Brazil: How To Aquire Real Estate In Brazil?

I. Introduction

Under Brazilian law, questions relating to property are governed by the law of the place where the property is situated (lex situs). Thus, it is the law of the place which has competence to classify property as movable or immovable, and to determine whether it may be the subject of a right in rem. Hence, real property situated in Brazil is subject to Law No. 3.071, of January 1, 1916 (the "Brazilian Civil Code") to determine the rights and liabilities of neighbors, encumbrances relating to adjoining properties, grounds for expropriation of property by public authorities, the means of transfer, etc. Both possession and ownership are governed by lex situs.

The same principles govern rights in rem over the property of third parties (e.g. emphyteusis, easements, usufructs, use, habitation, income payments due on real property).

Pursuant to the Brazilian Civil Code, assets are divided into two broad categories - movable and immovable. Immovable properties comprise land together with its surface, and all things attached to or forming part of the land, the air space above the land and the subsoil. However, the Brazilian Federal Constitution enacted on October 5, 1988 (the "Federal Constitution"), restricts the definition of immovable property, providing that mines and products from the subsoil, as well as waterfalls, constitute, for the purposes of exploitation and usage, property distinct from the land. The exploitation of mineral resources and hydroelectric power requires federal authorization or license.

Permanent attachments to the ground, such as seed sown, or buildings constructed which cannot be removed without destruction, modification or damage, become immovable property. Likewise, assets kept by the owner in his property for industrial purposes or otherwise by way of improvement, become immovable property and although physically movable, such assets are transformed and treated as immovable by reason of the use to which they are put by the owner.

Some property rights are treated as immovable property: rights in rem over immovable property, government stock incorporating an inalienability clause, and the right of an heir to inherit property.

Foreign-owned companies face basically the same legal provisions as their Brazilian-owned counterparts. Special conditions may apply to the purchase of property located near the coast or frontiers, in rural areas or certain specific areas designated as being of national security. There are no restrictions for the purchase of property located in urban areas.

II. Possession and Ownership

With respect to real estate properties, two broad categories of rights emerge: the right of possession and the right of ownership, both differing from each other by the following specific characteristics.

(i) The right of possession is the personal right of exercising powers constituting dominion or ownership. Under Brazilian civil law, possession may be gained by the apprehension of the object or by the exercise of the right of apprehension; by having the object at one's disposal or the right so to have it; or by any of the general methods of acquisition. Possession may be acquired by a person claiming it (or by his/her representative or agent) or, subject to ratification, by a third party acting without a mandate, or by constitutio possessorio (by which a person who formerly enjoyed possession in his own name exercises rights of possession in the name and on behalf of someone else, e.g.; where an owner transfers his house to a third party but remains in possession as a lessee). The right of possession comprises the right to institute proceedings to claim possession, the right to receive the fruits (including rents and other income from the property), the right to be indemnified for necessary improvements carried out, and the right to retain the object. The possession of property is forfeited by abandonment, by delivery to a third party, by the loss or destruction of the property, by its becoming ineligible for purchase or sale, by a third party taking possession (perhaps against the will of the person formerly in possession) if the possession is not maintained or reinstated in due time, and by constitutio possessorio.

(ii) The right of ownership is the most important of all property rights and is defined by the Brazilian Civil Code as the right of an individual to use, enjoy and dispose of his goods, and to recover them from whoever may have taken possession of them without due cause. It is an absolute and exclusive right and may belong to several persons at the same time (co-ownership or condominium). The owner may dispose of his property as he deems fit, subject only to certain restrictions imposed in the public interest or out of respect for the property rights of third parties, such as: (a) the right of expropriation of real estate properties by the Public Power against payment of adequate compensation; (b) the restrictions relating to the division of urban land (subdivision or parceling, zone (or planning) and building) as, for example, those restrictions imposed for the establishment of industrial plants in critical pollution zones, the mandatory setback of buildings and the restriction on the number of stories in an apartment block by reference to the location and the size or the plot; (c) the restrictions imposed in the interest of national security, such as the restrictions on the sale of private land within 150 kilometers of the national frontier; and (d) the restrictions imposed in areas considered essential for the defense of the country. There are also further restrictions arising from the local legislation in particular localities and from building covenants as well as restrictions on acquisition of rural land by foreigners.

III. Acquisition and Loss of Ownership

III.1. General Provisions

There are four methods of acquiring a real estate property: (a) by registering a deed of transfer in the appropriate land registry (According to Brazilian law, a sale and purchase agreement does not constitute ownership by the purchaser, but only personal obligations to both parties.); (b) by accession; (c) by prescription and by inheritance. These last three forms of real estate property acquisition are also subject to registration with the appropriate land registry. These are: court orders by which undivided land is divided among different owners; court orders in the winding-up of an estate of a deceased person or the division of property, awarding immovable property to creditors in payment of the debt of the estate; and public auctions and adjudications.

Similarly, orders of separation, divorce and nullity must be registered when immovable and rights in rem which are subject to registration are included in the settlement of property; an order made in a prescription action; and an order relating to land acquired by installments. Prescription is the acquisition by virtue of certain periods of continued possession.

The main grounds for extinguishing real estate ownership are: expropriation (which is the unilateral act of public law, with repercussions in private law, by which individual ownership is transferred to the relevant authority upon payment of fair compensation by the said authority for the benefit of the public); transfer; renunciation; abandonment or destruction of the property.

III.2. Acquisition of Rural Property

Law No. 5.709, of October 7, 1972, which regulates acquisition of rural property by foreign companies authorized to operate in Brazil, envisages to avoid the denationalization of national territory. It provides that foreign companies can only acquire rural property if the purpose is the implementation of agricultural, cattle-raising, industrialization or colonization projects, and that such projects must be linked to their respective estates. Such projects must be approved by either the Brazilian Agriculture Ministry or the Department of Trade and Industry, depending on the project required.

The President of Brazil may, upon specific decree, authorize the acquisition of rural property beyond the provisions of the current law, in cases where such property is the object of priority projects involving the country's development plans.

III.3. General Remarks and Requirements Upon Purchase

The acquisition of a real estate property in Brazil between the purchaser and the seller is generally agreed by means of a contract. Contracts of purchase are in many ways similar to those in Europe and North America, however with many important differences. For instance, there is no equivalent to the English concept of "freehold". If a property is purchased by a single buyer (not in a condominium situation), than the purchaser has absolute title to that area of ground (excluding subsoil which belongs to the State). In addition, the purchaser will be responsible for payment of service charges (in case of a condominium) and property taxes.

In case of multiple ownership (as it is the case of condominiums), where a purchaser buys one or more floors of an office block, the purchase contract will be for a specified fraction of the total building and land and so the purchaser receives perpetual rights to use the floors that he is purchasing. He is, in addition, given proportional voting rights in the administration of the condominium. The legal equivalent for condominium purchase is outright purchase. An owner of part of a condominium has the right to sell his fraction without the interference of the administration of the condominium. However, sometimes there are restrictions on use.

Brazilian law requires, for a sale and purchase transaction, that the parties be both generally and specifically capable to perform such transaction. General capacity relates to the age and mental health of the parties (i.e. that they be over 21 years of age and mentally healthy (or, if not capable, that they be duly represented to perform such transaction). Specific capacity relates to the possibility of the selling party being bankrupt. In other words, a bankrupt person or company is most likely to have a general capacity, but will certainly lack of specific capacity to sell a property.

IV. Taxation

IV.1. Inter-Vivos Transfer Tax - ITBI

Legal entities are subject to Inter-Vivos Transfer Tax ("ITBI") - also assessed by the municipalities - when transferring, for any reason whatsoever, and on a remunerated basis, real property by nature of physical accession, rights in rem to any real property, except those in guarantee, and also assignment of rights for the acquisition of property. The rate established under Sao Paulo Municipal Law No. 11154/91 varies from 2 to 6 percent, depending on the property value.

ITBI is not assessed when the transfer of real property or rights to any such property takes place to pay up the capital of a company or when resulting from any merger, consolidation, spin-off or extinguishment of the legal entity, except if in any of the above mentioned cases, the acquirer's chief activity is the purchase and sale of such assets and rights, lease or commercial lease of real property.

IV.2. Income Tax

Income originated from rental and lease is taxed at the rate of 15 percent. Therefore, the foreign owner of a real estate property located in Brazil shall annually pay a 15 percent income tax over the amount received from its rental/lease.

V. Real Estate Investment Funds

Pursuant to Instruction No. 205, of January 14, 1994, issued by the Brazilian Securities Exchange Commission, real estate investment funds are aimed at developing real estate-related projects such as construction, acquisition of property, investments in projects enabling the growth of the housing and services in both urban and rural areas, for subsequent sale, letting or leasing.

These investment funds are currently being used for the purposes of raising funds for the construction of several Shopping Centers throughout Brazil. Previously, pension funds were direct investors of real estate projects but currently they are investing indirectly, by purchasing shares of property investment funds. Both individuals and corporations resident or domiciled abroad are entitled to acquire such shares, provided that the funds resulting from the investment are duly registered with the Central Bank of Brazil, thereby enabling the return abroad of the respective investment and the gains resulting therefrom.

Capital gains resulting from investments on real estate investment funds are subject to withholding tax at a rate of 10 percent upon remittance of such gains abroad.

The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

For more information please contact us.

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