, since the first full year of the Real Plan in 1995 to April 1999, Brazil registered a gross foreign direct investment inflow of almost $74 billion ($68 billion net).
Other constitutional amendments passed in 1995 opened formerly closed sectors, such as petroleum, telecommunications, mining, power generation, and internal transport to foreign investors. Since 1996, the insurance sector has been open to foreign investors and most major U.S. firms are already represented, mainly via joint venture arrangements. In the reinsurance sector, the government plans to privatize monopoly state enterprise the Brazil Reinsurance Institute in late 1999 and to open the market to foreign and domestic competition thereafter. New or expanded foreign investment in the banking sector is technically forbidden by the Constitution of 1988. However, since 1995 entry or expansion has been approved on a case-by-case basis on the basis of national interest, obligations under international agreement, or reciprocity. Foreign banks currently account for about 22% of banking system assets.
As of February 1999, Brazil had realized $69 billion in sales revenue and another $16.5 billion in debt transfer as a result of its decade-long privatization program. Federal privatizations accounted for two-thirds of the combined total of $85.5 billion. Foreign investment accounted for two-fifths of sales revenue with the United States in first place with a 14 percent share in the total. The overall U.S. investment total of $10 billion (38 percent of this in telecom alone) accounted for fully one-third of foreign investment in Brazil's privatization program from 1991 to 1998. Primarily reflecting a surge in telecom investment in 1998, Spain was in second place overall with a 12 percent share or $8 billion. Portugal took third place with a seven percent share and a $5 billion investment stake. In the telecom area, the U.S. dropped to third place in 1998 with a 14 percent share in the sectoral sales total of $27 billion. Spain took first place in this sector with a 19 percent share and Portugal was third with a 16 percent share.
All foreign investment must be registered with the Central Bank (see Conversion and Transfers Section in this chapter). With certain exceptions, registration is a pro forma matter. The certificate of registration issued by the Central Bank permits remittances of profits and repatriation of invested capital without additional Central Bank authorization.
Non-governmental groups in Brazil do not regard foreign investment as a major issue. Brazil has a strong nationalistic element, however, and the degree of foreign investment in the state-owned petroleum and telecommunications monopolies remains controversial for some. Unions representing workers in these areas have also opposed privatizing these sectors. It is not uncommon for privatization auctions to be held up for some time by judicial proceedings. However, the government has proven itself adept at dealing with such challenges and delays have not proven onerous. At present, there is some debate as to what limit, if any, to impose on foreign investment in Brazil's mass media.
Brazil has witnessed a significant market opening in recent years. On occasion, the government has also demonstrated a willingness to backtrack. Brazil's applied tariff rights are considerably lower than their bound rates. Brazil currently maintains no applied tariff rates ion excess of 35 percent. Tariffs under Mercosul's Common External Tariff system (TEC) were increased in November 1997 by 3 percent, except for energy and agricultural inputs. Many capital goods exported by the United States have been granted a flat 5 percent import tariff under a special regime. Sharp restrictions on short-term import finance were imposed in April 1997, ostensibly to correct financing distortions due to the large gap between domestic and international interest rates, also raised the cost of importing. These were eliminated for all practical purposes in April 1999.
In December 1995, the Government issued revised regulations establishing investment incentives in the automobile sector -- including a 50 percent reduction in import duties on automobile imports by manufacturers with production facilities in Brazil. However, this regime is scheduled to disappear by January 1, 2000.
Right to Private Ownership and Establishment
Foreign and domestic private entities may establish, own, and dispose of business enterprises. In some circumstances however they may be subject to more restrictions than domestic private entities. (See Openness to foreign investment, and conversion and transfer policies sections in this chapter.)
Protection of Property Rights
Patents -- The Industrial Property bill, approved by the Brazilian Congress in April 1996, and signed into law in May 1996, will significantly improve Brazil's existing regime for the protection of patents and trademarks. In most respects, the new law, which went into effect in May 1997, brings Brazil's patent and trademark regime up to the international standards specified in the Uruguay Round Trade Related Aspects of Intellectual Property (TRIPS) Agreement.
The law provides patent protection for chemical/pharmaceutical substances, chemical compounds and processed food products, which were not patentable under Brazil's 1971 Industrial Property Code. The new law also provides for the patentability of genetically altered microorganisms. In addition, the new law extends the term for product patents from 15 to 20 years and improves protection for trademarks, including for internationally "famous" marks. The law provides for "pipeline" protection, effective immediately, for pharmaceutical, chemical and processed food products that have been patented in other countries but not yet placed on any market. Processing of "pipeline" patents has proceeded slowly.
The new Industrial Property law includes compulsory licensing and local working requirements which appear to be TRIPS-inconsistent. The law would theoretically permit the grant of a compulsory license if a patent owner has failed to work, i.e. locally manufacture, the patented invention in Brazil within three years of issuance. There is an exception for cases in which local production would be "economically non-viable," in which case imports would be recognized as working.
Brazil is a signatory to the GATT Uruguay Round Accords, including the Trade Related Aspects of Intellectual Property (TRIPS) Agreement, signed in April 1994. Following passage of copyright and software copyright protection legislation in 1998, pending legislation on the protection of layout designs of integrated circuits is expected to bring Brazil's intellectual property rights regime in these areas up to TRIPs standards.
Brazil is a member of the World Intellectual Property Organization (WIPO) and a signatory of the Bern Convention on artistic property, the Washington Patent Cooperation Treaty, and the Paris Convention on Protection of Intellectual Property. In August 1992, Brazil removed its reservations and fully accepted the Stockholm revision of the Paris Convention.
Trademarks-- The fraudulent use of internationally "famous" marks has been a significant problem in Brazil. However, progress has been made in this area as Brazil has taken action in the last four years to provide greater protection for such marks. Some foreign firms have been successful in court actions against trademark infringement.
The new Industrial Property Law provides for significant improvements in Brazil's trademark regime, including better protection for internationally known trademarks. Trademark licensing agreements must be registered with the National Institute of Industrial Property (INPI) to be enforceable; however, the failure to register licensing agreements will no longer result in cancellation of trademark registration for non-use.
Copyrights: Brazil's copyright law generally conforms to world-class standards, although amendments are needed to address parallel imports. The new software copyright protection law contains amendments that would introduce a rental right and an increase in the term of protection to 50 years.
Despite the government's recent efforts to stem the flow of pirated goods across the border with Paraguay, enforcement of copyright laws has generally been lax. The U.S. private sector estimates that piracy of videocassettes, sound recordings and musical compositions, books and computer software continues at substantial levels. In the last three years, enforcement of laws against video and software piracy has improved, and foreign firms have had some success in using the Brazilian legal system to protect their copyrights. For example, a major U.S. software firm won a landmark decision against software pirates in 1993. The Government of Brazil has also initiated action to reduce the importation of pirated sound recordings and videocassettes.
Integrated Circuit Layout Designs -- A government drafted bill to provide protection for the layout design of integrated circuits (computer mask works) was introduced in the Brazilian Congress in April 1996. For information on Investment issues related to free trade zones, please see information under section "VI, Trade Regulations, Customs and Standards".
Major Taxation Issues Affecting U.S. Business
Profit and dividend remittances are subject to a 15 percent income withholding tax. Brazil has no double taxation treaty with the United States, but does have such treaties with a number of other countries. The United States and Brazil have discussed resuming negotiations on a bilateral taxation agreement but this has been postponed indefinitely. Please note, as stated above that U.S. business is particularly concerned about some of the stringent tax and revenue restrictions on operations in Brazil. The US/Brazil Council of the U.S. Chamber of Commerce can provide additional information on these issues.
It is also very important to perform rigorous proper due diligence in any business investment, especially related to the privatization process and especially in respect to tax liabilities. Several U.S. Companies have found themselves confronted with tax liabilities, often in back taxes, that they did not fully account for in their due diligence process because of lack of clarity. Ideally, a specific opinion should be obtained from the Receita Federal (the Brazilian IRS) on all outstanding tax issues before purchase investments are made.
Performance Requirements/Incentives
The government has been working for several years with the automobile industry to develop a formula for reducing certain import duties as a reward for exports containing a specific local content percentage. The automobile industry has been pressing for relief from various taxes in return for promises of increased investment and exports. In June 1995, the government announced a reduction on tariffs on imported inputs and accelerated depreciation provided that the value of the imports does not exceed 60 percent of domestic sales. The regulations, which will expire in December 1999, provide for a 50-percent reduction in import tariffs on automobiles imported by manufacturers with production facilities in Brazil.
Geographic preferences consist of tax benefits for investment in less developed parts of the country, such as the Northeast and the Center-West, with equal application to foreign and domestic investors. These benefits have had little impact on foreign investment decisions; most foreign investment remains concentrated in the more industrialized southern part of Brazil. Some municipalities provide land on favorable terms for industrial development.
In firms employing three or more persons, Brazilian nationals must constitute at least two-thirds of all employees and receive at least two-thirds of total payroll. Foreign specialists in fields where Brazilians are unavailable are not counted in calculating the one-third permitted for non-Brazilians.
Brazil offers the following export incentives:
- Tax and tariff exemptions for equipment and materials imported for the production of goods for export;
- Excise and sales tax exemptions on export products;
- Excise tax rebates on materials used in the manufacture of export products;
- Withholding tax exemption for remittances overseas for marketing and for loan payments; and,
- Financial operations (IOF) tax exemption for deposit receipts on export products.
Brazil offers the following investment incentives:
- Accelerated depreciation on new machines and equipment for industrial production;
- Income tax deduction for expenses of feeding workers and providing transportation;
- Income tax deduction for cultural donations/sponsorships; and,
- Value-added tax deductions for R & D spending in the telecommunications sector in Brazil.
The Special Agency for Industrial Financing (FINAME) of the National Bank for Economic and Social Development (BNDES) provides financing for purchases by Brazilian firms of Brazilian-made machinery and equipment -- capital goods with a high level of domestic content.
Transparency of the Regulatory System
Labor law, especially, has been a target for reform recently. Change is difficult, however, because many of the elements most criticized have been enshrined in the Constitution of 1988. The more rigorous requirements for amending the Constitution make change a long, difficult process. In addition, many defend these constitutionally defined "rights" as legitimate conquests by the labor movement. Elements of labor legislation most frequently criticized include: a) mandatory and extensive benefits; b) high non-wage payments by employers to support these benefits; c) a mandatory tax on employers and workers to support a government-defined union structure; d) restrictions on union organization (some of which have eased in recent years); and e) the labor courts system.
At present, at the request of either one of the interested parties, the labor courts serve as compulsory arbitrators, determining salaries and working conditions in collective bargaining disputes. The current Labor Minister favors reducing this role of the courts to encourage negotiated rather than imposed wage settlements. He also favors amending the Constitution and the laws so that these "rights" could be included in collective bargaining agreements. The Minister also wants to end restrictions on union organization and the so-called "union tax" which requires all workers to contribute a portion of their salaries to support the union structure.
Greatly reduced inflation virtually has eliminated pressures on businesses to make frequent salary adjustments, and government efforts to control salary levels have ended. In July 1995 the government issued a decree ending the indexation of wages and salaries, and leaving salary increases to annual bargaining between employers and unions. Since the decree, most wage settlements have barely covered the rate of inflation, indicating that the government has severed the link between inflation and salary increases. When the devaluation of the Real in early 1999 incited fears of renewed inflation, the union movement proved extremely reluctant to press for the reimpostion of wage indexation.
Corruption
Corruption is a persistent problem in Brazil. Transparency International, a non-governmental organization based in Berlin, listed Brazil as the 46th most corrupt of 85 countries listed in its 1998 Corruption Index, a survey of international business perceptions. In a show of good faith, Brazil has worked constructively with the U.S. and other countries in the hemisphere in developing the Inter-American Convention on Corruption. Brazil signed the Convention, which calls on signatories to pass legislation criminalizing corruption, in 1996. Brazil is a signatory of the 1997 OECD Bribery Convention, which has yet to be ratified in their Congress.
A number of Brazilian NGOs have emerged to work for further progress in this area. Brazil has many laws against corruption but enforcement is weak. Because of traditional state domination of the economy with many large parastatals in key sectors, opportunities for corruption have always been plentiful. However, times are changing with many state enterprises already privatized or slated for privatization and public tolerance of political or business corruption clearly declining. The Government is also moving to deregulate many areas of the economy, which should diminish opportunities for corruption.
Labor
There is growing recognition that the Brazilian educational system has failed to adequately prepare the workforce for future economic growth. Regional disparities are profound in terms of the availability of skilled and semi-skilled workers. Regional disparities are also apparent in regard to illiteracy, which, according to 1990 Brazilian Institute of Geography and Statistics (IBGE) statistics, stands at 23.3 percent of the population -- with 14.7 percent illiteracy in the Southeast (including Rio and Sao Paulo) and 42.6 percent in the Northeast (including Recife and Salvador). Functional illiteracy is higher than the noted rates.
Brazil's work force numbers approximately 70,000,000 persons, but roughly half of that number work in the informal economy. IBGE calculates an average unemployment rate for the country based on data taken monthly from Brazil's six largest metropolitan areas. IBGE's survey showed that the average unemployment for these areas during 1998 was 7.75 percent, a substantial increase over the low of 3.8 percent registered in 1996.
The number of strikes in 1998 decreased slightly during 1998 as Brazil had an average of 85 a month against more than a 100 a month in 1997. Given rising unemployment, most strikes have been over jobs and companies' plans for downsizing.
Brazil has ratified the ILO Convention on workers' rights, and those rights are respected scrupulously, if grudgingly. Labor unions, especially in the most skilled sectors, such as metalworking and banking, tend to be well-organized and aggressive in defending wages and working conditions. Unions have organized most sectors of the economy and in general do an excellent job of ensuring respect for workers' rights. In addition, workers may pursue their grievances through a system of labor courts that blanket the country.
Until recently, labor relations were dominated by a conflict approach. Both management and labor would stake out extreme positions and defend them as long as possible. The ultimate decision on salaries, job tenure, and other areas would be imposed by the labor courts, rather than through negotiated compromises between labor and management. The current Labor Minister has advocated a more negotiation-oriented approach, and is seeking changes in Brazilian labor laws to facilitate direct labor-management negotiations, and to deregulate and limit labor courts rule-making authority.
Efficiency of Capital Markets and Portfolio Investment
Brazil opened its market to foreign portfolio investment in 1991. The Brazilian financial sector is large and sophisticated. Perennially high real interest rates and a reluctance of banks to lend for more than six months has meant that few businesses, either foreign or domestic, have been able to borrow locally. Instead, companies doing business in Brazil normally seek to borrow from abroad to take advantage of lower interest rates and availability of longer term capital. Larger firms in particular enjoyed increasingly narrower spreads and longer tenors as perceived "Brazil risk" dropped prior to the onset of the Asian Financial Crisis in late 1997. Since that event and particularly following the Russian default in August 1998, access by top-tier Brazilian firms to international capital markets has been constrained, requiring firms to accept shorter tenors and more costly financing. Following the January 1999 decision to move to a floating rate regime, access to international capital markets for first-line firms has improved but pricing is still well above pre-Crisis levels.
With the introduction of the new currency, the "Real," in July 1994, monthly inflation dropped from 50 percent in June 1994 to only two percent for all of 1998. The disappearance of so-called "float income" due to high inflation caused the banking sector to enter a period of consolidation in 1995. The share of the financial sector in GDP consequently dropped sharply from almost 16 percent in 1993 to fewer than seven percent by 1995. Brazil had 233 banks as of December 1998, down 40 institutions from June 1994. The number of federal banks stayed stable at six, but the number of state banks dropped by ten to 24. The number of private national banks fell by 41 to 106, while the number of foreign affiliates stayed the same at 19. Reflecting a wave of acquisitions in recent years, the number of foreign controlled banks surged by 17 to 36 in the four and a half-year period.
Banks expanded credit operations rapidly following commencement of the stabilization policy in mid-94. However, fearing a consumption boom, Brazil's Central Bank imposed high compulsory reserve requirements that were later eased in the second half of 1995. At the same time, borrowers, unaccustomed to a low inflation environment, over-borrowed and subsequently fell behind in payments due to high interest rates. For their part, some banks proved unable to judge credit risk well and suffered rising default rates as a result, particularly via mass merchandiser clients who increasingly extended credit directly to clients.
Due to these factors and the loss of "float income", estimated at US$ nine billion in 1993 alone, domestic banks began to experience liquidity problems and 1996 and 1997 were marked by a series of failures, mergers, and acquisitions. Three of the country's ten largest banks failed and were taken over by other banks and some 20 smaller banks have been liquidated. Individual state banking institutions in particular are burdened with large amounts of unserviced debts owed by state governments and many are in poor financial health. Of 33 state banking institutions, an estimated two-thirds will be liquidated, privatized, or transformed into development agencies. Bank profits increasingly depend on arbitrage operations, i.e., borrowing overseas at lower rates to re-lend in Brazil and high spreads (over 20 percent on an annual basis) between what banks pay depositors and what they charge borrowers. Banks are also relying more on fee income for revenues and seeking to contain costs while expanding customer services.
BRAZIL'S TEN LARGEST BANKS Public and private (US$ Billions) (December 1998) BANK Total Total Net Assets Deposits Worth Banco do Brasil 101.3 44.2 5.4 Federal Savings Bank 98.9 52.1 3.0 BNDES 67.8 0.3 9.1 Bradesco 41.5 21.3 5.3 Itau 32.7 19.6 3.8 Unibanco 21.6 7.7 2.4 Banespa 20.4 8.8 3.4 Real 13.6 4.3 0.8 Banrisul 12.9 3.4 N/A Safra 12.4 2.6 0.8Source: Central Bank
Notes: Conversion from domestic currency values at the average 1998 real/dollar exchange rate of 1.1603. Dollar values in 1999 will be considerable reduced to the devaluation of the domestic currency in January. Bradesco, Itau, Unibanco, and Safra are private banks. Banco do Brasil, the Federal Savings Bank (Caiza Economica Federal), and the National Bank for Economic and Social Development (BNDES) are federal banks. Banespa is the Sao Paulo state bank and is scheduled for privatization in 1999. Banrisul is the state bank of Rio Grande do Sul.
Few corporations raise capital through the Brazilian stock exchanges. In 1998 20 new issues in the primary market raised US$ 3,484 million and turnover in the secondary market was US$ 172,500. Trading is highly concentrated in a very few stocks. 586 companies are listed on Brazilian exchanges; however, the shares of former state-owned telecommunications company, Telebras, accounts for over 50 percent of volume. State-owned petroleum company Petrobras, state-owned electric company Eletrobras and recently privatized Sao Paulo State telecom company TELESP together account for about 18 percent of trading activity on the Brazilian exchanges. Brazilian firms are also listing on the NYSE via American Depository Receipts (ADR's). Examples include Telebras, Unibanco, Gerdau and Brahma Breweries.
The Brazilian Securities Exchange Commission (CVM) directly regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies. The CVM follows the policies set by the National Monetary Council and the Central Bank. Foreigners can only participate in the Brazilian securities market through a management company authorized by the CVM.
A president and four directors, appointed by the President and subordinate to the Finance Minister administer the CVM. Legislation establishing the CVM (enacted in 1976) empowers it to supervise the activities and services of the securities market and impose fines to punish infractions. In general, enforcement is regarded as weak. CVM authorization is required before securities exchanges can start operations.
The CVM has acted to open the capital market both internally and for foreign institutional investors. New types of securities have been authorized. At present, up to two-thirds of a corporation's capital may be preferred (non-voting) shares, so it is possible to achieve majority control of voting shares, in some cases, by holding only 17 percent of total capital. Accords have been signed with the Argentine and Uruguayan stock exchanges to permit joint trading.
The Government of Brazil admitted foreign portfolio investment by institutions via Resolution 1832 of May 31, 1991. Foreign portfolio investors, institutions, and funds must be registered with the CVM. Previously, institutional investors could not invest directly, but only via an investment fund established abroad. An individual must invest a minimum of US$ five million. No longer must funds remain in the country for a minimum period before being repatriated. The dividend remittance tax is 15 percent. The following table shows the significant growth in foreign portfolio investment since the opening:
Portfolio Investment in Brazil (US$ MILLIONS) YEAR INFLOW OUTFLOW NET 1994 21,769 16,820 4,949 1995 22,672 20,676 1,996 1996 25,190 19,320 5,870 1997 37,887 31,729 6,158 1998 26,504 24,547 1,957 1999 5,306 4,445 861 (Jan-Apr) Note: Portfolio investment defined as Annexes I to V. Source: Central Bank of BrazilIn mid-1991, foreign investors were permitted to invest in Brazil via American and international depository receipts (ADRs and IDRs), i.e. securities issued abroad based upon Brazilian shares deposited with a financial fiduciary institution. Permission for firms in Brazil to place commercial paper in international markets was granted in mid-1990 and has been much used as a cheaper source of financing than the high real rates and short-terms available in Brazil. Rules allowing swaps and hedges were issued in 1992. Resolution 1935 of June 30, 1992, authorized foreign institutional investors to trade on the futures and commodities market (BMF) futures and options contracts based on stock indices, interest rates, and exchange rates.
Leasing operations are extensively used and export financing by other governments is sometimes available for goods being imported into Brazil.
BNDES, the government national development bank, is the primary Brazilian source of longer-term credit. BNDES has traditionally limited its financing to Brazilian firms, but may consider loans to foreign firms, particularly for modernization and environmental purposes, particularly if BNDES' own source for such funds is foreign, e.g., the World Bank or Inter-American Development Bank or a bilateral official financing program. The first such loan to a multinational company was approved in June 1992.
FINAME (Special Agency for Industrial Financing) provides foreign and domestic companies operating in Brazil financing for the manufacturing and marketing of capital goods. In 1998 the program disbursed R$ 8.6 billion. BNDES-exim (Export Financing) is a part of FINAME, which finances capital and consumer good exports and services associated for both foreign and domestic companies. An export credit program for capital and some consumer durable goods, known as PROEX, was established in 1991. PROEX receives funds from the National Treasury to offer assistance in the areas of interest rate equalization, capital and other goods exports, and service exports. Its operations have recently been strengthened and expanded by the Government in an effort to stimulate exports. It is managed by Banco do Brasil.
Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil. Changes in indices used to correct for inflation have, at times, made normal accounting practices more difficult and given rise to legal challenges. The failure of major banks and large businesses during 1995, notwithstanding positive financial statements prepared by the major accounting firms, raised doubts about the credibility of these financial statements. Beginning in 1996, auditors have been personally liable for the accuracy of accounting statements prepared for banks.
The government legally ended the reinsurance monopoly in late 1996. With the completion of work by private consultants to value the Brazil Reinsurance Institute (IRB) and to recommend a privatization model, the firm is scheduled to be privatized in late 1999 and the reinsurance market opened to foreign and domestic competitors. U.S. and European firms have expressed concern with certain of the proposed regulations that will govern the reinsurance market in Brazil following privatization of IRB. Chief among these are a proposed $20 million collateral fund, limits on the ability of primary insurers to reinsure with foreign firms, and the portion of the market to be reserved for firms locally established in Brazil during an initial two-year transition period following the auction of IRB.
Brazilian law recognizes mergers, in which one company loses its separate identity by being merged into another, and consolidations, in which the pre-existing companies are extinguished and a new entity emerges. The procedures for both are essentially the same. Sales of Brazilian companies usually result from private negotiations, rather than stock exchange activities. Acquisitions resulting in market concentration in excess of 20 percent are subject to review by the Administrative Council for Economic Defense (CADE) under Brazil's 1994 Anti-trust Law.
Conversion and Transfer Policies
There are few restrictions on converting or transferring funds associated with an investment. However, the Central Bank has broad administrative discretion in regulating remittances, which in the past has created problems for foreign investors. At this time, foreign investors may freely convert Brazilian currency in the foreign exchange market.
Foreigners investing in Brazil must register their investment with the Central Bank Foreign Capital Registration and Supervision office (FIRCE). Investments involving royalties -- including franchises -- and technology transfer must be registered with the patent office (INPI) as well as with FIRCE. Registration with the Central Bank should be requested within 30 days of the inflow of resources to Brazil.
FIRCE has worked to eliminate registration delays and its regulations now call for approval within 30 days. If an application is not acted upon, approval is now automatic at the expiration of this period. The Central Bank also registers leasing contracts and offers certain more favorable treatment for longer periods
.Foreigners investing in Brazil, who have registered their investment with the Central Bank, are able to remit dividends, capital, and royalties, provided that applicable taxes have been paid and certain other conditions met. This remittance transaction may be carried out at any bank by presenting the certificate of registration and showing that any applicable taxes have been paid. Profit/dividend remittances also require the submission of a balance sheet showing the profit realized. The bank arranging the remittance must check that all requirements have been met and enter the remittance in the Central Bank computer system. The procedure is the same for registering and remitting of principal and interest on loans in the private sector. Remittances of capital gains require specific Central Bank approval.
In January 1992, the Central Bank revoked a 1981 instruction which had impeded remittances that stemmed from financial rather than operational profits and which, under certain circumstances, prevented registration of reinvestment stemming from financial profits. Firms are now free to reinvest any excess working capital and to treat financial profits the same as operational profits.
Loan Payments-- Since January 1991, private firms have been allowed to pay external creditors directly. Previously, these payments were made to the Central Bank and retained there to the detriment of creditors. For foreign loans, bonds, commercial paper, etc., favorable income tax treatment is given on remittance of interest and other charges, provided the funds remain in Brazil for 30 months.
Royalties-- There has been a relaxation since 1991 of the restrictions on the remittances of royalty payments for patent and trademark use between subsidiaries established in Brazil and the parent office headquartered overseas and on remittances of franchise contract royalties. A 1992 resolution simplified procedures and, in particular, eliminated a number of requirements (but not all) concerning technology transfer agreements. No royalties or other fees may be transferred between related companies for the use of software.
Under the provisions of a 1991 law, royalties for the use of patents and trademarks, and remuneration for technical, scientific, administrative or other assistance paid by the Brazilian subsidiary to an individual or entity domiciled overseas that directly or indirectly controls its voting capital has now become deductible, with some limitations, for purposes of determining taxable profits. Deductions are subject to the requirement that the parties sign an agreement that must be approved by INPI and registered with the Central Bank. The provision applies to contracts signed subsequent to January 1992. The law also permits remittance payments for trademark or patent licenses by a subsidiary established in Brazil to its controlling company overseas.
While the provision governing subsidiaries has been liberalized, branches (as opposed to subsidiaries) of foreign firms do not benefit from the law. Thus, a prohibition remains in effect on making either tax deductions or remittances for payment of royalties for trademark and patent licenses in those cases when the contract is between the branch in Brazil and the parent company headquartered overseas. Transfer of trademark fees is limited to one percent of turnover. In addition, legislation pre-dating the December 1991 changes and applying to both foreign and domestic firms, limits royalty deductions to 5 percent of product sales.
The remittance of franchise royalties requires prior action by INPI. Until July 1992, INPI did not recognize franchise contracts, and required separate contracts for trademarks, technical assistance services and technology transfer. In June 1992, INPI issued a regulation which recognizes that the above are contained in franchising contracts and, on a case-by-case basis, will approve the contracts for the payment of franchise royalties.
Remittances related to technology transfers are subject to the tax on credit, foreign exchange, and insurance (IOF). The IOF tax that had been imposed on software royalty remittances was eliminated in late 1994.
Taxes-- Profit and dividend remittances are subject to a 15 percent income withholding tax. Repatriations are exempt from income tax. Brazil has no double taxation treaty with the United States, but does have such treaties with a number of other countries. The United States and Brazil have discussed resuming negotiations for a bilateral tax treaty.
Identification-- the name of the person carrying out the transaction and the purpose must be provided for all foreign exchange transactions into or out of reais above $10,000 in value.
OPIC Inconvertibility Claims-- In the event OPIC must pay an inconvertibility claim, the U.S. Embassy and other USG agencies operating in Brazil have an annual need for approximately $60 million in local currency. Now entering the sixth year of its most successful stabilization program, Brazil has had a history of high inflation since the 1970's and this and frequent devaluations have been a traditional part of doing business here for many years. Government attempts to bring down the inflation rate have included the issuance of new currencies, with five different issues making their debut in the past decade. The fifth, the "Real", was introduced on July 1, 1994 and has proved the most durable of the lot thus far.
Expropriation and Compensation
There have not been any expropriatory actions in Brazil in the recent past nor any signs suggesting that the government is contemplating such actions. Some claims regarding land expropriations by state agencies many years ago have been judged by courts in U.S. citizens' favor. However, there remain individuals have not yet been compensated because the states have appealed these decisions. In other cases, U.S. firms have encountered lengthy court and administrative delays in seeking to collect funds owed them by government entities, e.g., for overpayment of taxes.
Dispute Settlement, Including Enforcement of Foreign Arbitral Awards
Brazil is not a member of the International Center for the Settlement of Investment Disputes (ICSID - also known as the Washington Convention) nor of the New York Convention of 1958 on the recognition and enforcement of foreign arbitration awards.
In September 1992, the Administration sent to the Congress for approval of the text of the Interamerican Convention on International Commercial Arbitration, which Brazil signed in January 1975, as well as the 1979 Interamerican Convention on the Extraterritorial Efficacy of Foreign (Judicial) Decisions and (Arbitral) Awards (Sentenças e Laudos).
Brazil has signed Bilateral Investment Agreements which permit arbitration by either ICSID or a panel set up under the United Nations Rules for International Commercial Law. Legal experts doubt that such arbitration provisions would apply if the Government of Brazil, or another government entity, was one of the parties to the dispute.
Arbitration clauses in contracts are not enforceable as such. Foreign arbitration awards require confirmation by a court of the country in which rendered and the Brazilian Supreme Court. Binding arbitration between foreign investors and state entities is apparently prohibited on the grounds that it infringes the sovereign rights of the state.
Brazil has a functional commercial code that governs most aspects of commercial association, except for corporations formed for the provision of professional services, which are governed by the civil code. Bankruptcy laws provide for creditors' rights. An overburdened court system is available for enforcing property rights; decisions take years. Decisions of the Supreme Federal Tribunal are not automatically binding on lower courts, leading to more appeals than would otherwise occur.
Political Violence (as it may affect investments)
There were no reports of politically motivated damage to foreign investors' projects or installations. Significant but decreasing human rights violations, however, continues to occur throughout Brazil. In urban areas, the police are frequently implicated in killings and abuse of prisoners, and are rarely charged and convicted. In rural areas, powerful landowners, often aided by police serving as their private security agents, use violence to settle land disputes and influences the local judiciary.
Bilateral Investment Agreements
Brazil has signed Bilateral Investment Agreements (BITs) with 14 countries and completed negotiations on two regional Mercosul agreements since 1994. National signatories include Portugal, Chile, the United Kingdom, Switzerland, Finland, France, Italy, Denmark, Venezuela, Korea, Germany, Cuba, the Netherlands, and Belgium-Luxembourg. There are two Mercosul investment-related agreements: the Buenos Aires Protocol ("extrabloc") and the Colonia Protocol ("intrabloc"). Negotiations are reportedly underway with other countries, including Norway, Spain, Sweden, and China. Both houses of the Brazilian Congress have yet to ratify any of the investment treaties negotiated by the government although at least three have passed Lower House committees.
OPIC and Other Investment Insurance Programs
Programs of the Overseas Private Investment Corporation (OPIC) are fully available and activity has increased in recent years. The size of OPIC's exposure in Brazil may occasionally limit its capacity for new coverage, particularly in the area of currency convertibility insurance.
Brazil became a member of the Multilateral Investment Guarantee Agency in 1992.
Capital Outflow Policy
There are few restrictions on converting or transferring funds associated with an investment. However, the Central Bank has broad administrative discretion in regulating remittances, which in the past has created problems for foreign investors. At this time, foreign investors may freely convert Brazilian currency either at the "commercial" or "floating" rates. (Refer to Chapter VII, Conversion and Transfer Policies Section for further details.)
There has been a relaxation since 1991 of the restrictions on the remittances of royalty payments for patent and trademark use between subsidiaries established in Brazil and the parent office headquartered overseas and on remittances of franchise contract royalties. A 1992 INPI resolution simplified procedures and, in particular, eliminated a number of requirements (but not all) concerning technology transfer agreements. No royalties or other fees may be transferred between related companies for the use of software. (Refer to Chapter VII - Royalties Section for further information.)
CAPITAL OUTFLOW FROM BRAZIL 1992-1999 (US$ millions) YEAR NET OUTFLOW 1992 2,328 1993 9,282 1994 18,480 1995 23,707 1996 20,559 1997 35,912 1998 36,290 1999 7,368 (Jan-Apr) Source: Central Bank of Brazil. Capital outflow total equals Portfolio + Direct Investment + Funds.Major Foreign Investors in Brazil
As of December 1998, the United States was the largest single foreign investor in Brazil followed by Spain, Germany, Japan, and France. Investment from the Cayman Islands began growing rapidly in 1995 and is thought to represent mainly repatriation of Brazilian capital entering the country as foreign investment and, to a lesser extent, investment activity by other national groups. Investment from Spain and Portugal surged in 1998 due to involvement in telecom privatization and greatly increased investment in the banking sector by Spain.
According to a study of Central Bank statistics carried out by the Brazilian Studies Center for Transnational Companies and Economic Globalization (SOBEET), the stock of direct foreign investment in Brazil stood at US$ 130.7 billion as of December 1998. Of this, the United States reportedly had the largest share at about 30% or about US$ 39 billion. Spain had 8.4% of the total or US$ 10.9 billion and Germany 8.1% or US$ 10.5 billion.
Four U.S. companies -- GM, Ford, Texaco, and Exxon -- are among the top ten domestic firms. Six of the top ten importing firms in 1998 were foreign: Fiat, General Motors, Mercedes-Benz, Ford, and Ericsson Telecommunications. Four of the top ten exporters -- Fiat, Ford, General Motors, and Volkswagen -- represented foreign investment.
Brazil's Contact Information for Investment-related Inquiries.
Questions regarding investment norms should be addressed to the Department of Foreign Capital of the Central Bank of Brasil - FIRCE, at the following addresses:
BANCO CENTRAL DO BRASIL Departamento de Capitais Estrangeiros - FIRCE SBS - Quadra 3 - Bloco B - Ed. Sede - 70 andar 70074-900 Brasilia - DF phone # 55 61 414 1380 fax 55 61 226 3441 NATIONAL BANK OF ECONOMIC SOCIAL DEVELOPMENT - BNDES República do Chile, 100/Room 1120 20139-900 - Rio de Janeiro - RJ Phone: (5521) 277-7001 Fax: (5521) 533-1538 José Pio Borges, President José Mauro Carneiro, Vice President Fernando Perrone, Infrastructure Director Sallustio Rosa, Financial Assistant Phone: (5521) 277-7399 José Luis Osório , Privatization Director Phone: (5521) 277-8061/8062 Fax: (5521) 240-3890 RIO DE JANEIRO STATE SECRETARIAT OF ECONOMIC AND TOURISM DEVELOPMENT Rua da Ajuda, 5, 7 andar 20040-000 Rio de Janeiro, RJ Tito Bruno Bandeira Ryff, State Secretary Tel: 55-21-533-3656 Fax: 55-21-533-3525 CODIN - RIO DE JANEIRO INDUSTRIAL DEVELOPMENT COMPANY Av. Nilo Peçanha, 11/Rooms 1003 and 1005 - Centro 20020-100 - Rio de Janeiro - RJ Phone: (5521) 210-1375 / 240-3851/3588 Fax: (5521) 262-0001 Marco Antônio de A. Araújo Lima, President RIO DE JANEIRO FEDERATION OF INDUSTRIES - FIRJAN Eduardo Eugênio Gouveia Vieira President Av. Graça Aranha nº 1 CEP 20030-002 - Rio de Janeiro - RJ - Brazil Tel: 55- 21-292-3939 Fax: 55-21-262-6705 Homepage: www.firjan.org.br BANCO BOZANO SIMONSEN Av. Rio Branco, 138 20.057-900 - Rio de Janeiro - RJ Phone: (5521) 508-4000 / 508-4232 (President's office) Fax: 508-4840 Julio Rafael de Aragão Bozano, Group President Paulo V. Ferraz Pereira, President BANCO ICATU Av. Presidente Wilson, 231 /9th Floor 20.040-001 - Rio de Janeiro - RJ Phone: (5521) 804-8500 Fax: (5521) 804-8600 Luis Antonio Nabuco Almeida Braga, President BAHIA SECRETARIAT OF INDUSTRY, COMMERCE AND MINING Centro Administrativo da Bahia Quarta Avenida, 415 41750-300 Salvador BA Phone: (55 71) 371-9962 / 370 7842 / 370 7838 Fax: (55-71)-370-7939 Benito Gama, Secretary STATE OF BAHIA FEDERATION OF INDUSTRIES - FIEB Rua Edistio Pondé, 342 41.760-310, Salvador, BA Phone: (55 71) 343-1261 Fax: (55 71) 341-3593 José de Freitas Mascarenhas, President Mauricio Chimabuquero, Economic Department GOVERNMENT PLANNING SECRETARIAT Palácio Anchieta Praça João Clímaco, s/n 29015-110 Vitória ES Ricardo Ferreira dos Santos, Coordinator Tel: 55-27-322-0355 Fax: 55-27-322-0483 STATE OF ESPÍRITO SANTO FEDERATION OF INDUSTRIES -FINDES Av. Nossa Senhora da Penha, 2053, Edif. FINDES 29.045-401, Vitoria, ES Phone: (55 27) 227-4280 Fax: (55 27) 225-3603 José Bráulio Bassini - President SUDENE - SUPERINTENDENCY FOR THE DEVELOPMENT OF THE NORTHEAST Aloísio de Guimarães Sotero Superintendent Praça Min. João Gonçalves de Souza, s/nº Ed. Sudene - Sala 13n-041 - Engenho do Meio CEP 50670-900 Recife-PE Phone: (55-81) 416 2109 Fax: (55-81) 271 3843 E-mail: asotero@sudene.gov.br SERGIPE FEDERATION OF INDUSTRIES Federação das Indústrias do Estado de Sergipe Idalito de Oliveira, President Av. Carlos Rodrigues da Cruz, s/nº Capucho 49080-190 Aracaju, SE Tel: (55-79) 241 2410 / 241 3344 Fax: (55-79) 241 3564 SECRETARIA DO PLANEJAMENTO DO ESTADO DO RIO GRANDE DO SUL Elbio Renato M. Martins Av. Borges de Medeiros, 1501 Porto Alegre, 90119-900 RS Phone: 55/51/225-8437 Fax: 55/51/228-9702 SECRETARIA DE ESTADO DA INDUSTRIA, COMERCIO E DESENVOLVIMENTO ECONOMICO DO
ESTADO DO PARANÁ Naim Akel Filho R. Marechal Hermes, 751 - 3º andar Curitiba, 80530-230 PR Phone: 5541/ 254-7612 / 252-7102 / 252-4561/ 252-7676 Fax: 5541/ 252-4820 SECRETARIA DA HABITAÇÃO E DESENVOLVIMENTO URBANO DE SAO PAULO Attilio Piraino Filho attilio@ibm.net Rua Sao bento 405 22 andar Sao Paulo, SP Phone: 5511/239-1410 ou 5511/239-2112 Fax: 5511/239-0313 SECRETARIA DE DESENVOLVIMENTO ECONOMICO DE SANTA CATARINA Antonio Ceron Rua Tenente Silveira, 94 - 12º andar Florianópolis, SC Phone: 55/48/ 216-8888 Fax: 55/48/ 216-8998
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