- Note: Olavo is going to continue posting on some of the more technical topics regarding Brazilian law and investment. This post is first of two describing the Brazilian judiciary, how it functions, and some of the changes we will likely see in the future. It is interesting to note the role of foreign investors encouraging change.

There is no legal conference around the country where Justices (Ministros) from both the Supremo Tribunal Federal (“STF”) andthe Superior Tribunal de Justiça (“STJ”), the highest courts in the country for constitutional and non-constitutional matters, respectively, don’t complain about the amount of cases receive. In response, the courts and legislature are pursuing several measures to change this picture. But to understand where the burden comes from and how it can be resolved, it is helpful to first look at the judiciary in general and how cases arrive at the highest courts.

Brazil has state and federal courts (the so called ordinary branch – justiça ordinária) in addition to electoral, labor, and military courts (the so called special branch – justiça especial or justiça especializada).

Ordinary Branch

• The highest court for non-constitutional matters (above state and federal courts of appeal) is the STJ. In most cases, the STJ is the highest court that will make a decision. The STJ was created by the 1988 Federal Constitution to help to lower the number of cases that reach the STF.
• A case reaches the highest court in different ways. For a claim to reach the STF, the party has to show the case deals with a direct violation to the Federal Constitution. Most civil procedure matters, for instance a domestic arbitration dispute, will only reach the STJ, because even though they may deal with a violation to the Constitution (i.g. due process), such violation is indirect.
• Another requirement for a case to reach the STF is the so called prequestionamento (all topics have to be stated in the decision made by the lower court), exhaustion of all other types of appeals (exaurimento de recursos), and that the party, as mentioned, demonstrates a direct violation to the constitution.

As a matter of practice, a party always has to appeal to both higher courts (STF and STJ) if it wants to have its claim heard.

Special Branch

• All courts in the special branch have higher courts. Their decisions (and STJ decisions) tend to be final, unless overturned by theSTF due to constitutional issues.

Exceptions: Original and Extraordinary Jurisdiction

Original jurisdiction means the case starts in the appellate court and not in the lower courts. Superior (STJ), Extraordinary and Appellate Courts (Courts of Appeal, Regional Federal Courts) can have original jurisdiction over some matters. In this sense, a crime (either a felony or a political crime) committed by a member of the National Congress is judged by the STF, not any lower court. A crime committed by the governor or by members of the State National Assemblies is judged by the State Courts of Appeal (Tribunais de Justiça or “TJs”).

The STF and STJ may also have appellate jurisdiction, instead of extraordinary and special jurisdiction, respectively. In this sense, a first degree final ruling in a political crime starts in the lower court but is then appealed directly to the STF, instead to a federal court of appeals – known in Brazil as a Regional Federal Court, Tribunal Regional Federal – TRF, since it has jurisdiction over a certain region of the country, not only over one particular state (what is known in the US as circuit).

In the same fashion, a final decision that deals with a foreign state or a foreign entity versus Brazilian municipalities or residents is appealed directly to the STJ.

Concluding Remarks

Despite the very large court system in Brazil, historically, the number of appeals that reach the STF in its capacity as a court of appeals was extremely high (more than five thousand a year as recently as five years ago). The vast number of procedural measures, the large size of the Brazilian Federal Constitution (which has 250 articles and several amendments), and the many articles within that document allowing for cases to start directly at that court – i.e. the STF has original jurisdiction to rule on any type of crimes (political or felonies) committed by members of the National Congress, by the President, the Vice-President, State Ministers and the Attorney General (article 102, b),– has created lots of cases for the STF. In addition to ordinary appeals, the cases arising from original jurisdiction overflow to the 11 Supreme Court Justices who could be occupied with different matters.

In recent years, different measures have tried to change this situation, as we shall see in a future post. Most were motived by criticism from foreign investors regarding the slowness of the Judiciary Branch and were consolidated in the Constitutional Amendment 45 of 2004 (Emenda Constitucional – EC – 45/2004). This amendment plus additional reforms have greatly changed the Brazilian court system, and these changes will be the focus of our next post on this subject.

- Editor’s Note: Olavo Bernardes, a Brazilian attorney studying for his LL.M. at the University of Miami, will be writing a series of articles on some of the basic concepts regarding investment in Brazil. The series will be rolling out in the coming weeks. It promises to be both practical and insightful. Enjoy!

With the world’s attention focused on Brazil, more people want to have a general idea of how to invest in the country. Through a series of articles we intend to enlighten on the general rules and difficulties to invest in the once called “sleeping giant.”

Brazil is a Federal Republic, comprised of 26 states and one federal district, Brasília. Unlike the United States, state rights are more limited and the numbers of topics states can legislate on are more reduced. However, as in the United States the Federal Government has the exclusive jurisdiction to legislate on “foreign exchange (VII); foreign and interstate trade (VIII); nationality, citizenship and naturalization (XIII) and emigration, immigration, entry, extradition and expulsion of foreigners” (XV). Article 22 of Federal Constitution – Constituição Federal – CF.

States on the other hand have so called concurrent jurisdiction to legislate, among others topics, on “tax, financial and economic law” (Article 24, I, Federal Constitution – CF). We shall analyze the tax structure of the country in future essays.

The Brazilian Constitution, although establishing free enterprise as the basis of its economic order (article 170, CF), has a strong social orientation, and in accordance with the dictates of social justice and to ensure a life of dignity to everyone, has the following principles: national sovereignty (I); private property (II); the social function of property (III); free competition (IV); consumer protection (V); and environmental protection (VI).

Those principles create the basis for a stronger interference by the state in matters such as expropriation for the improper use of land – i.g. the growth of illicit drugs –, and “disappropriation” for public use, i.g. for the purposes of agricultural reform or building a road. An important difference is that in expropriation there is no compensation, since the owner of the propriety acted criminally, while in disappropriation compensation is due. Also large projects normally require environmental licenses, products may be deemed harmful to consumers, etc. Finally given national sovereignty, foreigners may have limitation on certain investments, such as land located close to the borders or lands of a sizable amount. Another limitation is that foreign nationals and entities may not maintain a majority (more than 30%) or control broadcasting companies (article 222, Federal Constitution).

Article 172 of the Brazilian Federal Constitution states that “the law shall regulate, based on national interests, foreign capital investments, shall encourage reinvestments, and shall regulate the remittance of profits.” Extracting from these words, a foreign investment may be direct, meaning by the constitution of a type of society in the country, or indirect, by the purchase of stocks and bonds.

Although, Brazilian law does not discriminate between foreign and national capital, we shall see in future works that there has been a strong attempt by the government through different ministerial directives to contain merely speculative capital, the so called “hot money.”

Regarding reinvestment and remittance of profits, in general, currently there are no limitations to remittances of profits abroad. Therefore, a foreign branch duly established in the country wishing to send profits and gain abroad may do so, as long as it register its initial capital.

All foreign capital must be registered before the Brazilian Central Bank that issues a registration certificate reflecting the amount invested in foreign currency and the correspondent amount in national currency. This certificate is necessary for the reinvestment and repatriation of capital and for the registration of reinvestment of profits.

A foreign entity wishing to remit profits abroad may do so, without having to pay income tax, or leave a certain percentage in the country. There are no limitations in the current system for remittance of profits.

However, capital gains in the repatriation of capital are subject to pay corporate income tax of 15%. When the capital to be repatriated is larger than initially invested it shall be considered capital gain (Law nº 9.249, article 10).

Finally, it is worth mentioning that Law n° 4.131, of 1962 required the full equality between national and foreigner capital. There are registration requirements for the last, as we shall discuss in future articles.

To read the Brazil Federal Constitution (Constituição Federativa do Brasil) in English please access http://www.v-brazil.com/government/laws/constitution.html