Direct and Indirect Investment in Brazil: Remittance, Repatriation, and Reinvestment

Editor’s Note: This is a continuation of Olavo Bernardes’ work.

In our previous post, we had the opportunity to study how foreign capital enters the country. In this current article we will discuss the types of foreign investments and more importantly how foreign capital can leave the national territory.

1. Indirect/Market Investments

Foreign investments in Brazil can be divided in two types: direct and indirect (also known as market investments). We will not discuss this second type of investment in this essay, except to note it is not welcome under the current system. Indirect or market investment (investimento indireto ou de mercado) is the so-called (and criticized) speculative capital (capital especulativo). It is known for entering and leaving the country fast, normally by a mere matter of rumors on the particularities of the given country. Some call “hot money” or “smart money,” and government authorities perceive, especially given the recent prominence of the country, as something to be tolerated, but never fully accepted. Its existence can come in many forms as it is defined by the National Monetary Council (Conselho Monetário Nacional – CMN)’s Resolution nº 2.689/2000, which defines indirect investments among others as companies’ debentures, shares, bonuses and stocks owned by foreigners not residing in Brazil and obtained by operations in the financial and/or stock market.

2. Direct investments

Direct investments (investimentos diretos) are, in the definition of José Eduardo Carneiro Queiroz, “investments as direct foreign participation in certain types of national businesses and exposition to highly identifiable risks, as long as not made through the stock market.” Those are the kind of investments the country wants, since they are perceived to generate jobs.

a) Remittance of Profits

Until 1996, profits gained in Brazil and remitted abroad were subject to withholding taxation of 15% (the same rate that applies to corporations, in general). Currently, the profits or dividends calculated using as basis the results generated starting in January, 1996, paid or credited by legal entities taxed under the real, presumed or arbitrated profit, are not subject any longer to the withholding of income tax and are not part of the basis of calculation of the beneficiary’s income tax, residing in the country or abroad (Lei nº 9.249/95, art. 10).

As mentioned before, companies established with foreigner capital or foreigners residing in Brazil are subject to the same taxes as anyone else. If a company wants to remit money abroad, it may do so, at the end of its fiscal year, after paying the proper contributions and taxes to the government.

Nevertheless, those remittances can be made beforehand, along with the anticipated distribution of profits and dividends, as long as authorized in the company’s statute or by-laws (which can happen by end of a trimester, quarter, semester, etc.).

Remittances in currency do not depend on any previous authorization by governmental authorities (both in and out of the country). All the investor has to do is remit its investment through a banking establishment and operate using the official rate.

b) Reinvestment of Profits

Reinvestments of profits are the profits generated by national companies that are reinvested in the same company that generated them or in other sector of the economy (Art. 7º, Lei 4.131/1962). To reinvest profits, the foreigner investor must register those profits as foreign capital. In other words, it must act in the same way when it performed the initial investment, increasing the company’s basis of calculation for tax purposes (including for future repatriations).

c) Repatriation of foreign capital

According to Article 690, II, of the 1999 Income Tax Regulation Rules (Regulamento do Imposto de Renda de 1999 – RIR/99), the repatriation of foreign capital can be made at any time back to the country of origin, however it has to be duly registered before the Brazilian Central Bank (Banco Central do Brasil – Bacen). If the capital to be repatriated is larger than the capital initially registered, such difference shall be considered capital gain, being subject to the 15% withholding income rate.

d) Particularities of Sending Money Abroad

Different taxation treaties among Brazil and foreign countries may permit for the income tax to be taxed only once and restituted if taxed twice. Given the withholding rule, the payer/sender located in national territory is responsible for deducting the income tax, not the receiver of the income located abroad. According to latest income tax rules, brackets may vary from 15% to 25%, depending on the purpose of remittance (payment for services, capital gain, etc.) In general the rule goes the opposite way – the provider of services is responsible for deducting and paying income taxes. Another exception is for employees; the employer is responsible for deducting all taxes and social contributions due to the employee at the time of payment.

Regarding remittance of profits, given the double taxation rule, profits remitted abroad are not taxed, since they had been taxed before, when there is a distribution of profits and dividends. They have to be, however, declared in the legal entity’s annual income tax declaration. Also given recent rules by the Central Bank, all companies retaining foreign capital must declare the exact amount before that institution, until November 1, 2011 (Circular 3,559 of 19 September 2011).

Finally, it is worth mentioning that the remittance of foreign currency abroad for the purposes of investments by Brazilian entities is totally tax free (Articles 8, 9 and 10, Resolution nº 3.568/2008, part of the International Exchange and Capital Market Regulation – Regulamento do Mercado de Câmbio e Capitais Internacionais - RMCCI). Under the previous rules, transactions above US$ 5,000,000.00 (five million US dollars) required previous approval by the Bacen.

After this article, we will look at the particularities of dealing with investments inside the country.

Defining and Registering Foreign Capital for Investing in Brazil

- Ed. Note: Continuing series from Olavo Bernardes.

In 2010 Brazil received 48.4 billion US dollars in direct foreign direct investment, placing the country in fifth place in terms of direct foreign investment, after the United States, China, Hong Kong and Belgium. That was a growth of 84.6% compared to the previous year, accordingly to a study by the United Nations Conference on Trade and Development(“UNCTAD”).

A number of factors have contributed to this massive amount of investment. Some of those factors include the economic stability achieved, growth of the middle class, rating of Brazilian government bonds as “investment grade,” planning and construction of large infrastructure projects (largely due to the upcoming World Cup and Olympics). Also, the volume of remittances has never been higher, reaching US$ 18.768 billion according to statistics from the Brazilian Central Bank.

But what does “foreign capital” mean in the eyes of the Brazilian legal and regulatory regime? And how should foreign investors register their capital when investing in Brazil? Both of these questions are crucial to foreign investment in Brazil.

a) Definition of Foreign Capital

Law 4.131, from September 3, 1962, and its regulatory decree, Decree 55.762, from February 17, 1965, define as foreign capital, “the goods, machinery and equipment entering in the country, without an initial relocation of assets, destined to the production of assets and services, as well as financial or monetary resources entered to be applied to such activities, belonging to individuals or legal entities, residing or headquartered abroad.” These laws pre-date the 1988 Brazilian Constitution, which accepted the above definition.

As mentioned in a previous post, Article 172 of the Brazilian Federal Constitution states that “[t]he law shall regulate, based on national interests, foreign capital investments, shall encourage reinvestments and shall regulate the remittance of profits.” Article 5 of the Constitution further applies to foreign capital by guaranteeing particular rights. Article 5 established the principle of equality, providing equal protection and equal rights to all citizens and foreigners residing inside Brazilian territory; there is no discrimination between foreign and national capital, treating both equally.

This definition and guarantee of treatment is important. Especially concerning laws regarding taxation, any tax that treats foreign capital differently is per se unconstitutional because it violates principles of equal protection under the laws and equality of treatment.

b) Registration of Foreign Capital

All foreign capital in the form of foreign direct investment (investimento estrangeiro direto) must be registered before the Brazilian Central Bank. In order to regulate the capital that enters the country, Law 4.131 of 1962 attributed such function to the Credit and Currency Bureau (Superintendência da Moeda e do Crédito or “SUMOC”) until March 31, 1965, when the then recently created Brazilian Central Bank (Banco Central do Brasil or “BACEN”) took over such role. The BACEN issues a certificate of registration, reflecting the amount invested in foreign currency and its equivalent in national currency. Such certificate is necessary and obligatory for future remittances of profit abroad, repatriation of capital invested and registration of reinvestment of profits, as we shall see in future works.

Registration includes the following: a) foreign capital that enters the country under the form of direct investment or loans, whether in regular currency, or assets; b) remittance made abroad as capital gain, profits, dividends, interests, as well as royalties for the payment of technical assistance, or of any other title that implies transfer of profits abroad; c) reinvestment of foreign capital profits; e) changes in capital of monetary gain of companies proceeding of agreement with the legislation at stake; and the foreign capital and respective reinvestment of profits already existing in the country on September 27, 1962.

Registration is a simple procedure that can be done electronically using a BACEN registration program (Registro Declaratório Eletrônico or RDE). Given the nature of the registration, the person registering is legally responsible for any incorrect or incomplete information.Non-residents can register through representatives, which is normally the company receiving the foreign investment.

The registration of foreign capital must be in the currency of the country of origin, and when reinvesting the profits from the initial investment of foreign capital, the investor must carry out the same registration process. This registration must be in the Brazilian national currency and in the currency of the country to which it would be remitted. The reinvestment is subject to the exchange rates at the time of the registration of the reinvestment.

If the capital is represented by an asset, registration must use the price of the country of origin, and in the lack of satisfactory proof, according to values estimated based on market price by the recipient company.

c) Exchange rates and Additional Information

In terms of exchange rates (US Dollar-Real/Euro-Real),there are two authorized rates by the BACEN: the commercial/financial rate (câmbio comercial/financeiro) and the tourist rate (câmbio turistico). For foreign investments, the commercial rate normally applies.

Finally, it is important to observe that investments can be made in two ways, either by foreign exchange contracts or by international transfers in the Brazilian national currency (Transferências Internacionais em Moeda Nacional or “TIMN”).

The registration process is a fairly easy process that foreign investors should not forget. Failure to register (or register incorrectly) foreign capital and reinvestment can lead to heavy fines and taxes assessed by the relevant agencies. In future posts, we will discuss the remittance and repatriation of foreign investment, equally important topics when investing in Brazil.