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Brazil

Published on Friday 8th March 2019

    • Brazil

      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 the issuance of bonds in foreign capital markets.

      Last verified on Friday 8th March 2019

    • Brazil

      Yes. There is no limitation for private credit fund managers to offer credit in Brazil. However, limitations on interest rates that they are allowed to charge from borrowers shall apply when the lender established in Brazil is not authorised to operate as a financial institution by the Brazilian Central Bank (BCB). The Brazilian Civil Code provides for a 12 per cent p.a. ceiling when a domestic lender is a non-bank entity. In case of foreign private credit funds, they are not subject to such limitation, being allowed to charge the interest rates as per international market conditions and subject to applicable regulations.

      Last verified on Friday 8th March 2019

    • Brazil

      There is no restriction for a foreign lender to lend, or for a foreign arranger to arrange a loan, 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 BCB (SISBACEN) through the Financial Transaction Registry (ROF). Additionally, to provide such registration with the SISBACEN, a foreign lender must be enrolled with the BCB’s Companies Database (CADEMP).

      Theoretically, the SISBACEN may automatically submit the terms and conditions of the transaction for a detailed review by the staff of the BCB. In such case, the 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 the BCB holds discretion to require amendments to the loan conditions, from our experience, this hardly ever happens.

      Recent BCB Circular No. 3.883 as of 7 March 2018 modified specific procedures for registering funds inflow from foreign countries.

      Such procedures do not apply to foreign arrangers, since they do not render financing, but just render intermediation/structuring services.

      Last verified on Friday 8th March 2019

    • Brazil

      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 3, 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, diplomatic representations, among others), individuals and companies domiciled in Brazil are not allowed to have bank accounts in 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 the BCB to operate in foreign exchange markets.

      As for exchange rates, Brazil adopts the “managed” or “dirty float” system, with the BCB occasionally participating in the market (buying, selling, swaps) to influence the direction of the value of the Brazilian real 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, the 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, the CMN may also grant BCB a full or partial monopoly over exchange transactions. However, these restrictions have not been applied for over 20 years.

      Last verified on Friday 8th March 2019

    • Brazil

      The prepayment of loans abroad does not depend on any approval of the 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 12.

      Last verified on Friday 8th March 2019

    • Brazil

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

      Nonetheless, it should be borne in mind that, as per Law No. 4,595/64 (Brazilian General Bank Law), the CMN is authorised to grant to the 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 4.

      Last verified on Friday 8th March 2019

    • Brazil

      In accordance with Brazilian law, the existence of environmental damages gives rise to the civil 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 fault; it shall be enough to evidence the chain of causation between the damage and the activity that contributed to its occurrence for the application of environmental civil liability.

      In fact, the latest case law has broadened  the definition of causation, extending it to reach the agent that financed the activity that caused the damage or which made possible the action that caused the damage. 

      In addition to the civil liability, administrative and criminal liability may also apply.

      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 the 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.

      Last verified on Friday 8th March 2019

    • Brazil

      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, as defined by Brazilian relevant tax law.

      The Law provides a reduced zero rate in some special cases, such as the financing of export transactions. 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 “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 (except for the financing of import transactions).

      Last verified on Friday 8th March 2019

    • Brazil

      Brazilian regulation does not impose to borrowers the maintenance of a credit rating to mitigate overleverage risks. However, Brazilian thin capitalisation rules establish requirements and limitations to the tax deductibility of the interest payments derived from foreign loans, usually intercompany loans, or loans executed with entities located in tax haven jurisdictions or in privileged tax regime, which are necessary to the business activities of the Brazilian borrowers.

      In summary, the following ratios (debt to net worth) must be observed:

      • 2:1 (general rule) – individual or global debt to net worth ratio, including direct and indirect participation; and
      • 0.3:1 – debt to net worth ratio (in the event of loans with entities located in tax haven jurisdictions or privileged tax regimes). Besides the thin capitaliwation rule, there are special requirements for the deductibility of expenses paid to entities located in tax haven jurisdictions or in privileged tax regime.

      The comparison between foreign debt and the net worth of the borrower should be calculated by the monthly weighted average of the two. Consequently, if the thin capitalisation ratio is exceeded, the portion of interest related to the excess loan amount will not be deductible for the purposes of Brazilian corporate income taxes (the federal corporate tax  (commonly known as IRPJ) and the social contribution tax (CSLL)).

      Last verified on Friday 8th March 2019

    • Brazil

      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. Also, it is worth mentioning that foreign documents and documents drafted in foreign language must be translated into Portuguese language by an official translator, which fees are usually based on the quantity of pages of the relevant document.

      Last verified on Friday 8th March 2019

    • Brazil

      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. Interest earned by local bank or other financial institution, as lenders, would be subject to corporate income taxes (IRPJ and CSLL) and social contributions levied on revenue (PIS and COFINS). On the other hand, loans repayable to lenders in a foreign jurisdiction will be subject to the WHT and IOC, as described above.

      IOF (Credit)

      Local loans granted by banks and financial institutions to local lenders are subject to IOF (Credit), whose 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 (lender located abroad).

      Last verified on Friday 8th March 2019

    • Brazil

      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.

      Last verified on Friday 8th March 2019

    • Brazil

      Brazilian law provides favourable tax treatment to certain financing structures, such as those related to exports. (WHT zero rate).

      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 is subject to the WHT at a zero rate.

      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 is subject to the IOF (Credit) at a zero rate, as an incentive for exports.

      Last verified on Friday 8th March 2019

    • Brazil

      Local transactions

      Financial institutions incorporated under Brazilian law are generally not subject to limitations on interest rates. Usury laws do not apply to them. Recently, the 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. 

      Last verified on Friday 8th March 2019

    • Brazil

      There are no restrictions on the payment of interest in kind and interest can be capitalized and compound, provided that lender is a Brazilian financial institution or domiciled outside of Brazil (bank or non-bank).

      Last verified on Friday 8th March 2019

    • Brazil

      CMN Resolution No. 2.723, issued as of 31 May 2000, provides that the direct or indirect participation of Brazilian financial institutions and those institutions authorised to operate by the BCB in the capital stock of any companies headquartered in the country or abroad depend upon BCB’s prior authorisation, except for (i) investment banks, (ii) development banks, (iii) development agencies and (iv) multiple banks with investment or development portfolios. Therefore, in case a loan agreement provides for such conversion rights such prior authorisation must be obtained.

      This matter is also regulated by CMN Resolution No. 4.693, issued as of 29 October 2018, which provides conditions and limits for the extension of credit to related parties by financial institution and by leasing companies. Such Resolution regulates article 34 of Law No. 4,595, of 31 December 1964, as recently amended by Law No. 13,506, of 31 November 2017.   

      The following legal entities are deemed as related parties to a financial institution for purposes of CMN Resolution No. 4,693: (i) those having a qualified equity interest in the financial institution; (ii) those in which capital, there is a direct or indirect qualified equity interest; (iii) those in which there is effective operational control or preponderance in the deliberations, regardless of the equity interest; and (iv) those having an officer or member of the board in common with the financial institution. 

      A qualified equity interest is defined for purposes of CMN Resolution No. 4,693 as the direct or indirect participation held by individuals or legal entities in the capital stock of the financial institution or leasing company, or vice versa, equivalent to 15 per cent or more of the relevant shares.

      Finally, in accordance with CMN Resolution No. 4.693, related-party transactions can only be performed in conditions compatible with market conditions, including in relation to limits, interest rates, grace periods, maturity, collateral and criteria for risk assessment for purposes of accounting provisions. Further, and on a cumulative basis, the sum of the balances of the credit operations extended, directly or indirectly, to related parties shall not exceed 10 per cent of the shareholders' equity adjusted by accumulated income and expenses, less the amount of holdings held in institutions authorised to operate by the BCB and in foreign financial institutions, subject to a 5 per cent ceiling. 

      Last verified on Friday 8th March 2019

    • Brazil

      CMN Resolution No. 3,516, issued as of 6 December 2007, prevents financial institutions from charging fees for the prepayment of credit and financial leasing transactions extended to natural persons and to micro and small enterprises.

      Although said Resolution is, in principle, applicable only to Brazilian financial institutions and leasing companies, such prohibition may be raised and sustained by local Courts and thus foreign lenders should observe and comply with it.   

      When the borrower is not a natural person nor a micro or small enterprise there is no limitation on the ability of a domestic or a foreign lender to require such borrower to pay a make whole fee or premium in the event of prepayment of a loan, calculated on the expected return on the debt through maturity. 

      Last verified on Friday 8th March 2019

    • Brazil

      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 should 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.

      Last verified on Friday 8th March 2019

    • Brazil

      A foreign judgment will be recognized 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).

      Last verified on Friday 8th March 2019

    • Brazil

      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 23 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 21.

      Last verified on Friday 8th March 2019

    • Brazil

      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 (or of the place where they are domiciled), 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.

      Last verified on Friday 8th March 2019

    • Brazil

      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 3, 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, to provide such registration with SISBACEN, a foreign bank must be enrolled with the CADEMP.

      Last verified on Friday 8th March 2019

    • Brazil

      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.

      Last verified on Friday 8th March 2019

    • Brazil

      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.

      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 favor 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. 

      Last verified on Friday 8th March 2019

    • Brazil

      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 or lives in a stable union, the grantor’s spouse/partner 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 prenuptial agreement.

      Last verified on Friday 8th March 2019

    • Brazil

      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.

      Last verified on Friday 8th March 2019

    • Brazil

      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.

      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.

      Last verified on Friday 8th March 2019

    • Brazil

      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 labour credits (up to a limit of 150 times the monthly minimum wage per employee – currently about 149,700 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 includes 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. 

      Last verified on Friday 8th March 2019

    • Brazil

      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 149,700 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, see question 32.

      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.

      Last verified on Friday 8th March 2019

    • Brazil

      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 32.

      Last verified on Friday 8th March 2019

    • Brazil

      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.

      Last verified on Friday 8th March 2019

    • Brazil

      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 32.

      Last verified on Friday 8th March 2019

    • Brazil

      According to the principle of unavailability of public assets and properties, the laws of Brazil prohibit public assets being pledged as collaterals. Furthermore, the Brazilian Civil Procedure Code provided that certain assets cannot be judicially pledged and likewise cannot be pledged as collateral, such as: (i) furniture, belongings and domestic utilities that equip the debtor’s residence, other than those of a high value or that go beyond 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 him or her and his or her family, the earnings of an independent worker and the fees of a liberal professional; (iii) books, machines, tools, utensils, instruments or other necessary movable 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.

      With respect to fiduciary liens, there are restrictions to grant security interests in rural properties if the beneficiary of such security is a foreigner. As mentioned in question 9, 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.

      Last verified on Friday 8th March 2019

    • Brazil

      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 32 and 33, 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 regard 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, in the case of movable assets, 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, and, in case of real estate properties, request the consolidation of the property within its ownership to the relevant Real Estate Registry Office, which, once the borrower is summoned and does not settle the outstanding amount, will transfer the property to lender. Once the lender has possession/property of the assets/real estate properties, 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.

      Last verified on Friday 8th March 2019

    • Brazil

      Unsecured credit in Brazil will rank pari passu in right and priority of payment with all other unsecured and unsubordinated obligations, excepting only those obligations preferred by operation of law.

      In this sense, the Brazilian Bankruptcy Law, dated as of 9 February 2005 provides for different treatment among unsecured credits, which are sub-divided into credits with special privilege, general privilege and general unsecured credits.

      In addition, it is worth mentioning that debts originating from securities distributed and negotiated in local capital markets, may be entitled to the above privileges, in accordance with regulations issued by the Brazilian Exchange Commission (CVM).

      Last verified on Friday 8th March 2019

    • Brazil

      Fintechs

      Recently the CMN issued Resolution No. 4,656, which provides for the regulation of fintech lending activity in Brazil, by creating two new types of financial institutions that operate exclusively through electronic platforms. One extends loans using its own resources and the other connects natural persons and legal entities interested in extending/requesting a loan directly through electronic means.

      Such Resolution also established the requirements and proceedings for the authorisation to operate, the transfer of corporate control, reorganisations and the cancellation of the authorisation for these institutions.

      Data protection

      Following the guidelines established by the General Data Protection Regulation – GDPR currently in force in European Union, the Brazilian Data Protection Law (Law No. 13.709, LGPD), enacted on 14 August 2018, and amended by Provisional Measure No. 869 on 27 December 2018, will come into force in August 2020. The LGPD is the regulatory mark for data protection in Brazil and, in general, provides for certain requirements for data treatment by natural persons and legal entities, regardless of the country where they are located, which (i) collect personal data within Brazilian territory; (ii) carry out data treatment operations in Brazil; and (iii) whose treatment activity aims to offer or provide goods/services or perform data treatment of individuals located in Brazil; establishes parameters for cybersecurity, lists certain obligation for the agents involved, regulates the supervision and overview of these agents by the Data Protection National Authority; and provides for penalties to be applied against those acting against its terms, among others.

      Therefore, as all natural persons and legal entities that treats data pursuant to the LGPD’s definitions of data treatment, financial institutions in Brazil are subject to such law and shall comply with it.

      Last verified on Friday 8th March 2019

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