Exchange control & Foreign investment

Transcription

1 Brazil Upstream Guide Exchange control & Foreign investment Upstream taxation and foreign investment

2 2 I. EXCHANGE CONTROL AND FOREIGN INVESTMENT... 3 I.1. Investments... 3 I.2. Exchange Controls... 3 I.3. FUNDING AND PROFITS REMMITANCE... 4 I.3.A. Loan Operations... 4 I.3.A.1. Withholding Income Tax Imposition... 5 I.3.A.2. Foreign Exchange Variation... 5 I.3.A.3. Thin Capitalization Rules... 5 I.3.B. Foreign Currency Loan Operations... 6 I.3.C. Capital Contribution... 7 I.3.C.1. Profits/Dividends Remittance... 9 I.3.C.2. Interests on Net Equity I.3.C.3. Capital Gain I.3.C.4. Capital Repatriation I.4. Foreign Currency Bank Account I.4.A. Deposits I.4.B. Investments on Foreign Markets I.4.C. Official Authorization I.4.D. Consortium I.4.E. Funds Held Abroad... 14

3 I. Exchange control and foreign investment I.1. Investments In Brazil, there is no specific restriction regarding investments. The repatriation of share capital is generally not restricted if the investor registers the original investment, capital increases and capitalized earnings at the Brazilian Central Bank (BACEN). Repatriation is usually accomplished after sale of the shares to a local resident, a capital reduction or termination of the company. Commercial law contains specific rules on share redemptions and on companies re-acquiring their own shares. Capital is most commonly repatriated through the sale of shares. A foreign investor s capital gain on a sale to a local resident is the excess of the sale price over the foreign capital registered at BACEN. That gain is subject to a 15% withholding tax, according to the local Tax Law, unless when the beneficiary is an entity domiciled in a low tax jurisdiction (tax haven), when a 25% rate apply. Share capital may be repatriated through a capital reduction but, under certain circumstances, this may trigger withholding tax. Dividends paid out of profits generated after 1995 are not subject to withholding tax. If a company has accumulated earnings, a capital reduction may take place before or after dividends payment. However, if a company has accumulated losses, it will only be allowed to make a capital reduction if the summation of company s book accumulated losses and the amount of capital to be redeemed does not exceed its capital stock. Liquidations seldom occur. They are taxed similarly to a sale of shares. Repatriated funds in excess of the amount of foreign capital registered with the BACEN are subject to the 15% withholding tax, or 25%, when foreign investor is an entity domiciled in a tax haven jurisdiction. I.2. Exchange Controls During the past years, Brazilian government has enacted several rulings aiming to reduce the complexity of its exchange market. Among other changes, these rulings have provided for the unification of the Brazilian exchange market, which is now no longer divided into different segments. This exchange market is under control of the Brazilian Central Bank and is ruled by the International Capital and Foreign Exchange Market Regulation RMCCI. In order to simplify the exchange market the Brazilian National Monetary Council (CMN) and the Brazilian Central Bank (Bacen) have recently enacted two Resolutions (Resolution #3,844/2010 and Resolution #3,845/2010) which aims to consolidate the exchange market rules. Upstream taxation and foreign investment Exchange control & Foreign investment 3

4 As a general guideline, the RMCCI allows legal entities and individuals to purchase and sell foreign currency and perform international transfers in Brazilian Reais, regardless the nature of the operation, with no restriction with respect to the amount involved therein. Additionally, such regulation requires the operations in the foreign exchange market to be performed solely through market agents authorized by the Central Bank of Brazil for such purpose, as defined in the RMCCI. This means that, in such operations, either the buyer or the seller must be an agent authorized to operate in the foreign exchange market. The aforementioned permission applies to almost all transactions performed in the Brazilian exchange market. Only a few transactions are subject to specific ruling, such as investments performed in foreign stock or derivatives market or foreign investments carried by an entity whose authorization to operate had been previously granted by the BACEN itself. In general, in order to perform a transaction in the exchange market, BACEN only requires the involved parties to formalize it through an exchange contract and to register it before the Central Bank Database System SISBACEN. There is no specific provision with respect to the documentation that must support the exchange contract. Normally, the contract whose execution led to the currency exchange is required, together with other documentation able to prove the transaction s lawfulness as well as its economic ground and the responsibilities of the parties involved therein. A foreign investor planning to incorporate a company in Brazil may capitalize such company by means of subscribing capital shares or by loans. The Brazilian Central Bank registers all investments, whether in the form of capital or in the form of loans. Loans are generally registered through the RDE-ROF Module and direct investments are subject to registration through the RDE-IED return. In the RDE-ROF Module, the funds sent to Brazil may be registered in foreign currency while in the RDE-IED such funds must be converted into local currency ( Real ), in order to qualify for registration with the Brazilian Central Bank. The registration process of foreign investments, whether in the form of capital or loan, is relatively simple and straightforward. The exchange contract must be made through a financial institution authorized by Brazilian Central Bank to operate in exchange (normally a commercial bank). Profits that are reinvested in the business must also be registered as Foreign Registered Capital FRC (normally called reinvestment), and will generate registration in local currency through the RDE-IED, in the amount corresponding to the profits that would be remittable as dividends. I.3. Funding and profits remmitance The funding of a Brazilian legal entity is usually done through capital contribution (resulting in a paid-in capital, converted into local currency) or loans. The remuneration of the invested capital will be the profits and/or dividends and interest on net equity, which may be referred to as a tax deductible dividend payment. 4

5 I.3.A. Loan Operations According to the Brazilian Legislation, loans are to be registered before Brazilian Central Bank (Bacen) through an electronic based registration named ROF (Registro de Operações Financeiras), in which the details of the loans are to informed principal, interest rates, denomination of the currency, interest, dates principal and interests are due, etc.). There are no restrictions in the loans being denominated in a currency other than the US Dollar (e.g. loans can be denominated in Reais, Euros, etc.). Bacen also does not commonly demand a given interest rate to be practiced, although it can refrain from proceeding with the registration if understanding that the interest rates are outside market levels (something seldom seen in current days, since most of the companies registering loans do go for market rates). Regarding loan contracts not duly registered before Brazilian Central Bank, the interest rate of Libor + 3% should apply (Transfer Pricing rule). I.3.A.1. Withholding Income Tax Imposition According to the Section 702 of Brazilian Income Tax Code (RIR/99), interests on loans are subject to the Withholding Income Tax (IRRF) at a 15% rate (increased to 25% if the beneficiary is domiciled in a tax haven jurisdiction). The IRRF will be due on amounts paid, credited, delivered, used for, or remitted to beneficiaries resident or domiciled abroad, by a source located in Brazil. With such broad definition, the Federal Government aimed to cover all situations in which income is made available to a foreign beneficiary, regardless of the method of availability. In this sense, the tax is due if, and when, any of the listed events (payment, credit, delivery, use or remittance) materializes. I.3.A.2. Foreign Exchange Variation Regarding the foreign exchange variation on the loans, as provided by Section 30 of Provisional Measure # 1,858/99, re-enacted as # 2,158-35/01, the Brazilian companies are entitled to calculate the IRPJ, CSLL, PIS and COFINS on currency exchange variations on an accrual basis or on a cash basis. Therefore, company can choose the methodology for recognizing foreign exchange effects for income tax purposes. Please note that financial revenues are subject to a 0% PIS/COFINS rate, so that eventual gains should not produce effects in the computation of referred Brazilian federal taxes on revenues. It is important to stress that, according to Section137 of Law # 12,249/2010, the election of one of the abovementioned calculation basis methods shall be performed in January of each calendar-year and the permission to change the adopted method during the calendar-year is restricted to the cases whether a higher fluctuation on the exchange variation rates occurs. I.3.A.3. Thin Capitalization Rules Provisional Measure # 472/09, recently converted into Law #12,249/2010, introduced Brazil s first thin capitalization rules, which are designed to prevent the under-capitalization of Brazilian companies and the use of excessive indebtedness. Law #12,249/2010 maintained the two criteria for amounts paid or credited to be deductible established on the Provisional Measure, which take into account the relationship between the lender and the borrower as well as the location of the lender. Upstream taxation and foreign investment Exchange control & Foreign investment 5

6 Under the new rules, interest credited or remitted by a Brazilian entity to an entity or individual domiciled or incorporated abroad are subject to two general criteria: 1) Interest paid to related parties that are not located in tax haven jurisdiction or that do not benefit from a preferential tax regime as described in Law 11,727/08 may be deducted on an accruals basis for corporate income tax purposes only if the expenses are necessary for the company s activities, and both of the following thresholds are met: The related party debt-to-equity ratio does not exceed 2:1 calculated based on the proportion of related party debt to direct equity investment made by related parties; and The overall debt-to-equity ratio does not exceed 2:1 based on the proportion of total debt to total direct equity investment made by related parties. 2) Interest paid to an entity or individual located in a tax haven or that benefits from a preferential tax regime (regardless of whether the parties are related) may be deducted only if the expenses are necessary for the company s activities, and both of the following thresholds are met: The amount of the Brazilian entity s indebtedness to the tax haven resident does not exceed 30% of the net equity of the Brazilian entity; and The Brazilian entity s total indebtedness to all entities located in a tax haven jurisdiction or benefiting from a preferential tax regime does not exceed 30% of the net equity of the Brazilian entity. In both instances, the interest expense must be necessary for the Brazilian company s operations, so that even if the debt-to-equity ratios are respected, unnecessary leverage can be disregarded by the Brazilian tax authorities. For purposes of determining the total indebtedness, all financing forms and terms must be taken into account, regardless of whether the transactions are registered with the Brazilian Central Bank. Further, there are provisions that bring back-to-back arrangements and loans guaranteed or co-signed by any related party of the debtor company within the scope of the thin capitalization rules. With respects to the mechanics of the calculation, the net equity accounts to be used for purposes of the limits on the deductibility of interest expense, should be in accordance with Brazilian GAAP (now equivalent to IFRS), and the calculation should be made using the monthly weighted average method, meaning that the thin capitalization test should be applied on a monthly basis. According to the final wording of the law, the new thin capitalization rules should be effective as from 1 January 2010 and no specific reference is made to any difference between entry into effect for purposes of corporate income tax (IRPJ) and purposes of the Social Contribution on Net Income (CSLL). However, whether the rules should be effective for calendar year 2010 is the most controversial issue of PM 472, as under the Brazilian Constitution, the thin capitalization rules cannot become effective for at least for at 90 days after publication in the Official Gazette for purposes of the CSLL and not until the year following that in which PM 472 is converted into law for IRPJ purposes. Nevertheless, the wording of the law implies that the Brazilian tax authorities may try to apply the rules retroactively as from 1 January

7 I.3.B. Foreign Currency Loan Operations According to the Brazilian Legislation, the foreign currency loan to be registered before BACEN. The compliance with which will enable the borrower to remit abroad payments of interest and repayment of the loan, under the official exchange rate. Regarding the registration of a loan agreement, it is important to note that, once loan agreement is registered, any future amendment for the determination of the amounts disbursed, interest rates, term of payment etc., shall also be registered before BACEN, otherwise the terms already established must be observed; Another issue to be considered refers to the deductibility of the interest expenses for both Income Tax and Social Contribution Tax. The interest due is payable irrespective of the profitability of the Brazilian entity. In addition, these deductions are subject to Brazilian thin capitalization rules. On the other hand, according to the Transfer Pricing Guidelines, deductibility of interest charges arising from loans that are not registered with BACEN will not exceed LIBOR plus a 3% annual spread. It is important to stress that BACEN rules do not allow pre-payment of the contract prior to the date previously informed at the operation s electronic registration (RDE). However, extensions to the loan can be granted (but they must be duly registered with BACEN). I.3.C. Capital Contribution The capital contribution in a Company established in Brazil must be registered according to the Brazilian Central Bank rules (BACEN), as we will be referring to hereinafter. The direct investments must have a registration, represented by a certificate, which enables the foreign investor to exercise his rights, such as: repatriation of capital, remittance of profits, interest on equity payments, etc. The Foreign Capital Certificate identifies the investee, the foreign investor, the investment value in foreign currency, and the equivalent in Brazilian currency (Reais) and the number of shares/quotas that make up the capital. As mentioned above, the funds entering Brazil should be registered in the country s currency (Real). The conversion of the foreign currency effectively entering the country to Real should be done by the buying rate in effect, at the date of the effective entrance of the funds. Section 5 of Law # 4,350/1964 states that the foreign investment must be registered within 30 days upon the date of the capital inflow. BACEN Circular # 2,997/2000 established the main guidelines to be followed upon registration of the foreign investment in Brazil and implemented the Declaratory Registration of Direct Foreign Investments RDE-IED Module. This system allows online access to the registrations mentioned above, and as from September 4 th, 2000, any outflow of capital abroad shall only be allowed through the RDE-IED Module. Said Circular also provides that the company receiving the direct foreign investment (Brazilian subsidiary) and the nonresident investor (by means of its representatives in Brazil) are responsible for the registration of the investment. Upstream taxation and foreign investment Exchange control & Foreign investment 7

8 Due to the provisions of Federal Law #11,371/06 the registration of the foreign investment carried out through the FDE-IED Module is mandatory as from December, Same imposition applies to the capitalization of profits by the foreign investor. The invested company who fails to file such registration at the time provided in that legislation, or who files a registration which does not show the information required by that legislation shall pay a penalty that varies depending on the nature of such failure. Apart from the aforementioned statutory requirements, the registration of the foreign investment with BACEN is of fundamental importance to avoid future questioning by pertinent authorities with respect to the remittance of dividends, interest on capital, or repatriation of capital to shareholders domiciled abroad. Registration of foreign capital investment with the BACEN depends on the following general requirements: the foreign investor must not reside in Brazil; the foreign investor must have remitted to Brazil foreign currency or capital assets as a contribution to the equity of a local company; BACEN will only recognize the foreign currency remittances to Brazil that are made through normal banking channels, and are exchanged into Reais in accordance with existing regulations, through an authorized financial institution; the importation of capital assets as an equity contribution must have the prior approval of the BACEN and of the import/export authorities; the foreign investor, through his capital contribution, becomes a shareholder or a quota holder in a local company. For the purpose of registration, Law #4,131/1962 defines foreign capital as (...) goods, machines and equipment brought into Brazil with no initial exchange outlay, and which are to be utilized in the production of goods and services, as well as the financial or monetary resources introduced into the country for investment in economic activities. In both cases, they pertain to individuals or legal entities, resident, domiciled or with headquarters abroad. To register a capital investment in the RDE-IED Module, the foreign investor needs to inform its Cademp number. Cademp stands for Companies Register and it is a record maintained by the BACEN encompassing the main data on both Brazilian and foreign investors. The Cademp number will only be effective, for purposes of registering a capital investment in the RED-IED Module, once the foreign entity obtains its CNPJ number (National Register of Corporate Entities). A temporary CNPJ number is granted to the foreign investor on the first time it registers itself in the Cademp. Such temporary CNPJ number is only effective for a period of 180 days. Thereafter, the foreign investor must provide for its permanent register within the CNPJ. The DECEC (Department of Foreign Capital and Exchange) a department of the BACEN is the one responsible for the registration of foreign capital. The following transactions are subject to registration: direct investments; loans in cash or in assets; repatriation of capital and remittances of profits or capital gains abroad; remittances abroad of loan interest and repayments of loan principal; royalties and technical assistance contracts; any operation involving transfers of earnings abroad; reinvestment of profits. 8

9 I.3.C.1. Profits/Dividends Remittance Dividends are calculated upon the net profit after corporate taxes, accrued based on the Brazilian commercial legislation and are not subject to withholding income tax, regardless of the location in which the beneficiary is located. Regarding the dividends remittance to overseas, authorized banks may directly contract the operations related to profit and dividend remittances without BACEN s prior authorization, if the following documents are supplied: Balance sheet of the fiscal year in which profits were originated, as well as related statements of income and accumulated earnings and losses; Minutes of stockholders or other corporate meetings, in which profits or dividends distributions have been declared. BACEN admits the remittance of interim profits as long as the company s laws expressly authorizes such. If the dividend payment is based upon a balance sheet related to a period of less than a semester, then, in accordance with a provision of the Brazilian Corporate Law, the amount of the proposed dividend may not exceed the total capital reserves recorded in the same balance sheet; A completed form, as provided by BACEN, which is intended to evidence that the profits are remittable, i.e., that there is no gain derived from fiscal incentives, etc. Besides the points above, there are some restrictions in Brazilian legislation applicable to the distribution of dividends to foreign shareholders that should be noted: Foreign investors are not allowed to receive profits or dividends related to unpaid capital; Holding companies owned by foreigners are not allowed to receive profits or dividends related to unpaid capital participation in the subsidiary companies; Accumulated losses must be totally offset by profits before the distribution of profits, and only the excess is considered to be available for distribution; There are no limitations to the amounts of profits to be remitted, as long as they exist. In addition, it is worth to stress that accumulated losses could be offset by a capital reduction; Shares or quotas that generate remittable earnings are those registered, i. e., included in the certificate. Thus, if by any reason not all of the capital (in number of shares or quotas) is covered by the certificate ( taint in the capital), only the registered part shall generate remittable earnings, in the official exchange market; The exchange rate to be used is the selling rate in force at the effective date of the remittance. Finally, the foreign exchange contracts for the remittances of the dividends to shareholders overseas will be subject to the imposition of the Tax on Financial Operations (IOF) at a 0.38% rate (IOF due on foreign exchange operations). I.3.C.2. Interests on Net Equity A Company may decide to pay Interest on Net Equity (INE, as we will be referring to hereinafter) to its shareholders/quota holders. A Company may decide to pay interest on capital at year-end or during the year on an interim basis. The amount of payable INE is calculated based on the Long Term Interest Rate (TJLP), the local prime rate that is quarterly fixed by BACEN, applied to each shareholder s portion of net equity. Brazilian corporate law establishes that current earnings are not included as part of the net equity. A Company has the flexibility to use an interest rate that is lower than the TJLP to calculate the INE, but the chosen rate may not exceed the daily variation of the TJLP. Upstream taxation and foreign investment Exchange control & Foreign investment 9

10 INE is deductible to the extent it does not exceed fifty percent (50%) of largest of the following amounts: net income, as determined for accounting purposes, for the current period of interest payment before the provision for income tax and the deduction of the amount of interest; or accumulated earnings from prior years. In contrast to dividends, which are exempt from withholding tax, INE is subject to a withholding tax at the rate of 15% or 25%, when the beneficiary is domiciled in a low tax jurisdiction, as defined in Brazilian tax law. This is because INE is considered a financial expense for tax purposes, although it is effectively a return on equity. The withholding tax obligation arises on: the date of the payment of INE; when the amount of such interest is credited to the beneficiary; or when it is recognized as available by the balance sheet of the company. The tax legislation requires that payment of the withholding tax should be made by the third working day of the subsequent week following the payment or credit of INE to shareholders or quota holders. The Company s laws must provide the ability to choose to pay INE. BACEN requires companies to present the minutes of the shareholders or quota holders (in the case of a Limited Liability Company, or the Ltda. simply) meeting approving the payment of INE. These documents will also authorize remittances based on retained earnings and have to be attached to the balance sheet of the period as well as on profits generated during the period duly supported by a proforma balance sheet. As mentioned in previous item, a Brazilian company may not legally pay a dividend during a year in which it has also accumulated losses that exceed current earnings. Even though we believe that this rule should not apply in the case of INE, it is not entirely clear in tax legislation. For BACEN purposes, however, the INE should be treated as dividend. Therefore, a Company is not allowed to remit INE if has accrued loss greater than retained earnings. In other words, a Company must first offset its loss balances, before remitting INE abroad. Another relevant aspect is that the company can decide to pay both INE and dividends in the same year. The fact that one company decides to calculate INE does not avoid dividend payment. If the company complies with the aforementioned requirements, it can calculate the amount of deductible INE. Besides, if the company has accumulated profits, it can also distribute dividends to its shareholders/quota holders. Finally, the foreign exchange contracts for the remittances of the INE to shareholders overseas will be subject to the imposition of the Tax on Financial Operations (IOF) at a 0.38% rate. I.3.C.3. Capital Gain As per Brazilian tax legislation, in case a foreign Entity directly sells its investment in a Brazilian Entity to another resident Entity, such transaction is subject to Brazilian Capital Gains Taxation (15% rate applies; aggravated to 25% if the beneficiary is domiciled in a tax haven jurisdiction). In addition to the above, in case Foreign Entity sells its investment in Brazilian Entity to another Foreign Entity, Brazilian Tax Authorities understanding is also that such transaction would be subject to Brazilian Capital Gains Taxation. In this case, tax payments would be made by foreign entity representative in Brazil. 10

11 With respect to capital gains calculation, it is important to mention that Article 18 of Law 9,249/95 provides that the capital gain accrued by a resident or domiciled overseas must be calculated and subject to taxation according to the rules applicable for Brazilian residents. Complementing such legal provision, Brazilian tax authorities enacted a Normative Instruction, which provides that referred taxation should be the same applicable for Brazilian individuals. However, as a result of several administrative decisions, there is controversy on what should be the basis for the capital gain determination, as well as on what should be the currency in which the gain determination should be based on. I.3.C.4. Capital Repatriation It consists of a direct remittance, performed through a bank, without the previous authorization of the BACEN. It must be supported by a Registration Certificate, in which the amount to be remitted, in foreign currency, must be stated. A demonstrative spreadsheet of the capital gain calculation, as well as its respective payment voucher is also required. This is so due to the fact that, at the time of the repatriation of the investment, the value of such investment is subject to an exchange variation. In case such exchange generates a capital gain, it might be subject to withholding income tax. If the amount to be remitted exceeds that which is registered in the Certificate, the excess can only be remitted upon obtaining of a specific Remittance Authorization Certificate, to be issued by the BACEN. This operation is performed as a mean to repatriate resources to the investor abroad. The repatriated amount is calculated taking into consideration the book value of each share or quota. The rules applying to such operations are as follows: Exemption of Withholding Income Tax: The operation is exempt from withholding tax as long as the amount to be remitted does not exceed the cost of acquisition, in Brazilian currency (Reais) of the shares or quotas; Withholding Income Tax: Withholding tax is applicable, at a 15% rate, on the capital gain amount, unless when the beneficiary is an entity domiciled in a low tax jurisdiction, when a 25% rate should apply. However, in order to perform such operation, the Company needs first to eliminate the accumulated loss figures, since the BACEN procedures do not allow a Company to perform a transfer abroad, as Capital Repatriation, showing an accumulated loss in its Financial Statements. Upstream taxation and foreign investment Exchange control & Foreign investment 11

12 Therefore, if the Company presents, by the time of the repatriation an accumulated loss recorded, it will need to perform a reduction in its capital figure, in an amount corresponding to the accumulated losses. As a matter of fact, when the Company accesses the BACEN Electronic Register (RDE-IED), it will be required to inform the Net Equity figures for the closed Financial Statements, also considering the effects of the capital reduction performed to absorb the previously registered losses. It is also recommendable that the Company limits the Capital Repatriation to an amount that does not exceed the losses projected for the calendar year in which the repatriation is to take place, since BACEN requires that Brazilian Companies with foreign investors inform, each year, its net equity figures at the closing date. If the Company remits abroad, through Capital Repatriation, an amount exceeding its final net equity figure, BACEN will not authorize the performance of another capital reduction until the Company restores its net equity to a positive figure. I.4. Foreign Currency Bank Account As mentioned above, through the Resolution #2,644, the Brazilian Central Bank (BACEN) provided that the companies responsible for prospecting, producing, exploring, processing and transporting oil and natural gas, as well as those generating and transmitting electrical energy, could open and perform transactions through foreign currency accounts in Brazilian authorized banks. I.4.A. Deposits The referred resolution provides that the permission to hold a bank account in foreign currency applies to companies carrying out activities related to the implementing and developing of projects in the energy sector. Just one foreign currency account is permitted per company and per project. However, if the project is carried out through a consortium, all the participating companies may be holders of foreign currency accounts. Moreover, in order to open and operate a foreign currency account, the company must observe some conditions, mainly related to deposits made to and withdrawals taken from the account. Hence, such accounts may only receive deposits of funds in foreign currency in amounts equivalent to the Brazilian Reais received derived from the aforementioned activities. Such funds are reserved for the settlement of commitments and obligations abroad, and may be only withdrawn for this purpose. Moreover, the account holder is not allowed to maintain negative balances in such accounts, even if such balances are only occasional or temporary 12

13 The company holding an account in foreign currency is allowed to invest the deposited funds on the international market, noting that: a) Eventual reduction of the account s balance due to losses in such investments can be only offset by deposits in foreign currency resulting from revenues earned in the project s activities; b) The account holder does not have to formalize eventual funds inflow derived from gains in such operations through an exchanging contract. However, the corresponding earning must be destined for the settlement of liabilities incurred by the Company abroad related to the project. Previously to the opening of such accounts, the companies involved in projects associated to the prospecting, production, exploration, processing and transformation of oil and gas must have obtained a delegation (concession, authorization or permission) of the National Petroleum Agency - ANP or, furthermore, of the state entity responsible for delegation, when this case arises. I.4.B. Investments on Foreign Markets The Brazilian Central Bank also authorizes owners of foreign currency bank accounts to invest the money on foreign markets. However, it is worth mentioning that, in case the companies incur in losses as a result of such investments, no money can be reapportioned to cover the losses, unless if deriving from the oil and gas/energy activities in Brazil. On the other hand, the amount gained from such foreign investments is considered part of the foreign currency bank account, and there is no need to execute a foreign exchange agreement to transfer such money from abroad. Please note that receipts of bank transactions and foreign payments must be kept by the companies for a five-year period, counted as of the end of the year that the transactions were made. I.4.C. Official Authorization In order to open foreign currency bank accounts, the companies must be granted with an official authorization from the applicable regulatory agency (Brazilian Petroleum Agency - ANP or Brazilian Electrical Energy Agency ANEEL ) The cancellation of such authorization implies in the closing of the foreign currency bank account and in the conversion of its remaining balance into Reais. I.4.D. Consortium In case the official authorization from the regulatory agency (ANEEL or ANP) is granted to a consortium, each participant company, including the administrator company of such consortium, is authorized to open a foreign currency bank account. In case the administrator company is also operational, a second bank account may be opened. I.4.E. Funds Held Abroad Legal entities resident, domiciled or headquartered in Brazil are authorized to transfer funds to foreign banking institutions in order to constitute a deposit outside the country. The funds remitter must specify in the exchange contract, under the heading Other Specifications, the name of the foreign institution that will receive the deposits together with the corresponding account number. Additionally, as of 2006, values in foreign currency related to payments made to Brazilian companies or individuals regarding an exportation of goods or services, may be maintained on a Financial Institution overseas, within the limits set for the Brazilian National Monetary Council ( CMN ) 1. Therefore, initially, through Resolution #3.389/2006, CMN established that Brazilian exporters could hold abroad revenues only up to the amount that did not exceed 30% of all exportation income. The remaining part (70%) should be brought to Brazil, by means of Exchange Contracts. Upstream taxation and foreign investment Exchange control & Foreign investment 13

14 Nevertheless, CMN enacted Resolution # 3.548/2008, which authorized the Brazilian entities to keep overseas all cash funds associated with compensations received through exported goods or services. From this day on, no limitation subsisted regarding the maintenance of cash resources derived from exportation revenues abroad. When regulating the new provisions, the Brazilian Central Bank established that the receipt of the value in foreign currency from exports must occur by credit of the corresponding amount in a financial account owned by the exporter abroad, by credit in a Financial Institution overseas authorized to operate in the Brazilian Exchange Market or by international transfer of funds in Reais ( BRL ) 2. It is important to bear in mind that funds held in foreign countries can only be used to perform investments, financial applications and to make payments of the exporter s own obligations. The Law does not allow the exporter to contract any sort of loan compromising the revenues abroad 3. The Brazilian Federal Tax Authorities ( RFB ) is responsible for verifying that resources kept abroad receive the permitted destination. For this control, Normative Instruction #726/2007 introduced a return over use of resources in foreign currency arising from the receipt of exports ( DEREX ). Exporters Companies and Individuals must report annually to the RFB the origin and usage of the funds moved overseas during the preceding calendar year. This return comprises amounts related to the receipt of exportation transactions not brought to Brazil, simultaneous operations of acquisition and selling of foreign currency and the income received abroad arising from the use of the funds kept overseas. The maintenance or usage of the amounts held abroad in disagreement with the applicable Law and Regulations, will give rise to a 10% fine over this amounts. In this case, the RFB will also collect taxes due over those funds Section 1 of Law # 11,371/ RMCCI, Title 1, Chapter 11, section 1, item Section 1, paragrapah 2 of Law # 11,371/ Section 9 of Law # 11,371/

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16 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms Deloitte Touche Tohmatsu Limited. All rights reserved.