New Rules Bring Major Improvements to Brazil’s Business Environment

On 30 April 2019, Provisional Measure 881/2019 (Medida Provisória 881/2019, “MP”) was published and came into force. Nicknamed “The MP of Economic Freedom”, the MP brings major improvements for the Brazilian business environment.

The MP creates a “Declaration of Rights of Economic Freedom”, which has the intention to protect the free market and the free exercise of economic activities.

The MP will apply to the “application and interpretation” of civil, business, economic, town planning and employment laws. The MP sets as its guiding principles:

“I – the presumption of freedom in carrying out economic activities;

II – the presumption of good faith of individuals; and

III – the subsidiary, minimal and exceptional intervention of the State on the exercise of economic activities.”

The MP brings about the following changes:

Improved corporate rules, easier tax compliance and less tax litigation

Stronger corporate agreements

The MP is disruptive insofar as the interpretation of corporate agreements is concerned: parties to a corporate agreement (Brazil’s equivalent to articles of association, bylaws, corporate constitutions and other internal corporate rules) will not be able to rely on general principles that go against what the parties agree to in a contract.

This provides an enormous improvement to Brazil’s corporate rules and brings it closer to those corporate rules applicable in modern jurisdictions.

Clearer rules about piercing the corporate veil

Different courts interpreted the rules applicable to piercing (or lifting) the corporate veil differently. The MP amends article 50 of the Civil Code to make clear that the interpretation given by the decisions in the Superior Court of Justice is formally adopted in that statute.

The new wording of article 50 provides that the corporate veil may be pierced if there is “misuse of purpose” or “asset commingling”. “Misuse of purpose” will occur if the directors and shareholders acted with the intent to damage creditors or carry out illegal acts through the company. Merely acting outside of the corporate objects will not amount to misuse of purpose.

“Asset commingling”, on the other hand, requires “the absence of separation in fact” between the assets of the company and those of its shareholders or directors and will be found where:

  • the company repetitively fulfills obligations of the shareholders or directors (or vice-versa), such as paying for a director’s or shareholder’s personal bills;
  • there is a transfer of assets or liabilities without effective consideration moving from the parties (i.e. nothing of real value is exchanged between the company and the shareholder or director); and
  • “other acts of non-compliance with the separation of assets”.

Additionally, a new article 82-A was added to the Civil Code clearly setting out that the assets of directors and shareholders will not be affected in cases of bankruptcy (winding up) unless the corporate veil is pierced as set out in article 50.

The new provisions in the MP will minimise the discretion that judges currently have to interpret the rules applicable to piercing the corporate veil of Brazilian legal entities.

Single shareholder limited liability partnerships (limitadas)

As limited liability partnerships (limitadas) require two shareholders, the EIRELI was the only corporate structure available to those who did not wish to have a fellow shareholder but wanted to have the benefit of limited liability. Unfortunately, EIRELIs require minimum amounts of paid-up capital, which did not suit many entrepreneurs.

The MP provides that limitadas will be allowed to have single shareholders.

Digital records to substitute paper records

Taxpayers will be allowed to keep records in digital form.

Details about this rule are yet to be released and the rules will only come into force once the infrastructure is in place. However, it is clear that the MP’s intention is to end the need to keep documents in paper form, giving digital copies that comply with the criteria for authenticity the same legal weight as paper originals.

Reduction of pointless tax-related court proceedings and appeals

One of the most frustrating issues for taxpayers in Brazil is to have to endure years before the courts dealing with endless appeals filed by the tax authorities against lower court decisions or seeking enforcement of small amounts of allegedly outstanding taxes.

The MP takes the first step in addressing this issue by granting the Federal General Prosecutor of Revenue the power to issue regulations restricting the obligation on prosecutors to file court proceedings and appeals where “the benefit sought does not fit with the criteria of rationality, cost-effectiveness and efficiency”.

Moreover, in specific cases (for instance, when there is already a decision addressing the issue by the higher courts), the Prosecutor will not be bound to contest or appeal lower court decisions.

The criteria to be adopted by the Prosecutor is yet to be published.

Less court intervention in contract interpretation

Prior to the MP coming into force, courts could easily intervene in what the parties bargained for in a contract, restricting freedom of contract – the courts were bound to apply the “principle of the social function of contracts” when interpreting contractual terms.

The MP changes this by imposing on the courts the obligation to interpret contracts between private parties in light of the Declaration of Rights of Economic Freedom. In doing this, the courts must follow the principle of minimal State intervention and only intervene in “exceptional” cases. Additionally, judges are to presume that the parties acted in good faith when entering into binding agreements.

Moreover, for business agreements between companies, the parties will be presumed to have equal bargaining power and the contract is to be interpreted considering the risk allocation made between the parties to the agreement. The MP also expressly provides that the parties to agreements between companies are free to establish objective criteria for amending and terminating the agreement.

In a move that goes against the prevailing modern view of contract interpretation in some common law jurisdictions, the contra proferentem rule (which provides that a contract will be interpreted against the party that prepared it) will now apply to all Brazilian contracts between private parties. The application of the rule will go even further: if there are doubts in relation to a specific clause, that clause will be interpreted against the party that drafted it (which may be difficult to prove in court). Previously, the application of the contra proferentem was limited to consumer contracts and contracts of adhesion (pro forma agreements).

Easier business operations

Easier market access for new competitors, more competition and a level playing field

The MP creates an obligation on the government and government bodies to “avoid abuse of the power to regulate”. This is to be done so that:

  • there is no favouring of individual market players;
  • no interpretative rules are issued to prevent national or foreign market entrants or that prevent or retard innovation and the adoption of new technologies, processes or business models (except for those deemed to be high risk in the regulations);
  • create an exclusive privilege to a specific market segment;
  • demand technical specifications that may not be required to achieve the relevant objectives;
  • increase transaction costs without specific benefits;
  • create compulsory or artificial demands for products, services or professional activities, including via the use of notaries public and registrations;
  • limits are created to the setting up of new business entities or economic activities; and
  • restrict the use of advertising in relation to a specific sector, except where specifically prohibited by law (this provision will only come into force once the regulations are issued).

This is a clear attempt by the government to completely change the mindset of Brazilian bureaucrats so as to create a more business-friendly environment.

End of government permits for “low-risk activities”

Businesses that will carry out activities defined as “low risk” will no longer require licences to commence operations. This change does away with the various licences and permits imposed by Federal legislation that currently cause major delays in commencing operations.

“Low risk” is not defined in the MP but the definition will be published soon. I anticipate that activities such as the provision of consulting services, software development, the marketing and licensing of intellectual property rights and similar activities will fall within the definition of “low risk”.

Faster granting of licences and permits

For businesses not conducting high-risk activities, Federal licences and permits will be deemed to be granted if the government body does not object to the application within the set time frame.

Freedom to open business outside of business hours

Various restrictions on the days and times for opening businesses will be removed. The goal is to ensure that there is greater flexibility for serving customers outside business hours.

Freedom for startups to conduct R&D

The MP gives special attention to startups. The MP specifically addresses problems involving the bureaucracy for carrying out research and development.

Those startups operating on private property, that are not involved in activities that may affect Brazil’s health and safety, and that do not use restricted materials will be able to commence operations without any burdensome bureaucratic requirements.

Greater predictability and faster changes outdated rules

Decisions from government bodies now binding throughout the hierarchy

Government inspectors and government employees had the discretion to interpret rules as they saw fit.

Now, where circumstances are the same, a decision issued by a governmental body must be followed by all government employees.

Procedure to eliminate outdated rules and adopt international best practices

Due to Brazil’s bureaucracy, often regulations would remain in place for long after the risks they intended to protect have been overcome by technological improvements.

The MP creates a new administrative procedure for eliminating and excluding enforcement of rules that are out of date due to technological improvements.

Final remarks

The MP brings enormous advances to the Brazilian regulatory environment. This is another major step towards making Brazil a more open and business-friendly economy. With the continuation of pro-business policies, it is likely that the Brazilian economy will soon see the much-needed growth that the Bolsonaro government is seeking
(and Brazil should improve its position in ease of doing business rankings such as the World Bank’s Doing Business) .

The MP needs to be approved by Congress within 120 days from the date of publication and may be amended. Notwithstanding, it is unlikely that it will be substantially watered down by the Congress, so the changes will become permanent with the formal conversion of the MP into Law (the MP has the same effects as a Law until it expires or the Congress rejects it).

I anticipate that foreign businesses will soon realise that the Brazilian government’s mindset has changed for the better. As a consequence, we are likely to see more foreign companies taking active steps towards setting up new operations in the country.

Contact me if you require further information.

Last modified: May 9, 2019