On September 20, 2019, the Brazilian Federal Government enacted the Federal Law No. 13,874 (Economic Freedom Act), establishing the Declaration of Economic Freedom Rights. The Economic Freedom Act is a result of the conversion of Provisional Measure No. 881, of April 30, 2019, originally enacted with the aim of reducing government intervention in business activity.
The Economic Freedom Act intends to stimulate the economic activity through the reduction of Government intervention in the private activity and it is guided by the following principles: (i) freedom as a guarantee in the exercise of economic activities; (ii) good faith of the private party when dealing with the Government; (iii) the subsidiary and exceptional intervention of the Government in the exercise of economic activities; and (iv) the recognition of the vulnerability of the private party in face of the Government.
Please see below a brief summary of the main innovations introduced by the Economic Freedom Act. Considering its relevance, some of the matters listed below will be further analyzed in specific newsletters to be eventually published.
The Declaration of the Economic Freedom Rights
The Declaration of the Economic Freedom Rights (DEFR) establishes rules and principles to assure protection to the free initiative and the free exercise of economic activity. It also deals with the Government activity in its capacity of regulating, according to the provisions of the Brazilian Federal Constitution.
In agreement with the DEFR, all entities or individuals have the right to develop low risk economic activities, exclusively through private assets – either owned or legally used from third parties, without the need of any Government approval for liberation of the economic activity.
DEFR also brings significant innovation when it establishes that it is the right of any person, either entities or individuals, essential for the development and economic growth of the country:
- isonomic treatment of public
administration bodies regarding the exercise of acts of liberation
of economic activity, which will be bound by the same
interpretation criteria adopted in previous similar administrative
- ensuring that any deeds settled in
corporate legal business agreements will take precedence over
public policy rules, with some specific exceptions;
- the assurance that, in requests for
public acts of liberation of economic activity, the private
individual will receive, after the instruction of the process, an
express deadline for the analysis of the request, meaning the
silence of the authority after such deadline will imply in tacit
approval of the request, subject to certain hypotheses;
- prohibition of demanding abusive compensatory or mitigating measures that distort its function and are not reasonable or proportionate, when performing impact studies or other releases of economic activities under urban law.
Free Initiative Guarantees
With regard to public administration, the Economic Freedom Act establishes as its duty, in the exercise of regulating public norms, to prevent the abuse of regulatory power in such a way as to unduly: create a market reserve restricting the entry of new domestic or foreign competitors in the market; require technical specification that is not necessary to achieve the desired purpose; increase the transaction cost without demonstrating benefits; introduce limits to the free formation of business companies or economic activities, among others.
Regulatory Impact Analysis
Under the new rule, proposals for editing and amendment of normative acts of the federal public administration, which are of general interest to economic agents, will be preceded by a regulatory impact analysis, which will contain information and data on the possible effects of the normative act, in order to verify the reasonableness of its economic impact.
Amendments to the Brazilian Civil Code
The Economic Freedom Act amended some articles of the Brazilian Civil Code (CC) with relevant impacts.
Disregard of legal personality
The new Act introduced rules on the assumptions for disregard of legal personality, which have been applied to both the administrative and judicial spheres.
The new wording of the article 49-A enlightened the distinction between the legal entity and its partners, associates, founders or administrators, presenting asset autonomy as a lawful tool for allocation and segregation of risks, since they are instruments capable of generating jobs and stimulating new ventures.
Disregard of legal personality, under the terms of the Civil Code, may be applied to cases of misuse of purpose and confusion of property. These concepts were defined in the new wording of the article 50 of the Brazilian Civil Code and its succeeding paragraphs.
The rule defines “misuse of purpose” as the willful use of the legal entity for the purpose of harming creditors and engaging in unlawful acts of any kind. It also established that merely expanding or altering the original purpose of the specific economic activity of the legal entity is not deemed as misuse of purpose.
Furthermore, the rule elucidates the conception of interpretation of “commingling of assets”, which is the absence of de facto separation between assets, characterized by: (i) the company's repetitive fulfillment of obligations of its partners or managers, or vice versa; (ii) the transfer of assets or liabilities without effective consideration; and (iii) for other acts of non-compliance with asset autonomy.
More importantly, the rule expressly states that the mere existence of an economic group without the presence of the requirements set forth in Article 50 of the Brazilian Civil Code does not authorize the disregard of the personality of the legal entity.
The Act did not extend these new rules to sensitive matters such as labor, consumer and environmental contingencies, in which disregard of legal personality represents material business risks. The judiciary has a bias towards maintaining specific rules that are less clear and secure for these disputes.
Interpretation of the legal transaction
By inserting new paragraphs to article 113 of the Civil Code, the Act detailed ways to interpret a legal transaction (negócio jurídico), also taking into consideration as elements to its characterization (a) the behavior of the parties after the entering into the legal transaction; and (b) habits and traditions, as well as market practice and good-faith.
Social duty and minimum intervention in contracts
The Act maintained the principle of the social duty of the contract in the Brazilian Civil Code, an open rule that the judiciary resorts to in situations of socially undesirable contracts – sometimes with insecurity to the contracting parties. This possibility has, however, been reduced. The Economic Freedom Act introduced the principle of minimum intervention, which established contract review as an exceptional measure and created the presumption of equality in civil and business contracts.
The Act introduced a new chapter on investment funds in Book III of the Brazilian Civil Code. Although it reaffirms the jurisdiction of the Brazilian Securities and Exchange Commission (CVM) to discipline such funds, it also controls funds, establishing that the registration of the bylaws of the investment funds with the CVM is a sufficient condition to guarantee their publicity and opposition to third parties.
Additionally, the new rule allows funds to establish quota classes of distinct rights and obligations, making it possible to set up separate assets for each class and limiting the liability of each owner to the value of their shares. In the event that the fund does not have sufficient equity to settle the redemption quotas, the quotaholders will appear on the list of creditors, pursuant to the insolvency rules of the Brazilian Civil Code. As of the enactment of the Economic Freedom Act, creditors may fill for insolvency in court, as determined by the investment fund's shareholders in the fund’s bylaws, or by the CVM.
Finally, the Economic Freedom Act extinguishes the liability of fiduciary service providers from legal and contractual obligations under the funds’ bylaws, except in the case of willful misconduct or bad faith.
Federal Tax Administration Summary Statements
The Economic Freedom Act also created a committee that will be responsible for the issuance of summary statements of the federal tax administration. The committee will be composed of members of the Administrative Board of Tax Appeals, the Special Secretariat of the Federal Revenue of Brazil, the Ministry of Economy and the Attorney General of the National Treasury. Such public bodies must abide by these summary statements in the practice of administrative, normative and decision-making acts.
Pacified tax matters
In addition, the amendments to Law No. 10,522, of July 19, 2002 significantly expanded the list of hypotheses in which the Attorney General's Office of the National Treasury is exempt from contesting, offering counterarguments and filing appeals, as well authorizing such body to give up initiated appeals.
The Attorney General's Office of the National Treasury may waive the practice of procedural acts, including waiving initiated appeals (i) when there is a summary or opinion of the Attorney General of the Union that bears the same conclusion as the individual's claim, (ii) in relation to issues decided by the Federal Supreme Court, in constitutional matters, or by the Superior Court of Justice, the Superior Labor Court, the Superior Electoral Court or the National Class of Unification of Jurisprudence, within the scope of its respective jurisdictions, when (a) is defined in general repercussion or repetitive appeal or (b) there is no feasibility of reversing the thesis unfavorable to the National Treasury, according to criteria defined in the act of the Attorney General of the National Treasury, or (iii) when the economic benefit aimed at the procedural act does not meet the criteria of rationality, economy and efficiency.
Digital tax documents
The Economic Freedom Act also announced the possibility for taxpayers to file tax documents through microfilm or digitally, in which case the microfilm or digital document is equated with the physical document for all legal purposes. For this purpose, the Federal Executive Power will issue further regulations on the techniques and requirements to the acceptance of digital documents.
Amendment of Business Records
The new Act also presented modifications to Law No. 8,934, of November 18, 1994 (Public Records of Mercantile Companies’ Law) making it possible to automatically record acts, documents and statements that contain merely registration information that can be obtained through other databases available from public agencies.
Moreover, it reduced bureaucracy in the registration of acts of incorporation by providing for the filing deadline of five (5) days for the situations provided for in article 41, I of the Public Registrations of Mercantile Companies’ Law and two (2) days for situations not provided for in the said item by automatically granting: (i) registration applications that meet certain requirements, including: (a) approval of prior consultation of the viability of the business name and location and (b) use by the applicant of the standard instrument established by the National Registry Department Business and Integration (Drei); and (ii) requests for the filing of extinction acts.
The strong interventionism of the government in the insurance and reinsurance sector has been the subject of criticism over the last years, and the new legislation is a relevant step towards less the bureaucracy in the field. The insurance market should demand and observe the duly application of such Act by the insurance regulator, the Superintendence of Private Insurance (SUSEP).
In addition to the general highlights already mentioned in the previous topics, the new Act expressly repeals two provisions of Decree-Law No. 73/1966, which provides for the National Private Insurance System, regarding the principle of reciprocity in insurance operations, conditioning the authorization for the operation of foreign companies in Brazil to equal conditions in the country of origin, setting expectations for the inclusion of new market players and business opportunities.
Impacts on Labor Law
The referred Act also affects labor relations as it expressly states that the labor legislation is the right of the individual and the legal entity, and that the guarantee of these rights is essential for the economic growth and development of the country. Moreover, the Economic Freedom Law imposes the observance of its principles and its provisions in the interpretation and application of labor standards, which represents a challenge for the Labor Courts today.
The Economic Freedom Act repeals a number of provisions regarding the work booklet (CTPS) and creates an electronic system in which the annotations must be made within five (5) days and the information made available to the employee within 48 hours.
The new Act also states that an employer with up to 20 workers does not need to adopt time registration to control working hours. In addition, from now on, companies will be able to adopt a system to control the working hours per exception (i.e. where only the deviation of the regular hours are informed) provided a written individual agreement or a collective bargaining agreement is established.
Finally, the Economic Freedom Act determines the replacement of the “e-social” platform currently in force by a simpler digital bookkeeping system for social security, labor and tax obligations.
Our team is available to provide any further clarification on the matter.
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.