Brazil: The Government Policy in Relation to the Acquisition of Brazilian Rural Land by Foreigners

As a result of the agribusiness expansion in Brazil, the increase of commodity prices in the international market, the growing importance of biofuels, the more intense exploitation of the subsoil and the need to preserve forests and grasslands, rural lands became assets of great economic importance in the country. Therefore, it is quite natural that the foreign interest for investing in Brazilian rural properties has also increased. These investments, however, can and must be done within certain parameters, obeying the limits established by the applicable legislation.

The Brazilian government is eager to attract new foreign capital for projects aimed to increase its share of world agricultural exports but intends to continue to screen out unwelcome speculators and "sovereign investors" owned entities.

According to the official register of the Brazilian Institute for the Agrarian Reform (Instituto Nacional de Colonização e Reforma Agrária - INCRA), which is the government agency charged with land distribution, 45,000 square kilometers (km2)1 of Brazil's rural land is currently owned by foreigners, which corresponds approximately to 20% of the area of ​​the State of São Paulo. Independent estimates indicate that the total area under foreign control may be three times larger.

The acquisition of Brazilian rural land by foreigners is presently governed by Law No. 5,709, of October 7, 1971, which is regulated by Decree No. 74,965, of November 26, 1974, and permits non-Brazilians (i.e. citizens of other nationalities) resident in Brazil or Brazilian companies controlled by foreign capital to purchase up to 50 units of rural land (módulo de exploração indefinida - MEI), which may vary between 250 and 5,000 hectares2, depending on the region and soil yield. Furthermore, the sum of all rural land owned by foreigners cannot exceed 25% (one fourth) of the territory of the Municipality where they are located.3

In recent years, with the largest number of mergers and acquisitions (m&a transactions) by which the controlling interest of domestic companies was transferred to foreign legal entities, it was found that these foreign legal entities ended up owning land in Brazil that exceed by far the limits established by law. In some cases these m&a transactions have been considered as a subterfuge to circumvent the legal restrictions.

The theme has been the subject of a legal opinion of the Attorney-General of the Union (Advocacia-Geral da União - AGU) published on August 23, 2010, reaffirming the validity of Law 5,709/1971 and recommending measures to prevent the concentration of land in foreign hands4. The local press announces that now, in March 2011, the AGU has taken over the matter again and issued a notice addressed to the Ministry of Development, Industry and Foreign Trade (Ministério do Desenvolvimento, Indústria e Comércio Exterior - MDIC), which shall forward it to all the boards of trade of the different states of the Federation, which are responsible for the registration of the corporate acts of the Brazilian companies headquartered in their respective jurisdictions, in order to block the transfer of rural land to foreigners arising out of m&a transactions.

The measure will require the effective collaboration of the 3.224 registries existing in the country, which involves a lot of paperwork especially if the law reaffirmed by the AGU is applied retroactively. In fact, whether by omission of the registries or by failure of INCRA, there is no reliable information about the dimension of the rural land whose ownership belongs to foreigners. Some say, especially after the legal opinion issued by the AGU last year, that foreign companies have used the mediation of third parties to buy land in Brazil, but there is no data to prove this allegation.

The AGU also sent a reserved letter to the Ministry of Finance requesting the creation of rules, through instructions from the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM), regarding the acquisition by foreign investors of shares of Brazilian publicly-held corporations that hold control of rural land. The issue is extremely complex, since the securities of Brazilian publicly-held corporations are also quoted in the New York Stock Exchange and other markets. It is worth noting that the flow of foreign investment has been particularly strong in iron ore exploration and in the production of ethanol.

One can predict that the joint ventures between domestic and foreign companies, controlled Brazilian capital, will become more common, specially in the mining area or dedicated to carry out agricultural and cattle-raising projects, which represent today the most dynamic segments of the Brazilian economy.

Footnotes

1. One km2 is equal to 0.386302 square miles.

2. One hectare is a unit of area equal to 10,000 square meters.

3. In this regard, please see "The Acquisition of Brazilian Rural Land by Foreigners", an article of the same authors, dated 25 August 2010 and published by Mondaq.

4. Please refer to the same article mentioned in the previous footnote, which discusses the AGU´s opinion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
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