Doing Business in Brazil by CWTP

DOING BUSINESS IN BRAZIL 1st edition

2014

DOING BUSINESS IN BRAZIL 1st edition

DOING BUSINESS IN BRAZIL Preface............................................................................................................................................8 Who We Are ....................................................................................................................................9 Important Disclaimer ..................................................................................................................... 10 Glossary ........................................................................................................................................ 11 Introduction: Brief Summary of the Brazilian Legal System .............................................................. 13 CHAPTER 1: TYPES OF INVESTMENTS ...................................................................................... 14 Foreign Capital ................................................................................................................................................... 14 1.1. Foreign Direct Investment ............................................................................................................................. 14 1.1.1. Brazilian Securities Commission ................................................................................................................. 14 1.1.1.1. Public Companies .................................................................................................................................... 14 1.1.2. Direct Investments: Tax Aspects ................................................................................................................... 15 1.1.2.1. IOF (Tax on Financial Operations) .......................................................................................................... 15 1.1.2.2. Dividends ................................................................................................................................................ 15 1.1.2.3. Interest on Stockholders’ Equity............................................................................................................... 15 1.1.2.4. Thin Cap Rules ....................................................................................................................................... 16 1.1.2.5. Transfer Pricing ........................................................................................................................................ 17 1.1.2.6. Goodwill in Subscription of Shares .......................................................................................................... 19 .................................................................................. 20 1.2. Portfolio Investment ...................................................................................................................................... 20 1.2.1. Types of Investment Funds .......................................................................................................................... 21 1.2.2. Investment Fund Taxation ........................................................................................................................... 23 1.2.2 a) Private Equity Fund – FIP (Fundo de Investimento em Participação) ...................................................... 24 1.2.2 b) FIP-IE FUND (Fundo de Investimento em Participação em Infraestrutura) ............................................ 25 1.2.2 c) Real Estate Investment Fund – FII (Fundo de Investimento Imobiliário) ................................................. 25 1.2.2 d) Receivables Investment Fund - FIDC ..................................................................................................... 25 1.2.2 e) Other Funds ............................................................................................................................................ 26 CHAPTER 2: BRAZILIAN COMPANIES ....................................................................................... 27 2.1. Types of Corporations ................................................................................................................................... 27 2.1.1. Limited Liability Companies ....................................................................................................................... 27 2.1.2. Corporations (Sociedades Anônimas) .......................................................................................................... 28 2.1.3. Other Corporate Types ............................................................................................................................... 29 2.2. Commercial Registration .............................................................................................................................. 30 ............................................................................................................................. 30 2.2.2. Registrations and Licenses .......................................................................................................................... 30 2.3. Foreign Members and Shareholders ............................................................................................................... 31 2.4. Representation and Administration ................................................................................................................ 31 CHAPTER 3: CORPORATE TAXATION IN BRAZIL, GENERAL RULES ....................................... 32 3.1. Income Tax – IR ........................................................................................................................................... 32 ................................................................................................... 33 3.3. Social Integration Plan Contribution (PIS/PASEP) and Social Security Funding Contribution (COFINS)........ ............................................................................................................................................................................ 34 3.4. Tax on Manufactured Products (IPI) .............................................................................................................. 35 3.5. Economic Intervention Contribution (CIDE) ............................................................................................... 35 3.6. Social Security Contributions ........................................................................................................................ 36 3.7. Other Federal Taxes ....................................................................................................................................... 36 3.8. Commercialization of Goods and Services Tax (ICMS) .................................................................................. 36 3.9. Other State Taxes ........................................................................................................................................... 38 3.10. Municipal Services Tax (ISSQN).................................................................................................................. 38 3.11. Other Municipal Taxes................................................................................................................................. 38 3.12. Export Earnings........................................................................................................................................... 38 3.13. Ancillary Obligations .................................................................................................................................. 39

CHAPTER 4: CAPITAL GAINS ..................................................................................................... 40 CHAPTER 5: TAX INCENTIVES .................................................................................................. 41 5.1. Introduction .................................................................................................................................................. 41 5.2. SUDAM/SUDENE ...................................................................................................................................... 41 5.3. Technological Innovation ............................................................................................................................... 41 5.4. Manaus Duty-Free Zone (ZFM) ................................................................................................................... 41 5.4.1. Basic Productive Process (PPB) ................................................................................................................... 42 5.5. Infrastructure Incentives................................................................................................................................. 42 5.5.1. REIDI ........................................................................................................................................................ 42 5.5.2. REPNBL ................................................................................................................................................... 42 5.5.3. RECOF ..................................................................................................................................................... 42 5.6. RECOPA...................................................................................................................................................... 43 5.7. REPETRO ................................................................................................................................................... 43 5.8. Tax Break – Home Appliances ....................................................................................................................... 43 5.9. Drawback – Exporting Incentive .................................................................................................................. 43 CHAPTER 6: DOUBLE TAXATION AGREEMENT ........................................................................ 44 6.1. Relevant Aspects............................................................................................................................................ 44 ............................................................................................................................ 44 6.3. IRRF (Withholding Income Tax) .................................................................................................................. 44 6.4. Dividends ...................................................................................................................................................... 44 6.5. Tax Credits .................................................................................................................................................... 45 CHAPTER 7: LABOR ASPECTS .................................................................................................... 46 7.1. Introduction .................................................................................................................................................. 46 7.2. Service Rendering Agreement and Employment ........................................................................................... 46 7.3. Employment Relationship and Basic Rights of Employees............................................................................. 46 7.3.1. Salary and Wages ......................................................................................................................................... 47 7.3.2. Health Hazard Allowance and Risk Premium ............................................................................................. 47 7.3.3. Christmas Bonus (13th Salary) .................................................................................................................... 47 7.3.4. Weekly Paid Rest Period............................................................................................................................. 47 7.3.5.Vacations ..................................................................................................................................................... 47 7.3.6. Workday ..................................................................................................................................................... 47 .......................................................................................................................... 48 7.3.8. Severance Pay Fund – FGTS....................................................................................................................... 48 7.3.9. Social Security ............................................................................................................................................ 48 7.4. Termination of Employment Relationship ..................................................................................................... 48 7.5. Foreign Workers............................................................................................................................................. 50 7.5.1. Permanent Visa:........................................................................................................................................... 50 7.5.2. The Temporary Visa:.................................................................................................................................... 51 CHAPTER 8: BANKING SYSTEM ................................................................................................. 52 8.1. Central Bank of Brazil (BACEN)................................................................................................................... 52 8.2. RDE ............................................................................................................................................................. 52 8.3. RDE – ROF ................................................................................................................................................. 53 8.4. COAF ........................................................................................................................................................... 54 CHAPTER 9: MERGERS AND ACQUISITIONS, CORPORATE TRANSACTIONS, AND DUE DILIGENCE.................................................................................................................................. 56 9.1. Overview ...................................................................................................................................................... 56 9.2. Process Steps.................................................................................................................................................. 56 9.2.1. Memorandum of Understanding (“MOU”)................................................................................................ 56 9.2.2. Documentation and Information required for a corporate Acquisition ........................................................ 56 9.2.3. Business ...................................................................................................................................................... 57 9.2.4. Government Funding and Ownership – BNDES ....................................................................................... 57 9.3. Brazilian Antitrust System .............................................................................................................................. 58 9.3.1. General....................................................................................................................................................... 58 9.3.2. New Antitrust Law .....................................................................................................................59

CHAPTER 10: COMPANY REORGANIZATION OR BANKRUPTCY ........................................... 61 10.1. Court-supervised reorganization .................................................................................................................. 61 10.2. Out-of-Court Reorganization ..................................................................................................................... 62 10.3. Bankruptcy .................................................................................................................................................. 62 CHAPTER 11: OTHER RELEVANT ASPECTS ............................................................................... 65 11.1. Contracts ..................................................................................................................................................... 65 11.1.1. Contract characteristics ............................................................................................................................. 65 11.2. Contract formation...................................................................................................................................... 65 11.3. Preliminary contract .................................................................................................................................... 65 11.4. Contract Termination................................................................................................................................... 66 11.5. Purchase contracts........................................................................................................................................ 66 11.5.1. Types of Purchase Contracts .................................................................................................................... 68 11.6. Corporate Contracts ................................................................................................................................... 69 11.7. Mercantile Purchase Contract ...................................................................................................................... 69 11.8. Brazilian Real Estate Law............................................................................................................................. 71 11.9. Arbitration ................................................................................................................................................... 77 11.10. Brazilian Court Structure ........................................................................................................................... 78 CHAPTER 12: OIL AND GAS........................................................................................................ 80 12.1. Introduction ................................................................................................................................................ 80 12.2. Applicable Legislation .................................................................................................................................. 80 12.3. Other Applicable Rules................................................................................................................................ 81 12.4. Regulatory Agencies .................................................................................................................................... 82 12.5. Granting of exploration and production rights of oil and gas in Brazil.......................................................... 82 12.6 Employees .................................................................................................................................................... 84 12.7. Federal, state, and local government compensation ....................................................................................... 84 12.8. Exportation ................................................................................................................................................. 85 12.9. “Repetro” System ........................................................................................................................................ 85 12.10. Rights acquired with the exploration and production of oil and gas ........................................................... 85 12.11. Financing and support to oil and gas production: ....................................................................................... 86 CHAPTER 13: ENVIRONMENTAL ASPECTS ................................................................................ 87 13.1. Authority to create, inspect, and enforce environmental legislation ............................................................... 87 13.2. Environmental liability ................................................................................................................................. 87 13.3. Environmental licensing............................................................................................................................... 87 13.4. Sustainability................................................................................................................................................ 88 13.5. Legal Counsel .............................................................................................................................................. 88

Preface Despite recent growth in Brazil encouraged by economic and political stability, the complexities of the countryâ&#x20AC;&#x2122;s legal system continue to represent a major obstacle for entrepreneurs. For an international business owner unfamiliar with Brazilian regulations â&#x20AC;&#x201C; full of particular nuances â&#x20AC;&#x201C; such complexities might act as a deterrent to investment. The Doing Business in Brazil guide is a product of Costa, Waisberg e Tavares Paes Sociedade de Advogados (CWTP) and is also available online at www.cwtp.com.br. It has come as a response to numerous clients who have asked for a practical guide that would allow them to better understand the legal context for businesses operating in Brazil. This guide is a reference for clients looking for comprehensive legal information on doing business in Brazil. The content is intended to be straightforward and, with this in mind, we have summarized the main regulations that would affect international businesses looking to establish themselves in Brazil. In addition to these at-a-glance style summaries, we have also addressed topics that we believe to be particularly useful for companies and individuals considering how to best engage in commercial activities in the country of Brazil. The Doing Business in Brazil guide should not be considered an exhaustive resource on the subjects discussed herein.We hope that readers will use the guide as a first point of reference but will consider the services we offer when seeking more specific information and advice. This publication is the result of many hours of research, and although there are limits to providing a compact, comprehensive guide to Brazilian business law, the guide is a reliable source of information. The information and data presented in the guide was current as of May 31st, 2014, yet as the Brazilian legal context is ever evolving, we intend to publish regular updates that are relevant to our readers. Given the fluid nature of the legal landscape in Brazil, we recommend that all readers contact our firm to clarify any details.

Who We Are CWTP – Costa Weisberg e Tavares Paes Sociedade de Advogados - is a premier law firm specialized in enabling business success for its clients. From the extensive comprehension of ours client’s affairs, the firm provides strategic advice on all legal and business aspects arising from each activity, action or transaction. CWTP combines legal knowledge with a global view of organizational operations, presenting creative, safe and effective solutions for the development and structuring of our client’s businesses. Formed by a group of partners with extensive experience and market know how, CWTP is recognized for the quality of its services, sophistication and commitment, being directly involved in a significant number of large transactions and corporate litigation in Brazil and abroad. Our clients know and rely on our talent, standard of excellence and track record of success in a wide variety of industries and practice areas, such as leading corporations, financial institutions, family conglomerates, and professionals in complex, high-stakes situations with tax planning, liability claims, cases of insolvency, intricate commercial disputes, mergers, or acquisition deals. With offices in São Paulo, Rio de Janeiro, and Brasília, our firm works across the board, bringing together expertise and knowledge that effectively minimize risks and costs, while enabling a value proposition that meets the client holistically. Please visit www.cwtp.com.br for more information.

Important Disclaimer This publication should not be regarded as an exhaustive resource on the matters discussed in the following pages. It should not be treated, in any way, as a substitute for thorough research or the exercise of personal professional judgment. Neither the publishers nor the authors can accept any responsibility for losses occasioned due to an individual acting or refraining from action as a result of any material in this of the appropriate advisor. The contents herein contained are based on information that was current as of May, 2014 unless otherwise indicated. Because the legal landscape is ever evolving, it is possible that other laws and applicable rules referenced in this document have, since the date of publication, been altered in some way. Readers should contact us for more detailed information. This publication may not be reproduced, distributed, or published by the recipient, nor can it be used for any purpose whatsoever without the prior written consent of CWTP.

Glossary AFRMM ANP ANTAQ BACEN BNDS BNDSPAR BO CADE CADEMP CBE CC CF/88 CIDE CLT CNPE CNPJ COAF COFINS CPF CSLL CTPS CVM DESIG EIA FCPA FGTS FIDC FINAME IBAMA IE IED II INPI INSS IOF IPI IRPJ IRRF IRRF JCP LNG LOI M&A MME

Additional Freight for Merchant Marine Renewal Brazilian Oil Authority Brazilian Waterway Transportation Authority Central Bank of Brazil Brazilian Development Bank BNDES Participações S.A. Brazilian Antitrust Authority Individual and Corporate Taxpayers' Registry – Foreign Capital Brazilian Capital Abroad Brazilian Civil Code Brazilian Constitution of 1988 Contribution of Intervention in the Economy Consolidation of Labor Laws Brazilian Energy Policy Council Registry of Corporate Taxpayers Controlling Council of Financial Activities Social Security Contribution Individual Taxpayer Registry Social-Security Card Brazilian Security Commission Financial System Monitoring and Information Management Department Environmental Impact Assessment Foreign Corrupt Practices Act of 1977 Guarantee Fund for Length of Service Credit Investment Fund Special Industrial Financing Agency Brazilian Environment and Renewable Natural Resources Institute Export Tax Foreign Direct Investment Import Duty National Institute of Industrial Property Brazilian Social Security Institute Tax on Financial Transactions Tax on Manufactured Products Corporate Income Tax Withholding Income Tax Withholding Tax Interest on Stockholders' Equity Letter of Intent Mergers and Acquisitions Ministry of Mines and Energy

MOU MTE NDA NGO OECD PIS PORTFÓLIO PPB PPSA PROMINP PSC RDE RECOF RECOPA

REIA REIDI REPETRO REPNBL RFB ROF SBDC SEAE SEBRAE SISBACEN SISCOMEX SISNAMA SPV SRF STF STJ STM SUFRAMA TIR TSE TST

Memorandum of Understandings Ministry of Labor and Employment Non-Disclosure Agreement Non-Governmental Organization Organization for Economic Cooperation and Development Social Integration Program Portfolio Investments Basic Productive Process Pré-Sal Petróleo S.A. Brazilian Oil and Gas Industry Mobilization Program Production Sharing Contract Electronic Statement Registration Special Customs System for Industrial Bonded Warehouses under Computerized Control Special Taxation System for the Construction, Expansion, Renovation, or Modernization of Soccer Stadiums Renovation for FIFA 2013 Confederations Cup and 2014 World Cup Environmental Impact Assessment Report Special Incentive System for Infrastructure Development Special Customs System for Exporting and Importing Goods to be used in Oil and Natural Gas Research and Exploration Activities Special Taxation System for National Broadband Telecommunication Network Implementation Brazilian Federal Revenue Financial Transactions Brazilian Antitrust System Brazilian Small and Micro Business Support Service Brazilian Central Bank Information System Integrated Foreign Trade System Brazilian Environmental System Special Purpose Vehicle Federal Supreme Court Supreme Court of Justice Supreme Military Court Manaus Duty-Free Zone Superintendence International Transfers in Reais Supreme Electoral Court Supreme Labor Court

Introduction: Brief Summary of the Brazilian Legal System Brazil has adopted a civil law system, which has resulted in a legal system largely based on States and England. Despite adhering to a civil law system, case law is commonly referred to when The country of Brazil is organized as a federal republic, which encompasses a federal union, 26 states, more than 5,000 municipalities, and a federal district. All members of the federal republic have the power to issue laws within the limits that the Federal Constitution has prescribed for each legislative body. With certain matters, all levels of government â&#x20AC;&#x201C; federal, state, and municipal, while the federal district, it is worth noting, has been awarded both state and municipal capacities â&#x20AC;&#x201C; are able to enact legislation. Tax-related legislation is a useful example of one such case. On other matters, however, may not overlap with those given to another level of government. Expropriation, for example, is the exclusive domain of the federal government. It is important to emphasize that the federal government is entitled to regulate civil law and, as an extension, real estate rights as well. As a result, all work involving titles, transactions, leases, registrations, and developments must take federal legislation into account. This does not, however, transactions or development, so long as this legislation is pertinent to environmental, tax, and zoning estate agreements and developments.

CHAPTER 1 TYPES OF INVESTMENTS Foreign Capital

or juridical persons resident, domiciled, or headquartered outside of Brazil. In Brazil, foreign capital is guaranteed identical legal treatment to that given to domestic capital, and any discriminations that are not contemplated by law are prohibited.

1.1. Foreign Direct Investment in the capital stock of Brazilian companies that belong to either individuals or legal entities domiciled or headquartered abroad, bought or acquired under current legislation, as well as capital allocation by foreign companies.â&#x20AC;?

1.1.1. Brazilian Securities Commission The Brazilian Securities Commission (CVM) is an instrument created through Law No. Ministry of Finance. It maintains a separate legal identity and its own administrative authority. The main objectives of the CVM are the following: I. II.

To protect security holders against any irregular issuances or illegal actions by managers or controlling shareholders;

III. To ensure public access to information about trade deals; IV. V.

To stimulate permanent investment in the capital stock of public companies.

1.1.1.1. Public Companies A company can be either public or private. A public company is described as a company which securities are traded in the securities market, on the stock exchange, or in the OTC market. Private company securities, in contrast, are not available to the public. In order for a private company to and obtain authorization from the Brazilian Securities Commission (CVM). Therefore, in order for a company to issue securities or to trade on the stock or OTC market, it In order to register with the CVM, a public company must submit an application, signed by

Statements (DFP) forms, quarterly Information (ITR), Annual Information (IAN) reports, as well as additional documents. But before any securities can be distributed, the company must be registered with the CVM. management and administration of these funds is generally more cautious in the interest of protecting minority shareholders. For this same reason, public companies are also subject to CVM regulations and impromptu inspections. Public companies are required to report the following to the CVM, the stock exchange, and to the public: auditor, and a Standardized Financial Statement (DFP) form.This should be done up to three months after the end of the reporting period and at least one month before the Annual General Meeting; reporting period or one month after the Annual General Meeting; and Quarterly Information (ITR) form. This should be done within 45 days from the end of every quarter during the reporting period.

In addition, public companies must disclose, as per rules established by the CVM, all relevant company information such as, for example, any decision made by the shareholder The main goal of this stipulation is maintaining an orderly and veritable market for company securities, ensuring greater transparency in all capital market transactions.

1.1.2. Direct Investments: Tax Aspects Direct investments made by non-residents are subject to the following taxes:

1.1.2.1. IOF (Tax on Financial Operations) based on the value of the transaction, converted into Brazilian currency. rate may increase or decrease, with a maximum allowable rate of 25%.

1.1.2.2. Dividends Dividends paid by Brazilian companies are exempt from taxation. This exemption applies to payments made to residents of Brazil, as well as those made to non-resident natural or juridical persons.

1.1.2.3. Interest on Stockholders’ Equity payments to the partners and shareholders of a Brazilian company, regardless of whether or not they are residents.This is known as ‘interest on stockholders’ equity,’ or Juros Sobre Capital Próprio (JCP) in Brazil.

The goal of including JCP in this legislation was to treat returns on the capital of shareholders in Brazilian companies in a similar way to the interest paid on third-party loans, the result being

and falls under a special tax scheme that also allows deductions for Corporate Income Tax (IRPJ) JCPs are calculated using the Long-Term Interest Rates (TJLP) that apply to net equity accounts, where the tax deduction is determined according to the following criteria: (i) the JCP rate should not exceed the daily proportional variation of the TJLP on the net worth on the company, and (ii)

Interest on stockholders’ equity, paid to non-residents, is subject to a 15% withholding tax – which jumps to 25% if the payment is going to a so-called ‘tax favorable country’ or ‘tax havens’– while payments made to residents, in addition to a 15% withholding tax, are subject to the following taxes, applied to corporate partners or shareholders: the IRPJ (approximately 25%), CSLL (15% on Social Security Financing Program Contribution or COFINS (7.6%). consider when working with Brazilian companies.

1.1.2.4. Thin Cap Rules Brazil has thin capitalization rules that limit the indebtedness of Brazilians companies with foreign parent companies.The goal is to avoid excessive levels of debt that would have a detrimental case that certain debt limits are surpassed. Pursuant to Article 24 of Law 12,249/2010, interest that is paid or credited, by a Brazilian company, to a related party – given they are not located in a tax favorable country, nor subject to a privileged tax system – may only be tax deductible if the amount of the Brazilian company’s debt, on the date that interest is accrued, is not more than twice the value of the equity investment made by the related party. It must also be true that the overall debt incurred by the Brazilian company does not exceed twice the amount of total direct investment made by related parties. Interest that is paid or credited to a company located in a tax favorable country, or a country that has a privileged tax system – even if the company is not related – will only be deductible up until the point that the value of the payment exceeds 30% of the net worth of the Brazilian company. It is worth noting that the non-deductibility here only applies to the part of the debt that exceeds the aforementioned limits (two times the equity investment made by the related party or two times the total equity investments made by all related parties.)

TABLE – THIN CAPITALIZATION Interest Creditor/Beneficiary

Debt Limit

Person that is not a resident in a favorable tax or privileged tax system country Related party with direct investment in a Brazilian company

Two times the party’s level of investment in Brazilian company’s net equity

Related person without direct investment in a Brazilian company

Two times the Brazilian company’s total net equity

Related parties with direct investment in a Brazilian company – (total)

Two times the parties’ total investment in Brazilian company’s net equity

Related parties without direct investment in a Brazilian company – (total)

Two times the Brazilian company’s total net equity

Person domiciled in tax favorable or privileged tax system country Person domiciled in tax favorable or privileged tax system country or dependence

30% of Brazilian company’s net equity

Finally, it is worth noting that these restrictions do not apply to the interest payable to nonresidents, but rather to the tax deductibility of these interest payments. So long as the mentioned limits are followed, and provided that the loan was carried out in regular market conditions, and that the company is properly registered with the Central Bank of Brazil (BACEN), interest payments will be deductible. Interest paid or credited to related parties abroad that are not registered with BACEN will be subject to Brazilian regulations on transfer pricing, regardless of compliance with thin capitalization rules.

1.1.2.5. Transfer Pricing Brazilian rules on transfer pricing are relatively recent when compared to those in other countries. Brazil began to regulate transactions between related parties in 1997 in order to avoid the transfer of returns disguised as a cost or as interest. Although Brazilian legislation is based on guidelines provided by the OECD, the ‘arm’s length’ approach that governs this matter on a global scale has had only limited application in Brazil. apply to import and export transactions between related companies. In practice, Brazilian legislation Beyond controlling transactions between related parties, transfer price rules also apply to transactions done with any company residing or domiciled in a country that (i) does not tax income or where maximum income tax rates are below 20%, or (ii) whose legislation prohibits access to information regarding the corporate structure of legal entities, their owners, or the identity of the

TABLE - RELATED PERSON I – Headquarters of a Brazilian legal entity (domiciled abroad); II - Branch or subsidiary of a Brazilian legal entity (domiciled abroad); III - Individual or legal entity residing or domiciled abroad, whose level of corporate investment in the company is that of a parent or affiliated company under corporate legislation (relevant investment); IV - Legal entity domiciled abroad that is described as a parent or affiliated company under corporate legislation (relevant interest); V- Legal entity domiciled abroad that is under the same corporate or management control as the Brazilian company, or when at least 10% of each company’s capital is held by one individual or legal entity;

VI - Individual or legal entity residing or domiciled abroad that, together with a legal entity domiciled in Brazil, hold interest in a third legal entity, the sum of which is described as that of parent or affiliated companies under corporate legislation (relevant interest); VII - Individual or legal entity residing or domiciled abroad that is a member thereof, in a joint venture or co-ownership, under Brazilian legislation, in any venture; VIII - Individual residing abroad that is a relative or relative by affinity within the third degree, the spouse or partner of a company’s officers, or of a controlling member or shareholder with a direct or indirect interest; IX - Individual or legal entity residing or domiciled abroad, enjoying exclusivity, as agent, dealer, or franchisee in the buying and selling of products, services, or interests; X - Individual or legal entity residing or domiciled abroad, with respect to which a legal entity domiciled in Brazil enjoys exclusivity, as agent, dealer, or franchisee in the buying and selling of products, services, or interests.

In order to protect Brazilian tax interests, and to avoid the transfer of returns using the manipulation of international transaction prices, this legislation dictates that the parameter price should be determined for each transaction that involves a related party or a country with a privileged tax system. The parameter price is obtained through transfer pricing methods, consistent with Brazilian legislation.They serve as a reference point to compare to the prices that were used by the company. In theory, a parameter price should represent the actual price of the transaction, free of any manipulation that could result from the relationship between the two parties involved. These methods have been determined by law, and are intended to ensure that prices used by a company resemble, as closely as possible, actual market prices. They are summarized below: Imported goods, services, and rights: I.

Independently Compared Prices (PIC): this process uses a mathematically weighted average of the prices of goods, services, and rights – that are equal or similar – found in the Brazilian market and in the markets of other countries, as well sales and purchase transactions undertaken by the interested party or by a third party under similar payment conditions.

II. 40%, depending on the company’s economic sector. 40% applies to the pharmachemical and pharmaceutical products industries; tobacco products; optical, photographic, and cinematographic equipment and instruments; dental, hospital, and medical machines, instruments, and equipment; extraction of oil and natural gas; oil-derived products. 30% applies to the chemical product industry; glass and glass products; pulp, paper, and the paper products industry; metallurgy. 20% applies to other industries.

III. CPL method uses average production costs in the country of origin,

Exported goods, services, and rights: I. 18

Export Sales Price (PVEX): this method looks at the average export sales price that a company has charged to other clients or the price charged by other domestic exporters of the same good during the same income tax (IR) accrual period.

II. margin from the retail price. III. average of wholesale sale prices in the destination country, subtracting taxes and a 15% IV. Importing or exporting commodities: for the import and export of commodities between related companies, the PCI (Quotation Price on Imports) and PECEX (Quotation Price on Exports) should publicly listed on renowned international commodity and futures stock exchanges. The values are adjusted, in both directions, based on the average market premium on the date of the transaction or the date of the last known price. Both of these methods, therefore, are based on commodity quotes from renowned international commodity and futures stock exchanges. deposits made in dollars with a maturity of six months and a annual spread margin of 3%. That said, the Brazilian government can both reduce the spread or reestablish it, up to the aforementioned limit.

payments.

that this value does not exceed the transfer price determined by one of the methods outlined in the legislation. In the case of exports, the parameter sales price, determined by one of the methods outlined

1.1.2.6. Goodwill in Subscription of Shares The purchase and selling of shares in Brazil may bring about two events with tax implications: When the price paid by a buyer purchasing shares exceeds the book value of the investment, a so-called â&#x20AC;&#x2DC;goodwillâ&#x20AC;&#x2122; must be reported. If the transaction is correctly structured, any amount paid by the buyer over the book value can be recovered through a tax reduction, so long as certain requirements are met. For example, if goodwill could become a tax-deductible expense, reducing the amount of IRPJ and CSLL taxes paid.This amortization is contingent, however, on the buyer incorporating the acquired company, or vice versa. 19

It is worth noting that Brazilian accounting rules regarding premiums changed in December 2007, and that premiums were recentlysubject to new tax regulation.. Additionally, it is worth mentioning that if the buying or selling of shares generates reported goodwill for the buyer, it could, on the other hand, result in capital gains for the seller. Capital gains cost of the good being sold, subject to IRPJ and CSLL taxation at a rate of 34% (for legal entities) and 15% (for individuals). The following is a representation of the selling and purchasing of shares: A

TARGET $100

CASH $150

B A

TARGET

B TARGET $100 GOOWIL $50

TARGET $100 Taxable capital gain $50

TARGET $100 GOOWIL $50 Deductible goodwill $50

TARGET

With respect to investments held by Brazilian companies abroad, legislation mandates that the regardless of their distribution, on December 31st of each year. These Brazilian rules apply to any and all foreign companies controlled by a parent company located in Brazil, even if they are located in countries with normal tax schemes, i.e. not in countries with tax favorable or privileged tax systems. CFCs located in countries that have a Double Tax Treaty with Brazil should have their own treatment.

1.2. Portfolio Investment investors who are looking to diversify their invested assets and the risks involved, which are linked to It is important to mention that the investorsâ&#x20AC;&#x2122; relationship to one another is irrelevant in the formation and operation of FI funds once, adhering to the rules that govern FIs, the investors are linked to a fund manager, insofar as the managers are the ones providing administrative services and portfolio management. In this sense, FI funds represent investments that are mandatorily managed by professionals specializing in third-party resource management, someone who knows how to generate better results than those that would be obtained by an individual acting alone in the market.This is due to the fact 20

their disposal, resources that help to build a liquid asset portfolio and balance risk and return.

Finally, it is worth remembering, as we will detail below, that FIs operate in diverse markets, from regulated markets, such as the stock exchange, to the real estate market and credit market, among others.

1.2.1. Types of Investment Funds The broad regulation of the Brazilian stock market by the Brazilian Securities Commission (CVM) – an autonomous entity governed by Law No. 6,385 as of September 7th, 1976 and that is responsible

Below we will present some of the FI procedures regulated by the CVM, especially those tailored to institutional investors. (I) FIP – Equity Investment Fund (Fundo de Investimento em Participação) FIPs are Brazilian private equity funds, regulated by CVM Ruling No. 391 on July 16th, 2003, and amended by CVM Ruling Nos. 435/06, 450/07, and 453/07. Under the aforementioned rulings, FIPs include the following assets: shares, bonds, warrants, and other convertible or exchangeable securities issued by public or private companies. FIPs should take part in decision-making processes of the investee company, as well as strategic policy development, management, and the appointment of company directors. Accordingly, private companies receiving FIP funds cannot not be invested (a) abroad; (b) in the acquisition of real estate; or (c) in the subscription to or acquisition of shares belonging to the manager. Moreover, except when approved by the majority of FIP members, FIP funds cannot be invested in companies (a) where the administrator, manager, or members of the FIP councils or committees are also shareholders who hold shares that represent 5% of the FIP assets, or a company where partners and their respective spouses, individually or collectively, hold more than 10% of the voting capital stock or of the total investing company; (b) where the same people cited in (a) are part of the managing board, are advisors, or are accountants of the investing company; and (c) if the same people cited in (a) subscribed to by the FIP. Shares issued by the FIP may be described in the following ways or meet the following (b) conditions: (a) if the FIP invests resources in funds undergoing reorganization or restructuring, then the integration of shares in goods or rights, even securities, will be allowed, so long as these goods are linked to the reorganization of the company being invested in, and so long as the value is backed in the appraisal report; and (c) no redemption of shares is allowed, given that FIP regulation may permit the use of goods and rights, including securities, in share amortization and in the liquidation of the fund. (II) FIC FIP – Investment Funds in Equity Shares Funds (Fundos de Investimento em Cotas de Fundos de Investimento em Participações) Investment funds may be formed in order to invest in private equity funds (FIPs). These are known as Investment Funds in Equity Shares Funds (FIC FIP), and they should invest a minimum of 90% of their equity in the private equity fund. 21

(III) FII – Real Estate Investment Fund (Fundo de Investimento Imobiliário) FIIs funds are used to invest in real estate, or real estate-based assets, which are regulated by CVM under Ruling No. 472 as of October 31, 2008, amended by CVM Ruling Nos. 478/09, 498/11, and 517/11. An FII may invest in real estate assets including: (a) security interest; (b) stocks, FI fund ownership, promissory notes, and other securities subject to CVM authorization, provided that the main activities of the issuing entity are consistent with FII fund interests; (c) stocks or ownership in (d) interest in an FIP fund with an investment policy that exclusively contains activities permitted by FII, or interest in an FI fund (e) - CEPAC); (f) interest in other FII funds; (g) interest in FIDC funds with an investment policy that exclusively contains activities permitted by the FII, and provided that the transaction or issuances are registered with the CVM; (h) mortgage bills; and (i) real estate bills. The following restrictions are imposed on FII portfolio equity and returns: (a) they may not be part of manager's assets; (b) they may not be part of manager's assets for purposes of judicial or extrajudicial liquidation, and they cannot be subject to enforcement by lenders, regardless of their level of privilege; and (c) Regarding FII membership interest, note that members (a) cannot hold security interest in real estate and developments included in the FII fund equity; and (b) are not individually liable for legal or contractual obligations in connection with real estate and developments included in the FII fund or the manager's equity. Furthermore, membership interests are not redeemable. (IV) FIA – Stock Fund (Fundo De Investimento Em Ações) FIA funds are regulated by CVM Ruling No. 409 as of August 18th, 2004 and amended by CVM Ruling Nos. 411/04, 413/04, 450/07, 456/07, 465/08, 512/11, and 522/12. At least 67% of a FIA portfolio should include stocks, warrants (bonus de subscrição), share Depositary Receipts, provided that such securities are subject to trading on a cash or spot market or

economic nature, traded abroad, worth up to a limit of 10% of its net equity. With respect to the percentage that cannot be invested in stocks or other securities, the following concentration limits – per issuer – apply to portfolio assets: (a) up to 20% of FIA equity when the (b) up to 10% of FIA equity when the issuer is a public company; (c) up to 10% of FIA equity when the issuer is an FI fund; (d) up to 5% of FIA equity when the issuer is a natural or juridical person; and (e) up to 20% of FIA equity when the issuer is an FIA fund manager.

In addition, with regards to the percentage that cannot be invested in stocks or other securities, (a)

FI shares; (b) FI shares in FI shares; (c) FII shares; (d) FIDC shares; (e) FI shares in FIDC; (f) FI index shares negotiated on the stock market or in the OTC market; (g) Receivables. For FIA funds, payments for the redemption of shares should be made in Brazilian currency, use these securities for the payment and redemption of shares through detailed criteria established for such a procedure. (V) FIDC â&#x20AC;&#x201C; Receivables Investment Fund (Fundo de Investimento de Direitos CreditĂłrios) FIDC funds are regulated by CVM Ruling No. 356 as of December 17, 2001 and amended by CVM Ruling Nos. 393/03, 435/06, 442/06, 446/06, 458/07, 484/10, 489/10, and 498/11. At least 50% of FIDC equity must include the following forms of receivables: (a) securities mortgage, or commercial leasing sectors, including the rendering of services; (b) warrants and commercial contracts for product sales and purchases, goods and/or the provision of future services,

National Treasury bonds, BACEN bonds, credit securitized by the Brazilian Treasury, bonds issued by Receivables acquired from the same issuer or joint obligor can represent a maximum of 20% of the assets of the FIDC, although this percentage may eventually be raised once the issuer or joint (c) is a company obligor: (a) is a public company; (b) CVM regulations and audited by registered CVM auditors. (a) senior shares, which cannot be subordinated to others for purposes of amortization or redemption, but which can be divided into (b) subordinate shares, which would accordingly be subordinated to other shares for purposes of amortization and redemption, although it is still necessary that FIDC rules indicate payment, amortization, and redemption criteria for receivables. Even so, subordinate shares payments, amortizations, and redemptions can be made in receivables. The redemption of senior shares in receivables is also acceptable, but only in the case that the fund will be liquidated.

1.2.2. Investment Fund Taxation

Typically, investment funds are not taxed on the equity contained in their portfolios. There may be taxes levied at the source, but only on the value redeemed by the shareholder and dependent on the kind of investment fund. Below we will discuss taxes that are applied to the most common investment funds. 23

1.2.2 a) Private Equity Fund – FIP (Fundo de Investimento em Participação) •

FIP funds are not taxed: Earned income (including interest on stockholders’ equity) and capital gains incurred by the FIP are not subject to taxation, whether it is income tax or other taxes generally applied to businesses. (Article 68, I of Law No. 8.981/95)

•

Investor Taxation: FIP members are taxed at the source, at a rate of 15%, in the following cases: (i) redemption of FIP membership investments, (ii) FIP liquidation, and (iii) sale or disposal of FIP membership investment.

•

Investor Taxation: Gains that come from the sale of shares, taxed at a rate of 15%, will be treated as: (a) net gains, when they are accrued by a natural person through the stock exchange, or by a juridical person through transactions in or outside of the stock exchange; or (b) as capital gains, when accrued by a natural person in transactions outside of the stock exchange.

•

Dividends and Interest on Stockholders' Equity: FIPs are not taxed on their dividends or on the interest accrued on stockholders’ equity through portfolio stocks. Dividends distributed to FIP members are not taxed, while interest on stockholders’ equity, when distributed to members, is levied as a withholding tax of 15%.

• meet the following requirements: a.

The member must be headquartered in a country that is not considered a tax haven by Brazilian legislation;

The member must not individually hold, either directly or indirectly, more than 40% of the shares of the FIP; and

The members’ FIP investments must be registered in accordance with Resolution 2.689 and they must meet all applicable rules under the Brazilian Monetary Council.

FIP taxation is summarized below:

Dividends

Foreign Member

15%

Capital Gain

FIP

15%

Brazilian Member

15%

JCP

15%

Tax Heaven

Capital gain upon FIP ownership disposal: 15%

25%

1.2.2 b) FIP-IE FUND (Fundo de Investimento em Participação em Infraestrutura) This is a kind of FIP fund intended for investments in new infrastructure projects in areas such as energy, water and basic sanitation, and irrigation, as well as other areas of priority for the Brazilian government. FIP-IE funds are subject to more or less the same rules of taxation that apply to the FIP, with the exception of taxes on the redemption and sale of shares by a natural person, which in the case of the FIP-IE would have a rate of 0%.

1.2.2 c) Real Estate Investment Fund – FII (Fundo de Investimento Imobiliário) tax of 20%. investment funds, so long as the following requirements are met: i. Shares are traded on the stock exchange or in the OTC market; ii. iii. Individual members hold up to 10% of the total shares issued by the FII, or they receive up to 10% of the total returns accrued by the fund. This kind of investment fund is common in Brazil, especially for large real estate developments, given that the rent or income accrued through the fund, with relation to the real estate that it holds, is not taxed. This is illustrated below:

INVESTORS

FII

REAL ESTATE

Income: Taxation

1.2.2 d) Receivables Investment Fund - FIDC Like other funds, the yields on the assets of a FIDC portfolio are not taxed, and that includes an exemption from the IOF. Members are taxed according to the duration of the fund. FIDC Member Taxation (closed or open-end fund ): • Long-term funds (securities with an average term length over 365 days): 25

i. 22.5% for investments of 180 days or less; ii. 20% for investments between 181 and 360 days; iii. 7.5% for investments between 361 to 720 days; iv. 15% for investments of 720 days or more. • Short-term funds (securities with an average term length of 365 days or less) i. 22.5% for investments of 180 days or less; ii. 20% for investments exceeding 180 days. On open-end funds, a tax is levied once per semester by the IRRF, known as the “share eater,” at the rates listed above. For Legal Entities, the IRRF is considered a an advance on a tax due

1.2.2 e) Other Funds regulations such as those listed above, are also exempt from paying taxes on yields accrued through their portfolios. Members are taxed, according to the duration of the fund, as follows: • Long-term funds (securities with an average term length over 365 days): i. 22.5% for investments of 180 days or less; ii. 20% for investments between 181 and 360 days; iii. 17.5% for investments between 361 to 720 days; iv. 15% for investments of 720 days or more. • Short-term funds (securities with an average term length of 365 days or less): i. 22.5% for investments of 180 days or less; ii. 20% for investments exceeding 180 days. Withholding tax ("share eaters") are levied on open-end funds once per semester at 15% or redemption of membership shares at the rates listed above. For Legal Entities, the IRRF is considered to be a prepaid tax due at the end of each calendar year.

CHAPTER 2 BRAZILIAN COMPANIES 2.1. Types of Corporations Limited liability companies and corporations are among the most common, each requiring at least two members that are either individuals or legal entities, which we will outline in greater detail below.We will also analyze other types of companies that are used in other business sectors and areas.

regards to preferred levels of corporate governance, management, and fundraising options.

2.1.1. Limited Liability Companies Limited liability companies are the most common kind of companies found in Brazil. Because belonging to a member and to the company, they are a viable option for the initial or experimental development of a business in Brazil. Trade (Juntas Comerciais Estaduais), enrolling with the Registry of Corporate Taxpayers (CNPJ), government, which are determined according to a company's activities. These elements comprise the sum of a company's legal identity (valid for limited liability companies, corporations, and other types of companies as well). As we mentioned, the advantages of having a limited liability company are patrimonial in nature and related to the liability of members to third parties. In these cases, from an asset standpoint, a company’s assets (real, personal, tangible, and intangible) become part of the company’s ‘appropriated Moreover, limited liability companies are given this name because the liability of members is, by obligations to third parties. We should note that members share joint liability for the payment of company capital, in the case that there is unpaid subscribed capital and it is possible, in certain cases where abuse of authority or power is proven, that some or all members may also be held personally liable. In this situation, pursuant to the Brazilian Civil Code (Law No. 10.406/2002 and amendments), the liability of each member is limited to the members’ investments, noting the caveats mentioned above. As a rule, there is no minimum value or length of time required by law for capital payments in a limited liability company, other than in cases that apply to certain sectors and are governed by With respect to management, limited liability companies typically have two (2) executive organs, namely, (i) a group or assembly of members and (ii) the management, which may also include (iii) an auditing committee. However, other political and economic rights may be agreed upon under a member agreement (acordo de cotistas), an instrument by which members could establish, among 27

other things, rules on voting, withdrawal, the purchase and sale of respective shareholdings, and limitations on company power. in addition to the fact that they imply lower costs as compared to corporations and investment funds. For these reasons, this kind of company is sometimes used for corporate planning, corporate governance, inheritance, and tax purposes at the members’ discretion. The compensation paid to members comes through dividends or pró-labore (management fees). If outlined in a prior agreement, members may also receive interim dividends, i.e., for periods of less than one year. Limited liability companies are regulated under the Brazilian Civil Code, while some supplementary provisions applicable to corporations may also be applied, so long as this is expressly provided for in company's articles of association.

2.1.2. Corporations (Sociedades Anônimas) 6.404/1976 and amendments – also known as “LSA”) and, similar to what is outlined in the chapter regarding the limited liability companies, corporations have their own characteristics regarding much higher than those in connection with a limited liability company. In return, corporations have more transparency and managerial safety, and have generally developed more sophisticated means issuance and trading of securities on the Brazilian capital market. Similarly to limited liability companies, Brazilian corporations entangle the same process to its registration with the Federal and State (if necessary) Registry of Corporate Taxpayers (CNPJ), It also needs to obtain licenses, permits, and authorizations from government authorities, in according with the activities it will performe. As an additional legal formality, the incorporation charters have Moreover, corporations may be established as private entities (sociedades anônimas fechadas) or public entities (sociedades anônimas abertas). Such decision will have implications for registration procedures and authorizations with the Brazilian government and stock market authorities. Securities of public corporations may be traded in the stock exchange or in the OTC market, which is not permitted to private companies. Government oversight of public corporations is much more intensive than that applied to private entities, including the surveillance by the Comissão de Valores Mobiliários (CVM), a public agency created to regulate and monitor the capital market. Regardless of being public or private, the stock capital of the corporation is be divided into shares, which can be of the following types: (i) common shares, (ii) preferred shares, and/or (iii)

in more restrict environments, in the case of private corporations, and in a broader level for public papers, and other instruments used for fundraising, debt restructuring . As is the case of limited liability companies, corporations (except in certain cases) do not have mandatory minimum capital stock requirements. Nevertheless, corporate law (LSA) requires the deposit within the entity at the moment of its incorporation at least 10% of the capital stock subscribed Regarding management, the main bodies of corporations are: (i) the shareholders general meeting, (ii) board of directors, which is only mandatory in a few cases determined by law, (iii) board (iv) an auditing committee, which is not mandatory, unless so required by the shareholders. A corporation’s highest decision-making body is the shareholders general meeting,

Shareholders may also resort to a shareholders´ agreements, by means of which they may be setting forth a higher percentage of shareholders´ votes for the approval of certain matters). Such contracts may also be used to improve levels of corporate governance within the corporation and, in The corporate law expressly provides mechanisms that guarantee certain rights to minority shareholders in the event of change in the control of public corporations, such as receiving for its shares, at least, 80% of the price paid to the shares of exiting controlling shareholder. Corporations are also commonly used for business, inheritance, and tax planning, mostly in

2.1.3. Other Corporate Types There are other less common corporate models regulated by the Brazilian Civil Code, namely: i. General partnership (sociedade simples), whose rules apply also to limited liability companies. ii. Ordinary partnership (sociedade em nome coletivo), which only allows natural persons to take part in the company, where members are jointly and unlimitedly liable for partnership debts to third parties. It is understood that, in addition to their liability to third parties, partners may also, with a partnership agreement or by way of unanimous consent, delimit their liability to one another. iii. Limited partnership (sociedade em comandita simples), a legal entity that is formed by two groups of partners: a general partner (comanditado), which is necessarily an individual, unlimitedly responsible for partnership obligations; and an investor partner (comanditário), only liable for the amount invested in the partnership, given that such conditions are expressly outlined in the partnership agreement. Regardless of their ability to take part in resolutions and to audit partnership transactions, investor partners can neither manage the partnership, nor can they be mentioned in

the corporate name, as this would make them liable as general partners. Limited liability sole proprietorship (Empresa individual de responsabilidade limitada - “EIRELI”), extraordinarily regulated by Law No. 12.441/2011 as of January 2012, is a sole proprietorship whereby an entrepreneur has limited liability and may individually explore an economic activity without compromising his or her personal assets. The minimum capital stock should be 100 times only have one such company under his or her control. Regarding appropriated assets (patrimônio de afetação), the same rules contained in the limited liability company chapter apply. Another kind of company is the so-called sociedade em conta de participação, a type of unincorporated joint venture regulated by Brazilian Civil Code, formed by one entrepreneur (the administrative partner - sócio ostensivo) and investing partners (called the hidden partners, or investors - sócios ocultos or sócios participantes). In this kind of company, only the administrator is liable before third parties. Hidden partners or investors are only liable to the administrator, under the partnership agreement that governs the company. Despite being considered a company model, these companies are not legal entities and, therefore, the administrator is held liable to third parties, leaving investors as silent partners in company projects. This model of company is quite common in real estate developments and in the hotel sector, with a construction company or hotel company generally acting as the administrator while the hidden partners generally own the land or the hotel units.

2.2. Commercial Registration Companies and corporations depend on their registration with the Public Registrar of Companies (as mentioned, the Board of Trade in each state) for their formalization and legal existence. This registration is necessary both to validate the liability limitations in each company model, and for the

unless in the case of unincorporated entities, such as the sociedade em conta de participação, whose existence may be proved with the executed agreement or by any other means accepted under the law. Despite mandatory registration with the commerce registry, there are other registrations and authorizations that may be necessary for the entity´s operation, depending on its activities.

corporate taxpayer (CNPJ) will determine its taxpayer identity before tax authorities.

2.2.2. Registrations and Licenses Typically, a company´s or a corporation’s activities in Brazil are dependent upon the issuance of certain registrations and licenses. In general terms, companies must register with municipal and state government tax bodies, determined on a case-by-case basis, and obtain operating licenses and installation permits issued by municipal bodies.

Additionally, other regulatory or environmental licenses may be required, depending on the entity´s activities such as, for example, companies or corporations acting in pharmaceuticals, telecommunications, oil and gas, the rural sector, or in potentially pollutant activities. An entity's failure to obtain or maintain required licenses may lead to administrative sanctions that could

compromise, or even impede, the entityâ&#x20AC;&#x2122;s ability to undertake regular activities.

2.3. Foreign Members and Shareholders Foreign members or shareholders in limited liability companies or corporations are required to summons in judicial proceedings. Moreover, applicable legislation requires that company members or shareholders residing or based abroad who hold interest in a Brazilian company must be enrolled with the Registry of Corporate Taxpayers (CNPJ), if a legal entity, or with Individual Taxpayer Registry (CPF), if a natural person.

2.4. Representation and Administration on authority and representation be respected, as provided by law, and as outlined in the entityâ&#x20AC;&#x2122;s incorporation document. Otherwise, the administrator will be liable for any damage to third parties which arise from actions performed by the entity that are not authorized by law or in the incorporation document. Companies and corporations shall be represented and administered by natural persons, who may or may not be shareholders of the entity.The administrators must be elected by shareholders, or by the board of directors, in case of corporations that have constituted such corporate body. Rules for the appointment of administrators are outlined in the bylaws. Administrators in limited liability companies and corporations are required to reside in Brazil or hold a permanent visa. In case of directors of corporations who reside abroad, they are required to appoint a legal representative in Brazil with powers to receive summons of judicial proceedings. to carry out acts for the entity, as outlined in the corporate documents of the entity.

CHAPTER 3 CORPORATE TAXATION IN BRAZIL, GENERAL RULES The Brazilian Tax System is based on rules and principles provided by the Brazilian Tax Code of 1966 and the Brazilian Constitution of 1988. Under said guidelines, and in accordance with the political and administrative autonomy of our of our federal system, each sphere of government – federal, state, and municipal – may create and administrate axes under their competence. The Brazilian Constitution of 1988 allocates the power to collect taxes and contributions in the following ways:

Federal Government

States and Federal District

Municipal Governments

•

Income Tax (Imposto sobre a Renda e Proventos de Qualquer Natureza - IR)

•

Social Contributions on Net Profits (Contribuição Social sobre o Lucro Líquido CSLL)

•

Social Integration Plan Contribution (Contribuição para o Programa de Integração Social e para o Programa de Formação do Patrimônio do Servidor Público - PIS/PASEP)

•

Social Security Funding Contribution (Contribuição para o Financiamento da Seguridade Social - COFINS)

•

Tax on Manufactured Products (Imposto sobre Produtos Industrializados - IPI)

•

Economic Intervention Contribution (Contribuição para Intervenção de Domínio Econômico - CIDE)

•

Social Security Contribution (Contribuição ao Instituto Nacional do Seguro Social -INSS)

•

Tax on Financial Operations (IOF)

•

Import Duty (II)

•

Export Tax (IE)

•

Rural Real Estate Tax (ITR)

•

Commercialization of Goods and Services Tax (Imposto sobre Circulação de Mercadorias e Prestação de Serviços de Transporte Intermunicipal, Interestadual e de Comunicação - ICMS)

•

Estate and Gift Tax (Imposto sobre Transmissão Causa Mortis e Doação ITCMD)

•

Vehicles Tax (Imposto sobre Propriedade de Veículo Automotor - IPVA)

•

Municipal Services Tax (Imposto sobre Serviços de Qualquer Natureza ISSQN)

•

Real Estate Transference Tax (Imposto sobre Transmissão Inter Vivos de Bens Imóveis - ITBI)

•

Urban Real Estate Tax (Imposto sobre Propriedade Predial e Territorial Urbana - IPTU)

3.1. Income Tax – IR

income but, as per tax legislation, cannot reduce taxable income) and exclusions (values that were added to accounting records, but that should not be included in the calculation of the IR tax base) on December 31st of each calendar year or, alternatively, at the end of every quarter. 32

A 15% IR tax is imposed on the calculated tax base (taxable income), in addition to a 10% tax levied on all amounts exceeding R$20,000.00 per month. Income tax calculation is represented in

the following hypothetical example: 2013 CALENDAR YEAR Revenue

1,200,000.00

Expenses

500,000.00

Reported Income

700,000.00

(+) Additions – Transportation Fines

2,000.00

(-) Exclusions

0.00

Taxable Income

698,000.00

IR – 15%

104,700.00

IR – 10% Additional (for a value over R$20,000.00 per month); 698,000.00240,000.00*= 458,000.00

458,000.00

Total IR

150,500.00

(*20,000.00 x 12 months)

Alternatively, companies accruing up to R$72,000,000.00 in annual gross revenue may calculate is determined by applying rates to gross revenues reported quarterly, assuming that the result is

establishments is 8%, while the percentage applicable to service suppliers is 32%. See the example below: FIRST QUARTER OF 2013

INDUSTRY/COMMERCE Gross Revenue Profitability Percentage IR tax base 15% IR 10% Additional IR TOTAL IR

SERVICES

300,000.00

32%

24,000.00

96,000.00

3,600.00

14,400.00

0.00

*3,600.00

3,600.00

18,000.00

*[96,000.00 – (20,000.00 x 3 months)*10%]

when the IR was calculated by the presumed income, it was a only R$14,400.00 (R$3,600.00 x 4 qtrs.) for industry and commerce and R$72,000.00 (R$ 18,000.00 x 4 quarters) for service suppliers.

The income of Brazilian companies is also subject to the CSLL tax in similar terms to those of the IR, i.e., with relation to taxable income or presumed income. The system used to calculate the CSLL follows that used in the IR assessment. In the presumed income system, taxable income is determined by applying CSLL rates, ranging from 12% to 32%, to quarterly reported revenues. In general, a 9% rate is applied to the tax base of legal entities.

3.3. Social Integration Plan Contribution (PIS/PASEP) and Social Security Funding Contribution (COFINS) Both PIS and COFINS taxes may be calculated using two methods: (i) a cumulative system, and (ii) a non-cumulative system. As general rule, entity´s management in empowered with the decision of the calculation method. However, under certain circumstances, the law determines which method on a strictly cumulative basis. deduct certain kinds of credits, corresponding to the amount of PIS and COFINS paid by the parts along the chain. Under the cumulative system, a company is not able to deduct credits, but, on the other hand, it will be subjected to a lower tax rate. subject to cumulative calculation of PIS and COFINS, where payments are calculated using 0.65% and 3% rates, respectively, on total reported revenue from the sale of goods and services by a company (sales revenue), as shown in the following example:

JANUARY 2013 Total Revenue – Resale PIS – 0.65%

100,000.00 650.00

COFINS – 3%

3,000.00

Total

3,650.00

As a general rule, legal entities calculating their IR and CSLL based on taxable income should calculate their PIS and COFINS with the non-cumulative system, whereby these taxes are levied on or accounting class. Applicable tax rates are 1.65% and 7.6%, although the possibility of tax credits also exists, at the same rates, for costs and expenses as authorized by law. This could include, e.g., raw materials, products for resale, rent, and electric energy used in the business. See the following example: JANUARY 2013 Total revenue – Resale PIS – 1.65%

1,650.00

COFINS – 7.6%

7,600.00

A) Total Tax

9,250.00

Commodities

100,000.00

70,000.00

Credit – PIS – 1.65%

1,155.00

Credit – COFINS – 7.6%

5,320.00

B) Total Credit

6,475.00

Total Tax (A-B)

2,775.00

amount due under the cumulative system. However, a detailed analysis of the revenues, expenses, and costs of each entity is necessary before

an IR and CSLL point of view, but less advantageous with regards to cumulative PIS and COFINS, and vice-versa. rates of 1.65% and 7.6%, regardless of the system adopted by the legal entity. However, if legal entities were to be subject to non-cumulative calculation, they may discount credits originating from import transactions.

3.4. Tax on Manufactured Products (IPI) The IPI tax is calculated based on industry activities. In practice, the tax is imposed on the manufactured product output of an industrial establishment or the equivalent, as established under applicable legislation, such as a company that imports goods. The Brazilian Constitution of 1988 determines that the IPI is a selective tax, applied according to product essentiality. This means that the IPI burden should be higher for luxury products (e.g. a 300% tax on cigarettes) and moderate on necessary products (e.g. a 0% tax on medication). IPI rates are listed in the Manufactured Product Tax Table (TIPI). Additionally, it is worth noting that the IPI is a non-cumulative tax (invoice credit VAT system), previous transactions through a credit and debit system, as shown in the chart below: Input â&#x20AC;&#x201C; Raw Material Purchase

Output â&#x20AC;&#x201C; Finished Product

50.00

Sales

IPI tax rate

10%

IPI tax rate

Credit

5.00

Debit

Industry

(-) Credit Payable IPI

120.00 15% 18.00 5.00 13.00

3.5. Economic Intervention Contribution (CIDE) The CIDE is levied on payments to residents or individuals domiciled abroad as compensation for licenses for the use or acquisition of technological knowledge, technology transfers, and royalties. The CIDE is also paid by legal entities carrying out technical services, administrative counseling, or similar services performed by residents or those domiciled abroad. The CIDE is a 10% tax. Presently, a 30% credit is granted for the payment of royalties or payments related to patent exploration or trademark contracts (expiring on December 31st, 2013). royalties to foreign countries. 35

For example: • Royalty transferred abroad – R$500,000.00 • Payable CIDE – R$500,000.00 x 10% = R$ 50,000.00 • payments).

3.6. Social Security Contributions Social security contributions, which are contributions to the Brazilian Social Security fund (through the Brazilian Institute of Social Security - "INSS"), are levied on an entity's payroll at a that are granted according to the degree of working disabilities that result from the risks in the work environment. Social security payments also include FGTS contributions (8% on payroll – Item 7.3.8), the so-called education salary (Education Fund - 2.5% on payroll), and contributions to third parties (approximately) amounting to 3.3%. However, note that some taxpayers may pay a social security contribution tax on revenue at a reduced rate, such as corporate farmers, agribusiness companies, IT companies, call centers, and other industries pursuant to Laws 12.546/2011 and 12.715/2012, which establish a program for relieving payrolls.

3.7. Other Federal Taxes In addition to the taxes mentioned above, the Brazilian Constitution also includes the following federal taxes: • IOF – Tax on Financial Operations (mentioned in item 1.1.2.1); • ITR (Rural Real Estate Tax):The ITR is a tax levied on property, the right to use or possess (including for enjoyment) of property located outside the urban zone of a municipality, collected on January 1st of each year; • Import Duty (Imposto de Importação - II): a tax levied on imported foreign goods and travel luggage brought from abroad; and • Export Tax (Imposto de Exportação - IE): a tax on goods leaving customs territory.

3.8. Commercialization of Goods and Services Tax (ICMS) This is a tax on the circulation of goods (sale, gift, exchange, etc.), communication services, and intercity or interstate transportation services. ICMS is calculated as an embedded (“por dentro”) tax, i.e., its value is included in the price of a good or service, which means that the nominal tax rate will never be the actual tax rate. See: • Value of the transaction net of ICMS = R$100.00 • Tax = 18% 36

• ICMS included in price = R$100.00/(1-0.18) = R$100.00/0.82 = R$121.95

• Total amount on Tax Invoice = R$121.95 • Payable ICMS = R$121.95 x 18% = R$21.95 (actual tax rate of 21.95%) Similar to the IPI, the ICMS is also a non-cumulative tax (VAT under invoice credit method). The

INDUSTRY

WHOLESALE

INDUSTRY Sale ICMS tax rate ICMS

RETAIL

ULTIMATE CONSUMER

WHOLESALE 100.00 18% 18.00

Sale ICMS tax rate

RETAIL 120.00 18%

Sale ICMS tax rate

135.00 18%

ICMS

21.60

Assessed ICMS

24.30

(-) Credit

18,00

(-) Credit

21,60

ICMS

3,60

ICMS

2,70

In Brazil, ICMS tax rates vary from state to state and are established under state law. In São Paulo, for example, tax rates are 7%, 12%, 18%, or 25%, depending on the type of good or service. With respect to interstate transactions, ICMS rates are established by a Brazilian Senate Resolution to be 7% or 12%, depending on the state of origin and on the destination state. , 2013, transactions involving imported goods and commodities, so long as they have not undergone industrialization processes or so long as they have an import content above 40%, the ICMS interstate tax rate is 4%. st

steps along of the manufacturing chain, from the manufacturing establishment. The establishment, therefore, pays the ICMS levied on its own operation (Own ICMS) in addition to the ICMS incurred in subsequent steps that would be paid by wholesalers and retailers (ICMS-ST). This anticipated taxation mechanism is known as tax replacement, and may occur not only at the level of the manufacturer or importer, but also at other steps in the chain. Presently, Brazilian tax legislation established that the ICMS, as part of the tax replacement parts, fuel, vehicles, and paint, etc. For ICMS calculation under the tax replacement system, taxpayers must apply the percentages established in state legislation, Added Value Margins (MVA)5, or prices suggested by government authorities and manufacturers (tax agenda). For example:

37 5

transactions in market circulation, beginning with the step/transaction where the responsibility is transferred, representing a projection prepared by Brazilian Federal Revenue of market

INDUSTRY

WHOLESALE

REPLACING ITEM

INDUSTRY – OWN ICMS Sale

100.00

A) Own ICMS

18.00

RETAIL

FINAL CONSUMER

REPLACING ITEM

INDUSTRY – ICMS ST MVA Base ICMS-ST (100.00 x 35%)

35%

WHOLESALER/RETAILER ICMS

0.00

135.00

Presumed ICMS *

24.30

(-) Own ICMS

18,00

B) ICMS- ST

6,30

ICMS (A+B)

24.30

* Considering the 18% tax rate

3.9. Other State Taxes Brazilian tax legislation also establishes the following state taxes: i. IPVA, levied on the ownership of vehicles; and ii. ITCMD, levied on transfers of goods, such as from gifts and inheritance that would come as the result of a death.

3.10. Municipal Services Tax (ISSQN) Supplementary Law (presently, Law No. 116/2003). Taxpayers themselves - service providers, or a party hiring the services provided – will pay the ISSQN in certain cases determined by the legislation, including construction services, cleaning services, etc. Each municipal government establishes the applicable ISSQN rates, which ranges from a 2% minimum to a 5% maximum. As a general rule, ISSQN is paid to the treasury that belongs to the municipality where the service-providing establishment is located, although tax legislation outlines cases in which tax can be paid to the municipality where the party contracting the services is located.

3.11. Other Municipal Taxes In addition to the ISSQN, Brazilian municipalities are authorized to levy IPTU tax on urban real estate and ITBI tax on the transfer of real estate and related rights.

3.12. Export Earnings 38

Revenues that come as a result of export from Brazil are incentivized, and, other than IRPJ and

CSLL, no other taxes will be levied (PIS, COFINS, ICMS and IPI).

3.13. Ancillary Obligations Brazilian companies and corporations are required to provide information to federal, state, and ancillary obligations must be met: Ancillary OBLIGATION

SCOPE

Corporate Income Tax Return (DIPJ)

- IRPJ, CSLL and IPI calculation, based on company accounting entries;

Statement of Federal Tax Debits and Credits (DCTF)

- Information on debts and their connection to federal tax payments;

Social Contributions Assessment Statement (DACON)

- PIS and COFINS calculation, under cumulative and noncumulative tax systems;

Withholding Tax Return (DIRF)

- Information on taxable income paid or credited by the company, either on its own behalf or on behalf of third parties, and the consequent withheld Income Tax and/or contributions, identifying the taxpayer;

GFIP (FGTS Payment and Social Security Information Form)

- Information on the calculation of FGTS and social security contributions;

ICMS Information and Assessment Form (GIA)

- Information on ICMS calculation;

Electronic Tax Invoice (NF-e)

- Immediate electronic transfer of tax invoices for transactions regarding goods or services provided;

Public System for Accounting (Accounting and Tax SPED)

and

Tax

Reporting

- Electronic disclosure of Journal, Ledger, Trial Balances, Balance Sheets, records of inputs and outputs, and calculations of PIS, COFINS, IPI and ICMS payments.

means used tax authorities to justify a call for inspection.

CHAPTER 4: CAPITAL GAINS Natural persons and legal entities that transfer their assets are subject to the payment of taxes on cost. Individual capital gains are taxed at a rate of 15% as Income Tax. The capital gains of Brazilian legal entities, however, may be taxed as IRPJ and CSLL, at a total of 34%, and as PIS and COFINS, at a total of 9.25% on the reported revenue, and also as ICMS and IPI when applicable, upon sale of inventory, for example. levied, as per applicable legislation. Non-residents in Brazil are taxed on capital gains that result from the sale of assets held in the country, including equity, under the same rules applicable to resident individuals. This tax is also levied on transactions carried out between non-residents, in which case the obligation to withhold and pay income tax is transferred from the buyer to his or her appointed attorney in Brazil. This tax is levied at a rate of 15%, unless the non-resident is domiciled in a tax haven, in which case the tax is increased to 25%.

CHAPTER 5 TAX INCENTIVES 5.1. Introduction Brazilian tax legislation establishes numerous incentive programs to promote the growth of the Brazilian economy, creating tax relief mechanisms for companies that aim at attracting domestic and foreign investors who will develop their activities in Brazil. These programs include incentives for creation of new jobs, development of industrial, agricultural, and technological sectors, and stimulation of exports. The main tax incentive programs in Brazil are listed below.

5.2. SUDAM/SUDENE The Superintendence for Amazon Development (SUDAM â&#x20AC;&#x201C; LC No. 124/07) and the Superintendence for Brazilian Northeastern Region Development (SUDENE â&#x20AC;&#x201C; LC No. 125/07) were created with the goal of promoting inclusion and sustainability in these areas â&#x20AC;&#x201C; the Amazon and Northeast Region - and the competitive integration of local companies in these areas into the domestic and global economy. projects in economic sectors that the Brazilian government considers to be a priority for the development of these regions may receive incentives, including income tax reduction (75%) among to certain requirements provided by law.

5.3. Technological Innovation Established by Law No. 11.196/2005, this tax incentive permits a legal entity to deduct up to 60% of total costs on technological innovation research and development expenses reported for the operating expenses under IRPJ legislation (Income Tax Regulation, Articles 349 and 350). Similarly, legal entities are allowed to deduct up to 20% of total costs or payments related to research on and the development of granted patents. In order to take advantage of this incentive, it is required that the innovation being researched results in a new product or manufacturing process, as well as new functionalities or characteristics to an item that would result in improvements to the quality and productivity and further stimulate market competition.

5.4. Manaus Duty-Free Zone (ZFM) The Manaus Duty-Free Zone was created in 1967 to promote the formation of an economic base in the Western Amazon region and to enhance the productive and social integration of this region with the rest of the country, securing Brazilian sovereignty across the country's borders.

taxes on products destined for the incentivized region; the suspension of an IPI on imported products 41

are directed towards products rather than projects, and the manufacturing company will only enjoy them after production has begun.

5.4.1. Basic Productive Process (PPB) Pursuant to Law No. 8.387/1.991, the Basic Productive Process has been used by the Brazilian government to grant tax incentives under the Manaus Duty-Free Zone (ZFM) legislation. It has also way of a statute known as the Computer Law. completing a minimum number of steps required for manufacturing certain products in Brazil.

5.5. Infrastructure Incentives 5.5.1. REIDI This special ruling on infrastructure development incentives (REIDI) was created with the goal of attracting infrastructure investments by companies in the private sector, especially those investing in transport, port installations, energy, sanitation, and irrigation. new machinery, appliances, instruments, equipment, and construction material used in infrastructure

projects are approved by tax authorities.

5.5.2. REPNBL The Brazilian national broadband program special taxation scheme for telecommunication network implementation (REPNBL) is similar to the REIDI, although aimed at the telecommunications or modernization of telecommunication networks that support broadband Internet access. Basically, this system provides PIS/COFINS and IPI exemption for the acquisition of equipment

5.5.3. RECOF The special taxation scheme for industrial warehouses under computerized control (RECOF) without the payment of taxes, that will ultimately become products destined for exportation or the domestic market after being subjected to industrialization operations. Such operations, as outlined by RECOF, include the assembly of aircraft, automotive, computer or telecommunication products, semiconductors, and cutting-edge components for electronics, computers, or telecommunications, as listed in Attachment I to RFB Normative Ruling No. 757/2007. This incentive will expire within one year, which begins from the moment of departure through customs or acquisition in the domestic market. It may be renewed for one additional year, unless otherwise approved by the Brazilian Federal Revenue Authority (RFB). 42

5.6. RECOPA RECOPA is the special taxation scheme for the construction, expansion, renewal, or modernization of soccer stadiums for the FIFA 2013 Confederations Cup and FIFA 2014 World Cup. The RECOPA establishes an exemption from federal taxes (PIS, COFINS and IPI) on domestic sales or the importation of machinery, devices, instruments, new equipment, and construction materials to be used in or incorporated into the stadiums that host said events, pursuant to the requirements provided by applicable legislation.

5.7. REPETRO The special taxation scheme for the exportation and importation of goods to be used in the research and production of oil and natural gas (REPETRO) creates a total exemption from the IPI, that import and export equipment directly used in oil and gas research and production activities. scheme terminate when the imported equipment is once again exported.

5.8. Tax Break â&#x20AC;&#x201C; Home Appliances As a stimulus to economic growth in Brazil, the government has regularly issued rules reducing the IPI on the so-called white line (linha branca) products, including refrigerators, freezers, washing and drying machines for domestic use, and kitchen stoves, etc. As compensation for these tax

5.9. Drawback â&#x20AC;&#x201C; Exporting Incentive System, created by Decree-Law 37/66, consists in the relaxation of importation taxes tied to an exportation commitment. Federal legislation allows industrial importers to use this system for the suspension of, exemption from, or repayment of federal taxes. The options available in each of these categories should be analyzed on a case-by-case basis. Note that this system is not applicable to imported goods used for the industrialization of products to be consumed in Manaus Duty-Free Zone or free trade areas, nor to the exportation or importation of suspended or prohibited goods, among others.

CHAPTER 6 DOUBLE TAXATION AGREEMENT 6.1. Relevant Aspects Trade agreements with the following countries are currently in force in Brazil: South Africa, Argentina, Austria, Belgium, Canada, Chile, China, Korea, Denmark, Ecuador, Spain, the Philippines, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Norway, the Netherlands, Peru, Portugal, Slovakia, the Czech Republic, Sweden, and Ukraine. The Brazilian government has also signed treaties with Venezuela, Trinidad and Tobago, and

29th, 2005, and the latter was repealed by the Paraguayan Senate, on August 9th, 2004. Although Brazil is not an OECD member, the treaties signed by the Brazilian government largely follow OECD guidelines, save some exceptions intended to protect withholding taxes. Below we add further comments on the trade agreements signed by Brazil.

in Brazil if the legal entity has a permanent establishment in Brazil. entities that wish to do business in Brazil will simply create a Brazilian company to carry out local activities. In this context, it is clear that services supplied by non-residents in Brazil would only be taxed if the non-resident forms a Brazilian subsidiary that is providing said services. However, the Brazilian Federal Revenue Authority has attempted to adopt a limited interpretation of Article 7 of these Treaties, alleging that the revenues from services are not included them subject to Article 21 of the model convention, allowing for taxation in the payment source state. discussion and debate in Brazil.

6.3. IRRF (Withholding Income Tax) Brazilian treaties establish maximum income tax withholding rates applicable to the payment of dividends, interest, and royalties. But when lower rates are established by domestic legislation (e.g. in the case of dividends, which are currently exempt from taxation), tax rates are immediately reduced.

6.4. Dividends

With respect to dividend taxation, agreements signed by Brazil have, as a rule, adopted the cumulative tax powers of the country where a company is domiciled and distributing dividends

(source country) as well as those in the country of domicile of the legal entity receiving dividends (residence country). Dividends paid by Brazilian entities, even those dividends distributed to non-residents taxed in a tax haven, are exempt for income tax purposes. capital (JCP). In case of payment relating to international operations, if the Treaty for Avoidance of Double Taxation does not explicitly regulate JCP, domestic legislation of the state receiving the revenue will apply.

6.5. Tax Credits

revenues from services provided. (e.g. interest). The credit is higher than that received through the application of a conventional tax rate.

CHAPTER 7 LABOR ASPECTS 7.1. Introduction The rights and duties of employers and employees in Brazil are set out in the so-called “Consolidation of Brazilian Labor Laws – CLT”, which is the main statute regulating to labor rights in Brazil, approved in 1943. Labor rights are also regulated through collective bargaining and collective agreements. However, certain classes of employees, such as civil servants and employees of government entities are excluded from the scope of the Consolidated Labor Laws, as they are subject to special regulations. Below we present a brief and general memorandum containing the general labor law guidelines in Brazil for informative purpose only. This memorandum should not be considered an all-inclusive case and situation.

7.2. Service Rendering Agreement and Employment The regular procedure for hiring an individual to render services in Brazil is through the establishment of an employment relationship under CLT rules and regulations. According to Article of an employer (obeys employer rules and orders given by employer) and who receives a salary. Generally, employees are hired for an undetermined period of time. However, they can be, exceptionally, hired for a determinate period or for temporary work. People may also work as relationship, is that the employee is legally subordinated to the employer. goals. On the other hand, the provision of services without a contract requires independence and autonomy, while the service provider is responsible for his or her own work. With regards to the statement made above, it is important to highlight that for labor laws in Brazil, the substance of the legal relationship prevails over the form.Therefore, even if there is an individual Service Rendering Agreement between a legal entity and an autonomous service provider, if the elements that characterize the employment relationship exist (especially the subordination), there is the risk that such agreement will be considered an Employment Contract.

7.3. Employment Relationship and Basic Rights of Employees Brazilian labor law does not require a formal written employment agreement between employer and employee to prove a labor relationship between two parties.Therefore, employment undertaken in oral terms is fully valid and enforceable, subjecting both the employee and the employer to CLT rules and regulation. (“CTPS”) and in the employer´s books for social taxes and contribution payment purposes.

Among rights granted to Brazilian employees are (i) a minimum wage, adjusted annually by the Brazilian government - currently R$622.00 per month, (ii) non-decreasing pay, (iii) a prior notice period, (iv) maternity and paternity leave, (v) the right to strike, (vi) overtime compensation, (vii)

a risk, night and transfer premium, (viii) accident insurance, (ix) family and educational allowances, and (x) transportation and food compensation. Below we present a brief description of the main and most important rights granted to employees by the Brazilian Federal Constitution and the CLT.

7.3.1. Salary and Wages Any individual rendering any kind of service, under Brazilian law, is entitled to compensation (wage or salary), which can include, in addition to a monetary value paid in Brazilian currency, food,

completed, depending on the conditions established in the employment arrangement. The wages paid to an employee may never be less than the minimum wage or than the lowest wage level (piso salarial) established by a trade union in each professional sector. Some Brazilian states have also set a regional minimum wage, which must be met by any employer carrying out its activities in that state.

7.3.2. Health Hazard Allowance and Risk Premium In the case of employment in those activities that are considered by law to be hazardous, an employer must pay an additional monthly allowance. Such an allowance is equivalent to 10%, 20%, or 40% of the minimum wage, depending on the degree of hazard faced by the employee. In materials, the employer shall pay an additional amount of risk compensation at a rate of 30% of the employeeâ&#x20AC;&#x2122;s base salary.

7.3.3. Christmas Bonus (13th Salary) Employees have a right to a salary bonus every year, usually paid by the employer in November or December of each year. The bonus is calculated as one-twelfth of their December earnings, and multiplied by each month worked that year. When in vacation, the employee may request a proportional advance on such bonus.

7.3.4. Weekly Paid Rest Period All employees have a right to at least one-day of paid rest for each week of work. Preferably, this day should fall on a Sunday. Payments for this weekly day of rest should be already included in a monthly salary.

7.3.5. Vacations After completing a year (12 months) of work, any employee that has not been absent from

will be allocated, as per CLT Article 130. The salary paid during the vacation period must be issued (with a bonus of 1/3 of the salary), at very latest, two days before the start of the vacation period.

7.3.6. Workday razilian law stipulates that working hours in Brazil are limited to 44 hours per week or 8 hours per day (Item XIII, Article 7 of the Brazilian Federal Constitution), unless otherwise stipulated through a convention or agreement negotiated and approved by the relevant labor union. Work performed beyond these established time limits is considered to be overtime. Up to two

hours of overtime a day is allowed, so long as a written agreement is established between the employer and the employee or a trade union.The minimum compensation for overtime is 50% higher than the normal hourly rate, though overtime payments do not apply to employees in high positions, such as those in management. Night work is considering to be work performed between the hours of 10 p.m. and 5 a.m., and must be compensated at a rate that is at least 20% higher than the daily working wage.

to be negotiated and approved by the relevant labor union, pursuant to Federal Law 10.101/2000. Companies are also subject to payment of the following social contributions and fees, as follows:

7.3.8. Severance Pay Fund – FGTS Under the FGTS system, an employer is required to deposit, every month, the equivalent of 8% of an employee’s compensation for the previous month into a closed bank account under the employee’s name at the Federal Savings Bank of Brazil (Caixa Econômica Federal). An employee dismissed without cause under the FGTS system is entitled to withdraw the FGTS deposits made into the FGTS account during his or her employment with the company.

7.3.9. Social Security Under Brazilian social security law, every employee is required to be covered by social security insurance, which, in Brazil, is comprised of a monthly contribution made by employees, employers, and the government to the National Institute for Social Security (Instituto Nacional de Seguridade they are entitled. Employers that are legal entities must pay between 20% and 31.8% of their payroll to the INSS. Additionally, employees will have between 8% and 11% of monthly earnings deducted from their salaries, withheld by the employer for INSS purposes.

7.4. Termination of Employment Relationship The termination of an employment relationship may occur in the following cases: • Dismissal Without Cause (Unfair Dismissal): In the case that an employment contract is terminated by the employer, the employee will retain, at least, rights to the following items: a. Prior notice of 30 days – equivalent to a one-month salary – plus three days for each year of service in the same company beginning with the second full year of the employment contract, up to a maximum of 90 days of prior notice; b. Outstanding salary for the days worked during the month;

c. So-called ‘13th salary’ or Christmas bonus, which may be pro-rated, depending on the termination date;

d. Pro-rated vacation plus an additional one-third of salary bonus payment; e. Unused earned vacation plus an additional one-third bonus payment (double accrued vacation, if applicable); f. FGTS deposit: the deposit made into the employee’s closed account (equal to 8% of employee’s pay) the month of termination, based on the wages balance, prior notice, and a 13th salary; g. FGTS fee: 50% of the total amount deposited by the employer into the employee’s FGTS account. Out of this 50%, 40% will go to the employee and 10% to the government. h. Any other labor right related to termination, as provided by the current Collective Bargaining Agreement, and i. employee. If the employee is not required to work during the prior notice period, the payments referred to above must be made within 10 days from the date that the dismissal notice was delivered. If the

to the employer equivalent to the sum of one-month’s salary. • Dismissal with Just Cause: The dismissal of an employee for a just cause may only occur when the dismissal results from acts including dishonesty, improper conduct, lack of selfsentence has not been suspended. All circumstances under which dismissal for just cause are permitted are set out in Article 482 of the CLT. Such circumstances entitle the employer to terminate the employment agreement immediately, without notice. The employee will retain, at least, the right to the following: a. Outstanding salary for the days worked during the month; b. Earned vacation plus an additional one-third bonus payment; and c. FGTS deposit: the deposit made into an employee’s blocked account (equal to 8% of employee pay) in the month of termination. • Resignation: A resigning employee is entitled to all of the severance pay listed below: a. Outstanding salary for the days worked during the month; b. 13th salary or Christmas bonus – which may be pro-rated, depending on the termination date; c. Earned vacation plus an additional one-third bonus payment; d. Pro-rated vacation plus an additional one-third bonus payment, and e. FGTS deposit: the deposit made into the employee’s blocked account (equal to 8% of employee´s pay) in the month of termination, as well those made for the 13th salary.

The employee should give prior notice of 30 days to the employer before resignation; otherwise the employer will be entitled to discount a sum equivalent to a one-month salary from the severance pay. • Resignation by Constructive Dismissal (“Indirect Termination”) This kind of termination only occurs as the result of a serious error committed by the employer. In this situation, the employee must seek an authorization from the labor court recognizing the indirect termination and ordering the payment of all sums due on termination of the employment agreement. In the case that the employee wins the case, the same amount that is due in the case of unjust dismissal shall be paid to the employee.

7.5. Foreign Workers in Brazil. Generally, this takes the form of a temporary or permanent Visa. The Ministry of Labor must grant prior approval of all labor contracts with foreigners and, subsequently, the Ministry of

employees are Brazilian citizens. This ratio applies both to the number of employees and to the payroll, which means that two-thirds of the total wages paid by any company in Brazil must be made to Brazilian employees. Additionally, under the two-thirds rule, a Brazilian worker cannot receive a wage lower than that paid to a foreign worker performing the same job. Furthermore, in the case of redundancy, the foreign employee is required to be dismissed before a Brazilian employee performing the same work.

7.5.1. Permanent Visa: This kind of visa is usually granted to foreign individuals transferred to Brazil by international

Under this kind of visa, the National Immigration Council does not require foreigners to enter into an employment agreement with the Brazilian company. However, the foreign employee is not allowed to earn a salary lower than the one he or she earned in the country of origin. In order for this type of visa to be granted, the Brazilian company that will be employing the • into the capital stock of the Brazilian company, for each foreign citizen appointed to hold a • R$150,000.00, paid into the capital stock of the Brazilian company, on the condition that the Brazilian company must also generate at least 10 new jobs within two years following 50

7.5.2. The Temporary Visa: • Temporary Visa, Item V This type of visa is available to foreign individuals coming to Brazil to work for a temporary period of time, which should initially be no more than two years (renewed for an additional twoyear period with authorization from the Ministry of Justice) under an employment agreement with a Brazilian company.To obtain this visa, the foreigner must demonstrate his or her previous professional experience with the work he or she will be performing in Brazil. Regarding salary, the same rule that applies to the permanent visa is applicable to the temporary visa, which states that upon relocation to Brazil, the foreigner must earn an equal or larger salary than he or she was earning in their country of origin. • Technical Visa – 90 Days This visa is generally granted to foreign individuals coming to Brazil to work on a temporary basis to render technical support or technology-transfer services without an employment agreement with a Brazilian company. In order for this visa to be granted, the following requirements must be met: (i) the foreigner is not allowed to receive any payment from the Brazilian company; (ii) the candidate must prove that he or she has at least three years of experience in the activity to be performed in Brazil, and (iii) the company must prove that it will insure the foreign individual during his or her stay in Brazil. • Technical Visa – One Year This type of visa is available to foreign individuals coming to Brazil to work for a temporary period to render technical support or technology-transfer services without an employment agreement with a Brazilian company. Under this kind of visa, the Brazilian company contracting the service must provide the immigration authorities with a service agreement and details on the training program promoted to its employees. which the services will be rendered in the country. • Citizens of Mercosur As a result of an agreement between Mercosur countries – Brazil, Argentina, Uruguay, and Paraguay – and Chile and Bolivia, citizens of any of these countries may obtain a permit to live in any other and, consequently, enjoy the same rights as the citizens of that country, including the right to work. In this sense, citizens of the countries listed above intending to live and work in Brazil do not need a work visa. Instead, they will need a residency permit in order to work in Brazil. Such permits are valid for two years, but they may become permanent if their renewal is requested 90 days prior to expiration.

CHAPTER 8 BANKING SYSTEM 8.1. Central Bank of Brazil (BACEN) The BACEN is the body responsible for registering, inspecting, and monitoring foreign capital investments in Brazil. The BACEN is also responsible for registering investments related to the subscription to and payment of membership interests or shares in Brazilian companies by foreign individuals or legal entities. Therefore, all foreign investments must be registered with the BACEN in order to be considered as foreign capital. This registration is regulated by the BACEN itself, and it can be done by way of the Electronic Foreign Investment Registration System.

8.2. RDE The Electronic Declaratory Registration (RDE) is a computerized system comprised of four modules: Direct Foreign Investments (IED), Financial Transactions (ROF), Portfolio Investments (PORTFĂ&#x201C;LIO), and Brazilian Capital Abroad (CBE). The RDE allows investing parties to register foreign capital transactions in Brazil and Brazilian capital transactions abroad directly through the BACEN systems. The RDE-IED module, similarly, allows the registration of foreign direct investments in Brazilian companies. Direct investments are characterized by an intention of permanence and by the acquisition outside over-the-counter and stock exchange markets. Direct foreign investments (IED) must be registered with the BACEN, as determined by Law 4.131 as of September 3rd, 1962, and Law 11.371 as of November 28th 2006. This registration procedure is regulated by Circular Letter 2.997, valid as of August 15th, 2000. The registration of direct foreign investments, which is the responsibility of receiving companies and non-resident investors, can be done directly using the SISBACEN (BACEN Information System) and the IED module of the Electronic Declaratory Registration (RDE-IED), which have replaced paper registration. Registration can be done by receiving companies or by their representatives, and only by a representative (usually that of the receiving company) in the case of non-resident investors. Given the nature of the registration, the representative making the declarations will be responsible for the truth and legality of all information provided. Law 4.131/62 and Law 11.371/06, as well as Resolution No. 2.883 from August 30th, 2001 and No. 3.455 from May 30th, 2007, and Circular Letters No. 2.997/00 and 3.344 from March 7th, 2007, incomplete, or provided in an untimely fashion. Direct foreign investments that originated in currency exchange contracts and contracts for the importation of goods without currency conversion are registered in foreign currency, while those made through international transfers in Reais (TIR), as well as those that fall under Law 11.371, are registered in domestic currency. The proportional share of domestic and foreign currencies will

interest on stockholders' equity.

In order to register a direct foreign investment in RDE-IED, the relevant parties are required to already be enrolled with CADEMP (Registry of Individuals and Legal Entities - Foreign Capital) the enrollment of individual and corporate foreign investors with the Individual Taxpayer Registry (CPF) and the Registry of Corporate Taxpayers (CNPJ), respectively. Corporate foreign investors are enrolled with the CNPJ solely by way of their registration with CADEMP, which after being reviewed and authorized by BACEN, is forwarded to the Federal returns it to BACEN, usually the day after it is processed. Only then can the CADEMP number be used for the RDE-IED registration.

only be used for an RDE-IED after the CPF is included in the CADEMP.

8.3. RDE â&#x20AC;&#x201C; ROF agreements), equipment rental, vessel charters, and other transactions that must be registered with the The following transactions must be registered with the ROF module (listed in alphabetic order): I.

Ordinary lease, equipment lease, and boat charters, for a term exceeding 360 days, under Circular 2.731 as of December 13th 1996;

II.

Acquisition of intangible property with a payment term exceeding 360 days, under Circular 2.816, and Circular Letter 2.795 as of March 15th, 1998;

III. Lease-purchase agreement with a term exceeding 360 days, under Circular 2.731 as of December 13th, 1996; IV. Export credit (export securitization) under Circular 3.027 as of February 22nd, 2001; V.

Domestic or foreign currency loans, raised directly or through the investment of securities, including securities that may be converted into or exchanged for stock under Circulars No. 3.027 as of February 22nd, 2001, and No. 3.250 as of July 30th, 2004;

VI. Importation funding for a term exceeding 360 days, under Circular No. 2.731 as of December 13th 1996; VII. Technology funding under Circular No. 2.816 and Circular Letter No. 2.795 as of April 15th, 1998; VIII. Franchising, under Circular No. 2.816 and Circular Letter No. 2.795 as of April 15th, 1998; IX. Guarantees provided by international bodies, under Title 3, Chapter 3 of the International Exchange and Capital Market Regulation; X. Goods imported without foreign currency conversion to pay for capital in companies

receiving direct foreign investments under Circular No. 2.731 as of December 13th, 1996; XI. Patent exploration or license under Circular No. 2.816, and Circular Letter 2.795 as of April 15th, 1998; XII. Trademark use or assignment under Circular No. 2.816 and Circular Letter No. 2.795 as of April 15th 1998; XIII. Export prepayment with a payment term exceeding 360 days, under Circular No. 3.027 as of February 22nd, 2001; XIV. Any modality that will be registered with the INPI under Circular No. 2.816 and Circular Letter No. 2.795 as of April 15th, 1998; XV. Technical assistance services, under Circular No. 2.816 and Circular Letter No. 2.795 as of April 15th, 1998; XVI. Supplementary technical services and/or expenses in connection with operations registered with the INPI under Circular No. 2.816 and Circular Letter No. 2.795 as of April 15th, 1998. ROF registration requires the prior enrollment of the concerned parties with CADEMP - the

registration with the CPF or CNPJ for non-residents who have operational contracts with residents, including those registered with the ROF, other than those for the provision of services and the transfer of technology. For this purpose, a legal entity headquartered abroad will receive a CNPJ number

and return it to BACEN, usually a day after it is processed. Only then can this CADEMP number be used for registering with a ROF so long as it does not fall into one of the categories listed above. Brazilian diplomatic representations.

8.4. COAF The Brazilian Council for Financial Activities Control (Conselho de Controle de Atividades Financeiras - COAF) was established under Law No. 9.613 on March 3rd, 2008. Its purpose is to while promoting the cooperation and exchange of information between the public and private intended to incorporate resources, goods, and values that have been illegally integrated into the economy of a country, on a transitory or permanent basis. The law that established the COAF assigned a greater amount of responsibility to legal entities and communicate all suspicious transactions. The law also made legal entities liable to administrative 54

The COAF has jurisdiction across all of Brazilian national territory, as it is part of the Ministry of Finance. It is headquartered in the Federal District. Legal entities are subject to register with the COAF, regardless of whether their activities are ongoing or occasional, whether considered an ancillary activity or not, in accordance with Article 9 of Law 9.613/2008, if they engage in the following: I. or foreign currency; II. of exchange; III. Custody, issuance, distribution, settlement, trading, intermediation, or the administration of securities. Under the sole paragraph of Article 9, the same obligations apply to: I.

Stock exchanges, futures, and commodities exchanges;

II.

Insurance companies, insurance brokers, and supplementary pension funds or capitalization entities;

III. Companies administrating accreditation or credit cards, or the administrators of consortiums that purchase goods or services; IV. Companies that administrate or use cards, or any other electronic, magnetic, or similar means for the transfer of funds; V.

Commercial leasing or commercial factoring companies;

VI. Companies that distribute money or any type of asset, real estate, goods, services, or method; VII. Branches or representations of foreign entities that exercise any of the activities listed in this topic in Brazil, even if on only an occasional basis; VIII. Other entities whose activities require authorization from the body that regulates IX. Domestic or foreign individuals or legal entities that act in Brazil as agents, managers, representatives, commissioners, or otherwise represent the interest of a foreign entity performing any activity listed in this article; X.

Legal entities promoting activities linked to real estate, or the purchase of real estate;

XI.

Individuals or legal entities trading jewelry, stones, precious metals, art objects, or antiques.

XII. Individuals or legal entities trading luxury or high-value items, or performing activities that involve a large amount of in-kind resources. 55

CHAPTER 9 MERGERS AND ACQUISITIONS, CORPORATE TRANSACTIONS, AND DUE DILIGENCE 9.1. Overview The most common corporate business acquisitions or joint venture operations are carried out through the sale and purchase of assets and corporate interests, among others, and corporate

of due diligence, and the structuring of the transaction depends largely on actions and strategies that have become inherent to business transactions in the western world. Below we summarize some important steps in the acquisition of a company or other assets.

9.2. Process Steps 9.2.1. Memorandum of Understanding (“MOU”) M&A and models for other corporate asset acquisition negotiations and documents have been parties even while negotiations continue to develop and determine a business acquisition model (i) Memoranda of Understandings - MoU; (ii) Letters of Intent - LoI; or (iii) Typically, these documents are followed by a Non-disclosure Agreements (NDA), under which the parties ensure, in addition to their commitment to the negotiation, that they will not disclose the

of negotiation. But they provide necessary instrumental apparatuses for parties to consider the seriousness of their relationship and the disclosure of information – subject to the terms of the NDA – required for carrying out the intended business. In particular, they provide conditions precedent to a dispute resolution, as applicable, as well as the necessary unilateral or bilateral obligations that would

9.2.2. Documentation and Information required for a corporate Acquisition Taking into account the business practices recently developed by western countries in the area of M&A, or transactions involving the purchase or sale of assets, parties should expect to conduct legal, accounting, tax, and, as appropriate, environmental audits in order to evaluate the current state of the asset or business of interest. This process can also help to identify what necessities, obligations, and contingencies should be taken into account for pricing purposes in order to execute the transaction planned by the parties.

At this point, from a legal standpoint, the due diligence or legal auditing phase begins. During this phase, generally speaking, the seller provides the buyer with full access to corporate, tax, labor, civil, intellectual property, environmental, criminal, contractual, and regulatory information on the relevant company. This information provides for a broad appraisal of the business, allowing contingencies,

between parties to be surveyed.The entire business framework, for example, will ultimately be based on the appraisal that is conducted during the due diligence phase. Supported by the binding documents that initiate the contact phase, the due diligence phase gives way to aspects that will comprise the backbone of the intended business transaction. There is result, may vary depending on party needs and on the business in question.

9.2.3. Business Once the parties contact one another, establish a binding agreement, and complete due diligence, complete the transaction. During this phase parties determine the terms, conditions, contracts, guarantees, obligations, and rights under the business development model framework. It is also during this negotiation phase that parties will discuss questions of regulatory the transaction. Signing and closing are not required to take place on the same date; they are distinct but important moments that will ensure higher legal safety in working to meet the goals established during negotiation. The parties may choose court or arbitration proceedings for any failure of the parties to comply with the relevant contracts.

9.2.4. Government Funding and Ownership – BNDES Depending on the needs of each party, the Brazilian government may take part in commercial

Development Bank (Banco Nacional de Desenvolvimento Social - “BNDES”).

transaction. In exchange for funds that it makes available, the BNDES may also participate in a share of the business done between the two parties. That said, there are limits to government participation in a company, as well as obligations with respect to corporate governance, auditing committees, and foreign auditing committees, among other obligations that vary depending on the case. BNDES is a government body linked to the Ministry of Development, Industry, and Foreign Trade. As a main goal, it aims at investing in or otherwise fund enterprises linked with a variety of social and economic development goals in Brazil. Such investment and funding is linked to the Agency (Agência Especial de Financiamento Industrial - FINAME) and BNDESPAR (BNDES Participações, which subscribes to and pays for the securities of companies in which it holds ownership interest). Therefore, as explained, BNDES ownership may assume two distinct forms: (i) through funding, in which case BNDES makes resources available to the company against provided guarantees and 57

the collection of interest (in conditions typically better than those presented in the market), as in the case of FINAME. In exchange, the object of this funding must comply with BNDES rules and standards; and (ii) through ownership interest, whereby BNDES would become the investee's partner or shareholder, so long as certain rules are observed, such as restrictions on the entity´s activities that would come in exchange for the funding as established in the agreement with BNDES.

9.3. Brazilian Antitrust System The Brazilian Antitrust System (Sistema Brasileiro de Defesa da Concorrência - “SBDC”) represents a group of government institutions responsible for Brazilian antitrust policy. Its activities include the prevention and repression of economic agents, whether public or private, who could limit, falsify, or undermine free competition in Brazil. Presently, the SBDC includes two bodies: the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica “CADE”), a federal instrumentality linked to the Ministry of Justice, and the Economic Monitoring Finance. CADE comprises three separate bodies: (i) the Administrative Antitrust Court (Tribunal Administrativo de Defesa Econômica); (ii) the General Superintendence; and (iii) the Department of Economic Studies. The municipality also has a specialized attorney that represents and defends its interests in court. The Administrative Antitrust Court is a judicative body comprising a president and six members, appointed by the President of Brazil, and requiring Senate approval. In general, the function of consolidations and acquisitions, in addition to administrative case trials, and rulings on sanctions to be imposed as a result of antitrust crimes. The General Superintendence comprises a General Superintendent, appointed by the President of Brazil and subject to examination by the Senate, who is assisted by two Deputy Superintendents. The body has a twofold function: (i) bringing forth and providing evidence to support the review of merger cases, and (ii) bringing forth and providing evidence to support the investigation of merger criminal cases. The Department of Economic Studies is directed by a chief economist, who is appointed by the president of the Administrative Court and by the General Superintendent. Their function is to prepare studies and formulate economic opinions that would support the decisions made by other bodies in the CADE. Finally, SEAE activities include antitrust advocacy and the dissemination of programs and policies that would help to protect market competition.

9.3.1. General Law”). The functions of CADE include the following: I.

Preventive Function: CADE is an institution belonging to the Executive Branch, responsible for controlling market structures, analyzing mergers, acquisitions, consolidations, and other corporate and contractual transactions that could be considered mergers between market players and that have the potential to put free

competition at risk. II.

Repressive Function: The antitrust authority is also responsible for controlling conduct, listing among its goals the supervision, prevention, and determination of antitrust crimes, including cartelization, tying arrangements, predatory pricing, and the prevention and repression of antitrust crimes.

9.3.2. New Antitrust Law The New Antitrust Law changed the Brazilian antitrust environment substantially. With regards to structure control, the new law removed the market share criteria (20% of relevant market) that was set forth in Law No. 8,884/94 (the former antitrust law) and added a second criteria that deals with sales revenue (R$30 million) for the other party to the transaction, in addition to the R$400 million criteria already set forth (for at least one of the groups). Therefore, CADE will review all mergers in which (i) at least one group of companies involved reported gross annual sales in Brazil above R$400 million for the previous year; and (ii) at least one another involved group of companies reported gross annual sales in Brazil above R$30 million for the previous year. On May 30th, 2012, an inter-ministerial ordinance was approved (between the Ministry of Finance and Ministry of Justice), in compliance with Article 88 Â§ 1 of the New Antitrust Law, raising the aforementioned amounts from R$400 million and R$30 million to R$750 million and R$75 million, respectively. In accordance with the New Antitrust Law, mergers that fall within the established criteria require CADE's prior approval. So long as this approval remains pending, parties must be kept totally separate and all information shared between parties must also be restricted. Therefore, a merger undergoing analysis by the CADE will only be consummated after CADE's approval. Otherwise, charged. The New Antitrust Law requires that competitive conditions among the concerned parties be that â&#x20AC;&#x153;the parties should keep physical structures and competitive conditions unchanged until CADE nature from one party to the other, and also from exchanging sensitive information on competition, other than that which is strictly necessary for the parties to enter into a binding written document.â&#x20AC;? For the purposes of the antitrust law, a merger occurs when: (i) two or more previously independent legal entities are consolidated; (ii) one or more companies directly or indirectly acquires, upon purchase or exchange of stock, shares, or securities convertible into stock, or tangible or intangible assets, through contract or otherwise, control or any interest in one or more companies; (iii) one or more companies merge into one or more companies; or (iv) two or more companies enter into an association, consortium, or joint venture agreement. upon request by the parties involved or for 90 additional days at the discretion of the Administrative Court. Therefore, the maximum term for attempting a merger must not exceed 330 days. 59

Regarding conduct control, the most relevant changes introduced by the new law are related to

before the investigation is initiated. CADE may use a company's total sales when sales information

or negligence demonstrated while carrying out company business. Finally, the New Antitrust Law introduces changes to the criminal sanctions applicable to antitrust crimes. The current wording of the Antitrust Law establishes the possibility of prison terms ranging

the case of a settlement.

CHAPTER 10 COMPANY REORGANIZATION OR BANKRUPTCY In Brazil, Law No. 11.101/2005 regulates court-supervised reorganization, out-of-court reorganization, and bankruptcy declared by a business owner or company.

10.1. Court-supervised reorganization

supervised reorganization of a micro or small businesses. In addition, the business owner and its manager may not be a person sentenced for bankruptcy crimes. economic crisis, while maintaining a productive source of jobs and creditor interests and promoting the preservation of the legal entity, its social function, and stimulating economic activity. The following are the main ways that court-supervised reorganization is permitted: a. Through the awarding of special payment terms and conditions for past due or coming due obligations; b. owned subsidiary, a reassignment of membership interest or shares, respecting shareholders' rights under the applicable legislation; c. By changing the controlling interest; d. bodies; e. f. By increasing the entityÂ´s capital; g. By transferring the lease, including to a company formed by employees themselves; h. By reducing salaries and working hours, or establishing compensation time under collective-bargaining agreements or conventions; i. Through an in-kind payment of debt liabilities, regardless of whether or not a guarantee is provided by the entity or a third party; j. By entering into an agreement with creditors; k. By selling part of its assets; l. the date that the court-supervised reorganization application is assigned to the judge, m. By usufruct of the business;

n. By sharing management; o. By issuing securities; p. payments. Court-supervised reorganization applies to claims that exist on the date the reorganization a reorganization proceeding. During the court-supervised reorganization, the debtor's activities will

After the court-supervised reorganization is granted, the debtor must present a reorganization plan, approved by creditors according to two criteria: a. A favorable vote among creditors representing more than 50% of the total claims present at a meeting of creditors; and b. If there are three classes of creditors (labor creditors, security interest creditors, and unsecured creditors), the approval of two classes or, if there are only two classes of creditors, the approval of one class of creditors, provided that at least one-third of the creditors in the class that rejected the plan also voted favorably.

converted into bankruptcy.

10.2. Out-of-Court Reorganization an out-of-court reorganization with its creditors. The out-of-court reorganization plan is discussed between debtor and creditors directly and

An out-of-court plan will not include claims of a tax nature or claims that have originated from labor law or work-related accidents.

10.3. Bankruptcy

a. No court-supervised plan is approved; b. Without legal ground the debtor fails to pay, by the due date, a liquid obligation outlined in one or more of the enforceable instruments, equivalent to forty (40) times the minimum

a lien within the legal term; d. Debtor takes one the following actions, unless agreed upon as part of a court-supervised reorganization plan: e. Proceeds with the prompt liquidation of assets or resorts to a ruinous or fraudulent means of performing payments; f. Enters, or, by obvious actions, attempts to enter, with the purpose of delaying payments in part, to a third party, whether or not the creditor; g. Transfers the business to a third party, whether or not the creditor, without the consent of h. Simulates the transfer of its principal place of business, intending to bypass laws or i. clear assets to liquidate its liabilities; j. creditors, abandoning the establishment, domicile, principal place of business, or head k. Fails to meet an obligation under the court-supervised reorganization plan in a timely manner. The purpose of bankruptcy is the collection of property and the realization of assets to pay creditors. Payments are made in the following order: a. Debts originating under labor law, limited to 150 times the minimum wage per creditor; work-related accident debts; b. Secured credits not to exceed the value of recorded assets; c. d. Credits including special privileges; e. Credits including general privileges; f. Unsecured credits; g. Subordinated credits; Additionally, the following credits are not included in bankruptcy proceeding and should be paid before any other credit: a. Fees payable to the bankruptcy trustee and its assistants and labor or work-related accident claims, with respect to services provided after bankruptcy was declared; b. Amounts provided by lenders to the entity; c. Expenses for collection, management, asset realization, and distribution of products, as 63

well as costs of insolvency proceedings; d. Court costs related to actions and executions in which the bankrupt entity has been unsuccessful; e. Obligations resulting from valid legal actions taken during the court-supervised reorganization, pursuant to Article 67, or after declaring bankruptcy, and taxes incurred during taxable events that occurred after bankruptcy was declared, respecting the order of claims.

CHAPTER 11 OTHER RELEVANT ASPECTS 11.1. Contracts 11.1.1. Contract characteristics In accordance with Brazilian law, a contract is an agreement entered into between two or more persons establishing, regulating, or terminating a legal relationship between parties. From a legal standpoint, contracts can be civil or commercial in nature, or both.

maritime contracts). In practice, contracts are basically governed by fundamental principles of law, such as those provided in the Brazilian Civil Code. Contracts should be written in Portuguese or include a copy that has been translated into Portuguese if the contract was originally written in a foreign language. If a word or procedure causes any ambiguity in interpretation, it should be interpreted following the principle of good faith and according to local uses and customs from the place where the contract was signed.

11.2. Contract formation Since the formation of a contract implies an agreement, a manifestation of intent should be expressly or tacitly evidenced, according to the agreement reached by the parties.The initiative taken called acceptance. a contract are present, unless expressly stated otherwise. A contract is even valid if entered into in the absence of the parties. According to prevailing as soon as the volition of the parties is expressed. There are exceptions to this if, for example, the (i) party has agreed to wait for a response; or (iii) no acceptance occurs during this period of time.There

11.3. Preliminary contract A preliminary contract should include all conditions that are essential for contract execution, other than the formal contract structure itself. The instrument represents an assumed obligation to eventually sign the contract. An ordinary example of a preliminary contract is a promise of sale. Until the preliminary contract is perfected and registered, with no further clauses that would

Any failure to realize a preliminary contract would allow the aggrieved party to consider the

11.4. Contract Termination

terminate the contract. Such a termination is known as a â&#x20AC;&#x153;resolutionâ&#x20AC;? of the contract. Previously,

this context would only entitle the aggrieved party for damages, which would often times consume an unnecessary amount of time. However, with the passing of Law No. 8,953 on December 13,

damages, depending on the case. Contracts governing a relationship of consumption, may also be terminated if, for causes that becomes too burdensome to one of the parties. A contract can only be terminated before lapse of its term in case of breach , an accident, or a force majeure event, unless otherwise set forth therein (for instance when the contract establishes an accident or a force majeure event are considered to be the outcome of a situation that was initially an event can be declared by either party in order to justify contract termination. On the other hand, contracts that have been entered into for an undetermined term may be terminated if notice is given by either of the parties. However, if the nature of the contract

Contract may also be terminated upon mutual agreement (distrato). Contracts may also be considered null or voidable. A contract that goes against public policy, for nonexistent and the parties would return to the positions they maintained before entering into the contract. A contract is also voidable if it is considered harmful to a party.

11.5. Purchase contracts In accordance with Brazilian law, a purchase contract is an instrument whereby a party (seller) transfers ownership of a tangible or intangible property to another party (buyer), in exchange for payment. Pursuant to the Brazilian Civil Code, future commodities may be the content of a conditional 66

when the property comes into existence (for example, in the sale of future crops). Although the sale of third-party property is not considered valid, as a person may only sell his or her own property, Brazilian Civil Code includes an exception to this rule in which a seller, after consenting to sell a third-party property, will acquire the property from the third party and then sell it to buyer. If the sale is not completed, the seller remains liable for damages to the buyer. any eviction (foreclosure) if he or she knew the conditions of the litigation involving the property. The Brazilian Civil Code also establishes that sellers may only sell property to one or more of the sellers' descendants with the consent of the other descendants. The transfer of ownership of a movable property is carried out through a customary physical transfer. Nonetheless, there are contracts that contradict this general rule, including a clause that would limit delivery to a determined time frame or make it contingent on a determined condition. Such contracts include, for example, the sale of credit, where the price would be paid in installments. The transfer of real estate, however, could be made by registering the respective property with the corresponding real estate registry.

(a) Consent Contracts entered into between persons that do not have civil capacity are null. . (b) Property Property includes movable, immovable, tangible, or intangible property, the title of which will be transferred to the buyer. However, there are certain things that are not eligible for exchange, either due to legal determination or given its nature, and any contract containing such purpose may also be considered null or voidable. (c) Price amount the buyer agrees to pay the seller in exchange for property ownership. Price is payable in cash. Payment in gold or foreign currency is null. (d) Payment With cash sales, the buyer pays for property and gets a receipt in return. In an installment (credit) sale, the payment will be delayed according to the credit that the buyer has with the seller. (e) Seller's obligations Once an agreement is reached with a buyer for the sale of a property, the seller assumes three obligations: delivery of the property; responsibility for property defects; and the satisfaction of the buyer (i.e., seller remains responsible if buyer is dispossessed of property). . If, after the contract has been signed, the buyer discovers that the seller was not the owner of the property, the seller will be liable not only for refunding the price (in addition to interest

sanctions may also apply. (f) Buyer's obligations Buyer obligations include paying the price that is agreed upon and accepting the delivery of the to receive the payable amount. The form, date, place, and method of delivery must be agreed upon by both parties. If the contract is silent, the Brazilian Civil Code , as well as local uses and customs of the place where the contract was signed will apply.

11.5.1. Types of Purchase Contracts

(a) Sample sale

(b) Ad corpus andad mensuram Sales A real estate property will be sold ad corpus if the property has peculiar characteristics, required by the buyer, that are not related to the size or area covered by the property. An example of an ad corpus sale would be the sale of a house with a certain number of rooms, a garden, a garage, etc.This type of sale comes contrast to ad mensuram sales, where the buyer is primarily concerned with the the construction of a factory. (c) Contract for deed A contract for deed is an agreement undertaken by the seller to transfer a real estate title in exchange for a set payment from the buyer.The contract may contain an irrevocability clause, which would waive the right of both parties to cancel the sale.The contract shall be registered with the Real Estate Registry (Cart贸rio de Registro de Im贸veis) and the buyer shall acquire an in rem right, which

purchase of real estate. (d) Sale with Title Retention In a sale that will be paid by credit, the seller retains ownership of the object being sold until the buyer has made the payment in full. If the buyer defaults, Brazilian Civil Code entitles the seller and coming due, in addition to any other amounts payable; or (ii) reclaim possession of the thing sold. Additionally, the Brazilian Code of Civil Procedure establishes that, in the case that the buyer defaults, once established by proof of title, the seller may demand a hearing, without the presence of the buyer, for the seizure of the object sold.

(e) Sale of Fiduciary Alienation with Guarantee

maintains possession of the object in question as a guarantee, to keep the buyer from selling the object to third parties. However, a buyer is able to use of the object. In Brazil, this type of credit is

with a deed, but only transferred after the full payment of debt. In both cases, the buyer may use the object being purchased, but cannot sell the object until all debt is fully paid. (f) Sale upon Approval A sale upon approval depends on the satisfaction of the possible buyer with respect to the good in question, and on a subsequent positive or negative declaration. In other words, it is a purchase contract with a preventative clause, subject to the approval of the buyer, who is allowed to test and use the good in question. Should the buyer eventually decide not to buy the good, they will not have (g) Sale with Buyback Option This is a sale contract that includes a buyback clause, an ancillary provision included in a real estate contract that establishes that the seller, at the seller's discretion, may repurchase the same property within a certain amount of time after the signing of the contract (such period being limited to 3 years). In this case, the seller has to pay to the previous buyer the full price, in addition to contractual expenses and additional amounts for any improvements made to the property. The former buyer may not refuse to resell the property under these conditions.

11.6. Corporate Contracts Commercial contracts - mercantile or corporate - are contracts that are entered into between business owners, i.e., persons performing an organized economic activity for the production and circulation of goods and services.

11.7. Mercantile Purchase Contract (a) Essential Elements: I.

Object: Present or future commodity.

II.

Price: (i) Brazilian economic system: free enterprise; (ii) Freedom to stipulate price – arranged between parties; (iii) Government control of prices – direct (price freezing, changes to monetary policy regarding credit and monetary supply, maintenance and

III. Condition: (i) Agreement on the suspension and cancellation conditions that apply to the contract; (ii) Suspension conditions – postpone the enforceability of contract obligations; (iii) Cancellation conditions – cancel the enforceability of contract obligations. 69

(b) Contract Formation: “Purchase and sale, when pure, is considered binding and perfect, provided that the parties have agreed on the content and price,” according to Art. 482 of the Civil Code (CC). Agreement of will between contracting parties on object, price, and conditions, whether written,

nature or the circumstances were expressed,” according to Article 427 of CC. period.

Bilateral:The moment of signing or of a mutual expression of will establishes obligations for both parties.

II.

Consensual: A contract is established with the simple expression of will by both parties, creating consent with respect to the personal obligations of the contracting parties.

III. Onerous: Recognizing that both parties have proprietary obligations; IV. Commutative: Theparties are given roughly equivalent mutual consideration. V. be extended over time. I.

Typical and Nominate: Articles 481 to 532 of Brazilian Civil Code

(e) Seller's Obligations: I.

Transfer the ownership of the object, including accessories thereof.

II.

Keep and maintain the object until delivery, remaining liable for any losses seller causes.

III. performance) or opt for damages upon contract default (Article 475 of Brazilian Civil Code). IV. or quantity; or (ii) property value is lower than the value stated in the transaction. V.

Reducing Action or Quanti Minoris Action (Action calling for a reduction of price).

11.8. Brazilian Real Estate Law I. Main Real Estate Rights Ownership right to possess, use, and transfer property and to recover property from whoever may have taken it unlawfully. Ownership of private property is expressly secured by the Federal Constitution, provided that the owner abides by the propertyÂ´s social function. Otherwise, the property may be expropriated by the government under certain circumstances detailed in the applicable legislation. Thus, the right of ownership is not absolute insofar as it may be restricted due to public interest or in respect of property rights held by third parties. Examples of such restrictions are zoning regulations, ordinances, restrictions imposed in the interest of national security (coast and frontier lands), and certain neighbor rights provided by the Civil Code. Ownership of real estate is determined by registration with the Real Estate Registry in the records of each piece of real estate and of the rights pertaining to real estate. They are created and their responsibility is divided in accordance with geographic spheres of jurisdiction established by state legislation and overseen by the judiciary. Usually, ownership is acquired through the transfer of a title, whereby parties reach an agreement that would transfer the ownership of land from one party to the other. In most cases, the law requires the transaction to be formalized by a public notary (there are few, albeit important, exceptions to the mandatory use of public notaries for real estate purposes), who produces a deed. real estate, the deed must be registered with the pertinent Real Estate Registry. So long as the deed is not registered with the Real Estate Registry, the document will be binding for the parties involved in the agreement but not enforceable against third parties until the property, for all legal purposes, has changed owners. An owner can also transfer some of the rights he has over the property, such as the right to use the property or an easement, without ceasing to be its owner. Any such transfer must also be formalized through a public deed and registered with the Real Estate Registry. In the same way, any acts that modify, extinguish, transmit or create rights relating to real estate property must also be registered with the pertinent Real Estate Registry. These could include rights such as guarantees (mortgages, pledges, etc.) and court orders. Also, a person may become the owner of real estate through means other than the transfer of property from the previous owner, such as inheritance, foreclosure sales, or adverse possession, which occurs when a person possesses land openly and continuously for the amount of time prescribed by the applicable legislation (for urban land, for example, the period is ten years). Lastly, it is worth mentioning that ownership is deemed to be full or complete when all the legal powers inherent to it (possession, use, transfer, and recovery) are concentrated in one single entity, or limited when any of such powers are in the hands of another.

Ownership of Land by Foreign Investors foreign owner, provided that the foreign owner is registered with the tax authorities and has a duly appointed Brazilian resident with powers of attorney. Unfortunately, ownership of rural land by foreign investors is one of the most troublesome and convoluted topics in Brazilian Real Estate Law. The matter is regulated by Law No. 5.709 as of October 7th, 1971, under a law that was enacted when Brazil was under a military regime and had strong nationalistic principles. Firstly, foreign individuals or corporations are not allowed to acquire rural land or lands that are considered strategic to national security, unless the federal government gives special authorization. Moreover, a foreign individual cannot acquire more than 50 rural modules (a module is a Rural Reform and Colonization - INCRA). They take into consideration aspects of the land that are particular to each region of the country and any acquisition of more than three rural modules by an individual or company must be approved by the INCRA. As a result, the purchasing process is prolonged. With regards to foreign companies and corporations, an intense debate has surrounded their ability to acquire rural lands. But the general consensus is that they may acquire rural lands, provided that they present a plan for land usage and exploitation, a plan that must be approved by the Ministry of Agriculture and that may be subject to further restrictions from the INCRA. The treatment given to Brazilian companies or corporations controlled by foreign investors is also a matter of intense and ongoing debate, seeing that many investors attempt to shirk legal restrictions through the acquisition of a Brazilian company that could, in turn, purchase rural land. According to Law No. 5.709/1971, companies controlled by foreign investors should be subject to the same restrictions that apply to foreign investors, an understanding that was seconded in 2010 in However, after the Federal Constitution of 1988 was created, most legal scholars and courts understood that Law No. 5.709/1971 exceeded constitutional limits, and that the provision that applied restrictions to Brazilian companies controlled by foreigners was no longer valid. This debate it can still problematize real estate deals, given the ongoing debate surrounding the meaning of the law. Condominium or Concurrent Ownership This is the co-ownership of a property, whereby each of the co-owners has a legal right to a certain percentage or share of the real estate, and all charges related to the property are payable according to said share.

In most condominiums, given the indivisibility of the property, co-owners also have the right to refuse purchase of one anotherâ&#x20AC;&#x2122;s portion of the real estate. Also, when two or more people share ownership, any co-owner may petition the courts to divide up the property amongst the owners. If possible, the court will give a sole title to each co-owner for a portion of the property. Otherwise, the court will sell the land in a public auction and the proceeds will be divided among the co-owners.

In Brazil, most real estate developments include a condominium characterized by (i) areas of exclusive use, and private ownership areas (known as private areas), and (ii) common areas, owned and shared by all of the condominiums on the property. In this types of condominium, owners must establish certain rules to govern their relationship with respect to the private and common areas. These rules comprise what is known as a joint ownership covenant or condominium covenants, which are recorded by the Real Estate Registry. A common condominium arrangement involves a single piece of land where several apartments are built, each as an independent unit, but with certain common areas, such as swimming pools, gardens, playgrounds etc. Possession

property in the case of unlawful possession by another party. In practical terms, possession is intentionally exercising control over the land. This is one of excluding an individual from a property, and given the fact that it is a condition for enjoying certain rights, such as the right to acquire land by adverse possession. Possession ends when the power exercised over the property or the faculty to exert legal powers over to the property ceases, even if this is against the will of the possessor.This happens when the land is forfeited by transfer, loss, or destruction of the property by a third party that has taken possession, among other circumstances. Surface rights property. The person who receives surface rights is entitled to the ownership of any construction incorporated into the land and to the fruits derived from the property’s use. With surface rights, the ownership of the land itself stays with the land’s owner, but most of the ownership powers (use, enjoy and recovery) related to the land’s surface go to the person who acquires the surface rights. The owner of surface rights can even sell the surface rights to others,

compensation to the land’s owner. Easements Easements comprise the rights that one party has pertaining to another’s property. Easements to the easement, and the other party, which must abide by the easement. There are two types of easements provided by the Civil Code in Brazil: easement by necessity, which is the right of an owner to cross over another’s property for a special and necessary purpose, such as in order to gain access to at least one public road or public utilities (phone or gas lines); and an easement by time, which occurs when continued use of another’s property for special reasons can develop into the permanent use of such property, so long as certain legal conditions are met.

II. Real Estate Guarantees a) Mortgage A mortgage is an instrument that creates a lien on land as a security for the payment of a Mortgage agreements, or deeds, are recorded with the pertinent Real Estate Registry. The priority of the claim depends on the order in which it was registered with the Registry in question, insofar as the same property can be mortgaged more than once in Brazil. This form of lien is commonly used in bank loan agreements, when the borrower gives his or her land as collateral. When the borrower defaults, the mortgage holder initiates a lawsuit and has the right to sell the land at auction. However, mortgages generally entail lengthy and troublesome foreclosure processes. b) Fiduciary Transfer (Alienação Fiduciária)

and the full ownership of the land will become the debtor’s once again. foreclosure process that results from out-of-court procedures that enable the creditor to sell or retake the land in a short period of time, through simple and fast proceedings overseen by the Real Estate Registry. III. Real Estate Transactions Sale and Purchase Agreements The most common real estate agreement is the Real Estate Sale and Purchase Agreement, by means of which the buyer purchases the right of land ownership from the seller for a certain price. The agreement must specify and describe the property, in addition to providing the terms and conditions of payment. The price may be paid with money or through the exchange of other real estate or even future real units to be constructed on the land acquired. It is imperative to register the sale and purchase agreement with the competent Real Estate registry, since only through this registration will the land’s ownership be transferred to the buyer.

Parties will usually execute a Commitment or Promise to Sale and Purchase Agreement (CSPA) prior to the actual Real Estate Sale and Purchase Agreement. This CSPA binds the buyer and seller to execute the Real Estate Sale and Purchase Agreement in the near future, once certain conditions have been met (at least due diligence of the land and its owners). It is also important to register the CSPA with the Real Estate Registry, insofar as this registration will give the buyer priority over any other sale of the land, if the purchase price is paid.

Commercial Lease

providing the lessee with a residence, while the second is executed with the goal of allowing the lessee to undertake commercial activities. The main aspects that must be analyzed in commercial lease agreements are the right of the lessee to claim (i) a review of the lease, the rent paid, and/or (ii) a mandatory renewal of the lease agreement. With respect to the claim to review the lease and the rent paid, once the lease has been active for three years, the lessee may request a competent court to issue an order to adjust the amount of rent to market practicegive.This claim, however, does not apply to all lease agreements and the courts have decided that it does not apply to Built-to-Suit Agreements, for example. The right to claim mandatory renewal applies only to commercial lease agreements and in order

a third party and is not matched by the lessee; (ii) in order to carry out remodels on the property; or (iii) for personal use, or for use by a family member, provided that he or she is not involved in the same commercial activity as the tenant or lessee. Shopping Centers Shopping centers in Brazil have unique characteristics that distinguish them from other enterprises, as they are almost always organized as condominiums with both private and public areas, and that they frequently rely on professional management. The administrators of shopping centers are responsible for their tenant mix that, in other words, means creating a mixture of tenants that will maximize shopping center revenues and results. lots, especially in big cities. Parking lots provides management with a continual income from which they are able to draw. The lease agreements that re-entered into at shopping centers may also allow rent to be paid based on a percentage of the lesseesâ&#x20AC;&#x2122; sales revenues, or by way of payments made into a communal shopping center fund for marketing and advertising purposes. Sale and Leaseback In this type of agreement, the buyer agrees to purchase land (always with a structure already built on the property) from the seller in order to immediately lease said property back to the seller under pre-established terms and conditions. This form of transaction is actually a sale and purchase agreement, coupled with a lease agreement. It is commonly used in securitization transactions that provide collateral for the security that will later be issued. The sale and leaseback agreement can also be used with surface rights, whereby a company

transfers the right to the use of the landâ&#x20AC;&#x2122;s surface area to a special purpose company â&#x20AC;&#x201C; SPC â&#x20AC;&#x201C; which

CRI), a tranche backed by the receivables it will generate, by way of the the lease it holds with the company. transfer or mortgage on the land and performance guarantees to cover the risks associated with the developer and constructor, when necessary. Built-to-Suit construction on a new piece of land (the future lessee) hires a third party, usually owned by a real that would meet company needs; (iii) develop and construct the building; and (iv) lease the building, The BTS is the most common real estate deal used for securitization structures, insofar as the receivables generated by these agreements (the lease payments made by the lessee) are sold by the

Similar to the sale and leaseback agreements, BTS agreements also provide for guarantees, risks associated with the developer and constructor. BTS agreements became so frequent that in 2012 they were expressly included in Law No. 8.245/1991, which regulates commercial leases. The inclusion was of great importance, given that BTS agreements usually exclude the right of the lessee to review the paid lease and the mandatory renewal of the lease agreement. Furthermore, given that the duration of BTS agreements are generally long, the law establishes that in the event of early termination of the agreement, the lessee is obliged to pay an indemnity to the lessor for an amount equivalent to the sum of the remaining lease if the agreement had been carried out through the expected term. IV. Real Estate Developments and Land Parceling Real estate developments are regulated by Law No. 4591/1964 and by the Brazilian Civil Code, while land parceling is regulated by Law No 6.766/1979. two or more lots for future construction, with or without the addition of new public roads or works. Land parceling requires a somewhat lengthy procedure involving the relevant municipality and Real Estate Registry, assuming that the party interested in parceling land must submit the project and designs of future lots, regarding environmental and zoning aspects, for the prior approval of numerous municipal bodies. Furthermore, every land parceling procedure must include some type of public works to be undertaken by the interested party, such as the construction of parks, schools, roads, etc. 76

A land parceling project is one that aims to divide a large property into independent lots that could be sold in the future. It usually involves vast expanses of land, where the developer constructs streets and other public facilities (sewage, water, gas, and electric infrastructure) that would be donated to the local municipality, while the developer retains ownership of the lots. Unlike common real estate developments, seen below, the party responsible for a land parceling project does not sell the construction to third parties but, on the contrary, sells the lots while building streets and the general infrastructure that would be subsequently donated to the local government. Developments, on the other hand, aim at building and selling real estate units (commercial or residential) constructed on one piece of land. Any real estate development project must be approved by the local Municipal authorities, in order to verify that zoning and construction regulations have been met. It must also be registered of the developer with respect to construction, the use of the future units, and the establishment of a condominium. Only once the development project is approved and registered with the Real Estate Registry can the real estate units be sold to third parties. The developer will be responsible for executing and delivering on the project. Once the construction has concluded, local authorities will be able to issue a site’s “Habite-se,” which is a common name given to the permit that marks the formal conclusion of a construction project. This permit should also be registered with the Real Estate Registry. There is also an important tax liability that both developers and constructors are subject to. In order to obtain and maintain the proper license (habite-se), developers and constructors must register their construction with the National Social Security Institute – INSS (Instituto Nacional de Seguridade Social).

11.9. Arbitration Brazilian Law, based on Law No. 9.307/1996, makes it so that any person capable of entering into a contract is also subject to arbitration disputes related to disposable property rights. Arbitration is a form of dispute resolution that, despite being decided by a third party or parties, (the arbitrator) does not need to be submitted to the judiciary in order to be valid. Within the scope of arbitration, parties may opt for dispute resolution in law or in equity, and decide on the legal rules that will be applied. This is provided, however, that customary and public policy are not violated. Parties may appoint one or more arbitrators (always an odd number), or determine that such an appointment should be made by a panel of arbitrators from the established chamber of arbitration. The arbitrators should always be impartial and must abide by the same rules of impartiality applicable to court judges. In order to establish arbitration proceedings, the parties need to have entered into an agreement that includes an arbitration clause. Even without an arbitration clause, the parties may also agree to refer their disputes to arbitration under an arbitration covenant.Therefore, the most important aspect of arbitration is that the parties, by free expression of their will, have chosen to submit themselves to arbitration. 77

The agreement between parties to submit their case to arbitration is cause for dismissing a case, without judgment on the merits, if a party brings a matter to the judiciary that they had agreed would be submitted to arbitration. In arbitration proceedings, the refusal of a party to submit itself to a previously agreed arbitration will prevent a valid arbitration award from being issued.This is true provided that the disputing party is given every opportunity to submit its defense in the case that it wishes to do so. The parties may introduce all types of evidence that are legally accepted in arbitration proceedings, and the arbitration tribunal may request that the judicial authority order a witness to appear in the case that the witness refuses to testify. In addition to compelling the attendance of a witness, the parties may also resort to the court of original jurisdiction in the case that other coercive or provisional remedies are necessary for the enforcement of an arbitration award. In order words, although arbitrators have the authority to resolve disputes arising between parties, this same authority is not able to enforce their own ruling on awards alone, and enforcement must be sought in court. A Brazilian arbitration award is an enforceable legal instrument and is not subject to appeal or A foreign arbitration award - i.e., an award that is rendered outside Brazilian territory – will be recognized or enforced in Brazil according to international treaties and in compliance with issues that the Brazilian legal system has determined to be relevant to public policy. This includes the opportunity to be heard, and the due process of law, for example.Therefore, in order to be recognized

dispute may be resolved by arbitration in compliance with the Brazilian Law; and (ii) the decision is

11.10. Brazilian Court Structure The judiciary branch in Brazil is divided according to the types of disputes that are submitted for examination or by the quality of the persons involved in such disputes. Therefore, we have the General Jurisdiction Courts (Justiça Comum), which comprise the State Courts and the Federal Courts (they try cases involving the federal government), and the Special Jurisdiction Courts (Justiça Especializada), which comprises the Labor Courts, the Electoral Courts, and the Military Courts. Both General Jurisdiction Courts and the Specialized Jurisdiction Courts have two (2) tiers of

jurisdiction tier by a single judge. Any appeal brought against the decision of the single judge is reviewed by a collective board in the second jurisdiction tier or the Appellate Courts. Extraordinarily, some cases are tried in the Appellate Court in the second jurisdiction tier – these are the so-called causes of the original Appellate Courts jurisdiction. There are also Superior Courts, which operate as a special jurisdiction tier, and where only matters of law are discussed. The function of these courts is to standardize the decisions of other courts with respect to the interpretation of written law, also known as positive law. 78

The exceptional courts that belong to the Labor Courts, the Superior Labor Court (TST), the Electoral Courts, the Superior Electoral Court (TSE), the Military Courts, and the Superior Military

these courts. The exceptional General Federal Jurisdiction and General State Jurisdiction Court is the whose main function is to standardize the interpretation of federal government legislation considered unconstitutional. Basically, the Federal Court of Appeals is the last instance for cases on matters of involve matters of constitutionality and, as such, must be reviewed by the Supreme Federal Court). Finally, there is the Federal Supreme Court (STF), an extraordinary court whose main function is to standardize the interpretation and enforcement of the Brazilian Federal Constitution. This court has 11 justices, appointed by the President of Brazil, and is known as a political court with jurisdictional function.

CHAPTER 12 OIL AND GAS 12.1. Introduction Prior to 1995, the exploration of oil and gas reserves and the distribution of natural gas were government monopolies carried out by Petróleo Brasileiro S.A. – Petrobras (“Petrobras”), determined by law as a representative of the federal government. With the enactment of Constitutional Amendment No. 05/1995, the oil and gas sector was opened to private investors, granting states the right to explore alternative natural gas distribution options through concessions to state-owned or private companies, which led to the privatization of local gas distribution companies. Therefore, oil and gas became regulated businesses that could only be carried out by companies that were licensed or received government concessions to operate. Regardless if they were stateowned or private companies contracted for the execution of these activities, they were regulated by the Petroleum Law, which, among other things, set forth a national energy policy related to all oil activities. In addition, the Pre-Salt Laws establish a production sharing contract regime applied to future licensing of pre-salt and other areas deemed to be strategic by the government. Therefore, the right to explore and produce oil and natural gas can be granted by means of (i) Concession Agreements or (ii) Production Sharing Contracts (“PSC”). Even after Petrobras became subject to competition from private companies, it maintained a number of advantages in domestic operations. Despite the entry of new competitors to the market, in Brazil. Additionally, by virtue of the fact that it was the only operator in Brazil for so many years, Petrobras had the advantage of knowing not only where to look for reserves, but also knowing how to navigate the country’s regulatory process.

12.2. Applicable Legislation The Brazilian oil and gas sector is regulated, above all, by general provisions in the Brazilian and regulations summarized below: CF/1988 (main articles) Article 20 of the CF/88: Sets forth that oil and gas reserves located within Brazilian territory (including the continental shelf, territorial sea, and exclusive economic areas) are considered to be assets of the Federal Union; Article 25, §2º of the CF/88: Establishes that local natural gas distribution is a prerogative of the states.Therefore, each state may enact its own rules applicable to natural gas distribution and can sign its own concession agreements related to local natural gas pipeline services. Article 177 of the CF/88: Establishes that the Brazilian government can contract the following activities related to the oil and gas sector: (i) prospecting and development of deposits of oil, natural by-products resulting from the prospecting and development activities related to oil, natural gas, and 80

oil, basic oil by-products produced in Brazil, as well as pipeline transportation of crude oil, oil byproducts, and natural gas from any source. Federal Law No. 9478/1997 (“Petroleum Law”) In Brazil, the hiring of a state-owned or private company for the execution of these activities is regulated by Federal Law No. 9,478 /1997. Under this concession scheme, companies holding concession rights to explore reserves are entitled to the property of their production. This Law also created the ANP and CNPE. Decree No. 2705/1998: Establishes criteria for calculating and charging royalties and special participation. Federal Law No. 9847/1999: Deals with the supervision of activities related to the country’s fuel supply. Federal Law No. 11909/2009 (“Gas Law”) In 2009, Brazil adopted the Gas Law in order to regulate natural gas activities in the country.

Law No. 12351/2010 (“Pre-Salt Law”). In December 2010, three bills were approved that dealt with exploration and production in pre-salt reservoirs (“Pre-Salt Laws”). Collectively, the bills represented: (i) the introduction of a production sharing contract regime that would be be applied for future licensing of pre-salt areas and other areas deemed to be strategic by the government, and the implementation of an oil fund to that would support social and economic development in Brazil; (ii) the creation of a new, fully state-owned company named “Empresa Brasileira de Administração de Petróleo e Gás Natural S.A. - Pré-sal Petróleo S.A. (PPSA)”; and (iii) the capitalization of Petrobras.

12.3. Other Applicable Rules a. ANP and CNPE Directives, Acts, and Resolutions (available in www.anp.gov.br); b. Competition Rules: The oil and gas sector is subject to Brazilian rules on competition. The Law in Defense of Competition is applied to Brazilian territory and CADE (Federal Law N. 8,884/94) is the body declared competent to judge administrative proceedings on competition law, market prices, and antitrust matters. CADE issues rulings on infractions committed against economic order, as well as proceedings regarding relevant trade acts and law. As set forth in Article 10 of the Petroleum Law, ANP shall notify Brazilian antitrust authorities should they become aware of any potential anti-competitive conduct. c. asset, imposing the duty to protect and defend it for present and future generations on public authorities and communities.The National Environmental Policy (outlined in Federal Law No. 6938/81) regulates civil liability for damages caused to the environment. It has a strict liability nature, i.e., irrespective of fault. In the criminal sphere, the Environmental Crimes Act (Federal Law No. 9605/98) applies to every person, whether an individual or legal

entity, responsible for certain behaviors that are considered harmful to the environment. Both ANP and IBAMA are responsible for the safety and environmental regulations that apply to upstream activities. Given that ANP is the agency that supervises compliance with environmental standards, in Ordinance Rule No. 3 of 2007, it regulates the process of environmental licensing related to oilrigs. There are, in addition, special environmental and other government permits that are needed to operate in Brazil. In order to obtain requires the presentation of an Environmental Impact Statement and an Environmental Impact Statement Report (EIA/RIMA) by the entrepreneur, mandatory for all facilities Anti-Corruption Rules: Such rules are applicable to the oil and gas industry, in view of the Inter-American Convention against Corruption (Decree 4410/2003) and the United Nations

Practices Act of 1977 (FCPA), which prohibits payments, either directly or indirectly, or the gifting companies or foreign companies listed on the US stock exchange. Thus, proof of a US territorial nexus is not required for the FCPA to be used against US companies, and FCPA violations can occur even if the prohibited activity takes place entirely outside of the US. authorities (Antaq and Capitania dos Portos) and the Central Bank (for foreign exchange agreement registration) that may also apply, depending on the activity being performed.

12.4. Regulatory Agencies

The National Energy Policy Council (“CNPE”) has the main objective of fostering rational use of the nation’s energy resources, ensuring proper functioning of the national fuel inventory The Brazilian National Oil, Natural Gas, and Biofuels Agency (Agência Nacional de Petróleo, Gás Natural e Biocombustíveis – “ANP”) is a federal autarchy connected to the Brazilian Ministry of Mines and Energy and is generally in charge of regulating, contracting, and supervising economic activities encompassed by the petroleum, natural gas, and biofuel industries in Brazil, as well as establishing technical standards for various related activities. Furthermore, according to Article 25, Section 2 of the Brazilian Constitution, states shall develop local services for piped gas, either directly or through state regulatory agencies. Therefore, state regulatory agencies should be responsible for the regulation and distribution of piped gas as dictated by the state in question.

12.5. Granting of exploration and production rights of oil and gas in Brazil

Oil and gas exploration and production rights in Brazil are granted through a public bidding process, conducted by the ANP, pursuant to Articles 8 and 23 of the Petroleum Law and Articles 11 and 18 of the Pre-Salt laws. The bidding is open to foreign investors (either a company or consortium) under the condition that they incorporate a company, under Brazilian law, that has

or the competent state regulatory agency, in the case of natural gas distribution. The direct or indirect acquisition of oil-related interest by foreign and local companies is subject to the approval of the ANP. exploration and production rights, described below: (i) Concession Regime: The concession of oil blocks in Brazil is awarded through bidding rounds that are carried out by terms and conditions to be included in the tender documents.

for the bidding round as operator ‘A,’ ‘B,’ or ‘C’. gas exploration and other production activities. presented: (a) a notarized and complete copy of the articles of incorporation and bylaws of the applicant company registered with the Business Registry (or equivalent competent body) in the place of incorporation; and (b) qn express declaration by the company’s accredited representative that there are no pending litigations, legal proceedings, or other circumstances that could lead to the failure or bankruptcy of the company. Participants from other countries, shall present, in addition to the documents listed above: (a) proof that the company is legally constituted, organized, and that it functions according to the laws of its home country; and (b) an understanding that, in the event that company is successful in the bidding, it will constitute a company with its headquarters and management in Brazil according to Brazilian laws.

program; and (c) local content. ii) PSC (Production Sharing Contracts) Regime: for a proportion of the oil produced. The initial production, generally known as ‘cost oil,’ is sold and between the state and the investor. A signature bonus is used in the PSC system, with the objective of anticipating oil production 83

the contractor must pay to the government upon signature of the PSC. Through this system, the government is able to obtain funds that it would otherwise only have access to when the production Additionally, under the PSC regime, private parties, Petrobras, and even the government are entitled to bid for remaining participating interest in the PSC consortium. Petrobras must be the sole operator, with a minimum of 30 percent participating interest in the consortium, in order to be awarded the production sharing contract (PSC). Under this bidding regime, Petrobras, and the winner of the bid, will incur 100 percent of the and they will have the right to cost oil reimbursement (an amount of oil and natural gas equal to exploration and production costs), subject to what is known as a ‘government take.’ Note that, pursuant to Article 18 of Law No. 12,351/2010, the signature bonus under the

the auction will be the company or companies that propose the highest percentage of interest on or retention, both part of the government take, are not applicable under the PSC regime. It is important to mention that once the companies or consortia are awarded exploration rights and production rights in certain areas, the results of the bidding award are will be published on the

the concession or production sharing agreement, the following company - the one that made the

12.6 Employees Both foreign and Brazilian companies are required to hire local personnel as employees, observing the proportion of two-thirds Brazilian employees to one-third foreign employees in each branch, the main branch, and the agency. This same proportion shall be also observed with regards to payroll. This means that the remuneration received by foreign employees shall be equal to the proportion of foreign employees to Brazilian employees. requirements established by the Brazilian National Immigration Council. The employment agreement, in addition, shall be approved by the Ministry of Labor and Employment (“MTE”).

12.7. Federal, state, and local government compensation For granting companies the rights or concessions to conduct oil and gas exploration and production, federal, state and local governments shall be compensated through so-called ‘government related to the exploration and production of oil and natural gas. Government takes are the following: (a) a signature bonus, which is a lump sum payable in a single installment upon execution of the 84

compensation, payable in the event that high volumes of oil or natural gas are produced, or when a which is a yearly sum to be paid for the occupation or retention of oil prospecting areas. The rates that shall be paid are set forth by the ANP in the bidding documents and concession agreements, and are based on the minimum and maximum amounts established by Article 28 of Decree 2.705/98.

12.8. Exportation Oil and gas are freely exportable in Brazil, and there are no limits or quotas applicable to oil and gas production. The export company must register before the ANP, in accordance with ANP’s Normative Act No. 7/1999. Such registration must be requested by the operator on behalf of the consortia or by each party individually. For each oil and gas cargo load to be exported, the company shall send the ANP a letter outlining how all of the legal requirements established in ANP’s crude oil. Furthermore, the exportation of any goods, including oil and gas, must necessarily be recorded in the national integrated system for international commerce (SISCOMEX), an online instrument and eliminating parallel control in operations. Prices for oil and gas are stipulated according to market price and may vary according to internal and external factors, such as the international economic environment.

12.9. “Repetro” System The ‘repetro’ system is regulated by the RFB Normative Act No. 844/2008 and is a special system of temporary admission of goods, under which companies acquire assets to be used in petroleum activities (equipment and spare parts) and general taxes levied on imported equipment may be suspended once the equipment has entered Brazilian territory. Please see more detail in Chapter 5.

12.10. Rights acquired with the exploration and production of oil and gas Usufruct is the right to the use of a property and the right to enjoy its fruits and income to the exclusion of the owner. Therefore, a usufructuary (company or consortia) that holds oil and gas exploration rights may acquire the usufruct over a licensed area with the goal of developing petroleum activities. However, it cannot dispose of or destroy the resulting fruits or income, according to Article 1394 of the Brazilian Civil Code (Law 10.406/2002). This is usually applicable to onshore blocks, Oil and gas that belong to the concessionaire may be also used as a guarantee to secure the repayment of a debt using a lien on the oil. Under a reserve-based lending structure, a security package may include a guarantee of exploration and production rights or shares in an SPV that owns exploration and production rights.

previous consent of the ANP is required. 85

12.11. Financing and support to oil and gas production: undertaking oil and gas exploration or production. The Brazilian Development Bank (BNDES), for

distribution. Besides, the National Program for Oil and Gas Sector Mobilization (PROMINP), coordinated by the Ministry of Mines and Energy, supports Investment in Credit Rights (FIDC) and anticipates the value of contracts for Petrobrasâ&#x20AC;&#x2122; suppliers prior to the execution of the contracts. Accordingly, have signed a contract with Petrobras. There are additional institutions, such as the Brazilian Entrepreneurs Service (SEBRAE), that

CHAPTER 13 ENVIRONMENTAL ASPECTS 13.1. Authority to create, inspect, and enforce environmental legislation Under the Brazilian Constitution, the federal government has the authority to legislate environmental protection and to inspect and license activities that are or could potentially be However, federal legislation on environmental matters is usually followed and enforced by state and municipal inspection authorities. Government bodies and institutions responsible for the protection and improvement of the environment are part of the Brazilian Environmental System (Sistema Nacional do Meio Ambiente to conduct civil investigations, undertake civil actions in public interest, and prosecute crimes against the environment.

13.2. Environmental liability Environmental liability may apply in civil, administrative, or criminal spheres of law, both separately and concurrently, depending on the unlawful conduct.

company's behalf through a decision made by a company representative.

Civil liability arises from environmental and/or third party losses due to environmental damage.

that defend community interests. Civil liability for environmental damages is objective, and the means, regardless of fault or intent. In addition, all persons who facilitated, contributed to, or created conditions under which the environmental damage occurred are also jointly and unlimitedly liable.

13.3. Environmental licensing Environmental licensing is a procedure by which the environmental authority authorizes the location, installation, improvement, and operation of ventures, real estate, and activities that make use that might otherwise cause environmental degradation or impact.

i. Preliminary license: this license is granted in the preliminary planning phase of the activity to be implemented. This phase includes site approval, the conception of the 87

following implementation phases; i. Installation permit: by the approved plans, the schedule of approved projects, in addition to all environmental control actions and other conditions established by environmental authorities; and i. Operating license: a license that authorizes venture operation. Environmental licenses are granted by SISNAMA bodies, including the Brazilian Environmental and Renewable Natural Resource Institute (IBAMA), which is authorized to issue licenses for (a) ventures that could potentially impact the environment, (b) activities performed on indigenous land, in territorial sea, on the continental shelf, or in the exclusive economic zone, and (c) nuclear activities. Regarding local activities, state environmental bodies regulate ventures whose environmental impacts do not exceed state borders, while municipal environmental authorities regulate local activities with environmental impacts.

13.4. Sustainability statutes have been enacted as a result. The authority that inspects potentially pollutant activities is protection of the environment and natural resources is continuously growing. This environmental awareness originated internally, as a consequence of the enforcement of Brazilian legislation, but also from external factors, to the extent that the social conduct of companies is being closely observed and monitored by the international community, which includes product consumers, clients, lenders, the domestic public, and other partners.The concept of sustainability has been widely discussed in recent years, exploring ways to create wealth that will not jeopardize the environment while, at the same time, seeking to improve the quality of life of community and future generations.

13.5. Legal Counsel Our experience in recent years has demonstrated that establishing strategic lines of action with our clients and partners is indispensable in the modern corporate world: i. Procedural Environmental Strategies: Analyze situations where violations could occur, starting in the initial phases of the project, and evaluate all mitigating and aggravating elements before deciding on the best strategy to be implemented, always with the primary focus on the protection of the client. i. Administrative and Judicial Defenses: environmental matters, such as in the case of Notices of Violation and Administrative Proceedings. Also, environmental mitigation and compensatory actions are recommended in order to reduce and mitigate possible environmental damages and reduce an eventual penalty.

i. Environmental Commitment Instruments: Look to Administrative or Judicial Consent Decrees, instruments that are by nature executable out of court, as provided in Law 7.347/85. Through these decrees, the concerned party can voluntarily formalize its

intention to prevent damage, conform to legal requirements, and fully redress all damage that it may cause. Based on technical and legal analysis, Consent Decrees are prepared and entered into by the parties (the company, the environmental authority, and/or the Public

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