The government announced in July 26th a package aiming at: (i) simplifying exporters’ transactions, (ii) reducing exportation’s costs, and (iii) enabling tainted capital’s registration before the Central Bank. This last item seeks to regulate foreign investments made in Brazil without the due investment registration process before the Brazilian Central Bank, as well as to address the increasing demand for foreign currency related to transfers of profits and dividends outside of Brazil.
The tainted capital represents the capital of non-resident investors that: (i) was made in breach of Law #4.131/62, or (ii) was not permitted to be registered before the Brazilian Central Bank as foreign direct investment. The lack of Central Bank registration foreclosed the companies to remit dividends and repatriate capital to the foreign investors. There is an estimate that 1% to 2% of the total investment made by traditional multi-national companies that operate in Brazil for decades are in this situation, which may represent about US$ 10 billion.
The problem of the tainted capital appeared with the enactment of Law #4.131/62, which established the obligation to register foreign investments. At the time, many companies were not able to gather all the documentation necessary to the confirmation of funds entrance in reference to direct investment.
According to the new rules, the registration will be done exclusively in national currency and will comprehend unregistered capital and those subject to any other form of registration before the Central Bank, provided that: (i) the corresponding value has been regularly accounted for by the receiving company until 12/31/2004 in accordance with Brazilian GAAP, (ii) all the tax obligations have been properly discharged.
The following situations are encompassed by the new measures and permit the registration of the tainted capital: (i) conversion of the registered debts before the Central Bank with discounts determined by the National Monetary Council; (ii) reinvestment of profits from unregistered capital; (iii) change in the conditions set forth by the Central Bank, which considered, with regard to registration, the equity value instead of the market price; and (iv) corporate reorganization involving unregistered capital (mergers, acquisitions and spin-offs).
This new package also provided for: (i) funds in foreign currency from exports may be maintained abroad, but the initial limit is 30%, (ii) the exporter will no longer be required to pay CPMF over funds retained abroad, (iii) currency exchange contracts related to exportation may be executed in a simpler manner, (iv) the use of standardized forms in purchase and sale operations of foreign currency up to three thousand dollars, and (v) payments in reais will now be allowed in the duty-free shops located at ports and airports.Azevedo Sette is closely following the developments of this matter and its consulting team is available to provide additional clarifications about the topic.