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EXECUTIVE SUMMARY

Brazil is the second largest economy in the Western Hemisphere behind the United States, and the ninth 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 2019, which increased 26 percent since the beginning of its planned privatization program. 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 International Monetary Fund (IMF) reported the United States had the second largest single-country stock of FDI by final ownership representing 19 percent of all FDI in Brazil ($108 billion) behind only the Netherlands’ 23 percent ($131 billion) in 2018, the latest year with available data. The Government of Brazil (GoB) prioritized attracting private investment in its infrastructure and energy sectors during 2018 and 2019.

The Brazilian economy returned to an expansionary trend in 2017, ending the deepest and longest recession in Brazil’s modern history. However, the global coronavirus pandemic in early 2020 returned Brazil to recession after three years of modest recovery. The country’s Gross Domestic Product (GDP) expanded by 1.1 percent in 2019. As of May 2020, analysts forecast a contraction of 3.3 percent for 2020. The unemployment rate was 11 percent at the end of 2019. Brazil was the world’s fourth largest destination for FDI in 2019, with inflows of $75 billion, according to UNCTAD. The nominal budget deficit stood at 5.9 percent of GDP ($108.8 billion) in 2019 and is projected to end 2020 at around 11.1 percent of GDP ($204.5 billion). Brazil’s debt to GDP ratio reached 75.8 percent in 2019 with National Treasury projections to reach 80.8 percent by the end of 2020; while the Independent Financial Institution (IFI) of Brazil’s Senate projects 84.5 percent and the IMF projects to finish 2020 at 98.2 percent. The BCB lowered its target for the benchmark Selic interest rate to 4.5 percent at the end of 2019 from 6.5 percent since March 2018, and as of April 2020, the BCB anticipates an even lower rate of 3 percent by the end of 2020.

President Bolsonaro took office on January 1, 2019. In late 2019, Congress passed and President Bolsonaro signed into law a much-needed pension system reform, and have made additional economic reforms a top priority. Bolsonaro and his economic team have outlined an agenda of further reforms to simplify Brazil’s complex tax system, and the onerous labor laws in the country, but prospects for their implementation may be affected by the COVID-19 pandemic.

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, and maritime sectors. The Brazilian Congress is considering legislation to liberalize restrictions on foreign ownership of rural property and has already done so for 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, 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
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2019 106 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2019 124 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2019 66 of 129 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2018 USD 70.88 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2018 USD 9,140 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 sixth-largest destination for Foreign Direct Investment (FDI) in 2018, with inflows of $61.2 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: http://www.apexbrasil.com.br/en 

In 2019, the Ministry of Economy created the Ombudsman’s office to provide foreign investors with a single point of contact for concerns related to FDI. The plan seeks to eventually streamline foreign investments in Brazil by providing investors, foreign and domestic, with a simpler process for the creation of new businesses and additional investments in current companies. Currently, the Ombudsman’s office is not operating as a single window for services, but rather as an advisory resource for FDI.

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), and insurance (Law 11371/2006).

Screening of FDI

Foreigners investing in Brazil must electronically register their investment with the Central Bank of Brazil (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). Brazil’s Chamber for Foreign Trade (CAMEX) is considering creating an investment screening entity to holistically determine if specific foreign investments would detrimentally impact national security.

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 in Brazil.

In June 2019, Brazil’s Congress approved Law 13.842, ratifying a 2018 provisional measure that eliminated a 20 percent cap on foreign ownership of airlines. Foreign investors may now own 100 percent of capital in Brazilian airline companies.

While 2015 and 2017 legislative and regulatory changes relaxed some restrictions on insurance and reinsurance, rules on preferential offers to local reinsurers, which are incrementally decreasing 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 maintain a minimum solvency classification issued by a risk classification agency equal to Standard & Poor’s or Fitch ratings of at least BBB-.

Foreign ownership of cable TV companies, is allowed, and telecom companies may 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. The Senate’s economic affairs committee approved a bill (PL 2963/2019) in 2019 to ease restrictions on foreign land ownership.  Other Senate committees and the Chamber of Deputies have yet to consider the bill.

Brazil is not a signatory to the World Trade Organization (WTO) Agreement on Government Procurement (GPA), but became an observer in October 2017. However, Minister of Economy Paulo Guedes announced in December 2019 that Brazil intends to adopt GPA norms. 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 where 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 participating in Brazil’s public sector procurement to help these firms win government tenders. Nevertheless, foreign companies are often successful in obtaining subcontracting opportunities with large Brazilian firms that win government contracts. Under trade bloc Mercosul’s (Mercosur in Spanish) 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) November 2019 Economic Forecast Summary of Brazil summarized that the Brazilian economy was recovering gradually at that point. Pension reform was approved by Congress, and better prospects for progress on structural reform were lifting confidence and supporting investment, which was also buoyed by easier financial conditions. Low inflation and easier rules for withdrawal of funds in individual unemployment insurance accounts were expected to underpin stronger consumption. On the assumption that the reform agenda continues to advance, growth was projected to gain momentum in 2020 before the COVID-19 pandemic. As of May 2020, forecasts are for economic contraction in 2020 and unemployment is increasing. Monetary policy had been relaxed, which was considered appropriate as inflation was expected to remain below target during 2020 and 2021. Some scope for additional easing remains. OECD emphasized that ensuring fiscal sustainability and compliance with fiscal rules will require further adjustments on mandatory spending, while safeguarding effective social transfers and public investment. Raising productivity will hinge on improving the business climate through reforms in taxes, regulation, and lower trade barriers. Preserving natural assets will require more determined enforcement efforts.

The IMF’s 2019 Country Report No. 19/297 on Brazil highlighted that a sluggish recovery is underway, constrained by subdued aggregate demand and lackluster productivity. Nonetheless, the IMF assessed that Brazil’s external position remained strong thanks to ample reserves, a flexible exchange rate, and a contained current account deficit fully financed by large FDI inflows. The financial system is well capitalized. Intermediation margins in the banking sector remain high, hindering credit demand and investment. The IMF advised that, although the much-needed pension reform was positive, to put public finances on a sustainable path, additional measures are required, including containing the public wage bill, reducing other current expenditures, and addressing budget rigidities. Simplifying the overly complicated and distortive tax system will support growth. The IMF also emphasized the need to protect public investment and effective social programs, including Bolsa Familia. 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: http://www.oecd.org/brazil/economic-survey-brazil.htm , https://www.imf.org/en/Publications/CR/Issues/2019/07/23/Brazil-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-48520 , and https://www.wto.org/english/tratop_e/tpr_e/tp458_e.htm .

Business Facilitation

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 http://receita.economia.gov.br/orientacao/tributaria/cadastros/cadastro-nacional-de-pessoas-juridicas-cnpj .

Overall, Brazil dropped in the World Bank’s Doing Business Report from 2019 to 2020; however, it improved in the following areas: registering property; starting a business; and resolving insolvency. According to Doing Business, some Brazilian states (São Paulo and Rio de Janeiro) made starting a business easier by allowing expedited business registration and by decreasing the cost of the digital certificate.

Adopted in September 2019, the Economic Freedom Law 13.874 established the Economic Freedom Declaration of Rights and provided for free market guarantees. The law includes several provisions to simplify regulations, regulatory simplification provisions, and establishes norms for the protection of free enterprise and free exercise of economic activity.

Through the digital transformation initiative in Brazil, foreign companies can open branches on the internet.  Since 2019, it has been easier for foreign businesspeople to request authorization from the Brazilian federal government. After filling out the registration, creating an account, and sending the necessary documentation, they can make the request on the Brazilian government’s Portal through a legal representative.  The electronic documents will then be analyzed by the DREI (Brazilian National Department of Business Registration and Integration) team. DREI will inform the applicant of any missing documentation, via the portal and e-mail, giving a 60-day period to meet the requirements.  The legal representative of the foreign company, or other third party who holds a power of attorney, may request registration through: https://acesso.gov.br/acesso/#/primeiro-acesso?clientDetails=eyJjbGllbnRVcmkiOiJodHRwczpcL1wvYWNlc3NvLmdvdi5iciIsImNsaWVudE5hbWUiOiJQb3J0YWwgZ292LmJyIiwiY2xpZW50VmVyaWZpZWRVc2VyIjp0cnVlfQ%3D%3D   this link  

Regulation of foreign companies opening businesses in Brazil are contained in article 1,134 of the Brazilian Civil Code  and article 1 of DREI Normative Instruction 77/2020 .  English language general guidelines to open a foreign company in Brazil are not yet available, but the Portuguese version is available at the following link: http://www.mdic.gov.br/images/REPOSITORIO/SEMPE/DREI/MANUAIS/ATUALIZACOES_2018/EMPRESA_ESTRANGEIRA_NO_BRASIL_-_Portugus_-_verso_mar19.pdf .

For foreign companies that will be a partner or shareholder of a Brazilian national company, the governing regulations are DREI Normative Instruction 34/2017  and DREI Normative Instruction 38/2017 . The contact information of the DREI is drei@mdic.gov.br and +55 (61) 2020-2302.

[Reference]

Outward Investment

Brazil does not restrict domestic investors from investing abroad and APEX-Brasil supports Brazilian companies’ efforts to invest abroad under its “internationalization program”: http://www.apexbrasil.com.br/como-a-apex-brasil-pode-ajudar-na-internacionalizacao-de-sua-empresa . 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.

Brazil incentivizes outward investment.  Apex-Brasil organizes several initiatives aimed at promoting Brazilian investments abroad. The Agency´s efforts comprised trade missions, business round tables, support for the participation of Brazilian companies in major international trade fairs, arranging technical visits of foreign buyers and opinion makers to learn about the Brazilian productive structure, and other select activities designed to strengthen the country’s branding abroad.

The main sectors of Brazilian investments abroad are financial services and assets (totaling 51 percent); holdings (14 percent); and oil and gas extraction (9 percent).  Including all sectors, $378 billion was invested abroad in 2018.  The regions with the largest share of Brazilian outward investments are the Caribbean (41.7 percent) and Europe (40.4 percent), specifically the Netherlands, Austria. and Luxembourg.

There is no official restriction on Brazilian investors investing abroad.  Regulation on investments abroad are contained in BCB Ordinance 3,689/2013  (foreign capital in Brazil and Brazilian capital abroad).

2. Bilateral Investment 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. However, the Brazilian Congress did not ratify 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 (2015), Angola (2015), Mexico (2015), Malawi (2015), Colombia (2015), Peru (2015), Chile (2015), Iran (2016), Azerbaijan (2016), Armenia (2017), Ethiopia (2018), Suriname (2018), Guyana (2018), and the United Arab Emirates (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 (https://concordia.itamaraty.gov.br/ ). Brazil also negotiated an intra-Mercosul Cooperation and Investment Facilitation Protocol (PCFI) similar to the CFIA in April 2017, which was ratified on December 21, 2018. (See sections on responsible business conduct and dispute settlement.)

Brazil has a Social Security Agreement with the United States. The agreement and the administrative arrangement were both signed in Washington on June 30, 2015 and entered into force on October 1, 2018.  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.

Brazil does not have a double taxation treaty with the United States, but Brazil does maintain tax treaties to avoid double taxation with the following 33 countries: Austria, Argentina, Belgium, Canada, Chile, China, Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, the Netherlands, Norway, Peru, Philippines, Portugal, Russia, Slovak Republic, South Africa, South Korea, Spain, Sweden, Trinidad & Tobago, Turkey, Ukraine, and Venezuela. There are current treaty discussions in progress with Singapore, Switzerland, United Arab Emirates, and Uruguay.

Brazilian industry representatives have for years suggested a bilateral taxation treaty between Brazil and the United States would incentive U.S. FDI.  A document produced by Brazil’s National Industry Confederation (CNI) and Amcham Brazil is available on this topic in Portuguese:  https://bucket-gw-cni-static-cms-si.s3.amazonaws.com/media/filer_public/83/b2/83b2dc6a-8afc-43cf-813d-7cb9716f31f6/id_231928_acordo_evitar_dupla_tributacao_brasil_eua_web.pdf 

Brazil currently has pending tax reform legislation in Congress which is considered a priority by the government. The current texts propose simplifying tax collection by unifying various taxes. Current proposals generally maintain the tax burden at its current level which is quite high relatively to other countries in the region, but the form of collection would change to become based on consumption rather than production.

3. Legal Regime

Transparency of the Regulatory System

In the 2020 World Bank Doing Business report, Brazil ranked 124th out of 190 countries in terms of overall ease of doing business in 2019, a decrease of 15 positions compared to the 2019 report. According to the World Bank, it takes approximately 17 days to start a business in Brazil. Brazil is seeking to streamline the process and decrease the amount to time it takes to open a small or medium enterprise (SME) to five days through its RedeSimples Program. Similarly, the government has reduced regulatory compliance burdens for SMEs through the continued use of the SIMPLES program, which simplifies the collection of up to eight federal, state, and municipal-level taxes into one single payment.

The 2020 World Bank study noted Brazil’s lowest score was in annual administrative burden for a medium-size business to comply with Brazilian tax codes at an average of 1,501 hours, a significant improvement from 2019’s 1,958 hour average, but still much higher than the 160.7 hour average of OECD high-income economies. The total tax rate for a medium-sized business is 65.1 percent of profits, compared to the average of 40.1 percent in OECD high-income economies. Business managers often complain of not being able to understand complex — and sometimes contradictory — tax regulations, despite having large local tax and accounting departments in their companies.

Tax regulations, while burdensome and numerous, do not generally differentiate between foreign and domestic firms. However, some investors complain that in certain instances the value-added tax collected by individual states (ICMS) favors locally-based companies who export their goods. Exporters in many states report difficulty receiving their ICMS rebates when their goods are exported. Taxes on commercial and financial transactions are particularly burdensome, and businesses complain that these taxes hinder the international competitiveness of Brazilian-made products.

Of Brazil’s ten federal regulatory agencies, the most prominent include:

  • ANVISA, the Brazilian counterpart to the U.S. Food and Drug Administration, which has regulatory authority over the production and marketing of food, drugs, and medical devices;
  • ANATEL, the country’s telecommunications agency, which handles telecommunications as well as licensing and assigning of radio spectrum bandwidth;
  • ANP, the National Petroleum Agency, which regulates oil and gas contracts and oversees auctions for oil and natural gas exploration and production;
  • ANAC, Brazil’s civil aviation agency;
  • IBAMA, Brazil’s environmental licensing and enforcement agency; and
  • ANEEL, Brazil’s electricity regulator that regulates Brazil’s power sector and oversees auctions for electricity transmission, generation, and distribution contracts.

In addition to these federal regulatory agencies, Brazil has at least 27 state-level regulatory agencies and 17 municipal-level regulatory agencies.

The United States and Brazil conduct regular discussions on trade facilitation, good regulatory practices, and standards.  The 17th plenary of the Commercial Dialogue took place in September 2019, and regular exchanges at the working level between U.S. Department of Commerce, Brazil’s Ministry of Economy, and other agencies and regulators occur throughout the year.

Regulatory agencies complete Regulatory Impact Analyses (RIAs) on a voluntary basis. The Senate approved a bill on Governance and Accountability (PLS 52/2013 in the Senate, and PL 6621/2016 in the Chamber) into Law 13,848 in June 2019. Among other provisions, the law makes RIAs mandatory for regulations that affect “the general interest.”

The Chamber of Deputies, Federal Senate, and the Office of the Presidency maintain websites providing public access to both approved and proposed federal legislation. Brazil is seeking to improve its public comment and stakeholder input process. In 2004, the GoB opened an online “Transparency Portal” with data on funds transferred to and from federal, state, and city governments, as well as to and from foreign countries. It also includes information on civil servant salaries.

In 2019, the Department of State found that Brazil had met its minimum fiscal transparency requirements in its annual Fiscal Transparency Report. The Open Budget Index ranked Brazil on par with the United States in terms of budget transparency in its most recent (2017) index. The Brazilian government demonstrates adequate fiscal transparency in managing its federal accounts, although there is room for improvement in terms of completeness of federal budget documentation. Brazil’s budget documents are publicly available, widely accessible, and sufficiently detailed. They provide a relatively full picture of the GoB’s planned expenditures and revenue streams. The information in publicly available budget documents is considered credible and reasonably accurate.

International Regulatory Considerations

Brazil is a member of Mercosul – a South American trade bloc whose full members include Argentina, Paraguay, and Uruguay. While Brazil routinely implements Mercosul common regulations, it still adheres to Brazilian regulations.

Brazil is a member of the WTO and the government regularly notifies draft technical regulations, such as potential agricultural trade barriers, to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

Brazil has a civil legal system with state and federal courts. Investors can seek to enforce contracts through the court system or via mediation, although both processes can be lengthy. The Brazilian Superior Court of Justice (STJ) must accept foreign contract enforcement judgments for the judgments to be considered valid in Brazil. Among other considerations, the foreign judgement must not contradict any prior decisions by a Brazilian court in the same dispute. The Brazilian Civil Code regulates commercial disputes, although commercial cases involving maritime law follow an older Commercial Code which has been otherwise largely superseded. Federal judges hear most disputes in which one of the parties is the Brazilian State and also rule on lawsuits between a foreign state or international organization and a municipality or a person residing in Brazil.

The judicial system is generally independent. The Supreme Federal Court (STF), charged with constitutional cases, frequently rules on politically sensitive issues. State court judges and federal level judges below the STF are career officials selected through a meritocratic examination process. The judicial system is backlogged, however, and disputes or trials of any sort frequently require years to arrive at a final resolution, including all available appeals. Regulations and enforcement actions can be litigated in the court system, which contains mechanisms for appeal depending upon the level at which the case is filed. The STF is the ultimate court of appeal on constitutional grounds; the STJ is the ultimate court of appeal for cases not involving constitutional issues.

Laws and Regulations on Foreign Direct Investment

Brazil is in the process of setting up a “one-stop-shop” for international investors. According to its website: “The Direct Investments Ombudsman (DIO) is a ‘single window’ for investors, provided by the Executive Secretariat of CAMEX. It is responsible for receiving requests and inquiries about investments, to be answered jointly with the public agency responsible for the matter (at the Federal, State and Municipal levels) involved in each case (the Network of Focal Points). This new structure allows for supporting the investor, by a single governmental body, in charge of responding to demands within a short time.” Private investors have noted this is better than the prior structure, but still has kinks that need to be massaged to effectively become a true “one-stop-shop” to facilitate international investment. The DIO’s website in English is: http://oid.economia.gov.br/en/menus/8 

Competition and Anti-Trust Laws

The Administrative Council for Economic Defense (CADE), which falls under the purview of the Ministry of Justice, is responsible for enforcing competition laws, consumer protection, and carrying out regulatory reviews of proposed mergers and acquisitions. CADE was established in 2011 through Law 12529, combining the antitrust functions of the Ministry of Justice and the Ministry of Finance. The law brought Brazil in line with U.S. and European merger review practices and allows CADE to perform pre-merger reviews, in contrast to the prior legal regime that had the government review mergers after the fact. In October 2012, CADE performed Brazil’s first pre-merger review.

In 2019, CADE conducted 433 total formal investigations, of which 89 related to cases that allegedly challenged the promotion of the free market. It approved 406 merger and/or acquisition requests and did not reject any requests.

Expropriation and Compensation

Article 5 of the Brazilian Constitution assures property rights of both Brazilians and foreigners that own property in Brazil. The Constitution does not address nationalization or expropriation. Decree-Law 3365 allows the government to exercise eminent domain under certain criteria that include, but are not limited to, national security, public transportation, safety, health, and urbanization projects. In cases of eminent domain, the government compensates owners at fair market value.

There are no signs that the current federal government is contemplating expropriation actions in Brazil against foreign interests. Brazilian courts have decided some claims regarding state-level land expropriations in U.S. citizens’ favor. However, as states have filed appeals of these decisions, the compensation process can be lengthy and have uncertain outcomes.

Dispute Settlement

ICSID Convention and New York Convention

In 2002, Brazil ratified the 1958 Convention on the Recognition and Enforcement of Foreign Arbitration Awards. Brazil is not a member of the World Bank’s International Center for the Settlement of Investment Disputes (ICSID). Brazil joined the United Nations Commission on International Trade Law (UNCITRAL) in 2010, and its membership will expire in 2022.

Investor-State Dispute Settlement

Article 34 of the 1996 Brazilian Arbitration Act (Law 9307) defines a foreign arbitration judgment as any judgment rendered outside the national territory. The law established that the Superior Court of Justice (STJ) must ratify foreign arbitration awards. Law 9307, updated by Law 13129/2015, also stipulates that a foreign arbitration award will be recognized or executed in Brazil in conformity with the international agreements ratified by the country and, in their absence, with domestic law. A 2001 Brazilian Federal Supreme Court (STF) ruling established that the 1996 Brazilian Arbitration Act, permitting international arbitration subject to STJ Court ratification of arbitration decisions, does not violate the Federal Constitution’s provision that “the law shall not exclude any injury or threat to a right from the consideration of the Judicial Power.”

Contract disputes in Brazil can be lengthy and complex. Brazil has both a federal and a state court system, and jurisprudence is based on civil code and contract law. Federal judges hear most disputes in which one of the parties is the State and rule on lawsuits between a foreign State or international organization and a municipality or a person residing in Brazil. Five regional federal courts hear appeals of federal judges’ decisions. The 2020 World Bank Doing Business report found that on average it took 801 days to litigate a breach of contract.

International Commercial Arbitration and Foreign Courts

Brazil ratified the 1975 Inter-American Convention on International Commercial Arbitration (Panama Convention) and the 1979 Inter-American Convention on Extraterritorial Validity of Foreign Judgments and Arbitration Awards (Montevideo Convention). Law 9307/1996 amplifies Brazilian law on arbitration and provides guidance on governing principles and rights of participating parties. Brazil developed a new Cooperation and Facilitation Investment Agreement (CFIA) model in 2015 (https://concordia.itamaraty.gov.br/ ), but it does not include ISDS mechanisms. (See sections on bilateral investment agreements and responsible business conduct.)

Bankruptcy Regulations

Brazil’s commercial code governs most aspects of commercial association, while the civil code governs professional services corporations. In 2005, bankruptcy legislation (Law 11101) went into effect creating a system modeled on Chapter 11 of the U.S. bankruptcy code. Critics of Law 11101 argue it grants equity holders too much power in the restructuring process to the detriment of debt holders. Brazil is drafting an update to the bankruptcy law aimed at increasing creditor rights, but it has not yet been presented in Congress. The World Bank’s 2019 Doing Business Report ranks Brazil 77th out of 190 countries for ease of “resolving insolvency.”

4. Industrial Policies

Investment Incentives

The GoB extends tax benefits for investments in less developed parts of the country, including the Northeast and the Amazon regions, with equal application to foreign and domestic investors. These incentives were successful in attracting major foreign plants to areas like the Manaus Free Trade Zone in Amazonas State, but most foreign investment remains concentrated in the more industrialized southeastern states in Brazil.

Individual states seek to attract private investment by offering tax benefits and infrastructure support to companies, negotiated on a case-by-case basis. Competition among states to attract employment-generating investment leads some states to challenge such tax benefits as beggar-thy-neighbor fiscal competition.

While local private sector banks are beginning to offer longer credit terms, the state-owned Brazilian National Development Bank (BNDES) is the traditional Brazilian source of long-term credit as well as export credits. BNDES provides foreign- and domestically-owned companies operating in Brazil financing for the manufacturing and marketing of capital goods and primary infrastructure projects. BNDES provides much of its financing at subsidized interest rates. As part of its package of fiscal tightening, in December 2014, the GoB announced its intention to scale back the expansionary activities of BNDES and ended direct Treasury support to the bank. Law 13483, from September 2017, created a new Long-Term Lending Rate (TLP) for BNDES. On January 1, 2018, BNDES began phasing in the TLP to replace the prior subsidized loan rates. After a five-year phase in period, the TLP will float with the market and reflect a premium over Brazil’s five-year bond yield (which incorporates inflation). The GoB plans to reduce BNDES’s role further as it continues to promote the development of long-term private capital markets.

In December 2018, Brazil approved a new auto sector incentive package – Rota 2030 – providing exemptions from Industrial Product Tax (IPI) for research and development (R&D) spending. Rota 2030 replaced the Inovar-Auto program which was found to violate WTO rules. Rota 2030 increases standards for energy efficiency, structural performance, and the availability of assistive technologies; provides exemptions for investments in R&D and manufacturing process automation; incentivizes the use of biofuels; and funds technical training and professional qualification in the mobility and logistics sectors. To qualify for the tax incentives, businesses must meet conditions including demonstrating profit, minimum investments in R&D, and no outstanding tax liabilities.

Known as the Special Regime for the Reinstatement of Taxes for Exporters, or Reintegra Program, Decree 8415 reduced tax incentives for exports in February 2015. Decree 8415 reduced the previous three percent subsidy on the value of the exports to one percent for 2015, to 2.0 percent for 2016 and 2017, lowered it to 0.1 percent in 2018. This was deemed unconstitutional and the rate was raised again in 2019 to 2.0 percent indefinitely.

Brazil provides tax reductions and exemptions on many domestically-produced information and communication technology (ICT) and digital goods that qualify for status under the Basic Production Process (Processo Produtivo Básico, or PPB). The PPB is product-specific and stipulates which stages of the manufacturing process must be carried out in Brazil in order for an ICT product to be considered produced in Brazil. The major fiscal benefits of the National Broadband Plan (PNBL) and its supporting implementation plan (Regime Especial de Tributação do Programa de Banda Larga para Implantação de Redes de Telecomunicações, or REPNBL-Redes) have either expired or been revoked. In 2017, Brazil held a public consultation on a National Connectivity Plan to replace the PNBL. In 2018, Brazil launched the Internet for All program aimed to ensure broadband internet to all municipalities by offering tax incentives to operators in rural municipalities.

Law 12.598/2012 offers tax incentives to firms in the defense sector.  The law’s principal aspects are to: 1) establish special rules for the acquisition, contract, and development of defense products and systems; 2) establish incentives for the development of the strategic defense industry sector by creating the Special Tax Regime for the Defense Industry (RETID); and 3) provide access to financing programs, projects, and actions related to Strategic Defense Products (PED).

A RETID beneficiary, known as a Strategic Defense Company (EED), is accredited by the Ministry of Defense. An EED is a legal entity that produces or develops parts, tools, and components, to be used in the production or development of defense assets. It can also be a legal entity that provides services used as inputs in the production or development of defense goods.  RETID benefits include sale price credit and tax rate reduction for the manufacturing supply chain, including taxes on imported components. Additionally, RETID provides exemption from certain federal taxes on the purchase of materials for the manufacture of defense products, strategic defense products (PRODE / PED) and services provided by strategic defense companies (EED).

In April 2020,  the Brazilian Defense and Security Industry Association (ABIMDE) requested the Minister of Defense to consider implementing improvements to Law 12.598 by allowing all its members to:  1) have access to special bidding terms (TLE) for defense and security materials and 2) automatically utilize their RETID status, rather than being required to individually apply to the Ministry of Defense for certification, as is currently the process.

Foreign Trade Zones/Free Ports/Trade Facilitation

The federal government grants tax benefits to certain free trade zones. Most of these free trade zones aim to attract investment to the country’s relatively underdeveloped North and Northeast regions. The most prominent of these is the Manaus Free Trade Zone, in Amazonas State, which has attracted significant foreign investment, including from U.S. companies. Constitutional amendment 83/2014 came into force in August 2014 and extended the status of Manaus Free Trade Zone until the year 2073.

Performance and Data Localization Requirements

Government Procurement Preferences: The GoB maintains a variety of localization barriers to trade in response to the weak competitiveness of its domestic tech industry. These include:

  1. Tax incentives for locally-sourced information and communication technology (ICT) goods and equipment (Basic Production Process (PPB), Law 8248/91, and Portaria 87/2013); and
  2. Government procurement preferences for local ICT hardware and software (2014 Decrees 8184, 8185, 8186, 8194, and 2013 Decree 7903); and the CERTICS Decree 8186, which aims to certify that software programs are the result of development and technological innovation in Brazil.

On December 26, 2018, President Michel Temer approved and signed Decree 9.637/2018, which revoked Decree 8.135/2013 including its requirement that IT providers to the federal government disclose source code if requested.

The Institutional Security Cabinet (GSI) mandated the localization of all government data stored on the cloud during a review of cloud computing services contracted by the Brazilian government in Ordinance No. 9 (previously NC 14), made official in March 2018. While it does provide for the use of cloud computing for non-classified information, it imposes a data localization requirement on all use of cloud computing by the Brazil government.

Investors in certain sectors in Brazil must adhere to the country’s regulated prices, which fall into one of two groups: those regulated at the federal level by a federal company or agency and those set by sub-national governments (states or municipalities). Regulated prices managed at the federal level include telephone services, certain refined oil and gas products (such as bottled cooking gas), electricity, and healthcare plans. Regulated prices controlled by sub-national governments include water and sewage fees, vehicle registration fees, and most fees for public transportation, such as local bus and rail services. As part of its fiscal adjustment strategy, Brazil sharply increased regulated prices in January 2015.

For 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, according to Brazilian Labor Law Articles 352 to 354. This calculation excludes foreign specialists in fields where Brazilians are unavailable.

Decree 7174/2010, which regulates the procurement of information technology goods and services, requires federal agencies and parastatal entities to give preferential treatment to domestically produced computer products and goods or services with technology developed in Brazil based on a complicated price/technology matrix.

Brazil’s Marco Civil, an Internet law that determines user rights and company responsibilities, states that data collected or processed in Brazil must respect Brazilian law, even if the data is subsequently stored outside the country. Penalties for non-compliance could include fines of up to 10 percent of gross Brazilian revenues and/or suspension or prohibition of related operations. Under the law, Internet connection and application providers must retain access logs for specified periods or face sanctions. While the Marco Civil does not require data to be stored in Brazil, any company investing in Brazil should closely track its provisions as well provisions of other laws and regulations, including a data privacy bill passed in August 2018 and cloud computing regulations.

At the end of 2019, President Bolsonaro codified the new tax and incentives regime for the ICT sector, known as the Informatic Law. The regime is aligned with the requirements of the World Trade Organization (WTO), following complaints from Japan and the European Union that numerous Brazilian tax programs favored domestic products in contravention of WTO rules.

The new Informatic Law provides for tax incentives to manufacturers of ICT goods that invest in research, development, and innovation (RD&I) in Brazil. In order to receive the incentives, the regulation maintains a minimum nationalization requirement for production but reduces the need for nationalization if there is a greater investment in R&D. At least 60% of the production process is required to take place in Brazil to ensure eligibility.

5. Protection of Property Rights

Real Property

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 are, nonetheless, expanding their portfolios in Brazil.

Intellectual Property Rights

Rights holders in Brazil continue to face intellectual property rights (IPR) challenges. Brazil has remained on the “Watch List” of the U.S. Trade Representative’s Special 301 report since 2007. For more information, please see: https://ustr.gov/issue-areas/intellectual-property/Special-301 

Brazil has one physical market listed on USTR’s 2019 Review of Notorious Markets, located in Sao Paulo.  Rua 25 de Marco in Sao Paulo is notorious for hosting shopping malls that sell counterfeit and pirated goods, including Galeria Pagé, Shopping 25 de Março, and Santa Ifigenia.  Despite recent enforcement efforts, this market remains the most notorious counterfeit market in the country and is reportedly a distribution center for counterfeit and pirated goods throughout Sao Paulo.  For more information, please see: https://ustr.gov/sites/default/files/2019_Review_of_Notorious_Markets_for_Counterfeiting_and_Piracy.pdf . According to the National Forum Against Piracy, contraband, pirated, counterfeit, and stolen goods cost Brazil approximately $74 billion in 2019. (http://www.fncp.org.br/forum/release/292 ) (Yearly average currency exchange rate: 1USD = 3.946 R)

For additional information about treaty obligations and points of contact at local IP offices, please see the World Intellectual Property Organization (WIPO)’s country profiles: http://www.wipo.int/directory/en  

6. Financial Sector

Capital Markets and Portfolio Investment

The Central Bank of Brazil (BCB) embarked in October 2016 on a sustained monetary easing cycle, lowering the Special Settlement and Custody System (Selic) baseline reference rate from a high of 14 percent in October 2016 to 4.5 percent at the end of 2019. Inflation for 2019 was 4.3 percent, within the target of 4 percent plus/minus 1.5 percent. The National Monetary Council (CMN) maintained the BCB’s inflation target at 4 percent for 2020, but lowered it to 3.75 percent in 2021 and 3.5 percent for 2022. Because of a heavy public debt burden and other structural factors, most analysts expect the “neutral” policy rate will remain higher than target rates in Brazil’s emerging-market peers (around five percent) over the forecast period.

Following the 2004-2012 boom that more than doubled the lending/GDP ratio (to 55 percent of GDP), the 2015-2016 recession and higher interest rates significantly decreased lending. Analysts project that the Debt/GDP rate in 2020 will equal 98 percent.

The role of the state in credit markets grew steadily beginning in 2008, with public banks now accounting for over 55 percent of total loans to the private sector (up from 35 percent). Directed lending (that is, to meet mandated sectoral targets) also rose and accounts for almost half of total lending. Brazil is paring back public bank lending and trying to expand a market for long-term private capital.

While local private sector banks are beginning to offer longer credit terms, state-owned development bank BNDES is a traditional source of long-term credit in Brazil. BNDES also offers export financing. Approvals of new financing by BNDES increased 27 percent in 2019 from 2018, with the infrastructure sector receiving the majority of new capital.

The Sao Paulo Stock Exchange (BOVESPA) is the sole stock market in Brazil, while trading of public securities takes place at the Rio de Janeiro market. In 2008, the Brazilian Mercantile & Futures Exchange (BM&F) merged with the BOVESPA to form what is now the fourth largest exchange in the Western Hemisphere, after the NYSE, NASDAQ, and Canadian TSX Group exchanges. In 2020, there were 430 companies traded on the BM&F/BOVESPA exchange. The BOVESPA index increased 31.58 percent in valuation during 2019, but dropped beginning in March 2020 due to the economic impact of the COVID-19 pandemic. Foreign investors, both institutional and individuals, can directly invest in equities, securities, and derivatives; however, they are limited to trading those investments on established markets.

Wholly owned subsidiaries of multinational accounting firms, including the major U.S. firms, are present in Brazil. Auditors are personally liable for the accuracy of accounting statements prepared for banks.

Money and Banking System

The Brazilian financial sector is large and sophisticated. Banks lend at market rates that remain relatively high compared to other emerging economies. Reasons cited by industry observers include high taxation, repayment risk, and concern over inconsistent judicial enforcement of contracts, high mandatory reserve requirements, and administrative overhead, as well as persistently high real (net of inflation) interest rates. According to BCB data collected for final quarter of 2019, the average rate offered by Brazilian banks to non-financial corporations was 13.87 percent.

The banking sector in Brazil is highly concentrated with BCB data indicating that the five largest commercial banks (excluding brokerages) account for approximately 80 percent of the commercial banking sector assets, totaling $1.58 trillion as of the final quarter of 2019. Three of the five largest banks (by assets) in the country – Banco do Brasil, Caixa Economica Federal, and BNDES – are partially or completely federally owned. Large private banking institutions focus their lending on Brazil’s largest firms, while small- and medium-sized banks primarily serve small- and medium-sized companies. Citibank sold its consumer business to Itau Bank in 2016, but maintains its commercial banking interests in Brazil. It is currently the sole U.S. bank operating in the country.

In recent years, the BCB has strengthened bank audits, implemented more stringent internal control requirements, and tightened capital adequacy rules to reflect risk more accurately. It also established loan classification and provisioning requirements. These measures apply to private and publicly owned banks alike. In April 2018, Moody’s upgraded a collection of 20 Brazilian banks and their affiliates to stable from negative. The Brazilian Securities and Exchange Commission (CVM) independently regulates the stock exchanges, brokers, distributors, pension funds, mutual funds, and leasing companies with penalties against insider trading.

Foreigners may find it difficult to open an account with a Brazilian bank. The individual must present a permanent or temporary resident visa, a national tax identification number issued by the Brazilian government (CPF), either a valid passport or identity card for foreigners (CIE), proof of domicile, and proof of income. On average, this process from application to account opening lasts more than three months.

Foreign Exchange and Remittances

Foreign Exchange

Brazil’s foreign exchange market remains small, despite recent growth. The latest Triennial Survey by the Bank for International Settlements, conducted in December 2016, showed that the net daily turnover on Brazil’s market for OTC foreign exchange transactions (spot transactions, outright forwards, foreign-exchange swaps, currency swaps, and currency options) was $19.7 billion, up from $17.2 billion in 2013. This was equivalent to around 0.3 percent of the global market in both years.

Brazil’s banking system has adequate capitalization and has traditionally been highly profitable, reflecting high interest rate spreads and fees. Per an April 2018 Central Bank Financial Stability Report, all banks exceeded required solvency ratios, and stress testing demonstrated that the banking system has adequate loss-absorption capacity in all simulated scenarios. Furthermore, the report noted 99.9 percent of banks already met Basel III requirements and possess a projected Common Equity Tier 1 (CET1) capital ratio above the minimum 7 percent required at the beginning of 2019.

There are few restrictions on converting or transferring funds associated with a foreign investment in Brazil. Foreign investors may freely convert Brazilian currency in the unified foreign exchange market where buy-sell rates are determined by market forces. All foreign exchange transactions, including identifying data, must be reported to the BCB. Foreign exchange transactions on the current account are fully liberalized.

The BCB must approve all incoming foreign loans. In most cases, loans are automatically approved unless loan costs are determined to be “incompatible with normal market conditions and practices.” In such cases, the BCB may request additional information regarding the transaction. Loans obtained abroad do not require advance approval by the BCB, provided the Brazilian recipient is not a government entity. Loans to government entities require prior approval from the Brazilian Senate as well as from the Economic Ministry’s Treasury Secretariat and must be registered with the BCB.

Interest and amortization payments specified in a loan contract can be made without additional approval from the BCB. Early payments can also be made without additional approvals, if the contract includes a provision for them. Otherwise, early payment requires notification to the BCB to ensure accurate records of Brazil’s stock of debt.

In March 2014, Brazil’s Federal Revenue Service consolidated the regulations on withholding taxes (IRRF) applicable to earnings and capital gains realized by individuals and legal entities resident or domiciled outside Brazil. The regulation states that the cost of acquisition must be calculated in Brazilian currency (reais). Also, the definition of “technical services” was broadened to include administrative support and consulting services rendered by individuals (employees or not) or resulting from automated structures having clear technological content.

Upon registering investments with the BCB, foreign investors are able to remit dividends, capital (including capital gains), and, if applicable, royalties. Investors must register remittances with the BCB. Dividends cannot exceed corporate profits. Investors may carry out remittance transactions at any bank by documenting the source of the transaction (evidence of profit or sale of assets) and showing payment of applicable taxes.

Remittance Policies

Under Law 13259/2016 passed in March 2016, capital gain remittances are subject to a 15 to 22.5 percent income withholding tax, with the exception of capital gains and interest payments on tax-exempt domestically issued Brazilian bonds. The capital gains marginal tax rates are: 15 percent up to $896 thousand in gains; 17.5 percent for $896 thousand to $1.79 million in gains; 20 percent for $1.79 million to $5.38 million in gains; and 22.5 percent for more than $5.38 million in gains. (Note: exchange rate used was 5.58 reais per dollar, based on May 4, 2020 values.)

Repatriation of a foreign investor’s initial investment is also exempt from income tax under Law 4131/1962. Lease payments are assessed a 15 percent withholding tax. Remittances related to technology transfers are not subject to the tax on credit, foreign exchange, and insurance, although they are subject to a 15 percent withholding tax and an extra 10 percent Contribution for Intervening in Economic Domain (CIDE) tax.

Sovereign Wealth Funds

Law 11887 established the Sovereign Fund of Brazil (FSB) in 2008. It was a non-commodity fund with a mandate to support national companies in their export activities and to offset counter-cyclical development, promoting investment in projects of strategic interest to Brazil both domestically and abroad. The GoB also had the authority to use money from this fund to help meet its fiscal targets when annual revenues were lower than expected, and to invest in state-owned companies. In May 2018, then-President Temer signed an executive order abolishing the fund. The money in the fund was earmarked for repayment of foreign debt.

7. State-Owned Enterprises

The GoB maintains ownership interests in a variety of enterprises at both the federal and state levels. Typically, boards responsible for state-owned enterprise (SOE) corporate governance are comprised of directors elected by the state or federal government with additional directors elected by any non-government shareholders. Brazil, an OECD key partner country but not yet an OECD member, has participated in many OECD working groups. Nevertheless, Brazil does not follow the OECD Guidelines on Corporate Governance of SOEs. Brazilian SOEs are concentrated in the oil and gas, electricity generation and distribution, transportation, and banking sectors. A number of these firms also see a portion of their shares publicly traded on the Brazilian and other stock exchanges.

In the 1990s and early 2000s, the GoB privatized many state-owned enterprises across a broad spectrum of industries, including mining, steel, aeronautics, banking, and electricity generation and distribution. While the GoB divested itself from many of its SOEs, it maintained partial control (at both the federal and state level) of some previously wholly state-owned enterprises. This control can include a “golden share” whereby the government can exercise veto power over proposed mergers or acquisitions.

Notable examples of majority government-owned and controlled firms include national oil and gas giant Petrobras and power conglomerate Eletrobras.  Both Petrobras and Eletrobras include non-government shareholders, are listed on both the Brazilian and American stock exchanges, and are subject to the same accounting and audit regulations as all publicly-traded Brazilian companies.  The GoB intends to privatize Eletrobras through an issuance of new shares that would dilute the government’s majority stake and has submitted a legislative proposal to Congress.  Congressional approval is uncertain, however, and would likely not occur before 2021.  Petrobras is also cooperating with government efforts to privatize and diversify Brazil’s energy sector by reducing its participation and exiting mid- and downstream markets.  In 2019, Petrobras sold its natural gas distribution pipeline network, started the divestment of eight oil refineries, sold its controlling stake in Brazil’s largest retail gas station chain, and is in the process of selling its shares in regional natural gas distributors. Brazil previously restricted foreign investment in offshore oil and gas development through 2010 legislation that obligated Petrobras to serve as the sole operator and minimum 30 percent investor in any oil and gas exploration and production in Brazil’s prolific offshore pre-salt fields.  As a result of the GoB’s desire to increase foreign investment in Brazil’s hydrocarbon sector, in October 2016 the Brazilian Congress granted foreign companies the right to serve as sole operators in pre-salt exploration and production activities and eliminated Petrobras’ obligation to serve as a minority equity holder in pre-salt oil and gas operations.  Nevertheless, the 2016 law still gives Petrobras right-of-first refusal in developing pre-salt offshore fields and obligates operators to share a percentage of production with the Brazilian state. The GoB supports legislation currently in Congress to further liberalize the development of pre-salt fields by removing Petrobras’ right-of-first refusal as well as production sharing requirements.  The opening of the offshore oil and gas market to foreign investment has generated more than $20 billion in project bonuses since 2017.

Privatization Program

Given limited public investment spending, the GoB has focused on privatizing state–owned energy, airport, road, railway, and port assets through long-term (up to 30 year) infrastructure concession agreements. Eletrobras successfully sold its six principal, highly-indebted power distributors. The SOE is currently working to begin a capitalization process to reduce the GoB’s shareholdings in the company to less than 50 percent. The process cannot move forward, however, until Congress passes a bill authorizing the reduction. In 2018, Petrobras faced criticism over its daily fuel adjustment policy and a country-wide, 12-day truckers strike hit Brazil hard. To end the strike, the GoB eliminated the collection of the CIDE tax on diesel and gave a $3 billion subsidy to diesel producers (mainly Petrobras) to reduce prices to consumers (primarily truckers).

In 2016, Brazil created the Investment Partnership Program (PPI) to expand and accelerate the concession of public works projects to private enterprise and the privatization of some state entities. PPI covers federal concessions in road, rail, ports, airports, municipal water treatment, electricity transmission and distribution, and oil and gas exploration and production contracts. Through the end of 2019, PPI auctioned off 172 projects, collecting $33.5 billion in auction bonuses and securing private investment commitments of $171 billion. The full list of PPI projects is located at: https://www.ppi.gov.br/schedule-of-projects 

While some subsidized financing through BNDES will be available, PPI emphasizes the use of private financing and debentures for projects. All federal and state-level infrastructure concessions are open to foreign companies with no requirement to work with Brazilian partners.

In 2008, the Ministry of Health initiated the use of Production Development Partnerships (PDPs) to reduce the increasing dependence of Brazil’s healthcare sector on international drug production and to control costs in the public healthcare system, where services are an entitlement enumerated in the constitution. The healthcare sector accounts for 9 percent of GDP, 10 percent of skilled jobs, and more than 25 percent of research and development nationally. PDP agreements provide a framework for technology transfer and development of local production by leveraging the volume purchasing power of the Ministry of Health. In the current administration, there is increasing interest in PDPs as a cost saving measure. U.S. companies have both competed for these procurements and at times raised concerns about the potential for PDPs to be used to subvert intellectual property protections under the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

8. Responsible Business Conduct

Most state-owned and private sector corporations of any significant size in Brazil pursue corporate social responsibility (CSR) activities. Brazil’s new CFIAs (see sections on bilateral investment agreements and dispute settlement) contain CSR provisions. Some corporations use CSR programs to meet local content requirements, particularly in information technology manufacturing. Many corporations support local education, health, and other programs in the communities where they have a presence. Brazilian consumers, especially the local residents where a corporation has or is planning a local presence, generally expect CSR activity. Corporate officials frequently meet with community members prior to building a new facility to review the types of local services the corporation will commit to providing. Foreign and local enterprises in Brazil often advance United Nations Development Program (UNDP) Millennium Development Goals (MDGs) as part of their CSR activity, and will cite their local contributions to MDGs, such as universal primary education and environmental sustainability. Brazilian prosecutors and civil society can be very proactive in bringing cases against companies for failure to implement the requirements of the environmental licenses for their investments and operations. National and international nongovernmental organizations monitor corporate activities for perceived threats to Brazil’s biodiversity and tropical forests and can mount strong campaigns against alleged misdeeds.

The U.S. diplomatic mission in Brazil supports U.S. business CSR activities through the +Unidos Group (Mais Unidos), a group of U.S. companies established in Brazil,which support public and private CSR alliances in Brazil. Additional information can be found at: www.maisunidos.org 

9. Corruption

Brazil has laws, regulations, and penalties to combat corruption, but their effectiveness is inconsistent. Several bills to revise the country’s regulation of the lobbying/government relations industry have been pending before Congress for years. Bribery is illegal, and a bribe by a Brazilian-based company to a foreign government official can result in criminal penalties for individuals and administrative penalties for companies, including fines and potential disqualification from government contracts. A company cannot deduct a bribe to a foreign official from its taxes. While federal government authorities generally investigate allegations of corruption, there are inconsistencies in the level of enforcement among individual states. Corruption is problematic in business dealings with some authorities, particularly at the municipal level. U.S. companies operating in Brazil are subject to the U.S. Foreign Corrupt Practices Act (FCPA).

Brazil signed the UN Convention against Corruption in 2003 and ratified it in 2005. Brazil is a signatory to the OECD Anti-Bribery Convention and a participating member of the OECD Working Group on Bribery. It was one of the founders, along with the United States, of the intergovernmental Open Government Partnership, which seeks to help governments increase transparency.

In 2019, Brazil ranked 106th out of 180 countries in Transparency International’s Corruption Perceptions Index. The full report can be found at: https://www.transparency.org/cpi2019 

Since 2014, the federal criminal investigation known as Operação Lava Jato (Operation Carwash) has uncovered a complex web of public sector corruption, contract fraud, money laundering, and tax evasion stemming from systematic overcharging for government contracts, particularly at parastatal oil company Petrobras.  The ongoing investigation led to the arrests of Petrobras executives, oil industry suppliers, including executives from Brazil’s largest construction companies, money launderers, former politicians, and political party operations. Many sitting Brazilian politicians are currently under investigation.  In July 2017, former Brazilian President Luiz Inacio Lula da Silva was convicted of corruption and money laundering charges stemming from the Lava Jato investigation.  The Brazilian authorities jailed Lula in April 2018, and the courts sentenced him in February 2019 to begin serving an almost 13-year prison sentence.  In November 2019, Lula was freed after the Brazilian Supreme Court (STF) ruled against the execution of sentences, including imprisonment, until all appeals have been exhausted, a process known as segunda instancia.  The move overturned judicial precedent established in February 2016 and reaffirmed in April 2018.  Legal experts argue the move hamstrings Brazil’s efforts to combat endemic corruption, as wealthy defendants who previously faced immediate sentencing in the segunda instancia may now remain free as long as they have the resources to continuously appeal their case to the Supreme Court.  The ruling affected 4,895 cases nationwide, according to Brazil’s National Justice Council (CNJ), including dozens of high-profile politicians and businessmen.  In March 2019, authorities arrested former President Michel Temer on charges of corruption.  Temer was provisionally freed on March 25, 2019 by a writ of habeas corpus, arrested again on May 9, 2019 when a regional federal court overturned the writ, and freed again on May 15, 2019 by the STF.

On December 25, 2019, Brazilian President Jair Bolsonaro signed a packet of anti-crime legislation into law, which included several anti-corruption measures.  The new measures include regulation of immunity agreements – information provided by a subject in exchange for reduced sentence – which were widely used during Operation Carwash.  The legislation also strengthens Brazil’s whistle blower mechanisms, permitting anonymous information about crimes against the public administration and related offenses.

In December 2016, Brazilian construction conglomerate Odebrecht and its chemical manufacturing arm Braskem agreed to pay the largest FCPA penalty in U.S. history and plead guilty to charges filed in the United States, Brazil, and Switzerland that alleged the companies paid hundreds of millions of dollars in bribes to government officials around the world. The U.S. Department of Justice case stemmed directly from the Lava Jato investigation and focused on violations of the anti-bribery provisions of the FCPA. Details on the case can be found at: https://www.justice.gov/opa/pr/odebrecht-and-braskem-plead-guilty-and-agree-pay-least-35-billion-global-penalties-resolve 

In January 2018, Petrobras settled a class-action lawsuit with investors in U.S. federal court for $3 billion, which was one of the largest securities class action settlements in U.S. history. The investors alleged that Petrobras officials accepted bribes and made decisions that had a negative impact on Petrobras’ share value. In September 2018, the U.S. Department of Justice announced that Petrobras would pay a fine of $853.2 million to settle charges that former executives and directors violated the FCPA through fraudulent accounting used to conceal bribe payments from investors and regulators.

Resources to Report Corruption

Petalla Brandao Timo Rodrigues
International Relations Chief Advisor
Brazilian Federal Public Ministry
contatolavajato@mpf.mp.br

Transparencia Brasil
R. Bela Cintra, 409; Sao Paulo, Brasil
+55 (11) 3259-6986
http://www.transparencia.org.br/contato 

10. Political and Security Environment

Strikes and demonstrations occasionally occur in urban areas and may cause temporary disruption to public transportation. Brazil has over 50,000 murders annually, with low rates of completion in murder investigations and conviction rates. In 2018, then-President Temer signed a federal intervention decree giving the federal government control of the Rio de Janeiro state’s entire public security apparatus under the command of an Army general. The federal intervention ended on December 31, 2018, with the withdrawal of the military. The military also supported police forces in 11 states and nearly 500 cities for the 2018 general elections.

Non-violent pro- and anti-government demonstrations have occurred periodically in recent years.

Although U.S. citizens usually are not targeted during such events, U.S. citizens traveling or residing in Brazil are advised to take common-sense precautions and avoid any large gatherings or any other event where crowds have congregated to demonstrate or protest. For the latest U.S. State Department guidance on travel in Brazil, please consult www.travel.state.gov.

11. Labor Policies and Practices

The Brazilian labor market is composed of approximately 124 million workers of whom 32.9 million (26.5 percent) work in the informal sector.  Brazil had an unemployment rate of 11.2 percent as of March 2020, although that percentage was nearly double (22.6 percent) for young workers ages 18-29.  Foreign workers made up less than one percent of the overall labor force, but the arrival of more than 253,000 economic migrants and refugees from Venezuela since 2016 has led to large local concentrations of foreign workers in the border state of Roraima and the city of Manaus.  Migrant workers from within Brazil play a significant role in the agricultural sector.

Low-skilled employment dominates Brazil’s labor market. According to Brazil’s official statistical agency IBGE, approximately 40 percent of all Brazilians employed at the end of 2019, worked in the informal sector and thus were not entitled to the full benefits formal workers enjoy under Brazil’s labor and social welfare system. Young workers (18-24 year-olds) were the most likely to be unemployed, with over 25 percent officially jobless per IBGE. Since 2012, women have on average been unemployed at a higher rate (3.15 percentage points higher) than their male counterparts. IBGE’s quarterly unemployment report released on April 30, 2020 showed 12.9 million Brazilians (12.2 percent) were jobless in the first quarter of 2020, an increase of 1.2 percentage points over the fourth quarter 2019.

Workers in the formal sector contribute to the Time of Service Guarantee Fund (FGTS) that equates to one month’s salary over the course of a year. If a company terminates an employee, the employee can access the full amount of their FGTS contributions or 20 percent in the event they leave voluntarily. Brazil’s labor code guarantees formal sector workers 30 days of annual leave and severance pay in the case of dismissal without cause. Unemployment insurance also exists for laid off workers equal to the country’s minimum salary (or more depending on previous income levels) for six months. A labor law that went into effect in November 2017 modified 121 sections of the national labor code (CLT). The law introduced flexible working hours, eased restrictions on part-time work, relaxed rules on how workers can divide their holidays, and cut the statutory minimum lunch break from 60 to 30 minutes. The government does not waive labor laws to attract investment; they apply uniformly cross the country.

Collective bargaining is common and there were 11,587 labor unions operating in Brazil in 2018. Labor unions, especially in sectors such as metalworking and banking, are well organized in advocating for wages and working conditions and account for approximately 19 percent of the official workforce according to the Brazilian Institute of Applied Economic Research (IPEA). Unions in various sectors engage in collective bargaining negotiations, often across an entire industry when mandated by federal regulation. The November 2017 labor law ended mandatory union contributions, which has reduced union finances by as much as 90 percent according to the Inter-Union Department of Statistics and Socio-economic Studies (DIESSE). DIESSE reported a significant decline in the number of collective bargaining agreements reached in 2018 (3,269) compared to 2017 (4,378).

Employer federations also play a significant role in both public policy and labor relations. Each state has its own federation, which reports to the National Confederation of Industry (CNI), headquartered in Brasilia, and the National Confederation of Commerce (CNC), headquartered in Rio de Janeiro.

Brazil has a dedicated system of labor courts that are charged with resolving routine cases involving unfair dismissal, working conditions, salary disputes, and other grievances. Labor courts have the power to impose an agreement on employers and unions if negotiations break down and either side appeals to the court system. As a result, labor courts routinely are called upon to determine wages and working conditions in industries across the country. The labor courts system has millions of pending legal cases on its docket, although the number of new filings has decreased since the November 2017 labor law went into effect.

Strikes occur periodically, particularly among public sector unions. A strike organized by truckers unions protesting increased fuel prices paralyzed the Brazilian economy in May 2018, and led to billions of dollars in losses to the economy.

Brazil has ratified 97 International Labor Organization (ILO) conventions. Furthermore, Brazil is party to the UN Convention on the Rights of the Child and major ILO conventions concerning the prohibition of child labor, forced labor, and discrimination. For the past eight years (2010-2018), the Department of Labor, in its annual publication Findings on the Worst forms of Child Labor, has recognized Brazil for its significant advancement in efforts to eliminate the worst forms of child labor. On January 1, 2019, newly-elected President Jair Bolsonaro eliminated the Ministry of Labor and divided its responsibilities between the Ministries of Economy, Justice, and Social Development. The GoB, in 2019, inspected 272 properties, resulting in the rescue of 968 victims of forced labor.  Additionally, GoB officials removed 1,040 child workers from situations of child labor compared to 1,409 children in 2018.  Of these, 20 children were rescued from situations of slavery-like conditions, compared to 28 in 2018.

12. U.S. International Development Finance Corporation (DFC) and Other Investment Insurance Programs

Programs of the U.S. International Development Finance Corporation (DFC) are available, although DFC reports that certain new authorities established by the BUILD Act of 2018, including equity investments, technical assistance, grants, and feasibility studies, may require a new bilateral Investment Incentive Agreement with the Government of Brazil. DFC has stated it intends to invest in infrastructure and women entrepreneurship projects as its primary focus in Brazil. Brazil has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1992.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistatical source* USG or international statistical source USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $1.73 trillion 2019 $1.869 trillion www.worldbank.org/en/country 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:
BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2018 $107.99 billion 2018 $70.878 billion BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Host country’s FDI in the United States ($M USD, stock positions) 2018 $20.37 2018 ($2.468 billion) BEA data available at
https://www.bea.gov/international/
direct-investment-and-multinational-
enterprises-comprehensive-data
 
Total inbound stock of FDI as % host GDP 2018 $41.1% 2018 36.6% UNCTAD data available at https://unctad.org/en/Pages/DIAE/
World%20Investment%20Report/
Country-Fact-Sheets.aspx
 

[Select country, scroll down to “FDI Stock”- “Inward”, scan rightward for most recent year’s “as percentage of gross domestic product”]

* Source for Host Country Data: https://www.ipea.gov.br/portal/ 

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (U.S. Dollars, Billions)
Inward Direct Investment Outward Direct Investment
Total Inward 568.74 100% Total Outward 208.43 100%
The Netherlands 131.27 23.1% Cayman Islands 55.99 26.9%
United States 107.99 19.0% British Virgin Islands 48.69 23.4%
Spain 52.84 9.3% Austria 30.12 14.5%
Luxembourg 51.22 9.0% Bahamas 22.63 10.9%
France 32.52 5.7% United States 20.37 9.8%
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, current US Dollars)
Total Equity Securities Total Debt Securities
All Countries 45,754 100% All Countries 31,960 100% All Countries 13,793 100%
United States 15,689 34.3% United States 12,073 37.8% Spain 4,261 30.9%
Bahamas 7,316 16.0% Bahamas 7,220 22.6% United States 3,615 26.2%
Spain 4,407 9.6% Cayman Islands 3,705 11.6% Mexico 2,406 17.4%
Cayman Islands 4,120 9.0% Luxembourg 1,518 4.7% Republic of Korea 1,871 13.6%
Mexico 2,508 5.5% Switzerland 1,205 3.8% Cayman Islands 415 3.0%

14. Contact for More Information

Economic Section
U.S. Embassy Brasilia
BrasiliaECON2@State.gov
+55-61-3312-7000

2020 Investment Climate Statements: Brazil
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