On 21 September 2019, Law 13,874/2019 came into force. Nicknamed the Economic Freedom Law, it marks a major move towards greater economic freedom and a more business-friendly environment in Brazil. The Law was a conversion from Provisional Measure 881/2019 (Medida Provisória 881/2019, “MP”), which was published on 30 April 2019 by President Bolsonaro.
The Economic Freedom Law creates the Declaration of Rights of Economic Freedom, which has the intention to protect the free market and the free exercise of economic activities
Moreover, the Economic Freedom Law applies to the “application and interpretation” of civil, business, economic, town planning and employment laws and sets as its guiding principles:
“I – the presumption of freedom in doing business;
II – the presumption of good faith of individuals;
III – the subsidiary, minimal and exceptional intervention of the state on doing business; and
IV – the recognition of the vulnerability of the individual before the state.”
Below are the main changes brought about by the Law.
Improved corporate rules, easier tax compliance and less tax litigation
Stronger corporate agreements
The Law is disruptive insofar as the interpretation of corporate agreements is concerned, as now 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 the agreement’s written terms.
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 Law amends article 50 of the Civil Code to make clear that the interpretation given in decisions of the Superior Court of Justice is adopted.
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. It will be found where:
- the company repetitively fulfils 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); or
- there are “other acts of non-compliance with the separation of assets”.
The new provisions in the Law will minimise the discretion that judges currently have to interpret the rules applicable to piercing the corporate veil of Brazilian legal entities.
Limited liability partnerships (sociedades limitadas) required two shareholders and the EIRELIs 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.
The Law changed this and now limitadas will be allowed to have single shareholders.
Digital records to have the same probative value as paper records
Taxpayers will be allowed to keep records in digital form.
On 11 October 2019 the Federal Revenue Department issued Interpretation Declaration 4/2019, stating that the digital documents will have the same probative value as hard copies. The documents may be stored in any electronic means, whether optical or equivalent, and the original may be destroyed after digitalisation, except for those with historical value).
The Law’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 Law 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 Law coming into force, courts could easily change the effect of contractual terms, restricting freedom of contract – the courts were bound to apply the “principle of the social function of contracts” when interpreting contracts.
The Law 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 in all but “exceptional” cases. Additionally, judges are to presume that the parties acted in good faith when entering into binding agreements.
Moreover, parties will be presumed to have equal bargaining power and the contract is to be interpreted considering the risk allocation agreed by the parties to the agreement. The Law also expressly provides that the parties are free to establish objective criteria for amending and terminating the agreement.
Easier business operations
Easier market access for new competitors, more competition and a level playing field
The Law creates an obligation on the government and government bodies to “avoid abuse of the power to regulate”. The regulations must not:
- favour individual market players;
- issue interpretative rules that 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);
- demand technical specifications that may not be required to achieve the relevant objectives;
- increase transaction costs without proven benefits;
- create compulsory or artificial demands for products, services or professional activities, including via the use of notaries public and registrations;
- limit the starting of new business entities or economic activities;
- restrict the use of advertising in relation to a specific sector, except where specifically prohibited by law; and
- impose requirements under the guise of tax-related registration that have the effect of restricting low risk business activities (see below).
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.
Resolution 51/2019 of the Management Committee of the National Network for the Simplification of Registration and Legalisation of Companies and Businesses (CGSIM, being the Portuguese acronym) has already set 287 activities as “low-risk” including accounting and law firms, hairdressers, bars, music and language schools.
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
Days and times for opening businesses have been expanded. The goal is to ensure that there is greater flexibility for serving customers outside business hours.
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 Law creates a new administrative procedure for eliminating and excluding enforcement of rules that are out of date due to technological improvements.
The Law 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 once the full effects of the Law are felt in the market).
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.
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Last modified: November 26, 2019