Monte & Queiroz Advogados: Acquisition of rural property by foreigners

Monte & Queiroz Advogados: Acquisition of rural property by foreigners

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Chamber Member News Post Date: 04/17/17 Source: Monte & Queiroz Advogados By: Luiz Otavio Monte Vieira da Cunha and Monte & Queiroz Advogados
Summary

The Brazilian Federal Constitution sets forth, in Article 190, that “the law shall regulate and limit the acquisition or lease of rural property by foreign individuals or legal entities, and shall establish the cases that depend on authorization by the National Congress”.

Federal Law No. 5709/71 is the rule that governs this matter, and it sets forth, in Articles 1 and 5, that Brazilian legal entities in which foreign individuals or legal entities hold equity interest, on any account, holding a majority of their capital stock and who are resident or which have their principal place of business abroad may only acquire rural properties designed for the implementation of agricultural, animal-raising, industrial or settlement projects linked to the purposes of their By-Laws, upon approval of the Ministry of Agriculture or of the Ministry of Industry and Commerce, as the case may be.

Decree No. 74965/74 was the rule that regulated the aforementioned Law No. 5709/71, reiterating the requirements for the acquisition of rural properties by foreigners, providing that:

Article 1. Foreigners resident in the Country and foreign legal entities authorized to operate in Brazil may only acquire rural properties in the form set forth in these regulations.

Paragraph 1. Brazilian legal entities in which foreign persons, whether individuals or legal entities, hold equity interest, on any account, holding a majority of their capital stock and who are resident or which have their principal place of business abroad are also subject to the system established by these regulations.

Article 11. Foreign legal entities authorized to operate in Brazil, or Brazilian legal entities, in the event of Article 1, Paragraph 1, may only acquire rural properties when they are designed for the implementation of agricultural, animal-raising, industrial or settlement projects linked to the purposes of their By-Laws.

Paragraph 1. The acquisition shall be conditional upon approval of the projects by the Ministry of Agriculture, after consultation with the competent federal body.

Paragraph 2. The following bodies are competent to analyze the projects:

a) the Brazilian Settlement and Agrarian Reform Institute (INCRA), for settlement projects;

b) the Amazon Development Superintendence (SUDAM) and the Northeastern Region Development Superintendence (SUDENE), for agricultural and animal-raising projects located in the respective areas;

c) The Ministry of Industry and Trade, for industrial and touristic projects, by means of the Industrial Development Council and of the Brazilian Tourism Company, respectively.

In addition, Article 6 of Law No. 5709/71 and Article 13 of Decree No. 74965/74 set forth that the following joint-stock companies must mandatorily adopt the form of registered shares: a) those that devote to rural parceling b) those that directly explore rural areas; or c) those that own rural properties not linked to their activities as set forth in their By-Laws.

In addition, public deeds of purchase of properties that mention as buyer foreign legal entities or Brazilian legal entities a majority of the capital stock of which is held by foreign individuals or legal entities must contain a transcription of the act that granted the authorization for acquisition of the area (Article 9, Sole paragraph, of Law No. 5709/71 and Article 14 of Decree No. 74965/74).

Pursuant to Federal Law No. 5709/71 and its regulating Decree No. 74965/74, in the event of failure to meet the requirements and formalities for the acquisition of properties by foreigners, the business would be declared null by operation of law, and the return of the property price by the seller to the buyer is guaranteed. Let us see:

Law No. 5709/71:

Article 15. Acquisitions of rural properties in breach of the provisions of this Law are null by operation of law. The notary public who draws up the deed and the registration official who transcribes it shall be held civilly liable for the damage they cause to the contracting parties, without prejudice to the criminal liability for nonfeasance or misrepresentation. The seller is required to return the property price to the buyer.

Decree No. 74965/74:

Article 19. Acquisitions of rural properties in breach of the statutory provisions are null by operation of law: The Notary Public who draws up the deed and the registration official who transcribes it shall be held civilly liable for the damage they cause to the contracting parties, without prejudice to the criminal liability for nonfeasance or misrepresentation; the seller shall be required to return to the acquirer the property price, or the amounts received on this account as part of the payment.

However, in the past there have been discussions on the applicability of the rule of Article 1, Paragraph 1 of Law No. 5709/71, due to doubts with respect to receipt of this rule by the 1988 Federal Constitution or not. In other words, it is questioned if the restrictions applicable to foreign legal entities also apply to Brazilian legal entities in which foreign persons, whether individuals or legal entities, hold equity interest, on any account, holding a majority of their capital stock and residing or having their principal place of business abroad.

At the time of purchase of the real properties, the prevailing understanding was that the rule was not applicable, because the Office of the General Counsel to the Federal Government - AGU, by means of Opinion No. AGU/LA-04/1994, which was adopted by Opinion No. GQ-22 of July 7, 1994, established the understanding that there was no such receipt. Below is the summary of said Opinion:

“Acquisition, by a Brazilian company with foreign capital, of the controlling interest in a company with the same characteristics. No receipt, by the 1988 Constitution, of paragraph 1 of Article 1 of Law No. 5709 of 1971. No need, in this case, for authorization of the National Congress, due to the inapplicability of Paragraph 2 of Article 23 of Law No. 8629, of 1993.”

Subsequently, the understanding explained above was confirmed by Opinion No. AGU/LA-01/1997,adopted by Opinion No. GQ-181, of December 17, 1998, the summary of which is transcribed below:

1. The conclusion of Opinion AGU/LA-04/1994, relating to revocation of Paragraph 1 of Article 1 of Law No. 5709, of October 7, 1971, remains unchanged, irrespective of revocation of Article 171 of the 1988 Constitution.

2. Possibility that future non-constitutional laws impose, based on relevant grounds, limitations to foreign capital in certain cases.

However, in 2010, such understanding was deeply changed upon issuance of Opinion No. LA-01, which presented the following conclusion:

In view of all the above, I differ from NOTE No. AGU/GM 241/2007, and understand:

a) that Paragraph 1 of Article 1 of Law No. 5709, of 1971 was received by the 1988 Federal Constitution, either in its original wording or after enactment of Amendment to Constitution No. 6, of 1995, in view of the former provisions of Article 171, Paragraph 1, 11 and of the provisions of Article 1, I, Article 3º, 11; Article 5, head provision; Article 170, I and IX; Article 172 and Article 190;

b) for a Brazilian legal entity to be held equivalent to a foreign legal entity contemplated in the statutory provision mentioned in the preceding item, for the establishment of limits and restrictions to the acquisition and lease of rural properties, the following is necessary:

i. the foreigner, individual, must be a non-resident or the legal entity must not have its principal place of business in the country;

ii. the foreigner, individual or legal entity, described in the preceding item must hold interest, on any account, in a Brazilian legal entity; and

iii. this equity interest must grant its holders the power to conduct the resolutions of the shareholders’ meeting to elect a majority of the company’s managers and to direct the corporate activities and the operation of the company’s bodies.

c) that in view of the understanding contained in the preceding items, Opinion QG-181, of 1998, and Opinion GQ-22, of 1994, should be revoked, and for that purpose this Opinion must be submitted to the approval of the President of the Republic for his approval and, subsequently, published in the Federal Official Gazette so that, pursuant to the provisions of article 40 of Supplementary Law No. 73, of 1993, it produces binding effects to the entire public administration.

In view of that, upon publication in the Federal Official Gazette of approval of Opinion No. LA-01, which revoked Opinion No. GQ-181, of 1998, and Opinion No. GQ-22, of 1994, the understanding was changed, and therefore the limitations to the acquisition of rural properties by foreign companies were established, holding Brazilian legal entities equivalent to foreign legal entities, provided: a) the foreign member, individual, is not resident or the legal entity does not have its principal place of business in the country; b) the foreign member, individual or legal entity, described in the preceding item holds interest on any account in a Brazilian legal entity and c) this equity interest grants its holders the power to conduct the resolutions of the shareholders’ meeting, to elect a majority of the company’s members and to direct the corporate activities and the operation of the company’s bodies.

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