Brazilian Regime of Acquisition and Purchase of Rural Properties by Foreign Investors

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Brazilian Regime of Acquisition and Purchase of Rural Properties by Foreign Investors

By Clarita Costa Maia*

It is widely expected that at any time of Brazil’s new Federal Administration the legal parameters for the acquisition and purchase of rural properties will face a dramatic change. The new legal framework might not only favor international investments on agriculture and food industry but energy deals, among others, to the extent land might be used as collateral in financing contracts.

The legal revision is causing anxiety in Brazilian civil society. It was already posited as a political commitment that the new framework will avoid speculation of land, since it will support foreign investment in agricultural products with longer production cycles such as oranges, pulpwood, sugar cane and coffee.

This change responds to an expressive group of Brazilian doctrinaires in Agrarian and Land Law’s concerns, as well as the private sector’s, to whom the current regulatory mark was anomalously determined and is dramatically counterproductive. A binding legal opinion issued by the Federal Attorney General’s Office, which pacified the praxis of the Brazilian Federal Administration, is in the center of the controversy. According to most of the aforementioned doctrinaires, the Legal Opinion surpasses the limits of the constitutional order and confronts the principles of the separation and independence of powers in order to comply with a protectionist juridical and economical ideology supposedly in the name of national security and public interest. More precisely, the legal statement under scrutiny, Opinion No. 01/2008-RVJ CGU/AGU, was premised in a contra legem rationale that exalted a presumed systematic interpretation of the Constitution.

Up until 2011, the restrictions to foreign investments brought by Legal Opinion CGU / AGU-1/2008-RVJ, from 2008, resulted on the suspension of agroindustry investments in the country in the order of 15 billion dollars1. In the scenario of economic crises and loss of investment capacity by the State and the Brazilian productive sector, the liberalization of the economy and the enhancement of participation of foreign capital in the Brazilian economy appears to be the natural, if not the only, possible alternative for economic growth.

By the promulgation of the current Brazilian Constitution, in 1988, the major legal diploma on the subject was the Federal Law Nº 5,709, dated October 7, 1971, which, according to its title, regulates the acquisition of rural property by foreign residents in the country or foreign legal entity authorized to operate in Brazil. Nowadays, the legal framework concerning the purchase and rental of rural properties in Brazil encompasses over twenty-seven legal diplomas, the Constitution and the Federal Law Nº 5,709 of 1971 being the most important of them.

Article 1, paragraph 1, of Federal Law Nº 5,709 of 1971 states that when a Brazilian juridical person is owned by foreign individuals or legal entities that have the majority of their share capital and reside or have a foreign seat, it is also considered to be foreign in nature and, therefore, subject to a less favorable treatment in relation to the other Brazilian juridical persons.

The new constitutional order received the Federal Law Nº 5,709 of 1971 except by its article 1, paragraph 1. The article 171 of the Federal Constitution brought a more liberal, although still restrictive, discipline. According to it, there were two kinds of Brazilian companies: the one incorporated under Brazilian law and having its headquarters and administration in the country; and the one with national capital whose effective control is in a permanent character under the direct or indirect ownership of natural persons domiciled and resident in the country or of entities of internal public law. It was considered by effective control the ownership of the majority of its voting capital and the exercise, de facto or de jure, of the decision-making power to manage its activities. The nationality of the individuals and legal entities were made irrelevant and the place of residence was considered decisive.

Five years after the promulgation of the Constitution, and notwithstanding the discipline of article 171, which repelled the one of the article 1, paragraph 1, of Federal Law No. 5,709 of 1971, the Federal Law No. 8,629 of 1993, article 23, which regulates the constitutional provisions relating to agrarian reform, provided for in Chapter III, Title VII, of the Federal Constitution, stated that the foreigner residing in Brazil and the legal entity authorized to operate in Brazil may only lease rural property under Law No. 5,709 of 1971. That deepened the controversy.

In 1995, however, the Constitutional Amendment No. 6 removed article 171 from the Constitution with the clear intent of opening Brazilian market to international investments, a measure that was in accordance to the spirit of the political and economic changes then implemented in Brazil at that time.

The removal of article 171 raised the question about the possible repristination of article 1, paragraph 1, Federal Law No. 5,709 of 1971, which, in practice, would bring back the former discrimination, even more severe than the one determined by the former Constitutional article 171.

In Brazil, the Federal Attorney General's Office (AGU) is responsible for the judicial and extrajudicial representation of the Union and for the legal advice of the Executive Branch (article 131 of the Federal Constitution). It is also entitled of establishing the interpretation of the laws and the Constitution in case of doubts and legal disputes within the Federal Administration (Article 4, X and article 10 of Complementary Law No. 73 of February 10, 1993), by means of legal opinions that must be the first approved by the President and published to be legally binding. 

Numerous of Federal Attorney General’s Office legal opinions were delivered about this subject. The first, AGU QG-22/94, defended the non-repristination of the article 1, paragraph 1, of the Federal Law No. 5,709 of 1971 on the grounds of material incompatibility with art. 171, I, of the Federal Constitution, which did not allow restrictions on the Brazilian company (although controlled by foreign capital), in addition to those provided for in the Magna Carta itself. The Legal Opinion was approved but not published by the President, being therefore non-binding. The second, AGU GQ-181-97 also concluded for the non-repristination, but admitted that a future law could establish a limit on the application of foreign capital in the country, in face of art. 172 of the Constitution, which states that the law will discipline foreign capital investments based on the national interest, encourage reinvestment and regulate remittances. This Legal Opinion was both approved and published; therefore, it was made legally binding. The third and final Legal Opinion, CGU/AGU-1/2008-RVJ, dated September 3, 2008, concluded diversely. In the face of the new scenario of the world economy and allegedly total lack of control of acquisitions by companies controlled by foreigners, for national sovereignty sake, the Legal Opinion concluded for the repristination. The legal rationale was based on a systematic interpretation of the Constitution, as previously mentioned. This understanding was, later, consolidated by AGU LA-01/2010, dated August 19, 2010, prepared by the Federal Attorney General's Office and approved by the President of the Republic. This is the one in force at the moment.


The Opinion No. 01/2008-RVJ CGU/AGU was the response to the doubt that arouse with the Constitutional Amendment No. 6, 1995, that withdrew article 171 of the Brazilian Constitution about the limits of rural land acquisition by foreign investors. This Amendment removed from the Brazilian legal system the following typology of Brazilian enterprises and, therefore, the differential treatment then conferred: the Brazilian companies with national capital and the Brazilian companies with foreign capital. With this Constitutional reform, only two types of companies would be recognized in our legal system as regards nationality: the Brazilian company and the foreign company, regardless the shareholding structure in both cases. Therefore, indirect investments would be regulated by article 172 of the Federal Constitution and, by virtue of the commandment of its chapeau, would be object of a complementary law.

In both cases, the Constitutional Amendment No. 6, of 1995, that clearly extinguishes a bifrontal typology of Brazilian enterprises, and article 172 of the Federal Constitution that expressly determines the need of a complementary law to further regulate the foreign indirect investment, there is a clear emphasis of the Derivative Constitutional Power as the competent instance of constitutional reform and regulation. 


By the Opinion No. 01/2008-RVJ from CGU/AGU, the former taxonomy was, in effect, rescued and the foreign investors, both private and corporate, would be disciplined in their initiatives of purchasing rural properties in Brazil by the terms of the Law No 5,709 of 1971. It happens that the preparatory work of the Constitutional Amendment No. 6, of 1995, and all its political and judicial fundamentals were in the sense of a liberalization endeavor. The repristination of the previously mentioned legal norm generated an even broader restriction by the amplifying interpretation, in contrast with the hermeneutic rule exceptiones sunt strictissimae interpretationis, meaning, "exceptions must be interpreted strictly"2.

From the strictly legal point of view of the human rights law, no foreigner should be subject to a regime different from that conferred to the national, except when explicitly determined in constitutional and legal terms, with transparency and reasonableness. This is the instruction inserted in the Universal Declaration of Human Rights (Article 2), the Bustamante Code (article 1), the International Covenant on Economic, Social and Cultural Rights (articles 1 to 4), the International Covenant on Civil and Political Rights (Articles 2 and 26) and the American Convention on Human Rights (articles 1 and 26). Therefore, this systematic interpretation might even promote international responsibility of the State of Brazil in the face of International Law. 

Federal Law No 5,709 of 1971 establishes more strict rules to the purchase and rental of rural properties by foreigners concerning to the extension of the areas under interest and the procedure of purchase and rental.

Under the current legislation, natural persons may acquire areas not exceeding fifty Modules of Indefinite Exploration (MIE)3, in a continuous or discontinuous area, and under the condition of previous authorization or license, except in the case of purchase of extensions inferior to three MIE, in which hypothesis, these conditions are not obligatory. The foreign legal entities referred to in art. 1 of the Law, by their part, may only acquire rural properties destined to the implantation of agricultural, livestock, industrial or colonization projects, linked to its statutory objectives. Those projects must be approved by the Ministry of Agriculture, after hearing the competent federal agency for regional development in the respective area and on the projects of an industrial nature, after hearing the Ministry of Industry and Commerce. After the specific approval, there is still space for discretion by the Administration’s part to grant or not the authorization for the acquisition of the rural area. In any case, the sum of the rural areas belonging to foreigners, being natural persons or legal entities, must not exceed a quarter of the surface of the municipalities where they are located, as evidenced by certificate of the Real Estate Registry. Natural persons or legal entities of the same nationality must not own more than 40% (forty percent) of the limit fixed of the rural areas of each municipality.

The juridical insecurity caused by the many changes in the Federal Administration’s interpretation over the Brazilian legal framework on the subject, the many criticism raised by the juridical community over a de facto constitutionality control carried out by an incompetent instance of the Brazilian Administration, the counterproductive effects of such framework and the economic crisis itself motivated a gentle move in Brazilian Executive Power towards a more critical posture concerning international investments restriction.


Law 13,097, dated January 19, 2015, on Public-Private Partnership Contracts, altered article 23 of Law 8,080, dated September 19, 1990, that establishes the Brazilian Unified Health System to expressly allow the participation of foreign capital companies in the provision of health care services. Although, the legal change was considered redundant, since it was already defensible international investments in the area after the Constitutional Amendment Nº 6, of 1995, it was advisable to operate to the change in order to bury any controversy.


In the same vein, parallel to the Decision 1,942, of 1995, of the Union Court Accounts relating to non-urban lands governance in Brazil, which advocated, inter alia, for a better management and control of the rural lands in Brazil, modernization and simplification of the related legislation, the Ministry of Agriculture, Livestock and Food Supply created a Working Group (Notification No 180/2015/Mapa, dated July 29, 2015, with the aim of examing and proposing solutions to the acquisition of rural lands by foreigners.


The Working Group presented a bill to the Civil House which, nevertheless, did not reach consensus. It was then presented to the Chamber of Deputies’ Parliamentary Front for Agriculture, that, however, preferred to concentrate efforts on the legislative process of the Project of Law Nº 4,059 of 2012, brought to Parliamentary scrutiny again on March 23, 2016, which is under scrutiny along with Project of Law Nº 2,289 of 2007, Nº 2,376 of 2007, Nº 3,483 of 2008 and Nº 4,240 of 2008.

According to the Chamber of Deputies’ bylaw, the older proposition must be voted at first, which would have an adversely effect on the other Projects of Law. If, during the discussion, a motion is raised with the aim to reverse the order of the Propositions, anyone can award the precedence.


As already mentioned, the four Projects, by material affinity, gained joint processing and were attributed a regimental urgency regime on September 16, 2016. The bills are ready to be voted by the Chamber of Deputies’ Floor, last stage of legislative processing in the original house and one step before sending the bill to the analyses of the Federal Senate. The actual discussing and voting depends on the Chair’s Secretary General, along with the President of the Chamber’s, decision to put the bills on the Floor.


According to the Chamber of Deputies’ bylaw, the legislative Opinion over the Bills must be delivered during the discussion. If, however, the interim between now and the voting of the Bills by the Floor one of the Commissions designated to give the Legislative Opinion finish its considerations this Opinion will be the first to be analyzed. Commissions do not give conclusive statements, signaling that even in the case of a non-approval or significant change in the merits of any of the bills, the Floor can still change the wording of the bill that will finally prevail.

The Project of Law Nº 2,289 of 2007 that, according to the bylaw, would be the first to be analyzed, making unnecessary the consideration over the other bills that stablishes more liberal limits for foreigners to acquire and rent rural properties. According to its wording, the acquisition and rental of rural property per person shall not exceed the size of up to 35 (thirty-five) modules, in continuous or discontinuous area, observing the limit of up to 2,500 (two thousand and five hundred) hectares, and exempts from any authorization or license the acquisition of areas not superior to four (4) tax modules and the lease of areas not superior to ten (10) tax modules. The Project of Law determines, as well, that in rural lots, the occupation of a minimum of 50% (fifty percent) of the total area will be mandatorily made by Brazilians. Finally, it maintains the extension limits existing in the current legislation but excludes from the restrictions the acquisitions of rural areas when the acquirer is married to a Brazilian person under the communion of assets regime.


Project of Law Nº 4,509 of 2012, by its turn, literally determines that the restrictions established in this Law do not apply to legal entities, Brazilian companies, even if incorporated or controlled directly or indirectly by persons, natural persons or legal entities, overcoming the legal controversy brought by the interpretation of the Federal Attorney General’s Office.


Project prohibits the purchase or rental of rural properties by the non-governmental organization with operations in the Brazilian territory that has headquarters or non-governmental organization established in Brazil whose majority of the same individual is a foreign individual, or company established abroad or also coming from more than one of these sources when affiliated companies; the private foundation when its founders are persons framed in the provisions of previous items or foreign companies or foreign companies authorized to operate in Brazil with headquarters abroad; and the sovereign funds constituted by foreign states.


Albeit the Project of Law Nº 4,509 of 2012, maintains the current extension limits, as Project Nº 2,289 of 2007, the express disposal of the discrimination between Brazilian companies with national capital and Brazilian companies with foreign capital is considered to be enough to increase the level of legal security for foreign investments and to encourage the entry of foreign capital in Brazil for the bold, convenient and necessary private and public endeavors. The measure will also mitigate the inefficiencies found in the national agricultural sector, such as a lack of modernization related to low environmental standards and the maintenance of rural real estate speculation, generating, after all, uneconomic effects and distorting the competition ambiance.


In the scenario of political stabilization, Brazil will be, in 2017, the stage of important and liberal legal changes.


1 The study of Dr. Luis Eduardo Brito Scoton and Flavia Trentini refers to the report of the Brazilian Association of Rural Marketing and Agribusiness of the subject. SCOTON, Luis Eduardo Brito & TRENTINI, Flavia. Limitation on the Acquisition of Rural Properties by Legal Persons of Foreign Capital: Interest Groups and Socioeconomic Effects www.ipea.gov.br/code2011/chamada2011/pdf/area8/area8-artigo5.pdf Access on August 1, 2016) reports on research carried out by consultants MBAgro and Agroconsult, at the request of the Brazilian Marketing Association Rural & Agribusiness (ABMR & A). BRAZILIAN MARKETING ASSOCIATION RURAL & AGRONEGÓCIOS Opinion - Economic Impacts of the AGU's Opinion, which imposes restrictions on the acquisition and lease of agricultural land by Brazilian companies with control of the capital held by foreigners. Abmra.org.br/form_dl.htm  


2
SCAFF, Fernando Campos. O Arrendamento e a Parceria Rural Frente aos Limites à Aquisição de Terras por Estrangeiros. Parecer. Revista de Direito Civil Contemporâneo | vol. 2/2015 | p. 297 - 312 | Jan - Mar / 2015 DTR\2015\2168


3 The MIE is a unit of measure, expressed in hectares, derived from the concept of rural module, for the properties with undefined exploitation. The size of the MEI varies between 5 and 100 hectares, according to the Typical Zone of Module (ZTM) of the municipality of location of the rural property and is determined by the Brazilian National Institute of Colonization and Agrarian Reform (INCRA). Such maximum limits may be expanded by the President of the Republic, under the consultation of the National Security Council. 

  


[*]
Clarita Costa Maia is partner of Pinheiro, Mourão, Raso e Araújo Filho Advogados in Brasília, Brazil. She focuses her practice on international law, corporate law, agribusiness, mining, energy and government contracts. She is president of the International Committee of the Brazilian Bar Association, Brasília Section. She may be contacted at 55+61+996983407 or clarita@pmraf.com.br 
 

photo
Brasilia,
Thursday, May 4, 2017
Real Property