Resource type: Articles: know-how
Status: Law stated as at 21-Sep-2010
Jurisdictions: Brazil, Mexico

A round-up of major horizon issues for General Counsel doing work in Latin America.

Energy: Brazil

Oil and gas exploration

The 2007 discovery of huge reserves of oil and gas deposits off the coast of Brazil has prompted a great deal of regulatory activity in the country. 

In June 2010, the Brazilian federal government approved one part of the new regulations, known as the Brazilian Pre-Salt Oil and Gas Framework, regarding the exploitation of these so-called pre-salt reservoirs (as they are buried under a layer of salt). The government-owned oil company Petrobras is set to play a major role. 

The new regulations introduce production sharing agreements (PSAs) and enable Petrobras to be the exclusive operator of the pre-salt fields′ exploration. Under the regulations, the Brazilian government can sign agreements exclusively with Petrobras, or with other companies through a bidding process, but with Petrobras remaining the operator of the project.

The new regulations also state that Petrobras must use 65% "local content", or local manufacturers, in relation to the equipment used for oil exploration. There have been reports that Petrobras has expressed concerns that this percentage of local suppliers is too high, and that local suppliers do not have the capacity to supply such a large operation. 

There have also been discussions between the Brazilian power regulator, the National Oil Agency (ANC) and the environmental authorities about increased safety regulations, following the Gulf of Mexico oil spill. Brazil′s safety standards are already considered among the strictest in the world.

Petrobras is also in the process of issuing US$25 billion (about EUR18.7 billion) of shares to raise finance in preparation for the pre-salt field exploration. The stock offering, which was initially scheduled for July 2010, was delayed to September 2010 so that the ANC could fully assess the size and value of the oil reserves underneath the pre-salt.

Foreign companies looking to invest in the exploration of the pre-salt fields should consider the following issues:

·         The development of legislation and regulation regarding the exploitation of the pre-salt fields is ongoing, and may be subject to change, depending on the outcome of the October 2010 presidential elections in Brazil.

·         The new PSA scheme means that foreign investors will need to liaise with Petrobras at every level, and prepare for the specific bidding regulations that Petrobras must comply with when it is contracting out services and entering into partnerships with third parties.

·         Investors need to establish and incorporate a Brazilian vehicle before they can operate in the Brazilian oil and gas sector.

·         Companies should be aware of the complexity and rigidity of the current environmental security regulations in Brazil, and bear in mind that they may be subject to change and stricter controls. Currently, companies are liable to third parties and the environmental authorities for any damages that occur to the environment, with no cap on liability. The potential new regulations for environmental protection may be even more rigorous, and create higher insurance costs.

Renewable energy projects

Despite the discovery of oil reserves off the coast of Brazil, the country is keen to promote other renewable sources of energy to diversify its energy output. Projects being developed include wind farms, small hydro-electric plants and biomass projects fuelled by ethanol derived from sugar cane. 

In late 2009, the Brazilian government organised and held the first wind power auction. A number of local players and international investors took part, bidding on who would build, generate and supply energy from wind plants. 71 projects were approved in this first auction. More auctions are planned in the latter part of 2010 for further wind plants, as well as for other renewable energy projects, such as small hydroelectric plants and sugar cane-fuelled biomass plants.

The renewable energy sector is of major interest to foreign investors in Brazil, particularly as there are no restrictions imposed on foreign investors bidding in the auctions, and participating could earn investors Certified Emission Reduction (CER) credits in the UN′s Clean Development Mechanism (CDM) and the EU Emissions Trading Scheme (ETS). 

Foreign investors and companies wishing to participate in the development of renewable projects in Brazil, and wanting to take part in future auctions, should be aware of the following issues:

·         Before bidding in an auction, investors must already be involved in a renewable energy project in Brazil, which must have been developed to a minimum level for at least one year.

·         To build up or develop an initial portfolio of renewable energy projects, investors can liaise or partner with a local player who is already involved in the market and has contacts within the local farming communities (who will also be involved in the projects).

·         Companies looking to compete in the auctions must register in an online system and give technical and environmental details of the projects they are putting forward.

Tax: Brazil

Changes to thin capitalisation rules and tax haven blacklists

Multinational companies with investments in Brazilian subsidiaries or partners need to be aware of two important changes to the Brazilian tax regime regarding thin capitalisation and tax havens.

The changes to thin capitalisation rules in Brazil were first published in December 2009, and codified in June 2010 in Law No. 12,249/10. These new rules limit the tax benefits multinational companies can obtain when funding their Brazilian partners or subsidiaries through inter-company loans. The rules state that a company can only obtain a tax benefit on the interest of its loan to a Brazilian subsidiary if the debt is no larger than twice the amount of its net equity investment in the Brazilian subsidiary. If the company giving the loan is located in a tax haven, the debt can be no larger than 30% of the net equity investment in the Brazilian subsidiary. The new rule aims to ensure that Brazilian companies are not undercapitalised and do not have excessive debts.

In June 2010, the Brazilian tax authorities also published an updated blacklist of tax havens, called favourable tax jurisdictions (FTJs) and privileged tax regimes (PTRs), in Regulation 1037 (Instrução Normativo n. 1037/2010). Brazilian companies that send money to any of these listed jurisdictions or regimes will face an increased tax rate, and will be subject to the new thin capitalisation rules. 

FTJs are defined as jurisdictions that either: 

·         Impose no, or less than 20%, income tax. 

·         Do not disclose information about the ownership of corporate entities.

PTRs are regimes that: 

·         Impose no, or less than 20%, tax on domestic or foreign income.

·         Grant tax benefits but do not require companies to perform a local economic activity. 

·         Do not provide information on the ownership of companies or assets. 

An example of a PTR includes the Spanish Entidad de Tenencia de Valores Extranjeros (ETVEs) (or Foreign Securities Holding Company) regime.

Companies and multinationals with investments in Brazilian companies, partners or subsidiaries should therefore:

·         Carefully review and consider their loan structures to ensure that they are fully tax efficient and do not fall foul of the new thin capitalisation rules.

·         Check whether any of the entrants on the new lists of FTJs and PTRs are jurisdictions or regimes that they use to channel their funds, and should amend and reorganise their funding structures accordingly.

Potential changes to transfer pricing rules

Over the course of 2009 and into 2010, Brazil′s transfer pricing rules have frequently been debated in the Brazilian legislature and congress. Discussions have focused on the way in which companies in Brazil calculate the resale price (known as the Resale Price Method (RPM)) of imported products coming from related companies located outside Brazil. Under current law there are two RPMs: one for the simple resale of imported goods and services (that is, for distributors), and another for imported products that need to undergo some manufacturing or production (that is, for manufacturers). Both RPMs have different specified calculation methods and minimum profit margins. 

It was proposed that the law be amended to make the transfer pricing rules more consistent, and to ensure that they were in line with the guidance (or normative instructions) provided by the Federal Revenue (tax authority) of Brazil.

Provisional Measure 478/09 (Medida Provisoria 478 (MP 478)) was issued in late 2009 to amend the current law. MP 478 proposed: 

·         The introduction of a single version of the RPM. Under this, the sale price of an imported product would be calculated in accordance with the product′s total cost when sold as a finished product, whether the product was imported as a raw material or as a finished good. 

·         The RPM be calculated to include a set minimum profit margin of 35% on sales of products that were simply resold and those that were subject to further manufacturing.

However, due to other legislative priorities, the Brazilian congress did not approve MP 478 and the dual RPM system remains in place. Lawyers expect that there will be continuing discussion regarding changes to the transfer pricing rules in 2011, following the presidential elections of October 2010. 

Companies that are exporting and importing in Brazil should therefore be prepared and:

·         Reassess their management of imports and exports.

·         Start planning their tax audits and transfer pricing strategies at the start of 2011, to anticipate, and allow for, any adjustments that might be necessary by 31 December, when transfer pricing calculations take place in Brazil. 

For more information on tax issues in Brazil, see Tax on Corporate Transactions: Brazil.

Experts interviewed

GC Agenda is based on interviews with experts from firms endorsed by PLC Which lawyer?. PLC would like to thank the following experts for participating in interviews for this issue: 


Luis Santos

Santos y Ríos Abogados, Santa Fe, Mexico

Luis Gerardo Garcia Santos Coy and José Ruiz

Creel García-Cuéllar Aiza y Enríquez SC, Mexico City, Mexico

Corporate governance

Oliver Brahmst

White & Case LLP, New York, USA

Michael Fitzgerald 

Milbank Tweed Hadley & McCloy LLP, New York, USA

Paul Schnell

Skadden Arps Slate Meagher & Flom LLP, New York, USA

Claudia Farkouh Prado

Trench Rossi & Watanabe Advogados (Associado a Baker & McKenzie), Sao Paulo, Brazil

Dispute resolution 

Paul Schnell

Skadden Arps Slate Meagher & Flom LLP, New York, USA


Pedro Seraphim

TozziniFreire Advogados, Sao Paulo, Brazil

Ana Karina Esteves de Souza

Machado Meyer Sendacz e Opice Advogados, Sao Paulo, Brazil


Luiz Felipe Ferraz and Glaucia Maria Lauletta Frascino

Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados, Sao Paulo, Brazil

Raquel Cristina Ribeiro Novais

Machado Meyer Sendacz e Opice Advogados, Sao Paulo, Brazil

(Practical Law -  21.09.2010)

(Notícia na Íntegra)