27 June 2012
In October of 2011 the Agriculture, Cattle Breeding and Rural Development Committee of the House of Representatives created a special subcommittee to analyze and propose measures regarding the acquisition and use of rural areas in Brazil by foreigners, natural persons and legal entities.
Formation of the subcommittee was prompted because of Federal General Attorney’s opinion AGU LA 01/2010 (AGU’s Opinion), which has given a new interpretation to the first paragraph of Article 1 of Law no. 5,709, of October 7, 1971, governing the acquisition of rural properties by foreign natural person or legal entity.
Since 2010, AGU’s Opinion has created problems for foreign investors in several key sectors of the Brazilian economy, including mining. For example, Brazilian mining companies ultimately controlled by foreigners have faced legal uncertainty about the ownership of the rural property where their mining deposits are located, as they cannot—according to the AGU’s Opinion—register the full ownership of the rural properties.
As a result of this situation, companies controlled by foreign capital, not just mining companies, are discouraged from investing in Brazil since they are prevented from acquiring the ownership of their own rural properties and the ones neighboring the mine.
This has led to loss of competitiveness, reduced tax revenues for federal, state and municipalities and a lack of job creation.
Accordingly, after several hearings, on June 13, the House of Representatives approved Report 04/2012, which proposes a new legal framework for the ownership of rural properties by foreigners. The report replaces the interpretations in the AGU’s Opinion by proposing a bill that treats as Brazilian any company established in Brazil, even if directly or indirectly controlled by a foreign entity or natural person.
Despite the approval of the report, the decision is not universally accepted, even among parliamentarians of the special subcommittee or among the other deputies and federal senators. The debates and opinions take into consideration several aspects, such as national sovereignty and the distribution of wealth and food in the country. However, the main argument in favor of the presented bill is to avoid regulatory barriers that may inhibit the inflow of foreign capital.
The original text of the proposed bill contained more restrictions on ownership of rural properties by foreigners. As a result of the vigorous debate, the current version has been significantly modified, with several of the initial requirements being removed.
As approved by the subcommittee, the proposed bill presents relevant and positive changes. For example, it:
- Deems as Brazilians, for purposes of the bill, any Brazilian entity controlled by foreigners;
- Does not limit the maximum term for leasing the rural property;
- Does not limit the size of the rural lands that can be leased or acquired;
- Does not require foreigners to obtain a positive opinion from the Ministry of Mines and Energy for the acquisition of rural properties for mining projects.
The subcommittee’s report must still be forwarded to the plenary of the House of Representatives for deliberation before the proposed bill can be enacted as law. Thus, there is still a long way to go before the changes made by the proposed bill can be applied.
Meanwhile, in some specific cases, measures and temporary solutions can be adopted to mitigate the legal uncertainty.
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Observations in this update about Brazilian law are by Tauil & Chequer Advogados. They are not intended to provide legal advice to any entity; any entity considering the possibility of a transaction must seek advice tailored to its particular circumstances.