By Alberto Murray Neto, Fabrício Polido and Tatiana Erhardt
Paulo Roberto Murray - Law Firm
LEGAL BULLETIN
Real Estate Transactions in Brazil and
Acquisition of Rural Lands by Foreign Entities
Brazil has undoubtedly become one of the most important countries amongst emerging BRICs and a friendly environment for attracting, receiving and hosting the recent growing waves of foreigners and foreign investments worldwide.
Official figures share the information that the ongoing population of foreigners living in Brazilian territory stands at more than one million people. Indeed, the importance of this group of people in the daily life of Brazil, in the economy, culture and in many other sectors and activities, is unquestionably remarkable.
Far beyond of the scope of Art.5 of the Federal Constitution of 1988, foreigners in Brazil are accorded exactly the same rights as Brazilians, such as the inviolable fundamental rights to life, equal treatment, security and property. In addition, Article 190 of the Constitution states that statutory law shall govern and limit the purchase or lease of rural real estate property by foreigners, whether individuals or legal entities, and shall determine the particular cases in which authorizations from the National Congress and Brazilian National Institute of Agrarian Reform and Colonization – INCRA - will be required.
It is important to highlight that Brazilian laws do not forbid ‘per se’ the purchase of rural estate by foreigners domiciled in Brazil, or even by locally established legal entities owned by foreign capital. However, whereas on the one hand the law allows such purchases, on the other hand it sets out some statutory limitations with which buyers and sellers have to comply.
As further discussed in this Legal Bulletin, this special matter is governed by Law No. 5.709 of October 1971, which sets forth the modes of acquisition and establishes general rules and conditions for their implementation. This encompasses all foreigners residing in the country, foreign legal entities authorized to operate in Brazil as well as Brazilian legal entities that have in their equity the majority capital owned by a foreign individual or legal entity.
A) Law No. 5.709/71 and mandatory limitations for acquisition of rural real estates located in Brazil by foreign companies.
1. The relevant general rules governing acquisition of real estates and transfer of property under Brazilian Law are established by the Civil Code of 2002. In this perspective, foreign individuals and legal entities can acquire any real estate property in Brazil in the same conditions as those afforded to nationals (individuals and companies), but subject to mandatory limitations regarding: i) the scope of the real estate transaction, ii) the area involved in the acquisition and iii) the place where the real estate is located.
2. For instance, mandatory limitations for cross-border real estate transactions are established in case of acquisition of real estates located in the coast or in the areas of border of Brazil and specific areas which are considered of national security (see Law nº 6.634/79).
3. With regard to foreign individuals and legal entities, Law No. 5.709/71 set forth the legal regime for regulation of cross-border real estate transactions involving any rural property located in Brazil. They refer to those transactions in which a foreign individual with residence or foreign company authorized to operate in Brazil is party. Transactions of such nature are governed by the provisions of Law No. 5.709/72 and have to be subject to the prior approval of INCRA - Brazilian National Institute of Agrarian Reform and Colonization.
4. For foreign individuals having habitual residence in Brazil, Law No. 5.709/71 establishes a threshold of an equivalent area of 50 (fifty) units of rural property, which are named “rural units” (“módulos rurais“) or “units of indefinite exploitation”. The area correspondent in “hectares” of each “rural unit” is fixed by the Executive Branch and by the laws of each State of Federation, ranging from 5,0 ha. (five hectares) to 100,0ha (a hundred hectares), depending upon the administrative region where the rural property is located (North, Center-West, Northeast, Southeast and South of Brazil) and particular economic and environmental conditions of this region. Foreign individuals with permanent residence overseas are not entitled to acquire rural real estates in Brazil, except in those cases related to inheritance rights by legitimate succession.
5. In the same token, Law No. 5.709/71 establishes that foreign legal entities authorized to operate in Brazil are solely allowed to acquire a rural property in Brazil if the main purpose of the transaction is related to the implementation of “agricultural, cattle-raising, industrialization or colonization projects” in the acquired real estate. Said projects must be linked to the purpose of the foreign legal entity (irrespectively of the legal formed vested, whether an association, limited liability company, corporation, foundation or trust) and shall be prior authorized by the Ministry of Agriculture, the regional administrative bodies (“prior approval review”) and also, in case of industrial projects, by the Ministry of Industry and Commerce. Thus, this is still a complex procedure which depends mainly upon the decision of the Ministry of Agriculture, which is effected by INCRA.
6. According to the provisions of Law Nº 5.709/71, the acquisition of a rural real estate comprising 1 to 3 “rural units” is not subject to this special legal regime for cross-border real estate transactions in Brazil. Acquisitions of rural estates comprising 3 (three) to 50 (fifty) “rural units” by foreign individuals or of areas comprising 3 (three) to 100 (hundred) “rural units” by foreign companies authorized to operate in Brazil are governed by Law Nº 5.709/72 and are subject a prior review procedure by the Ministry of Agriculture and its INCRA.
7. On the other hand, any transaction involving the acquisition or a rural lease of a rural real estate comprising a total area superior than 50 (fifty) “rural units”, by individuals, and 100 (hundred)”rural units”, by foreign entities, must be submitted to the Brazilian National Congress. This is emphasized by the provisions of Law No. 8.629/93 establishing further requirements for the acquisition and lease of lands by foreign companies, such as the obligation of prior notification to the National Congress of real estate transactions involving more than 100 (hundred) ”rural units” or “units of indefinite exploitation”.
8. Besides the authority of INCRA and National Congress over the clearance of those transactions involving the acquisition of rural lands in Brazil by foreigners, Land Office Registers operating in the jurisdiction of the place where the real estates are located also have the obligation to regularly inform the Justice Controllers of the Federal States and the Brazilian Ministry of Agriculture about the list of the acquisitions of rural real estates by foreign entities.
B) Companies incorporated under Brazilian Law having foreign capital as buyers of rural lands.
1. Until 1995, the legal regime applicable to the acquisition of rural real estates by “foreign legal entities authorized to operate in Brazil” was equally extended to any legal entity incorporated under Brazilian Law that had foreign individuals or entities as owners of the majority of the social capital. The Constitutional Amendment No.6 of 1995 (EC 6/95), however, changed Article 171 of Brazilian Federal Constitution of 1988, which prior established a distinction between: i) companies incorporated under Brazilian Law and with main seat in Brazil, irrespectively of the nationality of the ownership of the capital, and ii) Brazilian companies having corporate interests owned by nationals (“national companies”). It is important to remark that according to the Civil Code of 2002 any company incorporated under Brazilian Law and owned by foreigners – individuals or companies - is considered a “Brazilian company”.
2. Since this constitutional distinction and criteria regarding the nationality of the capital of the companies ceased to exist after the enactment of the EC No. 6/95, INCRA adopted a different interpretation of the application of the provisions of Law Nº 5.709/71. This approach has been reflected in legal opinions issued by the Brazilian Federal General Advocate – “AGU” (Legal Opinion AGU/LA04/94 and Legal Opinion GQ 181, of 17th December, 1998). In sum, those opinions recognized the legality of acquisition of rural lands by Brazilian companies, thus incorporated under Brazilian Law, but having foreign equity
3. The practical results of this approach of INCRA since 1996 led to a favorable environment in which any company incorporated under Brazilian Law having foreign quota holders or shareholders with their habitual residence, seat or place of business overseas (individuals or companies) were entitled to acquire rural real estates in Brazil without the relevant mandatory limitations imposed by Law Nº 5.709/71.
4. For “foreign individuals with permanent residence” or “foreign legal entities authorized to operate in Brazil” however those limitations have been always maintained and were verified in a case-by-case analysis. Any transaction infringing the provisions of Law No. 5709/71 is void and null (Article 15) and the competent Registers of Deeds and Land Office Registers shall not be allowed to proceed with the registration of the relevant agreements and titles of acquisition of the rural lands in case the foreign acquirer have not complied with the mandatory limitations established by that Law.
C) Changing scenario – the new opinion of Brazilian AGU (August 2010) – returning to the ‘staus quo’ of Law No. 5.709/71.
1. Even before the emergence of the global financial crisis in the end of 2008, INCRA signalized that Brazilian AGU would review those legal opinions concerning the scope of application of Law No 5.709/71, particularly because some sectors of Brazilian government were sustaining a narrow interpretation to the current regulation on ownership of rural lands by foreigners.
2. In fact, the General Attorney Office issued a new opinion on August 2010, overruling the mainstream approach within the governmental bodies, administrative agencies and all entities which are directly subject to the Executive branch in Brazil, such as INCRA, the Land Office Registers, public (publicly owned) banks and enterprises. This opinion was published in Brazilian Federal Gazette nº 161 (under the quotation AGU/LA 01/2008), as of August 23, 2010, and, according to Articles 40 and 41 of the Complementary Act No 73/1993, this opinion is binding to all entities of the public administration bodies and Executive branch.
3. In sum, this opinion, which was further approved by Former Brazilian President Lula, contends that Art. 1º, § 1º, of Law No 5.709/1971 (establishing legal provisions on limitations to acquisition of rural lands in Brazil by subsidiaries or companies with foreign capital ownership/equity) was incorporated by reception by Brazilian Constitution of 1988. As afore remarked, this was also applicable to the remaining constitutional provisions even after the Constitutional Amendment N.6 of 1995, which suppressed the distinction between “Brazilian companies” and Brazilian companies owned by foreign entities or owned by foreign quota holders/shareholders exercising the corporate or voting control.
4. Thus, the legal opinion at stake assimilates the existing statutory limitations for acquisition of rural lands by foreigners to any sort of transaction involving the acquisition of rural lands by Brazilian companies having foreign owners – individuals or companies – representing or exercising the majority of quotas/shares and voting control and residents or with seat of business overseas.
5. This is clearly a return to the old approach of the practice of government bodies prior to the enactment of the Constitutional Amendment No.6. We explain: basically, it is a return to the “status quo ante”, which in fact is in compliance with Law N. 5.709/71, but questionably not consistent with Brazilian Constitution of 1988, pursuant to its current provisions.
6. With regard to its practical effects, AGU´s opinion is binding to Land Office Registers and INCRA and those entities are requested to perform the legal duties according to Law N. 5.709/71. In the case of Land Office Registers, authorities are requested to deny, refuse or cancel any registration or recordal of a purchase and sale transaction which was closed by the parties (buyer and seller) without complying with the requirements set forth by the Law (i.e., basically the request for authorization submitted to INCRA).
7. It is important to remark that the “majority of capital stock” was construed and interpreted according to Art.116 of Brazilian Corporate Act of 1976, which sets forth the concept of “corporate control” under the rule of “majority of capital stock”. According to said provision, corporate control is deemed to be vested in the person or entity having the ownership ensuring the “power to lead and control the relevant decisions of the company, elect the members of the Board of Directors, to lead the company’s corporate activities and to orientate the operation of the company’s main bodies”.
8. The legal opinion considers that this case also falls within the scope of any legal entity with majority capital stock owned by foreigners (individuals or legal entities), and with habitual residence or seat in Brazil, hence incorporated under Brazilian law – what is also the legal status of Brazilian companies having foreign capital in their stock.
9. Turning to the effectiveness of the statutory limitations, a re-interpretation of Art.1, §1, of Law nº 5.709/197, will result to the following conclusion, that is to say that any acquisition of rural land by foreigners must be submitted to the approval by INCRA and, in some cases, to National Congress. Under the Rural Land Acquisitions Act, said transactions are invariably subject to statutory limitations.
D) Concluding Remarks
1. This article briefly approaches some relevant information and legal analysis concerning the mandatory limitations for acquisition of rural real estates by foreign individuals and legal entities in Brazil. It is mainly based on the interpretation and application of relevant provisions of Brazilian Federal Constitution of 1988, Civil Code of 2002 and Law No. 5709/71 which regulates the acquisition of rural real estates by a foreigner resident in Brazil or foreign legal entity authorized to operate in Brazil, as well as the practice of the governmental bodies having power to authorize said real estate transactions.
2. As prior mentioned, any real estate transaction involving the acquisition of a rural land by a foreigner with permanent residence in Brazil or a legal entity authorized to operate in Brazil is governed by Law No. 5.709/71 and is subject to the prior review of INCRA and, in some cases, the approval by the National Congress. This obligation is only exempted in case of acquisition by foreigner individuals of areas comprising between 1 and 3 ‘rural units’, which may amount 3 to 5 hectares, depending on the region of Brazil.
3. Foreign companies as such can only acquire a rural real estate in Brazil when the main purpose of the transaction is bound to the provisions of Law No. 5.709/72, namely the implementation of “agricultural, cattle-raising, industrialization or colonization projects” in the acquired real estate, duly approved by INCRA (Art. 5). In addition, any foreign entity operating in Brazil – even as ‘foreign’ owner of immovable goods or investor - must comply with the procedure of administrative authorization set up by Executive Branch, under the competence of National Department of Registry of Commerce (DNRC).
4. Due to the complexity involving those clearance review procedures, the most recommendable method for cross-border rural real estate transactions in Brazil is that related to the acquisition of the land by a Brazilian subsidiary of the foreign company. But even in those cases, the intended acquirer, i.e. a company duly incorporated under the laws of Brazil and affiliate entity of the foreign company, is recommended to apply for a request of authorization (clearance) before INCRA. This applies for transactions occurring after the approval of the new opinion of Brazilian General Attorney Office (AGU), by which governmental bodies are bound to comply with the requirements established by Law No. 5.709/71
5. Some issues are still inconclusive with respect to the Opinion issued by AGU on August 2010. First, there is a main consensus that the Office has no powers to legislate: there must be an amendment to the statutory law in order to adjust it with the 1988 Brazilian Constitution or a new amendment to the Constitution itself. Furthermore, Brazilian companies owned by foreign capital are accorded with same level of protection and treatment as those granted to Brazilian companies owned by national capital. This is result of a constitutional provision and must be as such respected.
São Paulo, April 2011
****
Alberto Murray Neto – amurray@prmurray.com.br
Tatiana Guimarães Erhardt - tguimaraes@prmurray.com.br
Fabrício Bertini Pasquot Polido - fpasquot@prmurray.com.br