Bank Financing

Last verified on Tuesday 6th March 2018

Brazil

António Manuel França Aires, Fabio de Almeida Braga and Antonio Giglio Neto
Demarest Advogados (São Paulo)
  1. 1.

    What are the most common forms of bank financing in your jurisdiction?

  2. The most common forms of bank financing in Brazil in local currency are: working capital finance, real estate finance, export finance, including advance on foreign exchange agreements (ACC), rural credit and consumer loans. Despite being less relevant, other common transactions based on fundraising in the local market are: revolving credit facilities, discount of receivables, vendor or purchaser financing, credit assignments and financial lease.

    As to forms of bank financing in Brazil based in foreign currency, the most common transactions are foreign loans, import financing, pre-export financing and international issuance of bonds.

  3. 2.

    Are any governmental or central bank registrations or approvals required for a foreign lender (being a lender not incorporated in your jurisdiction or operating through a branch or office outside of your jurisdiction) to lend to a borrower in your jurisdiction?

  4. There is no restriction for a foreign lender to lend to a Brazilian borrower without being locally registered, licensed or otherwise authorised to operate in Brazil.

    As to the inflow of funds into Brazil, the amounts, terms and conditions of the credit facility must be registered with the System of Information of the Central Bank of Brazil (SISBACEN) through the Financial Transaction Registry (ROF). Additionally, in order to provide such registration with the SISBACEN, a foreign lender must be enrolled with: (i) the Brazilian Corporate Taxpayers’ Register (CNPJ), which does not entail any obligation to pay taxes in Brazil on its overall income; and (ii) the Central Bank of Brazil’s Companies Database (CADEMP).

    Theoretically, SISBACEN may automatically submit the terms and conditions of the transaction for a detailed review by the staff of the Central Bank of Brazil (BCB). In such case, BCB will have a five-day period to review the transaction, during which the foreign exchange agreement (sale of the incoming foreign currency against local currency) may be executed, and the funds cannot be made available to the Brazilian borrower. Despite the fact that BCB holds discretion to require amendments to the loan conditions, from our experience, this hardly ever happens.

  5. 3.

    Are there any foreign exchange provisions restricting, or governmental or central bank registrations or approvals required for, a borrower in your jurisdiction to contract debt obligations in a foreign currency or to remit funds abroad?

  6. Currently, there are no exchange controls in place that restrict a borrower to contract debt obligations in a foreign currency or to remit funds abroad. Nevertheless, only after the foreign lender and the loan transaction have been duly registered with SISBACEN, as per question 2, may the foreign lender transfer the relevant funds to the Brazilian borrower.

     As a general rule (with certain exceptions such as insurance companies when operating internationally, and diplomatic representations), individuals and companies domiciled in Brazil are not allowed to have bank accounts in a foreign currency in Brazil. Thus, as soon as the wire transfer reaches a Brazilian commercial bank, a foreign exchange agreement must be performed to convert its amount in local currency. Where there are any remittances or payments to be made into or out of Brazil, Brazilian currency will have to be converted into local or foreign currency, respectively, and such foreign exchange transactions may only be carried out by financial institutions duly licensed with BCB to operate in foreign exchange markets. 

    As for exchange rates, Brazil adopts the “managed” or “dirty float” system, with BCB occasionally participating in the market (buying, selling, swaps) to influence the direction of the value of the Brazilian real in order to pursue its monetary policy. 

    Exchange-control policy is conducted by the National Monetary Council (CMN), empowered by law to regulate exchange transactions in light of international and domestic macroeconomic circumstances. As such, apart from market interactions, CMN may impose temporary restrictions on imports and remittances of foreign capital abroad, whenever there is a serious instability in the balance of payments. In these circumstances, according to applicable law, CMN may also grant BCB a full or partial monopoly over exchange transactions. However, these restrictions have not been applied for over 20 years.

  7. 4.

    Are there any governmental or central bank registrations or approvals required for the prepayment of loans abroad?

  8. The prepayment of loans abroad does not depend on any approval of BCB or any other regulatory authority. Nevertheless, before such prepayment is made, the relevant parties have to provide the prepayment registration with the SISBACEN through the ROF. Otherwise, the foreign exchange transaction cannot be performed and the funds cannot be remitted abroad.

    Also, in case prepayment results in an average maturity of 180 days or less, counted from the inflow of funds to Brazil, the required foreign exchange transaction will be subject to the tax on credit, exchange and insurance transactions (IOF) at a rate of 6 per cent. Actually, although this tax, generally known by the acronym IOF, applies to several events (credit, foreign exchange and insurance), if it is accrued on foreign exchange transactions, the acronym used is IOC (“C” for Câmbio). We shall use IOC in such case, and shall use IOF (Credit), when referring to the tax being applied on the act of lending, granting money credit. For further information about the IOC, see question 9.

  9. 5.

    Are any mandatory governmental or central bank deposits required to be made from loan proceeds?

  10. There are no mandatory governmental or Central Bank of Brazil deposits required to be made from loan proceeds.

  11. 6.

    Describe any governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.

  12. In general, there are no governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.

    Nonetheless, please bear in mind that, as per Law No. 4,595/64 (Brazilian General Bank Law), CMN is authorised to grant to BCB the sole control regarding foreign exchange transactions in case of serious imbalance in the national balance of payments or if such situation is imminent, which has not been the case for over 20 years. For further information regarding restrictions over foreign exchange, see question 3.

  13. 7.

    Describe any environmental liabilities and any other areas of lender liability that may arise as a result of the activities of a borrower or the realisation of a security interest.

  14. In accordance with Brazilian law, the existence of environmental damages gives rise to the obligation to repair the environment and indemnify third parties affected by such damages. Such an obligation is attributed to the “polluter”, irrespective of the existence of guilt; it shall be enough to evidence the causation between the damage and the activity that contributed to its occurrence as a requisite for the application of environmental civil liability.

    In fact, the latest case-law understanding has been granting ample and flexible interpretation to the limits of definition of causation, extending its effects to agents that are farther from the activity that caused the damage, and making it possible to reach the agent that financed the activity that caused the damage or which made possible the action that caused the damage. 

    In view of such scenario, the importance of preventive measures increases, which seek to reduce or eliminate any claim of faulty conduct by financial institutions involved with projects of potential environmental impact.

    In accordance with Resolution No. 4.327 issued by CMN on 25 April 2014, such measures shall include (i) the performance of an environmental audit regarding the activity that will receive the credit or the project that will be financed; (ii) the establishment of contractual conditions of termination or application of penalties in case of occurrence of violation of environmental rules by the borrower; and (iii) follow-up routines of strategic projects and checking of compliance with contractual obligations related to the environmental matter. Please note that, despite being considered a lender’s responsibility, such environmental precautions are usually performed at the borrower’s expense.

    Finally, it is worth mentioning that, as Brazilian law prohibits foreigners to acquire rural properties of a certain size, there are restrictions to the realisation of security interests granted in such properties, particularly in case of fiduciary liens or any other lien that results in the definitive or revocable ownership transfer to the creditor. The consequence is that rural land should only be taken as collateral in the format of a mortgage and not fiduciary lien, where there is such revocable transfer of ownership until full payment is made. This is the conservative approach. There are grounds to claim that this is not an actual transfer, only a lien and thus should not suffer such restriction. The matter of the foreign ownership of rural land in Brazil is a hot topic and changes are being discussed in the political realm, in order to liberalise the existing legal treatment.

  15. 8.

    Are interest payments or loan fees subject to a withholding tax?

  16. In the case of foreign loans to Brazil, interest payments, loan fees and any other charges paid, credited, or remitted by a local borrower to a foreign lender under financial transactions are subject to a withholding tax (WHT) at rates ranging from 15 per cent to 25 per cent depending on whether the beneficiary of such payment is located in any country or jurisdiction with a favourable taxation or under a privileged tax regime, as defined by Brazilian relevant tax law.

    The applicable rate may also be impacted by any double taxation treaty (DTT) in force between Brazil and the country where the beneficiary is located on the date of the relevant payment.

    As a last note on this subject, although the international lender is the “taxpayer” of the WHT, the so called “gross-up” provisions, through which the burden of the withholding is shifted to the borrower, are allowed and are overwhelmingly used in international loans to Brazilian entities. 

  17. 9.

    What other taxes or mandatory fees, for example, transaction, registration or documentary, apply to loan transactions?

  18. IOC tax

    With regard to foreign exchange transactions for the inflow of borrowed funds, IOC is levied at a rate of 6 per cent in case the relevant loan transaction was executed with an average maturity of up to 180 days. If the term is 181 days or more IOC is charged at a zero rate.

    In case of reduction of the average maturity of foreign loan transactions to 180 days or less due to prepayment, the relevant funds shall be subject not only to IOC at the rate of 6 per cent, as we saw above, but also to default interest and late payment charges.

    The rate of the IOC shall be zero as to any payments of principal, interest or other amounts to the foreign lender. 

    Registration costs

    Although there is no specific tax levied on registering or recording the security, the creation of security liens requires the registration of the relevant agreements and, in order to provide such registration, certain fees must be paid to the relevant Registry of Deeds and Documents or Real Estate Registry, as applicable. Such fees are calculated based on the principal amount of the foreign loan transactions.

  19. 10.

    Are there different taxes applicable to loans repayable to lenders in your jurisdiction and loans repayable to lenders in a foreign jurisdiction?

  20. WHT

    Interest and other fees on local bank loans or other facilities are not subject to WHT. Those shall be treated as income and will be taxed together with the other income in the overall corporate income tax of the local bank or other financial institution.

    IOF (Credit)

    Local loans granted by banks and financial institutions to local lenders are subject to IOF (Credit), which rate and calculation shall depend on the structure of the credit facility. Basically the difference in treatment resides in the facility being a revolving facility or a facility with previously defined disbursement dates, amounts and maturities.

    IOF (Credit) does not apply to foreign loans and other credit facilities.

  21. 11.

    Is your country party to any double taxation treaties that reduce taxes payable by borrowers in respect of loan payments abroad?

  22. Brazil signed and adopted approximately 30 treaties to avoid double taxation – the DTT. The Brazil–Japan treaty, for example, establishes reduced WHT rate of 12.5 per cent. Some Brazilian treaties establish a reduced 10 per cent rate for seven to 10-year bank interest when the payee is a bank and the interest relates to loans with a minimum term of seven years (in some treaties a 10-year period is established) borrowed for the purchase of industrial equipment.

  23. 12.

    Do any financing structures receive favourable tax treatment, such as prepayments of exports?

  24. Brazilian law provides favourable tax treatment to certain financing structures, such as those related to exports.

    International prepayment transactions

    The export prepayment, for example, is a financing structure that allows exporters (or banks in their place) to advance financial resources arising from export trade with the purpose to fund such transaction. As a consequence, the settlement of the debt occurs through the shipment. If the advance was granted by a foreign bank, repayment is made directly by the relevant foreign importer as payment for the export trade. In this case, the interests levied on the advance are exempted from WHT.

    Local ACC

    Similarly, the ACC mentioned above allows exporters to obtain in advance local currency in order to fund the relevant export trade. In this case, the exporter enters into a foreign exchange transaction with a financial institution selling in advance the hard currency it will receive when the importer pays. Usually upon the shipment, the hard currency is delivered directly to such financial institution in a foreign account. Despite the lender being a local financial transaction, the amounts received due to the ACC are not subject to the payment IOF (Credit), as an incentive for exports.

  25. 13.

    Describe any limitations on interest rates or the ability of lenders to charge default interest under loan agreements.

  26. Local transactions

    Financial institutions incorporated under Brazilian law are generally not subject to limitations on interest rates. Usury laws do not apply to them. Very recently, CMN established certain limitations (not a cap) on the kind of rate that may be used in credit card revolving facilities. Also, there is a strong legal framework as to the transparency of the total cost of a local loan (interest, fees, monetary escalation, taxes, expenses). Consumer protection for individuals is also a concern for the BCB and state prosecutors, to avoid abuse.

    With respect to default interest, Resolution No. 4.558, dated 23 February 2017, generally allows the bank to levy on overdue amounts, not only the rate stated in the agreement, plus a fine, usually set at 2 per cent flat, plus overdue interest, ordinarily charged at 1 per cent per month. There will also be the possibility of the bank opting to charge damages.

    Foreign transactions 

    As to loan agreements executed under foreign law, the above-mentioned rules are not applicable. In this case, any limitation should be provided by the relevant legislation governing the transaction, which normally is NY law or, to a less extent, UK law. In practice, this results in the charging of the rate of the agreement, plus 1 or 2 per cent per year, which, as it is so much lower than the Brazilian rates, is normally not disputed. 

  27. 14.

    Describe any restrictions that may apply to the choice of law, for example, whether a choice of New York or English law will be recognised and enforced in your jurisdiction.

  28. There is no legal restriction for the choice of a foreign law to rule agreements entered into in Brazil, as long as the internationality (elements of connection: nationality of the parties, the currency, place of payment accounts, etc) of such agreement is evidenced and such choice does not violate Brazilian sovereignty, public policy and good morals. This understanding is considered a consequence of the legal principle of free will of the relevant parties, which is the basis of Brazilian general theory of contracts. With regard to such internationality, it shoudl be borne in mind that the main aspect to be considered for this purpose is the presence of connection elements between the parties’ obligations, the jurisdictions where such obligations shall be fulfilled and the chosen foreign law. In other words, the chosen foreign law must be connected somehow to the objective terms and conditions of the loans.

    In the absence of a choice of law provision under the relevant agreement, our conflict of laws provisions shall apply. Those state that the applicable law shall be the one of the place where the agreement is signed or of the agreement proponent residence.

    Notwithstanding the above, in practical terms, when the Brazilian debtor does not have assets outside of Brazil, the creditor bank usually enforces the agreement in Brazil, without invoking the foreign law, even if it was chosen to govern the loan.

  29. 15.

    Describe generally the requirements for the enforceability of a foreign judgment in your jurisdiction in respect of an outstanding loan.

  30. A foreign judgment will be recognised and enforceable in Brazil if and when ratified by the Superior Justice Court of Brazil as a valid judgment. Upon submission of a foreign judgment to the Superior Justice Court of Brazil, the final decision must: (i) comply with all formalities necessary for its enforcement under the laws governing the outstanding loan; (ii) have been issued by a competent Court after proper service of process; (iii) not be subject to any appeal; (iv) not offend Brazilian national sovereignty, public policy or good morals (in this regard, we have no reason to believe that the laws of New York or England would be against such Brazilian rules); (v) be duly translated into Portuguese language by a sworn public translator; and (vi) be registered with the competent Registry of Deeds and Documents in Brazil (together with its translation).

  31. 16.

    Upon the closing of a loan, what procedural requirements (execution formalities, notarisation, registration, recordation or filing) should be observed to ensure that a loan agreement or related judgment is enforceable in your jurisdiction?

  32. Upon the closing of a loan, the following procedural requirements must be fulfilled to ensure that a loan agreement whether governed by Brazilian or foreign law is enforceable in Brazil: (i) the loan agreement must be executed by all parties therein; (ii) all pages of the loan agreement must be signed with initials by all parties therein; and (iii) the loan agreement must be also executed by two witnesses. If the loan agreement is in English or other foreign languages, the procedural requirements indicated in question 17 must also be satisfied.

    With regards to any security interests granted under the loan agreement, the relevant agreements must be registered at the appropriate Registry of Deeds and Documents or at the Real Estate Registry, as the case may be, in order to such security interest be considered legal, valid, perfected and binding.

    Finally, as to the enforceability of related judgments, please refer to question 15.

  33. 17.

    Does a loan agreement in English need to be translated or locally registered to be enforceable in your jurisdiction?

  34. A loan agreement in English is enforceable in Brazil as long as: (i) the signatures of the parties of such loan agreement, if not executed in Brazil, are notarised by a notary public licensed to act as such under the laws of the place of signing and apostilled by the competent authorities under the laws of the place of execution; (ii) the loan agreement is translated into Portuguese language by a sworn translator; and (iii) the loan agreement (together with the respective sworn translations) is registered with the appropriate Registry of Deeds and Documents in Brazil having jurisdiction over the place where the head offices of the loan parties are located, which registration can be made at any time before judicial enforcement in Brazil.

    It should be borne in mind that in case such loan agreement in English is executed by parties domiciled in a country that has not acceded to the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents, also known as the Apostille Convention, such loan agreement must be notarised by a notary public licensed to act as such under the laws of the place of signing and consularised by the competent authorities under the laws of the place of execution.

  35. 18.

    Must a foreign bank be registered in your jurisdiction to enforce any rights under the applicable loan documentation?

  36. A foreign bank does not need to be registered in Brazil to enforce any rights under the applicable loan documentation.

    Nonetheless, as provided in question 2, in order to enable the inflow of funds and the procurement of such funds in Brazil, the terms and conditions of the loan transaction must be registered with the SISBACEN through the ROF and, in order to provide such registration with SISBACEN, a foreign bank must be enrolled with the CNPJ and the CADEMP.

  37. 19.

    Are foreign lenders treated any differently from local lenders in enforcing loan documentation in the courts of your jurisdiction?

  38. As a general rule, the treatment is not different, however, in certain cases, according to Law No. 13,105, dated 16 March 2015 (Civil Procedure Code), a foreign creditor that has no properties in Brazil must post bond for court costs and fees in an amount equal to 10 to 20 per cent of the total amount in dispute. If the creditor meets the requirements for a summary collection claim, no bond is required.

  39. 20.

    Is consideration required for the enforceability of a contractual obligation or guarantee?

  40. In accordance with the Brazilian law, consideration is required for the enforceability of a contractual obligation or guarantee.

  41. 21.

    To enforce a loan in your jurisdiction, need the loan be evidenced by a promissory note or other form of título executivo?

  42. As a general rule, to enforce a loan in Brazil, the relevant credit must be clear, liquid and due. Also, it must be evidenced by an enforceable instrument, such as promissory notes. Please bear in mind that, besides those enforceable instruments by definition of law, the qualification of a loan agreement as an enforceable instrument may be obtained upon the execution of the relevant agreement by the parties therein and two witnesses. Usually, foreign loan or other credit agreements with local borrowers, are accompanied by a promissory note prepared under the rules of the Geneva Convention providing a Uniform Law for Bills of Exchange and Promissory Notes.

    A recent instrument, the Bank Credit Certificate (CCB), for example, is an enforceable instrument by definition of law and, in consequence, ensures enforcement through summary collection claims. The CCB does not have the simplicity of the Geneva Convention type promissory note, and may contain all the provisions, covenants, calculations, representations and warranties that usually make part of a NY law or UK law agreement, without losing the availability of the summary proceedings. It is worth mentioning that the CCB may be denominated in foreign currency and also issued in favour of foreign financial institutions, provided that it is subject to Brazilian law and jurisdiction, representing therefore a safe alternative for international loans in cases where the debtor’s assets and revenues are located in Brazil and enforcement would therefore be sought in Brazil.

    Slowly, the CCB is spreading into international loans, mainly those granted by foreign branches or subsidiaries of local banks. 

  43. 22.

    To enforce a guarantee (aval) in your jurisdiction, is it necessary that the guarantee be evidenced by a guarantee agreement or other form of título executivo?

  44. There are two categories of guarantee under Brazilian law: fiança and aval. As a general rule, to enforce fianças in Brazil, such guarantee must be evidenced by an enforceable instrument. With regards to aval, there should be no additional requirements in order to enforce such guarantee, as the aval is a signature by the aval grantor in a promissory note, letter of exchange, CCB, and other similar instruments.

    Please note that, in accordance with Brazilian law, in case the grantor is married, the grantor’s spouse must authorise such granting of guarantee (fiança or aval) in order to the security be considered valid, binding and enforceable obligation of the grantor. To bind the couple’s assets, they both should grant the personal guarantee when there is some kind of separation of assets in the pre-nuptial agreement.

  45. 23.

    Are there any restrictions on loans to multiple borrowers or on a guarantee in respect of a loan to an affiliated entity?

  46. There are no restrictions on loans to multiple borrowers. Likewise, there are no restrictions to grant a guarantee in respect of a loan to an affiliated entity.

  47. 24.

    Can a party grant a secured or unsecured guarantee in respect of a loan to an unaffiliated third party?

  48. There are no restrictions for a party to grant a secured or unsecured guarantee to an unaffiliated third party, provided that, since consideration is required for the enforceability of contractual obligations or guarantees, the grantor has, directly or indirectly, a business interest in such granting. Of course, in this case, the due diligence of the corporate powers and authorisations is of paramount importance.

  49. 25.

    Is there a distinction between the granting of a security interest and the perfection of a security interest?

  50. As a general rule, to grant a security interest means to celebrate an agreement through which one party constitutes a security interest in favour of another party. On the other hand, to perfect a security interest means to fulfil the requirements provided by law in order to constitute the security interest or to make it valid and known to third parties, according to the type of guarantee. Mainly, the requirements may be fulfilled upon registration of the relevant agreements with the competent Registry of Deeds and Documents or Real Estate Registry, as applicable.

    Please note that certain types of security interests, such as fiduciary liens and specific pledges, are only considered a legal, valid, binding and enforceable obligation of the relevant grantor upon registration of the relevant agreement in the competent Registry of Deeds and Documents or Real Estate Registry.

  51. 26.

    What is the most common form of granting and perfecting a security interest in movable assets?

  52. Pledges and fiduciary liens are the most common forms of granting and perfecting a security interest in movable assets, either physical of rights, including receivables.

    Pledges

    Conventional subsets of pledge, set out by law, include rural pledges (where pledged assets are agricultural machinery and equipment, crops, inventories or animals), industrial and mercantile pledges (for industrial machinery, materials, instruments, raw materials and manufactured products), credit rights and credit instruments pledges, for receivables, rents, credits or credit instruments and pledged vehicles.

    Whenever a pledge is created, title to the pledged asset remains with the pledgor, but possession may or may not be temporarily transferred to the pledgee's domain. If the pledged asset is sold, deteriorated or modified, the loan accelerates. If repayment is properly made by the pledgor upon maturity of the loan, then the loan is terminated and the pledge, which is accessory to the loan, is also considered automatically terminated. A release document is then signed and registered at the appropriate Registry of Deeds and Documents, Real Estate Registry, or traffic, transport or licensing department(s), as the case may be, for effectiveness with third parties.

    In a judicial liquidation scenario, a proceeding similar to the United States Chapter 7, a loan secured by a pledge over the pledgor’s assets is only subordinated to labor credits (up to a limit of 150 times the monthly minimum wage per employee – currently about 143,100 reais). That does not mean, however, that the lender is entitled to the full amount of the pledged assets. These are sold to benefit the liquidating estate, and the lender is granted priority (with other creditors secured by mortgages and pledges) in sharing the proceeds thereof, as well as the proceeds from the sale of the liquidating estate’s other assets.

    Fiduciary liens

    As to fiduciary liens, such security interest gives a lender the revocable fiduciary ownership of an asset or right. If payment is properly made by a borrower upon maturity of the loan, title automatically reverts to the original owner.

    When a fiduciary lien is created, possession of the asset is deemed to be split into direct possession, held by the borrower, and indirect possession, held by the lender 

    Under Brazilian law, the following types of fiduciary lien are possible: (i) fiduciary transfer of non-fungible movable assets; (ii) fiduciary transfer of fungible assets – to domestic financial institutions only; (iii) fiduciary transfer of bank accounts; (iv) fiduciary transfer of real properties; and (v) fiduciary assignment of receivables.

    In general terms, in the event of judicial reorganisation, a proceeding similar to United States Chapter 11, a lender secured by a fiduciary lien is not subject to the effects of the reorganisation proceeding nor the reorganisation plan, having the right to payment regardless of the provisions of the agreed plan. It is worth mentioning that Brazilian courts have recently been easing such creditor’s exclusion from the effects of the reorganisation proceeding or the reorganisation plan in case the receivables transferred in a fiduciary basis are considered indispensable for the company’s preservation and might jeopardise its recovery. This has resulted in full or partial releases of such funds to the debtors.

    Please note that during the stay period of the reorganisation, which comprehends 180 days following the approval of the judicial reorganisation request, the sale or removal of debtor’s facilities or equipment considered essential to the debtor’s commercial activities is suspended.

    Finally, the advantage of fiduciary forms of security compared to pledges and mortgages is that the lender typically enjoys greater protection in the event of a borrower’s judicial liquidation. A lender may take possession of an asset de pleno jure, while the borrower’s other creditors have to abide by the terms and other conditions of a judicial liquidation proceeding. That is, since ownership is deemed to be transferred to the lender, the asset is not considered part of the liquidating estate for the purposes of apportioning among creditors in a judicial liquidation proceeding. If the debtor or any third-party holder resists, possessory injunctions are in place to remedy. 

  53. 27.

    What is the most common form of granting and perfecting a security interest in real estate?

  54. Mortgage and fiduciary liens are the most common forms of granting and perfecting a security interest in real estate.

    Mortgages

    Mortgages can only be created by a public deed  prepared by a notary public, except in certain cases where the law expressly authorises a lien to be created within a private credit instrument or certificate.

    In addition to the execution of a public deed, perfection of a mortgage involves recording this public deed at the Real Estate Registry in the jurisdiction where the mortgaged property is located. Once recorded, the mortgage is in force for third parties, although until that time, it is deemed to be legally binding between the contracting parties as of execution of the public deed. A properly recorded mortgage gives the mortgagee preference over any prior-but-unregistered mortgage created on that same property.

    Whenever a mortgage is created in a real estate property, both legal title to and possession of the property remain with the mortgagor. If the mortgaged property deteriorates or depreciates, and the mortgagor does not offer additional collateral, the loan accelerates. If repayment is properly made by the mortgagor upon maturity of the loan, then the loan is terminated and the mortgage, which is accessory to the loan, is also considered automatically terminated. A release document is signed and registered at the competent Real Estate Registry for effectiveness with third parties, undue refusal by the creditor does not impair the debtor’s right to the release.

    Finally, a mortgage is ranked the same as a pledge for liquidation purposes in a judicial liquidation scenario, a loan secured by a mortgage is only subordinated to labour credits (up to a limit of 150 times the minimum monthly wage per employee – currently about 143,100 reais). That does not mean, however, that the lender is entitled to the full amount of the mortgaged property. The property is sold to benefit the liquidating estate, and the lender is granted priority (with other creditors secured by mortgages and pledges) in sharing the proceeds thereof, as well as the proceeds from the sale of the liquidating estate’s other assets.

    Fiduciary liens

    As to fiduciary liens, please refer to question 26.

    In case of fiduciary transfers of real estate properties, if the debtor does not fulfil its obligations under the relevant agreement, the fiduciary ownership shall be consolidated in favour of the creditor. Thus, the creditor and current owner of such real estate property shall promote a public auction in order to sell it. If the biggest offer does not reach the assessed value of such real estate property, the creditor must organise a second auction. At this time, if the biggest offer is not equal or superior to the amount of the debt, the debt shall be considered extinct even if the due amount wasn’t fully settled. In such case, the creditor keeps the auctioned real estate property to be sold in the future.

  55. 28.

    What is the most common form of granting and perfecting a security interest in receivables and accounts?

  56. Fiduciary liens are the most common forms of granting and perfecting a security interest in receivables and accounts.

    With respect to fiduciary transfer of fungible assets, such as receivables, please consider that this category of collateral should be avoided in case its beneficiary would be a financial institution incorporated under foreign law. As per certain recent court decision, foreign financial institutions are not entitled to be secured by such fiduciary lien, which is restricted to financial institutions incorporated under Brazilian law and, therefore, authorised to operate by BCB.

    For further information regarding fiduciary liens, please refer to question 26.

  57. 29.

    Does your jurisdiction recognise the transfer of assets to a trust for the benefit of a lender as a means of granting a security interest in such assets?

  58. Differently to what generally happens in certain foreign jurisdictions, where it is possible to grant a security interest simply by transferring the assets to a trust for the benefit of a lender, in Brazil there is no express provision in Brazilian law regarding the transfer of assets to a trust for the benefit of a foreign lender as a means of granting a security interest in such assets. Therefore, in accordance with Brazilian law, security interests in assets are only considered granted upon the execution of relevant collateral agreement by the parties therein and the registration of such relevant collateral agreement at the competent Registry.

    Considering that there is no express provision in Brazilian law regarding the transfer of assets to a trust, please note that in order to avoid any unexpected incident with the enforcement and foreclosure of such security interests it is very important to make clear on the relevant agreements that the trust has been appointed to act on behalf, in the name and as legal representative of the foreign lender regarding the enforcement and foreclosure of such security interests granted in the transferred assets.

  59. 30.

    Does your jurisdiction recognise the fiduciary transfer of assets (such as an alienação fiduciária) to a lender as a means of granting a security interest in such assets?

  60. Fiduciary transfer of assets to a lender as a means of granting a security interest in such assets is recognised in Brazil as long as the relevant agreement (i) is duly executed by the parties therein and (ii) registered at the Registry of Deeds and Documents in the jurisdiction where the domicile of both parties is located. In addition, the agreements that create fiduciary transfers shall contain:

      • total amount of the debt or its estimation;
      • term or the period of payment;
      • interest rate, if applicable;
      • description of the object being assigned, with the elements indispensable to its identification;

    and if executed under financial or capital markets, shall also contain:

    • penalty clause;
    • index of monetary correction, if applicable;
    • fees; and
    • general costs.

    In case the assets fiduciary transferred are real estate properties, the relevant agreement must also be registered with the Real Estate Registry in the jurisdiction where the fiduciary transferred property is located. On the other hand, in the case of vehicles, fiduciary transfer is also annotated on the ownership certificate issued by the traffic, transport or licensing department(s).

    For further information regarding fiduciary liens, see question 26.

  61. 31.

    Are there any types of asset that cannot be pledged as collateral under the laws of your jurisdiction?

  62. According to the principle of unavailability of the public assets and properties, the laws of Brazil prohibit public assets to be pledged as collaterals. Furthermore, the Brazilian Civil Procedure Code provided that certain assets cannot be judicially pledged and likewise cannot be pledged as collaterals, such as: (i) furniture, belongings and domestic utilities that equips the debtor’s residence, except from the ones with high value or that overpass the common necessities of a standard way of life; (ii) remuneration, subsidies, wages, salaries, retirement revenues, savings and pension funds, as well as any amount receipt by a third party liberalities and destined for his and his family, the earnings of an independent worker and the fees of a liberal professional; (iii) books, machines, tools, utensils, instruments or other necessary moveable assets useful to the exercise of the debtor’s profession; (iv) life insurance; and (v) the amount deposited on savings account, limited to 40 minimum wages.

    Please bear in mind that, with respect to fiduciary liens, there are restrictions to grant security interests in rural properties in case the beneficiary of such security is a foreigner. As mentioned in question 7, Brazilian law prohibits foreigners to acquire rural properties on the national territory and, therefore, such foreigner would not be able to properly enforce such security granted in its favour.

  63. 32.

    Describe any restrictions on enforcement of security. For example, any statutory regime that may stay the enforcement of the security or provide that enforcement is limited to public sale through the courts.

  64. Except in the events of judicial reorganisation or liquidation of the debtor, in which case the security granted is subject to the restrictions provided in questions 26 and 27, the enforcement of security liens must comply with the proceedings established by Brazilian law, as follows.

    Mortgages

    In the event of default on a loan collateralised by a mortgage and provided that a favourable court decision has been issued in a summary collection claim, the mortgage may be enforced at the competent court through: (i) adjudication of the mortgaged property by the creditor; (ii) private sale of the mortgaged property by the creditor; or (iii) a public auction to sell the mortgaged property.

    Pledges

    As to pledged assets, the lender is allowed to sell the pledged asset and such sale may take place in an out-of-court proceeding, provided that the borrower has contractually granted the creditor this right. If no such authorisation exists, then the sale must necessarily be sought judicially through the same mechanism described above for the mortgage. As explained above, it is also possible for the lender to adjudicate the pledged assets, if duly approved by the court. 

    Fiduciary liens

    With regards to fiduciary types of security, given that the assets are deemed to have been transferred to the lender on a fiduciary basis, the lender may file a possessory suit seeking seizure of the assets, which will be preliminarily granted if the borrower is proven to have defaulted, thus restoring possession to the creditor. Once the lender has possession of the assets, it may sell them in an out-of-court private sale.

    Finally, it is important to note that, in theory, any contractual provision that authorises a lender to keep assets offered as security if a loan is not repaid will be null and void. Only if the borrower and the lender so agree upon an actual default, may the borrower transfer ownership of said assets to the lender as payment in kind of the outstanding debt.

  65. 33.

    Describe any other relevant legal considerations in connection with loans to a borrower in your jurisdiction.

  66. A new collateralisation structure for bank financing transactions has been recently introduced in Brazilian legislation named the Opening of Credit Facility. Pursuant to Law 13,476, dated August 28, 2017, which created this new collateral structure, funds will be made available to the relevant borrower by means of the performance of specific financial transactions in the formats described in the previous items of this questionnaire linked to the credit facility.

    Accordingly, the contractual instrument governing such collateral structure must provide (i) the total amount of the credit to be made available through specific loan transactions (called “linked financial transactions”); (ii) the term; (iii) the procedures to enter into linked financial transactions; (iv) the minimum and maximum interest rates that may be charged under these linked financial transactions; and (v) the collateral package.

    The main advantage of this new collateralisation structure is that the collateral may secure any and all linked financial transactions (including future transactions), regardless of any new or additional registration of the relevant collateral agreements.

    In case fiduciary transfers of real estate properties are granted to secure the credit facility, Law 13,476 specifically provided that the general rules applicable for the foreclosure of fiduciary transfers of real estate properties (ie, extinction of the debt and release of the debtor after the second auction if the biggest offer has not been equal or higher than the amount of the debt, as explained in question 27) shall not apply. However, considering the novelty of this law and previous similar legal provisions that have been disregarded by Brazilian courts, please note that, it is highly likely that this provision will be subject to further debate in the Brazilian legal community, and, therefore, specific advice must be sought at the appropriate time on this matter.

    Also, Law 13,476 introduced new rules governing the creation of liens over financial assets. Financial assets subject to registration and/or deposit obligations in registration entities and/or central depositaries (such as B3 SA – Brasil, Bolsa, Balcão), pursuant to Brazilian securities rules, must be registered with the respective entity in which the encumbered assets are registered and/or deposited, as applicable. With regard to financial assets that are not subject to such registration or deposit obligations, creation of the relevant lien is still subject to registration of the relevant agreement with the Registry of Deeds and Documents in the jurisdictions where the parties therein are domiciled.

    Please note that (i) registration entities and central depositaries are still implementing their operational systems to register liens pursuant to Law 13,476 and (ii) this new procedure for the creation of liens has not yet been discussed by Brazilian courts. Therefore, until this provision is subject to further debate by the Brazilian legal community, it is advisable, in addition to the registration of the relevant lien with the registration entities and central depositaries (when such operational systems have been duly implemented), to continue registering the relevant agreement with the Registry of Deeds and Documents in the jurisdictions where the parties therein are domiciled. In any case, specific advice must be sought at the appropriate time on this matter.

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Questions

  1. 1.

    What are the most common forms of bank financing in your jurisdiction?


  2. 2.

    Are any governmental or central bank registrations or approvals required for a foreign lender (being a lender not incorporated in your jurisdiction or operating through a branch or office outside of your jurisdiction) to lend to a borrower in your jurisdiction?


  3. 3.

    Are there any foreign exchange provisions restricting, or governmental or central bank registrations or approvals required for, a borrower in your jurisdiction to contract debt obligations in a foreign currency or to remit funds abroad?


  4. 4.

    Are there any governmental or central bank registrations or approvals required for the prepayment of loans abroad?


  5. 5.

    Are any mandatory governmental or central bank deposits required to be made from loan proceeds?


  6. 6.

    Describe any governmental measures that may be taken to declare a moratorium on the loan obligations of private companies.


  7. 7.

    Describe any environmental liabilities and any other areas of lender liability that may arise as a result of the activities of a borrower or the realisation of a security interest.


  8. 8.

    Are interest payments or loan fees subject to a withholding tax?


  9. 9.

    What other taxes or mandatory fees, for example, transaction, registration or documentary, apply to loan transactions?


  10. 10.

    Are there different taxes applicable to loans repayable to lenders in your jurisdiction and loans repayable to lenders in a foreign jurisdiction?


  11. 11.

    Is your country party to any double taxation treaties that reduce taxes payable by borrowers in respect of loan payments abroad?


  12. 12.

    Do any financing structures receive favourable tax treatment, such as prepayments of exports?


  13. 13.

    Describe any limitations on interest rates or the ability of lenders to charge default interest under loan agreements.


  14. 14.

    Describe any restrictions that may apply to the choice of law, for example, whether a choice of New York or English law will be recognised and enforced in your jurisdiction.


  15. 15.

    Describe generally the requirements for the enforceability of a foreign judgment in your jurisdiction in respect of an outstanding loan.


  16. 16.

    Upon the closing of a loan, what procedural requirements (execution formalities, notarisation, registration, recordation or filing) should be observed to ensure that a loan agreement or related judgment is enforceable in your jurisdiction?


  17. 17.

    Does a loan agreement in English need to be translated or locally registered to be enforceable in your jurisdiction?


  18. 18.

    Must a foreign bank be registered in your jurisdiction to enforce any rights under the applicable loan documentation?


  19. 19.

    Are foreign lenders treated any differently from local lenders in enforcing loan documentation in the courts of your jurisdiction?


  20. 20.

    Is consideration required for the enforceability of a contractual obligation or guarantee?


  21. 21.

    To enforce a loan in your jurisdiction, need the loan be evidenced by a promissory note or other form of título executivo?


  22. 22.

    To enforce a guarantee (aval) in your jurisdiction, is it necessary that the guarantee be evidenced by a guarantee agreement or other form of título executivo?


  23. 23.

    Are there any restrictions on loans to multiple borrowers or on a guarantee in respect of a loan to an affiliated entity?


  24. 24.

    Can a party grant a secured or unsecured guarantee in respect of a loan to an unaffiliated third party?


  25. 25.

    Is there a distinction between the granting of a security interest and the perfection of a security interest?


  26. 26.

    What is the most common form of granting and perfecting a security interest in movable assets?


  27. 27.

    What is the most common form of granting and perfecting a security interest in real estate?


  28. 28.

    What is the most common form of granting and perfecting a security interest in receivables and accounts?


  29. 29.

    Does your jurisdiction recognise the transfer of assets to a trust for the benefit of a lender as a means of granting a security interest in such assets?


  30. 30.

    Does your jurisdiction recognise the fiduciary transfer of assets (such as an alienação fiduciária) to a lender as a means of granting a security interest in such assets?


  31. 31.

    Are there any types of asset that cannot be pledged as collateral under the laws of your jurisdiction?


  32. 32.

    Describe any restrictions on enforcement of security. For example, any statutory regime that may stay the enforcement of the security or provide that enforcement is limited to public sale through the courts.


  33. 33.

    Describe any other relevant legal considerations in connection with loans to a borrower in your jurisdiction.


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