US Investment Regulations in Brazil's Emerging Markets

 

Brazil, the largest economy in Latin America and one of the top 10 largest economies

in the world, is a commodities export-oriented economy that is primarily propelled by agribusiness and mining activities. It also has a diversified industry and service sector. Between the conclusion of World War II and the 1980s, Brazil was the leading destination for foreign direct investment (FDI) in Latin America. However, the sovereign debt crisis, in conjunction with high inflation and interest rates, rendered Brazil less appealing as an FDI destination. Several liberalizing measures were implemented in the early 1990s to deregulate the domestic market and expose the country to foreign trade. Furthermore, the Brazilian government renegotiated its foreign debt with the International Monetary Fund and private institutions, and a privatization program was established to modernize activities that were under state monopoly. However, it was not until 1994 that the Brazilian government was able to control inflation through the implementation of the Real Plan (Plano Real). This plan involved the creation of a new currency (the current Brazilian currency, the real), the restructuring of the financial system, the imposition of strict budgetary regulations, and the privatization of state-owned companies that were responsible for the operation of a substantial portion of the Brazilian infrastructure at the time, particularly in the energy, telecommunications, transportation, and port sectors.

During the 1990s, these policies were the catalyst for a new positive cycle of FDI in Brazil. In the early 2000s, foreign direct investment (FDI) experienced a decline once more due to external factors, including the crisis that affected the US stock markets, the global economic slowdown caused by terrorist attacks and conflicts, and the disclosure of accounting frauds perpetrated by large US and multinational companies. The Brazilian economy experienced a new surge in FDI in the late 2000s, which was a result of the increasing demand for commodities from emerging markets. This surge lasted until the early 2010s, when the fiscal and economic environment of the country deteriorated, commodities prices decreased, and Brazil's credit rating was downgraded by major credit agencies. It is anticipated that FDI in Brazil will increase in the coming years, despite the instability caused by the COVID-19 pandemic. This is due to the combination of the current excessive liquidity in global markets and local circumstances, such as (1) the depreciation of the Brazilian real against the US dollar, which has resulted in Brazilian assets becoming relatively inexpensive targets for foreign investors; (2) the potential approval of key legislative structural reforms that are currently under discussion, including tax and administrative reforms; and (3) a potential new round of privatizations involving some of the major state-owned companies (Eletrobras, Brazil's major electricity provider, was privatized in June 2022).

Procedural requirements

In Brazil, there is no specific legislation that regulates foreign direct investment (FDI). However, there are numerous laws and regulations that address foreign direct investment in a variety of contexts and structures, resulting in a patchwork of regulations. The primary obligation in Brazil with respect to FDI is the requirement to register any investment with the Central Bank of Brazil (Central Bank) through the Electronic Declaratory Registration System for Direct Foreign Investment (RDE-IED) within 30 days of the applicable FDI event (e.g., foreign capital injection or transfer of equity held by Brazilians in local entities to non-Brazilians). Registration with the RDE-IED is a prerequisite for all foreign direct investment (FDI) in Brazil, irrespective of its value, as stipulated in Central Bank Ordinance No. 3,689/2013.

The RDE-IED is designed to enable Brazilian enterprises that are recipients of FDI and foreign investors to register all pertinent FDI events, including the registration of: foreign investors with the Central Bank (as well as registration of changes to the name, address or corporate type of foreign investors); every Brazilian company that is a recipient of FDI, regardless of the amount, with the Central Bank (as well as registration of changes to the name, address and management of the Brazilian company, or changes to any information about the Brazilian company that is mentioned in the record of the Brazilian company in the RDE-IED – such as periodic updates to economic and financial information, whether annually or quarterly, depending on the amount of its assets and net worth as of 31 December of the previous year); capital injections and capital contributions paid in cash, assets or rights; events involving the repatriation of capital; payment of dividends and interest on equity to foreign investors; merger, spin-off and conversion transactions involving Brazilian companies that are recipients of FDI; and the dissolution and liquidation of Brazilian companies that are recipients of FDI and of the payment of the respective equity holdings to foreign investors, as applicable.

The RDE-IED is a declaratory system that enables Brazilian companies that are beneficiaries of FDI and foreign investors to input information regarding events such as the aforementioned. However, Brazilian companies that receive FDI and foreign investors are required to produce and maintain the supporting documentation that underpins any event that is registered with the RDE-IED. If the Central Bank requires this documentation, the failure to submit it may result in the imposition of fines and other penalties under the regulation. Administrative penalties are imposed for the failure to declare the necessary FDI information or provide the supporting documentation requested by the Central Bank, the late submission of such information or documentation, or the submission of incorrect, incomplete, or false information and documentation, as outlined in Laws No. 4,131/1962 and No. 11,371/2006 and Central Bank Circular No. 3,857/2017. The Central Bank evaluates the subsequent criteria when implementing these penalties:

Failure to declare the necessary information or submit the supporting documentation

requested by the Central Bank will result in a fine of 5% of the FDI, with a maximum of 125,000 reais. Late submission of information or documentation will result in a fine of 5% of the FDI, with a maximum of 25,000 reais. The fine will be reduced by 90% for delays under 30 days and 50% for delays between 30 and 60 days. Submission of incorrect or incomplete information or documentation will result in a fine of 2% of the FDI, with a maximum of 50,000 reais. Submission of false information or documentation will result in a fine of 10% of the FDI, with a maximum of 250,000 reais. The Central Bank will increase the penalties specified in items (1) to (3) above by 50% if the irregularity is not corrected within a reasonable time after it is detected.