Legislation for Foreign Investment Statutes in Countries in the Americas
Comparative Study
1. Legal bases for foreign investment
Objective: Indicate if there is a Foreign Investment Statute and describe it. In the paragraphs below, indicate the legal rank of the norms contained in the Statute, i.e., regulations for expropriation fall under which rank?
1.1 Constitutional
Investment – Constitution of the Federative Republic of Brazil, Article 171, amended by Constitutional Amendment No. 6 and Article 172.
1.2 Legal
Investment – Law No. 4.131/62, regulated by Decree No. 55.762/65.
1.3 Administrative
Investment
Resolution No. 1.289/97;
CVM (Securities Commission) Order No. 157 of August 21, 1991, supplemented by CVM Order No. 222 of October 21, 1994;
Resolution No. 2.034, of December 17, 1994;
Resolution No. 2.203 of September 29, 1995.
CVM order No. 209, 25.03.94 and Resolution No. 2247, 08.02.96 referring to mutual investment funds in arising enterprises, and CVM order 205, 14.01.94, and Resolution No. 2,248, 08.02.96 referring to property investment funds.
2. Concept and subject of foreign investment
Objective: It is essential that both the investor and the nature of the investment be identified, so as to determine to which activity and to whom the regulations will be applied. This is also essential at the international level, especially in case of dispute and arbitration.
2.1 Is foreign investment in your country legally defined or conceptualized?
Article 1 of Law 4.131/62 – Goods, machinery and equipment entering Brazil without an initial outlay of foreign exchange, for use in producing goods or services, as well as financial or monetary resources brought into the country for investment in economic activities, provided that in both cases they belong to natural or juridical persons resident, domiciled or having an office abroad.
2.2 Are there registered records or mechanisms to clearly identify both the foreign investor and the nature of the investment?
All investment or reinvestment in Brazil must be registered with the Central Bank of Brazil, specifically with the Department of Foreign Capital (FIRCE), to provide for the return of the capital and the remittance of profits.
2.3 Is it possible for a natural person to resort to the foreign investment legislation?
Yes
2.4 Is it possible for a citizen or resident to resort to the foreign investment regime?
Financial or monetary resources brought into the country are considered foreign capital if they belong to resident natural or juridical persons domiciled or having an office abroad.
2.5 Can a recipient company funded with both domestic and foreign capital resort to foreign investment regulations? Is this subject to restrictions?
Foreign direct investment may be made by bringing resources into the country in the form of currency or tangible or intangible assets, provided they are recognized by the National Institute of Industrial Property (INPI). They must be used in economic activities. Such investment may be made through branch offices of foreign enterprises authorized to do business in Brazil, by making an equity investment in a company or subscribing the capital of enterprises already operating in Brazil, or even by forming a new company, generally in the form of a joint stock company or limited liability company.
2.6 Is there a time limit for a foreign investor to be considered as such?
No, except in cases of debt for investment swaps.
2.7 Are restrictions imposed on the executive body or other staff of an enterprise. Are there nationality quotas? Under what conditions can the executives or other staff hired abroad send their earnings to their country of residence?
Pursuant to Decree-Law 5.452 (Consolidation of the Labor Law), two thirds of the employees must be nationals. A larger percentage is permitted only when there is an insufficient number of national specialists.
3. Scope of foreign investment activities
Objective: Define the legal scope of foreign investment in your country, as well as their conditions and limitations.
3.1 Describe the regulating principles of economic activity in your country.
a) Describe how economic freedom is guaranteed.
Article 170, Sole paragraph, of the Federal Constitution – Anyone may engage freely in any economic activity, without the need for authorization from government agencies, except in the cases provided for by law.
b) Is the principle of economic nondiscrimination guaranteed? Describe how.
Article 2 of Law 4.131/62 – Foreign capital invested in Brazil shall be accorded the same legal treatment as that applicable to national capital, in identical conditions. Any distinction not sanctioned by law is prohibited.
c) Public and private enterprises (local and foreign): do they compete on equal terms, or does the State have higher benefits?
National and foreign private enterprises compete in conditions of equality. The State may engage in economic activities only when necessary for reasons of national security or when it is in the common interest, as defined by law.
3.2 Indicate the scope of foreign investment, i.e., does it include movable and immovable property, assets, concessions, claims to money, intellectual property, industrial property, leasing, technology, etc.
Foreign direct investment may be made by bringing resources into the country in the form of currency, tangible assets, or even intangible assets, provided they are recognized by the INPI. They must be used in economic activities.
3.3 Reserved sectors
a) Indicate the sectors or economic activities reserved exclusively for the state in your country. Explain the regulations pertinent to these areas.
There are economic activities which, pursuant to constitutional or legal provisions, are reserved for the government, are closed to foreign capital, or are open to foreign capital only under certain conditions. They are:
a) Air transportation and freight agency services. Authorization is required from the Ministry of Aviation (Law No. 7565 of December 19, 1986 and regulation (portuaria) No. 146 of March 30, 1993).
b) Mineral exploration. Prior authorization is required from the Ministry of Mines and Energy, in the form of a permit from the Minister, as well as a document approving the by-laws of the enterprise and amendments thereto, issued by said Ministry (Decree-Law No. 227 of February 28, 1967, Articles 8-82).
c) Oil prospecting or refining. It should be pointed out that the easing of the oil monopoly has already been promulgated by the National Congress, through Constitutional Amendment No. 9 of November 9, 1995. Legislation setting forth the regulations is still pending.
d) Electricity and hydroelectric power. The purpose of the Law on Concessions, published on February 13, 1995, was to provide the government with a legal instrument establishing rules for the government’s delegation of the provision of public utility services to third parties. Under this system, the concession holder invests for his own account and at his own risk, and is compensated through the collection of rates. Investment in the electrical power sector (generation, transmission, and distribution) will thus be open to national and foreign private investors.
e) Agriculture and forestry. Authorization is required from the Ministry of Agriculture, under the system established by Law No. 5709 of October 7, 1971.
f) Health care. Direct or indirect investment in health care in Brazil is closed to foreign enterprises or capital, except in the cases provided for by law, pursuant to Article 199, paragraph 3, of the Federal Constitution.
g) Highway freight transport. Investment is limited to no more than 1/5 of the capital stock with voting rights. The enterprise must obligatorily be organized as a joint stock company and its capital must be represented by registered shares. This limit does not apply to juridical persons already existing on July 11, 1980, which, however, in the event of future capital increases through subscriptions, shall be required to have 4/5 of this increase in ordinary registered shares subscribed and paid up by national investors.
h) Maritime, river, and lake transport and coastwise shipping. Authorization is required from the Ministry of Transportation. The easing of the national government monopoly of these activities was promulgated by means of Constitutional Amendment No. 7 of August 15, 1995. Legislation setting forth the specific regulations, however, is still pending.
i) Financial institutions. Authorization is required from the Department of Financial System Organization (DEORF) of the Central Bank of Brazil. Direct or indirect investment is subject to the following limitations:
Commercial banks: up to 30% of the capital with voting rights, if the operations of Brazilian banks are restricted in the markets where their main offices are located.
New branches of financial institutions domiciled abroad may not be established until the conditions referred to in Article 192, III of the Federal Constitution have been satisfied. This topic was addressed in Statement of Principles No. 311 of August 25, 1995 of the Ministry of Finance.
The prohibitions do not apply to authorizations resulting from international agreements, reciprocity agreements, or in matters of interest to the Brazilian government to be decided on an ad hoc basis by the economic sector in question, in consultation with the President of the Republic.
j) Insurance. Prior authorization is required from the Superintendency of Private Insurance, in the form of an order approving the by-laws of the company and the corresponding foreign equity investment therein.
k) Telecommunications. The easing of the telecommunications monopoly was promulgated by the National Congress by means of Constitutional Amendment No. 8 of August 15, 1995. Legislation setting forth the regulations, however, is still pending.
l) Journalistic enterprises and the broadcasting of sound and of sound and images. Foreign investment is prohibited pursuant to Article 222 of the Federal Constitution.
m) Services for the safeguarding and transport of valuables. Investment by foreign investors is prohibited by Law No. 7102/83
b) Indicate the sectors or economic activities in which only foreign investment is excluded, restricted or limited in your country. Explain in what consists said exclusion, restriction or limitation.
See preceding response.
c) Does the Principle of International Reciprocity exist in the legislation of your country?
Yes, especially in the financial sector.
d) Is foreign investment subject to performance requirements?
No, the only requirement is that the foreign direct investment be made in an economic activity.
e) Can foreign investors take part in the privatization processes of your country?
Yes.
4. Rights and protection of foreign investment
Objective: Identify the type of treatment granted foreign investment i.e.: its rights, protection and incentives.
4.1 Treatment granted to the foreign investor and the investment
a) National treatment or Most-Favored-Nation clause (Refer to paragraphs 3.1 and 3.3).
In sectors where there are no constitutional restrictions. The MFN Clause applies.
4.2 Protection of Property
a) Constitutional or legal grounds that may lead to expropriation of, or limitations to property
Article 5, Subparagraph 4, of the Federal Constitution: The Law shall establish the procedure for expropriation for reasons of necessity or public utility or in the social interest, by means of fair monetary compensation paid in advance, except in the cases provided for in the Constitution.
b) How is compensation determined? Which value is it based on? How is it settled?
Between the parties or by court decision. Fair value. Must be paid in advance.
c) Can the authorities take possession of expropriated assets prior to paying compensation?
Yes. Expropriations shall be effected by making fair compensation in advance. However, by way of exception, in cases of imminent public danger, the authorities may take physical possession before payment is made, while having to assure the owner of subsequent compensation.
d) Is property of both corporal and incorporeal assets equally guaranteed?
Yes. The applicable laws in Brazil are the following:
a) Bill No. 200/95 (new software law)
Attachments:
1) Law 5988/73 (copyright)
2) Law 7646/87 (current software law)
b) Law 5772/71 (Industrial Property Code in force)
It should be noted that at present, the National Congress is considering and will soon vote on a new draft Industrial Property Code.
4.3 Transfers of investment, remittances of capital and benefits
a) Under what conditions may investments in the form of foreign exchange, capital goods, technology, associated credits, etc., be brought into the country? Are there specific regulations for each item?
Law No. 4.131/62 and Decree 55.762/65 regulate most foreign capital in Brazil, with specific regulations for each form of investment.
b) Are there restrictions to the remittances of capital, benefits, debt service, or other remittances derived from foreign investment?
Transfers abroad of earnings, dividends, interest, installment payments, royalties and technical, scientific and other forms of assistance must be registered with the Central Bank and recorded by the INPI (only for intangibles), with proof of payment of all taxes owed.
c) Are there different kinds of exchange rates? To which does the foreign investor have access?
There are two types of exchange markets: the Free-Rate Market and the Floating-Rate Market. Foreign investment is registered via the entry of resources through the Free-Rate Exchange Market.
4.4 Taxes and incentives to foreign rinvestment
a) Explain briefly the taxes that foreign investments are subject to.
It can be stated generally that the source (country of origin) of resources intended for direct investment (acquisition of real estate, payment of capital, individual acquisition of shares and enterprises domiciled in Brazil, etc.) is irrelevant for tax purposes.
Thus, the taxes levied on foreign direct investment are basically the same as those that make up the national tax system. The main levies on enterprises are:
On business profits: a) income tax:
a) The maximum income tax rate applied to capital gains realized in the transfer of foreign direct investment, to royalties and payments for services, and to interest payments, commissions, and other charges associated with foreign loans was lowered from 25% to 15%; this tax applies as well to the payment of interest to foreign investors for purposes of remunerating equity capital, with the possibility remaining open for the debtor in Brazil to assume responsibility for payment of the tax, in which case the basis of calculation is adjusted, except where capital gains are involved.
b) Article 10 of Law 9249/95 states that profits and dividends calculated on the basis of income recorded in January 1996 or thereafter and payments by juridical persons to their foreign investors shall not be subject to income tax withholding.
c) Capital gains obtained by foreign investors on the investments mentioned in the rules in Attachments I-IV of Resolution No. 1289/87 remain exempt from income tax withholding, with the rate applicable to the yield on variable income investments also remaining at 10%.
d) The rate applicable to fixed income investments, however, was raised from 10% to 15%, if income from foreign funds are subject to the impact of taxes on financial operations (IOF), rate of 7%.
e) In this context, and also with regard to transfers abroad, investments made through the Depository Receipts system shall also be exempt from the income tax on capital gains, with a 10% rate applicable to income earned in Brazil on investments in variable income assets.
f) Portfolio investments, especially income/capital gains earned by redeeming shares in Conversion and Privatization Funds, in which persons resident or domiciled abroad participate exclusively, shall remain subject to the differentiated tax system at rates of 10% or 15%, provided that 51% of their total investments are in variable or fixed income assets, respectively.
g) Since February, 1996 (Resolution 2,247 and 2,248), foreign investors are allowed to apply in mutual investment fund quotas in emerging enterprises and property investment funds. Profits from these funds by foreign investors are income tax free. The rate applied to the yield on variable income investments is at 10%, and the rate applied to the yield on fix income investments is at 15%. There is an impact on the recovery of quotas of the financial operation with the 10% rate if these funds do not regularly apply, at a maximum period of 180 days, and with the 5% rate in the recovery of one year after the establishment of the fund.
1) Social Contribution on Net Income (CSLL): rate of 10% (financial institutions, 30%); Income Tax Withholding (IRRF): rate of 15%, exempt if capitalized up to 180 days after determination; can be credited against Income Tax on Remittances Abroad, for which the same rate applies (15%).
2) On billing. a) Tax for Social Security Financing (COFINS): rate of 2% (exemption for financial institutions); b) Social Integration Program (PIS): rate of 0.65% of gross operating income (financial institutions, 0.75% of spread); c) Tax on Services (ISS): rates vary according to the municipality and are levied only on income earned from providing the service.
3) On added value. a) Tax on Manufactured Products (IPI): variable rates levied only on manufactured goods, including imports; b) Valued-Added Tax on Sales and Services (ICMS): basic rate of 17% (maximum 25%) levied on goods and certain specific services.
4) On financial operations: Tax on Financial Operations (IOF): variable rates depending on the term and nature of the operation (maximum rate of 25%).
5) On property: a) Municipal Real Estate Tax (IPTU): variable rates depending on the municipality; b) Vehicle Tax (IPVA): variable rates depending on the state; c) Rural Land Tax (ITR): rates varying from 0.2% to 4.5%.
6) On payroll: Contribution to the National Institute of Social Security (INSS) and others (SESC, SESI, SENAC, SENAI,SEBRAE, INCRA): rates varying between 25.5% and 28.6%.
Similarly, capital gains and investments made in the financial market by persons resident or domiciled abroad are subject to the same rules as are applicable to national investors. The main levies on financial operations are: a) IRRF – Fixed Income: rate of 10% on nominal investment income; b) IR – Variable Income: rate of 10% on net gains determined monthly; c) IR – Capital Gains: rate of 15% on real capital gains.
b) Are there special tax rules for foreign investment?
Yes. Certain funds, entities or securities portfolios belonging to or put together by investors residing or domiciled abroad are subject to special income tax provisions: a) mutual funds maintained with resources from the conversion of Brazilian external debt (Article 50 of Law 4.728/65): rate of 10% on positive differences between the surrender value and the purchase price of the share (portfolio income and capital gains are exempt)); b) entities mentioned in Decree-Law 2.285 (Articles 1 and 2), investment companies mentioned in Law 4.728/65 or fixed asset portfolios maintained exclusively by foreign investors: rate of 10% on income earned, except for dividends and bonuses, which are taxed at 15% (capital gains are exempt from the tax). Moreover, there is currently a levy of 7% of IOF (Tax on Financial Operations) on the equivalent in national currency of foreign currency entering the country for investment in fixed-income funds.
c) Has your country signed agreements with other countries in the Americas to avoid double taxation? If yes, list those countries.
Argentina, Canada and Ecuador.
d) Are there other incentives to foreign investment, such as access to domestic credit, investment insurance, industrial parks, customs exemptions, etc.?
The Federal Government does not grant special incentives for foreign investment, on principle. The only exception to this rule, however, is the possible granting of a reduction of the customs duty levied on imports of capital goods to be used in establishing the industry which is the subject of the foreign direct investment in question.
5. Dispute settlement
Objective: Because Bilateral Investment Treaties (BITs) will be part of another study, only an overview of the subject is required here.
5.1 Domestic settlements: Can the foreign investor resort to the same procedures as the national investor?
Yes.
5.2 Are there special forms of appeal available to foreign investors? Please describe.
No.
5.3 International settlements: Is your country a member of ICSID or other international arbitration mechanisms on the subject of investment?
No.
5.4 Has your country signed BITs with other countries in the Americas? What is the present status of said agreements, i.e., approved, ratified, in effect?
In the context of the Southern Cone Market (MERCOSUR) – Argentina, Brazil, Paraguay and Uruguay – two agreements were concluded: one intra-regional and the other, for nonmember countries, extra-regional; Venezuela and Chile. These agreements are being considered by the Brazilian National Congress.
5.5 Where in the juridical hierarchy of your country are international treaties and specifically the Investment Protection Agreements? Analyze your response in relation to the Constitution and domestic laws.
The international treaties and agreements for the promotion and reciprocal protection of investments carry the same weight in Brazil as statutory law, and, once promulgated by the President of the Republic (following approval by the Legislature) may be cited in the Brazilian judicial system, at all levels.
5.6 Do said agreements have "direct effect", that is to say, can they be invoked by the parties directly before the Courts and then applied to the case in question? If not, under what circumstances can they be invoked and applied?
See the preceding question.
6. National authorities
Objective: To identify the agencies in charge of foreign investment, their organization and functions.
6.1 Is foreign investment handled by specially appointed offices in your country? What is their hierarchical status? How are their actions integrated? What are their main attributions?
Yes. Department of Foreign Capital (FIRCE) of the Central Bank of Brazil.