Brazil is the second largest economy in the Western Hemisphere behind the United States, and the eighth largest economy in the world, according to the World Bank. The United Nations Conference on Trade and Development (UNCTAD) named Brazil the fourth largest destination for global Foreign Direct Investment (FDI) flows in 2017. In recent years, Brazil received more than half of South America’s total incoming FDI, and the United States is a major foreign investor in Brazil. The Brazilian Central Bank (BCB) reported the United States had the largest single-country stock of FDI by final ownership, representing 22 percent of all FDI in Brazil (USD 118.7 billion) in 2017, the latest year with available data. The Government of Brazil (GoB) prioritized attracting private investment in infrastructure during 2017 and 2018.
The current economic recovery, which started in the first quarter of 2017, ended the deepest and longest recession in Brazil’s modern history. The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2018, below most initial market analysts’ projections of 3 percent growth in 2018. Analysts forecast a 2 percent growth rate for 2019. The unemployment rate reached 11.6 percent at the end of 2018. Brazil was the world’s fourth largest destination for FDI in 2017, with inflows of USD 62.7 billion, according to UNCTAD. The nominal budget deficit stood at 7.1 percent of GDP (USD132.5 billion) in 2018 and is projected to end 2019 at around 6.5 percent of GDP (USD 148.5 billion). Brazil’s debt-to-GDP ratio reached 76.7 percent in 2018 with projections to reach 83 percent by the end of 2019. The BCB has maintained its target for the benchmark Selic interest rate at 6.5 percent since March 2018 (from a high of 13.75 percent at the end of 2016).
President Bolsonaro took office on January 1, 2019, following the interim presidency by President Michel Temer, who had assumed office after the impeachment of former President Dilma Rousseff in August 2016. Temer’s administration pursued corrective macroeconomic policies to stabilize the economy, such as a landmark federal spending cap in December 2016 and a package of labor market reforms in 2017. President Bolsonaro’s economic team pledged to continue pushing reforms needed to help control costs of Brazil’s pension system, and has made that issue its top economic priority. Further reforms are also planned to simplify Brazil’s complex tax system. In addition to current economic difficulties, since 2014, Brazil’s anti-corruption oversight bodies have been investigating allegations of widespread corruption that have moved beyond state-owned energy firm Petrobras and a number of private construction companies to include companies in other economic sectors.
Brazil’s official investment promotion strategy prioritizes the automobile manufacturing, renewable energy, life sciences, oil and gas, and infrastructure sectors. Foreign investors in Brazil receive the same legal treatment as local investors in most economic sectors; however, there are restrictions in the health, mass media, telecommunications, aerospace, rural property, maritime, and air transport sectors. The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property and air carriers.
Analysts contend that high transportation and labor costs, low domestic productivity, and ongoing political uncertainties hamper investment in Brazil. Foreign investors also cite concerns over poor existing infrastructure, still relatively rigid labor laws, and complex tax, local content, and regulatory requirements; all part of the extra costs of doing business in Brazil.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||105 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||109 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||64 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical-cost basis)||2017||$68,272||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$8,600||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Brazil was the world’s fourth largest destination for Foreign Direct Investment (FDI) in 2017, with inflows of USD 62.7 billion, according to UNCTAD. The GoB actively encourages FDI – particularly in the automobile, renewable energy, life sciences, oil and gas, and transportation infrastructure sectors – to introduce greater innovation into Brazil’s economy and to generate economic growth. GoB investment incentives include tax exemptions and low-cost financing with no distinction made between domestic and foreign investors. Foreign investment is restricted in the health, mass media, telecommunications, aerospace, rural property, maritime, insurance, and air transport sectors.
The Brazilian Trade and Investment Promotion Agency (APEX) plays a leading role in attracting FDI to Brazil by working to identify business opportunities, promoting strategic events, and lending support to foreign investors willing to allocate resources to Brazil. APEX is not a one-stop-shop for foreign investors, but the agency can assist in all steps of the investor’s decision-making process, to include identifying and contacting potential industry segments, sector and market analyses, and general guidelines on legal and fiscal issues. Their services are free of charge. The website for APEX is: .
Limits on Foreign Control and Right to Private Ownership and Establishment
A 1995 constitutional amendment (EC 6/1995) eliminated distinctions between foreign and local capital, ending favorable treatment (e.g. tax incentives, preference for winning bids) for companies using only local capital. However, constitutional law restricts foreign investment in the healthcare (Law 13097/2015), mass media (Law 10610/2002), telecommunications (Law 12485/2011), aerospace (Law 7565/1986 a, Decree 6834/2009, updated by Law 12970/2014, Law 13133/2015, and Law 13319/2016), rural property (Law 5709/1971), maritime (Law 9432/1997, Decree 2256/1997), insurance (Law 11371/2006), and air transport sectors (Law 13319/2016).
Screening of FDI
Foreigners investing in Brazil must electronically register their investment with the BCB within 30 days of the inflow of resources to Brazil. In cases of investments involving royalties and technology transfer, investors must register with Brazil’s patent office, the National Institute of Industrial Property (INPI). Investors must also have a local representative in Brazil. Portfolio investors must have a Brazilian financial administrator and register with the Brazilian Securities Exchange Commission (CVM).
To enter Brazil’s insurance and reinsurance market, U.S. companies must establish a subsidiary, enter into a joint venture, acquire a local firm, or enter into a partnership with a local company. The BCB reviews banking license applications on a case-by-case basis. Foreign interests own or control 20 of the top 50 banks in Brazil. Santander is the only major wholly foreign-owned retail bank remaining in Brazil. Brazil’s anti-trust authorities (CADE) approved Itau bank’s purchase of Citibank’s Brazilian retail banking operation in August 2017. In June 2016, CADE approved Bradesco bank’s purchase of HSBC’s Brazilian retail banking operation.
Currently, foreign ownership of airlines is limited to 20 percent. Congressman Carlos Cadoca (PCdoB-PE) presented a bill to Brazilian Congress in August of 2015 to allow for 100 percent foreign ownership of Brazilian airlines (PL 2724/2015). The bill was approved by the lower house, and since March 2019, it is pending a Senate vote. In 2011, the United States and Brazil signed an Air Transport Agreement as a step towards an Open Skies relationship that would eliminate numerical limits on passenger and cargo flights between the two countries. Brazil’s lower house approved the agreement in December 2017, and the Senate ratified it in March 2018. The Open Skies agreement has now entered into force.
In July 2015, under National Council on Private Insurance (CNSP) Resolution 325, the Brazilian government announced a significant relaxation of some restrictions on foreign insurers’ participation in the Brazilian market, and in December 2017, the government eliminated restrictions on risk transfer operations involving companies under the same financial group. The new rules revoked the requirement to purchase a minimum percentage of reinsurance and eliminated a limitation or threshold for intra-group cession of reinsurance to companies headquartered abroad that are part of the same economic group. Rules on preferential offers to local reinsurers, which are set to decrease in increments from 40 percent in 2016 to 15 percent in 2020, remain unchanged. Foreign reinsurance firms must have a representation office in Brazil to qualify as an admitted reinsurer. Insurance and reinsurance companies must maintain an active registration with Brazil’s insurance regulator, the Superintendence of Private Insurance (SUSEP) and maintaining a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.
In September 2011, Law 12485/2011 removed a 49 percent limit on foreign ownership of cable TV companies, and allowed telecom companies to offer television packages with their service. Content quotas require every channel to air at least three and a half hours per week of Brazilian programming during primetime. Additionally, one-third of all channels included in any TV package have to be Brazilian.
The National Land Reform and Settlement Institute administers the purchase and lease of Brazilian agricultural land by foreigners. Under the applicable rules, the area of agricultural land bought or leased by foreigners cannot account for more than 25 percent of the overall land area in a given municipal district. Additionally, no more than 10 percent of agricultural land in any given municipal district may be owned or leased by foreign nationals from the same country. The law also states that prior consent is needed for purchase of land in areas considered indispensable to national security and for land along the border. The rules also make it necessary to obtain congressional approval before large plots of agricultural land can be purchased by foreign nationals, foreign companies, or Brazilian companies with majority foreign shareholding. Draft Law 4059/2012, which would lift the limits on foreign ownership of agricultural land,
has been awaiting a vote in the Brazilian Congress since 2015.
Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but became an observer in October 2017. By statute, a Brazilian state enterprise may subcontract services to a foreign firm only if domestic expertise is unavailable. Additionally, U.S. and other foreign firms may only bid to provide technical services when there are no qualified Brazilian firms. U.S. companies need to enter into partnerships with local firms or have operations in Brazil in order to be eligible for “margins of preference” offered to domestic firms to participate in Brazil’s public sector procurement to help these firms win government tenders. Foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s Government Procurement Protocol, member nations Brazil, Argentina, Paraguay, and Uruguay are entitled to non-discriminatory treatment of government-procured goods, services, and public works originating from each other’s suppliers and providers. However, only Argentina has ratified the protocol, and per the Brazilian Ministry of Economy website, this protocol has been in revision since 2010, so it has not yet entered into force.
Other Investment Policy Reviews
The Organization for Economic Co-operation and Development’s (OECD) 2018 Brazil Economic Survey of Brazil highlights Brazil as a leading global economy. However, it notes that high commodity prices and labor force growth will no longer be able to sustain Brazil’s economic growth without deep structural reforms. While praising the Temer government for its reform plans, the OECD urged Brazil to pass all needed reforms to realize their full benefit. The OECD cautions about low investment rates in Brazil, and cites a World Economic Forum survey that ranks Brazil 116 out of 138 countries on infrastructure as an area in which Brazil must improve to maintain competitiveness.
The OECD’s March 15, 2019 Enlarged Investment Committee Report BRAZIL: Position Under the OECD Codes of Liberalisation of Capital Movements and of Current Invisible Operations noted several areas in which Brazil needs to improve. These observations include, but are not limited to: restrictions to FDI requiring investors to incorporate or acquire residency in order to invest; lack of generalized screening or approval mechanisms for new investments in Brazil; sectoral restrictions on foreign ownership in media, private security and surveillance, air transport, mining, telecommunication services; and, restrictions for non-residents to own Brazilian flag vessels. The report did highlight several areas of improvement and the GoB’s pledge to ameliorate several ongoing irritants as well.
The IMF’s 2018 Country Report No. 18/253 on Brazil highlights that a mild recovery supported by accommodative monetary and fiscal policies is currently underway. But the economy is underperforming relative to its potential, public debt is high and increasing, and, more importantly, medium-term growth prospects remain uninspiring, absent further reforms. The IMF advises that against the backdrop of tightening global financial conditions, placing Brazil on a path of strong, balanced, and durable growth requires a committed pursuit of fiscal consolidation, ambitious structural reforms, and a strengthening of the financial sector architecture. The WTO’s 2017 Trade Policy Review of Brazil notes the country’s open stance towards foreign investment, but also points to the many sector-specific limitations (see above). All three reports highlight the uncertainty regarding reform plans as the most significant political risk to the economy. These reports are located at the following links:
A company must register with the National Revenue Service (Receita) to obtain a business license and be placed on the National Registry of Legal Entities (CNPJ). Brazil’s Export Promotion and Investment Agency (APEX) has a mandate to facilitate foreign investment. The agency’s services are available to all investors, foreign and domestic. Foreign companies interested in investing in Brazil have access to many benefits and tax incentives granted by the Brazilian government at the municipal, state, and federal levels. Most incentives target specific sectors, amounts invested, and job generation. Brazil’s business registration website can be found at .
Brazil does not restrict domestic investors from investing abroad, and APEX-Brasil supports Brazilian companies’ efforts to invest abroad under its “internationalization program”: . Apex-Brasil frequently highlights the United States as an excellent destination for outbound investment. Apex-Brasil and SelectUSA (the U.S. government’s investment promotion office at the U.S. Department of Commerce) signed a memorandum of cooperation to promote bilateral investment in February 2014.
2. Bilateral Investment Agreements and Taxation Treaties
Brazil does not have a Bilateral Investment Treaty (BIT) with the United States. In the 1990s, Brazil signed BITs with Belgium, Luxembourg, Chile, Cuba, Denmark, Finland, France, Germany, Italy, the Republic of Korea, the Netherlands, Portugal, Switzerland, the United Kingdom, and Venezuela. The Brazilian Congress has not ratified any of these agreements. In 2002, the Executive branch withdrew the agreements from Congress after determining that treaty provisions on international Investor-State Dispute Settlement (ISDS) were unconstitutional.
In 2015, Brazil developed a state-to-state Cooperation and Facilitation Investment Agreement (CFIA) which, unlike traditional BITs, does not provide for an ISDS mechanism. CFIAs instead outline progressive steps for the settlement of “issue[s] of interest to an investor,” including: 1) an ombudsmen and a Joint Committee appointed by the two governments will act as mediators to amicably settle any dispute; 2) if amicable settlement fails, either of the two governments may bring the dispute to the attention of the Joint Committee; 3) if the dispute is not settled within the Joint Committee, the two governments may resort to interstate arbitration mechanisms.” The GOB has signed several CFIAs since 2015 with: Mozambique (April 2015), Angola (May 2015), Mexico (May 2015), Malawi (October 2015), Colombia (October 2015), Peru (October 2015), Chile (November 2015), Iran (November 2016), Azerbaijan (December 2016), Armenia (November 2017), Ethiopia (April 2018), Suriname (May 2018), Guyana (December 2018), and the United Arab Emirates (March 2019). The following CFIAs are in force: Mexico, Angola, Armenia, Azerbaijan, and Peru. A few CFIAs have received Congressional ratification in Brazil and are pending ratification by the other country: Mozambique, Malawi, and Colombia ( ). Brazil also negotiated an intra-Mercosul protocol similar to the CFIA in April 2017, which was ratified on December 21, 2018. (See sections on responsible business conduct and dispute settlement.)
Brazil does not have a double taxation treaty with the United States, but it does have such treaties with 34 other countries, including: Japan, France, Italy, the Netherlands, Canada, Spain, Portugal, and Argentina. Brazil signed a Tax Information Exchange Agreement (TIEA) with the United States in March 2007, which entered into force on May 15, 2013. In September 2014, Brazil and the United States signed an intergovernmental agreement to improve international tax compliance and to implement the Foreign Account Tax Compliance Act (FATCA). This agreement went into effect in August 2015.
5. Protection of Property Rights
Brazil has a system in place for mortgage registration, but implementation is uneven and there is no standardized contract. Foreign individuals or foreign-owned companies can purchase real property in Brazil. Foreign buyers frequently arrange alternative financing in their own countries, where rates may be more attractive. Law 9514 from 1997 helped spur the mortgage industry by establishing a legal framework for a secondary market in mortgages and streamlining the foreclosure process, but the mortgage market in Brazil is still underdeveloped, and foreigners may have difficulty obtaining mortgage financing. Large U.S. real estate firms, nonetheless, are expanding their portfolios in Brazil.
Intellectual Property Rights
The last year brought increased attention to IP in Brazil, but rights holders still face significant challenges. Brazil’s National Institute of Industrial Property (INPI) streamlined procedures for review processes to increase examiner productivity for patent and trademark decisions. Nevertheless, the wait period for a patent remains nine years and the market is flooded with counterfeits. Brazil’s IP enforcement regime is constrained by limited resources. Brazil has remained on the “Watch List” of the U.S. Trade Representative’s Special 301 report since 2007. For more information, please see: .
Brazil has no physical markets listed on USTR’s 2017 Review of Notorious Markets, though the report does acknowledge a file sharing site popular among Brazilians that is known for pirated digital media. For more information, please see: .