South American Real Estate News

Restrictions on the ownership of Brazilian rural real estate property by foreigners

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Historical background

Since 1971, the acquisition of rural estate properties by foreigners in Brazil is ruled by Federal Law No 5.709/71, and its regulatory Decree No 74.965/74 (‘Law 5.709’).
According to such legislation, the acquisition of rural property by a foreign individual domiciled in the country (‘foreign individual’) and a foreign company authorised to act in Brazil (‘branch’) is not prohibited but merely limited to certain caps described in the law.

The restrictions also applied to Brazilian companies in which foreigners resident abroad had the majority of the corporate capital, although such companies were supposed to be exempt since they were organised according to the laws of Brazil (‘Brazilian companies of foreign capital’). Nevertheless, paragraph 1, section 1 of Law 5.709 clearly stated that ‘the Brazilian company in which foreign individuals or entities have majority control of the corporate capital, by any means, are also subject to the regime established by this Law …’.

As a consequence thereof, the restrictions of Law 5.709 were applicable to (i) foreign individuals; (ii) branches; and (iii) any Brazilian companies of foreign capital.

The enactment of the Brazilian Constitution of 1988 incorporated article 171 which included a legal and constitutional level definition of ‘Brazilian company’. All companies organised according to the laws of Brazil and domiciled within the Brazilian territory were to be considered Brazilian and were not to be subject to any kind of restrictions.

An interpretation of the doctrine emerged stating that, since Brazilian companies of foreign capital were considered to be Brazilian companies, the terms and restrictions of Law 5.709 were no longer applicable to such companies. The general opinion was that paragraph 1, section 1 of Law 5.709 was to be considered, de facto, revoked by the enactment of the Brazilian Constitution of 1988 because it included a provision that was in nature opposed to those in Law 5.709.

In 1995, the enactment of Constitutional Amendment No 6 revoked Article 171 of the Brazilian Constitution under the premise that no distinctions were to be made between a Brazilian company and a foreign company.

This amendment reintroduced the discussion on whether the restrictions imposed by Law 5.709 should become again applicable to Brazilian companies of foreign capital. The majority of the doctrine adopted the interpretation that the restrictions should not become enforceable again because:

  • according to Brazilian principles of application of the law, restrictions could only be imposed by a new law; and
  • after Constitutional Amendment No 6, there could not be any discrimination against Brazilian companies of foreign capital, as they were considered to be Brazilian.

As a consequence of this understanding, after Constitutional Amendment No 6, the restrictions of Law 5.709 were considered to be applicable only to foreign individuals, branches or foreign entities domiciled abroad (‘foreign companies’).

In order to confirm this interpretation, the AGU issued the Opinion AGU/LA – 01/97 (the ‘AGU 01/97’), published in the Federal Official Gazette on 22 January 1999, stating that paragraph 1, section 1 of Law 5.709, was to be considered revoked as a whole, since it clearly contradicted the intentions and interpretations of the current Brazilian Constitution and even though article 171 of the Brazilian Constitution of 1988 was revoked as well, this could not restore an already-revoked section of the law.

Consequently, foreign investors wanting to acquire land in Brazil had only to incorporate a Brazilian company, which was undoubtedly a much less bureaucratic and faster method than meeting the requirements set out by Law 5.709.

However, foreign investors’ increasing interest in acquiring properties in the Brazilian rural areas and the world shortage of natural resources made the Brazilian Government bring the issue of acquisition of rural properties by foreigners into discussion again.1

As an official justification for issuing the AGU 1/2010, the AGU referred to the existence of a worldwide food crisis and the possibility that, in the future, biodiesel may be adopted, on a large scale, as an important alternative source of energy that could have the capacity to diversify the power generation matrix of Brazil, for its own advantage.

Moreover, in an article published in the economical newspaper Valor Econômico on 22 June 2010, the Ministry of Agricultural Development stated ‘We are going to introduce a PAC (proposal for the amendment of the Constitution) to make it clear to investors that they can invest in any field, except in lands’.2

In this sense, on 13 July 2010, the National Justice Council determined that the Real Estate Registry Offices should send, every three months, to the Local Internal Affairs Offices (which, in turn, will send to the National Internal Affairs Office and INCRA), a list of all acquisitions of rural properties by foreigners, whether legal entities or individuals, in their respective jurisdictions. The determination also requires the Local Internal Affairs Offices to regulate the Real Estate Registry Offices sending promptly a list of the acquisitions previously made.

On 14 July 2010 the Ministry for Development, Mr Guilherme Cassel, gave an interview in which he claimed that ‘today there is no control over the purchase of land by the hand of Brazilian companies controlled by foreigners’.3

On 19 August 2010 the AGU issued AGU/LA 01/2010, contrary to the AGU/LA 01/97 (that has been observed for the last 13 years), in the context of several journalistic articles published in the Brazilian media whereby the Brazilian Government had indicated the need to have more control over the acquisition of rural land in Brazil by foreigners.

The AGU/LA 01/2010 simply supports the thesis that the revocation of article 171 of the Brazilian Constitution has removed any impediment to enforce paragraph 1, section 1 of Law 5.709 and, therefore, it should be now considered applicable once again.

With regard to the general public’s opinion, the repercussion of the AGU/LA 01/2010 directly affects the players of the agribusiness, the pulp and paper companies, and the foreign investment funds that were acting in the Brazilian market.

An important issue to discuss is the fact that all these interpretations of Law 5.709 and the applicability or derogation of the restrictions to acquire rural property by foreigners is being practised by means of the AGU’s Opinions and not by a law enacted by the Brazilian Congress, basically because it is a matter of interpretation of the law by federal authorities.

The AGU is mainly a legal advisor for the Executive Branch and its opinions represent the ‘official interpretation’ of any given issue.

Therefore, at the request of the President the AGU, invested by the powers granted by Title V of Complementary Law No. 73,4 issued the AGU/LA 01/2010 which, with different arguments, now states that paragraph 1, section 1 of Law 5.709 is in fact in force and therefore, all the limitations contained therein to the acquisition of rural properties are from now on applicable to Brazilian companies of foreign capital.

Section 39 of Complementary Law No 73 states that only the President of Brazil may request the AGU to study any issue, and section 40 determines that an Opinion issued by the AGU, approved by the President and published in the Official Gazette is binding on the whole Federal Administration, including the Real Estate Property Registries.

Although AGU’s opinion is not a final and binding interpretation on the public in general and therefore, its accuracy and legality may be disputed before the Brazilian courts, it is binding on all offices of the executive branch of the Federal Government.

The effective restrictions

It is important to clarify that the terms and provisions of Law 5.709 do not prohibit foreign companies to acquire rural properties, but establish limitations to which the acquisition of property may be made. Therefore, future businesses in Brazil may continue, taking into consideration that a new step will have to be added to the checklist of acts and documents necessary for the acquisition – the authorisation of the Government through INCRA.

Please find below a detail of the limitations provided for in Law 5.709:

  1. an authorisation by INCRA is required for the acquisition by foreign individuals of rural property with more than three and fewer than 50 rural units;
  2. the legal limit of 25 per cent of land in the same County (‘Município’) owned by foreign individuals, foreign companies and/or Brazilian companies of foreign capital can not be surpassed;
  3. the legal limit of 40 per cent of land in the same County (‘Município’) owned by foreign individuals, foreign companies and/or Brazilian companies of foreign capital of the same nationality can not be surpassed; and
  4. authorisation of the Brazilian Congress is required for the acquisition over the limits of (ii) and (iii) above.

It is important to point out that in order to obtain such authorisations; a project regarding the exploitation of the rural land must be prepared by an agronomist engineer and submitted to the authorities, attesting to the economic viability of such project.

Furthermore, the Brazilian law authorises, in some special circumstances, the acquisitions by foreigners of areas larger than the maximum sizes above mentioned. For such purpose, the foreigner must present, before the National Security Council and the Brazilian Senate, a project containing information and details regarding the use of such an area. The Brazilian Senate must present its opinion based on the relevant interest of the project for the Brazilian economy and after the approval by such authority, the President of Brazil shall grant the final authorisation to the foreigner to explore such rural land, as per the guidelines of the project presented.

Note that the relevant Public Notaries and Real Estate Registry Offices are forbidden to register an acquisition made in violation of Law 5.709. If the Public Notaries and Real Estate Registry Offices do not observe the relevant legal provisions such registration shall be considered null and void and the officials concerned shall be considered civilly and criminally liable.

In a meeting held with INCRA officials last year, they stated that it was their understanding that, as an additional limitation and with regard to foreign companies and Brazilian companies of foreign capital, the size of the property shall not exceed the equivalent to 100 MEI in the Brazilian territory. Any acquisition over these limits must be approved by the Brazilian Congress.

Notwithstanding the above, considering that INCRA officials intend to apply these limitations, please find below an example of how to determine the number of hectares in the corresponding MEI. Please note that the MEI value varies depending on the State in which the rural estate property is located.5

Investors Affected

As a consequence of the publication of AGU/LA 01/2010 the limitations and restrictions set forth by Law 5.709 will be applicable again to Brazilian companies of foreign capital, the restrictions of Law 5.709 are now applicable to:

  • foreign companies and foreign individuals: who are domiciled abroad and are interested in acquiring, by any means, a rural property;
  • branches: the establishment of a foreign company duly authorised to operate in Brazil;
  • Brazilian companies of foreign capital: Brazilian companies organised under the laws of Brazil and domiciled within the Brazilian territory which are, in fact, an investment vehicle company of a foreign entity or individual, in which the majority of the corporate capital of the vehicle company is held, directly or indirectly by a foreign person or entity domiciled abroad.

Although it is yet unclear, the authorities of INCRA implied that it was their intent that control reaches the highest level of the corporate structure. Since the authorisation process requires that the majority shareholder of the Brazilian companies of foreign capital present their by-laws and incorporation documents, the participation of the foreign company will always be clear to the authorities and, therefore, they may require the documents of all the foreign companies until they reach the ultimate controlling shareholder.

The decentralised structures of both the Public Registries of Commerce and the Real Estate Registry Offices somehow prevented the administrative authorities from imposing the full force of the AGU/LA 01/2010 over all the investors affected and detailed above.

However, last March, the AGU requested the Ministry of Development, Industry and Trade to adopt some measures of the National Trade Registration (DNRC). This was specifically regarding the issuance of guidance directed to the Boards of Commerce of the whole territory of Brazil to take measures to prohibit the filing of any amendment to articles of association that provide any change in the corporate control of companies which own rural properties in Brazil that would imply in the transfer the control of such companies to foreign entities or foreign individuals.

The AGU has also requested of the Ministry of Agriculture, the adoption of measures by the Securities Commission (CVM) regarding the issuance of standard clauses and conditions that shall be used in commercial papers or investment agreements destined to be traded on the stock exchange, refusing the admission of securities which are not in accordance with the terms established by Brazilian law.

The AGU has argued that some listed companies might be using commercial strategies that could, indirectly, result in the acquisition of rural properties by foreign companies.

Transactions affected

In short, the acquisition, by any means, of rural estate property is subject to the restrictions determined by Law 5.709. Below is a list of the types of transactions affected by the new interpretation enforced by the AGU/LA 01/2010:

  • transfer of real estate rural property by any title: whether gratuitous or paid, the transfer of a rural property to a foreign company or a Brazilian company of foreign capital;
  • lease of real estate rural property: the lease and all its subspecies are also included under the restrictions of Law 5.709. Although not originally included, Federal Law No 8.629, enacted in February 1993 (‘Law 8.629’), extended the restrictions of Law 5.709 to lease agreements on rural properties. Please note that the exploitation of the surface or the assets set on the rural estate property is not included under these restrictions. The legal definition of lease (rural lease agreement, ‘contrato de arrendamento’) states that there is a lease when one of the parties assigns to the other party, for a determined or undetermined period of time, the use and enjoyment of a rural property for the purpose of agricultural, cattle, or agroindustrial exploitation;
  • corporate transactions: by means of the provisions of section 20 of Decree No 74.965/74 the restrictions also affect any transfer of shares or participations in Brazilian companies which own rural properties, including but not limited to mergers, spin-offs, incorporations, consolidations, and basically any operation that entails a change in control of the company owning the rural properties, when the said change in control implies the participation of a foreign company or individual domiciled abroad.

It is important to note that, when referring to Brazilian companies of foreign capital, while the terms and provisions of Law 5.709 refer to foreign companies or foreign individuals that hold the majority of the corporate capital of a Brazilian company by any means, the terms of the AGU/LA 01/2010 state that in order to equate a Brazilian company of foreign capital to a foreign company for the purpose of the application of Law 5.709, the following criteria must be followed:

  • the foreign company must not be domiciled within the Brazilian territory;
  • the foreign company must hold a participation, by any means, in a Brazilian company; and
  • that participation must assure the foreign company the power to conduct the resolutions of the shareholders’ meetings, to appoint the majority of the managers, directors or administrators of the Brazilian company, and to conduct the corporate activities and direct the day-to-day activities of the corporate bodies of the company.

This may cause an interpretation dispute since the AGU/LA 01/2010 somehow extends and bends the qualification of the foreign shareholder. If before, a Brazilian company that had a foreign shareholder holding 49 per cent of the corporate capital was not considered to be included within the provisions of Law 5.709, now, the same company may indeed be considered included within the limitations if a shareholders’ agreement was executed granting the said foreign shareholder the power to control the company, although it may not hold the majority of the corporate capital.

When it comes to analysing the effects of this new interpretation in light of the ongoing transactions, please note that, some transactions, depending on their stage, shall be affected and, therefore, will have to be analysed by INCRA in order to comply with Law 5.709:

a) transactions regarding the transfer of rural properties: as per Brazilian law, the transfer of ownership of  real estate property only occurs upon the registration of the relevant deed with the Real Estate Registry Office;

  • If the public deed of transfer of property and required registrations have already been executed and completed with the Real Estate Registry Office before the issuance of AGU/LA 01/2010, they should not be submitted for the approval of any new governmental agency, since they are considered to be closed deals, protected under the principle of vested rights, which protects the rights constituted before the enactment of a law or norm that may affect them. We can safely state that the transactions involving rural estate properties that have been already duly registered with the Real Estate Registry Office before the publication of AGU/LA 01/2010 will not be affected by it; all the transactions closed and registered before the publication of AGU/LA 01/2010 (with or without the certification by INCRA of the geo-referencing) are included above. Therefore, if a rural estate property was transferred to one of the subjects affected by AGU/LA 01/2010 as detailed above and such transaction was effectively and fully registered with the Real Estate Registry Office before the publication of AGU/LA 01/2010, even without the geo-referencing, it will not be affected by the consequences arising from AGU/LA 01/2010 and such transfer will not be revoked. Please note that section 273, paragraph d) of AGU/LA 01/2010 clearly states that ‘d) the effects of this Opinion must be effective as from the date of publication in the Federal Official Gazette, as determined on Article 2, item XIII of Law No. 9.784 of January 29, 1999’. The said law firmly states that within the Federal Public Administration there will not be a retroactive enforcement of a law. Note that no additional documents are required to prove that the property was duly transferred before the publication of AGU/LA 01/2010. The dating of the registered documents is sufficient to prove such fact;
  • If the public deed of transfer of property or the required registrations has not already been executed and/or completed with the Real Estate Registry Office, it will have to be submitted for the approval of INCRA, since the transaction has not yet completed the legal steps necessary for the transfer of the property right (execution of the public deed of transfer and its registration before the corresponding Real Estate Registry Office). In this case, we are talking about transactions where, at the time of publication of AGU/LA 01/2010 either (i) the public deed of transfer was not yet granted; and/or (ii) registration of the public deed of transfer with the Real Estate Registry Office had not yet occurred:

b) transactions regarding mergers, consolidation, spin-off and the transfer of interests in companies that own rural estate properties;

If the corporate documents necessary to transfer the quotas, shares or participation interests; or the documents necessary to merge or incorporate the companies in a corporate reorganisation were granted and registered with the Public Registry of Commerce, the Registry of Shares or the Company and the Real Estate Registry (when applicable) before the issuance of AGU/LA 01/2010, these transactions should not be submitted for the approval of any new governmental agency, since they are considered to be closed deals, protected under the principle of vested rights;

If the corporate documents necessary to transfer the quotas, shares or participation interests; or the documents necessary to merge or incorporate the companies in a corporate reorganisation were granted but not yet registered with the Public Registry of Commerce, the Registry of Shares or the Company and the Real Estate Registry (when applicable) before the issuance of AGU/LA 01/2010, they shall have to be submitted for the approval of INCRA, since the transaction has not yet completed the legal steps necessary to complete the transfer of the interests or the corporate reorganisation.

Authorisation process

AGU/LA 01/2010 was published in the Official Gazette on 23 August 2010, which is the date to be considered for the analysis of the effects over ongoing transactions.

Further, it is important to note that due to the fact that ownership of rural land will be subject to prior authorisation, when foreclosing a guarantee the creditor will no longer be allowed to be awarded the property but will have to wait for its public auction (which may, in theory, affect the actual value of the property).

According to information provided by INCRA, the request seeking authorisation to purchase the rural property or to close a transaction regarding a company owning rural estate property shall be submitted to INCRA, duly accompanied by the following documents:

  • usual documentation related to the property;
  • the corporate documents of the company interested in the acquisition;
  • the project to be implemented in the acquired property.

As we have been informed, if the requesting company has a foreign shareholder domiciled abroad with majority of the corporate capital, it will be necessary to file also (i) the corporate documents of the said shareholder; (ii) a certificate of good standing; and (iii) a power of attorney appointing a representative of the shareholder who must be empowered to be subpoenaed.

The filing will be directed by INCRA to the corresponding Ministry to which the exploitation project of the rural property is related.

Despite the above, INCRA is still working on the elaboration of an internal instruction to determine the guidelines of such previous approval. Considering that the mandatory character of such a procedure is quite recent, nobody is able to ascertain how long seeking an approval may take. This is the main problem facing foreign investors.

Conclusion

The current administration seems to be very aware of the damaging effects this kind of restriction may cause to the economy of the country and, therefore, should somehow search for an escape clause to allow once again the acquisition of property without limitations although maintaining certain requirements in order to enable the Government to conduct an ongoing survey on the acquisition of rural estate property by foreigners.

On 18 April of this year the newspaper O Estado de São Paulo published that at least US$15bn of investments failed to enter Brazil since AGU/LA 01/2010, according to a study commissioned by the Brazilian Association of Agribusiness and Rural Marketing (ABMR&A).

According to recently published news, the Federal Government is evaluating the possibility of creating a Regulatory Agency for Rural Lands (ARTR), subordinated to the Ministry of Agriculture and Agrarian Reform, in order to inspect, monitor, control and authorise business transactions involving ownership by foreigners of rural properties throughout the Brazilian territory.

Besides that, there are certain speculations on the fact that a draft of a legislative Bill is under consideration by the Government. This would define the limits for acquisition of rural property by foreigners. The draft apparently would state that the foreign individual/company would have to incorporate a special purpose company to buy the land and offer a golden share to the Government, which would mean that the Government would be a partner in all such foreign investments. This Bill would also be foreign investment funds.

Rumour has it that the intention of Congress is not to build any barrier to foreign investments but to create an instrument of control and supervision of the state over rural land use.

The change in strategies adopted in the acquisition of property is already present in other countries of Latin America. Argentina has studies and legislative Bills to be sent to Congress to restrict the purchase of rural real estate by foreigners in order to protect the natives and limit the sales coming from foreign capital as strategic assets.

Source: International Bar Association

Notes

1 According to the information published by Folha de São Paulo, on 21 March  2011, the official personal data of INCRA noted that 45,000.00km² of Brazilian land are currently owned by foreigners, which is equivalent to 20 per cent of the area of the State of São Paulo.
2 Valor Econômico, 06-22-2010.
3 Estadão, 07-14-2010, National Section, p a9.
4 Enacted on 10 February 1993.
5 The value in hectares of an MEI is provided in the Instrução Especial INCRA # 5-A (‘Instruction 5-A’) dated as of 1973, which depends on the reading of the Instrução Especial INCRA # 50 (‘Instruction 50’) dated as of 1997.

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