At the end of last year, Fibria, a world-leading producer of eucalyptus pulp, disclosed its R$1,65 billion sale of 210,000 hectares of land distributed throughout four Brazilian States to Parkia Participações. The large numbers involved in the transaction hardly surprised those acquainted with the Brazilian economy. Deals as such are common in the country, where the agribusiness currently represents around 1/3 of the GDP.
The PE&VC industry has not been blind to the profits arising out of the agribusiness sector. A significant number of private equity funds were set up in the past few years to invest exclusively in companies focused on agriculture, livestock, and so forth. And since most such companies own or lease real estate in rural areas, it is advisable that fund managers and investors in general be well aware of the restrictions the Brazilian legal system imposes on the acquisition of rural land by foreigners.
Although foreign investment is very much welcome, Federal Laws 5,709/71 and 8,629/93, as well as Decree 74,965/74 set forth that foreign natural persons resident in Brazil and foreign legal entities authorized to operate in the country may only buy or lease rural land after obtaining previous authorization from the Instituto Nacional de Colonização e Reforma Agrária (INCRA), a federal administrative agency, or in some cases from the National Congress1.
Law 5,709/71 imposes this same restriction on Brazilian legal entities controlled by foreigners (resident or not in the country)2. Even though this law defines as controlling any equity interest in a Brazilian legal entity’s capital stock higher than 50%, the Public Attorney Federal Office has issued a regulation setting forth that any interest granting the effective control of a Brazilian legal entity will be deemed a controlling interest (without reference to a minimum percentage). Such regulation is mandatory to all federal agencies. It does not clarify whether an equity interest higher than 50% that does not grant to its holder effective control of such legal entity will be considered a controlling interest.
In case a foreign legal entity or a foreign-controlled Brazilian legal entity wants to buy or lease rural land up to 100 MEI (Módulo de Exploração Indefinida)3 or a foreign natural person wants to buy or lease rural land up to 50 MEI, the authorization must come from the INCRA4. Such authorization will be granted or not on discretionary grounds and depends on the filing of a draft project pointing out which rural activities (agriculture, cattle-raising, related manufacturing, etc.) will be performed in the area and how. For rural lands larger in size than the above mentioned limits, the authorization must be given by the National Congress. Congressional approval is also required for new purchases or lease of rural land in Municipalities in which (a) 25% or more of its total rural area is owned or leased by foreigners or (b) more than 10% of its total rural area is owned or leased by foreigners of the same nationality.
Another restriction on the acquisition or lease by foreigners of rural land concerns areas located in the so-called “border zones” - the inner tracks of land within 150 kilometers from any Brazilian national border. A request to acquire or lease such lands must be submitted to the National Defense Council (NDC), an advisory board to the President on matters of national security, with an explanation of the purpose of the transaction. The NDC will analyze such explanation and grant or not authorization. In case authorization is granted, an additional one from the INCRA is also necessary. In both such cases the decisions are taken on discretionary grounds.
The acquisition or lease of Brazilian rural land not in compliance with the legal requirements is void. In many cases, however, compliance is troublesome, for even if all the bureaucratic conditions are met the INCRA, the Congress or the NDC may deny authorization.
Given the barriers imposed by these rules, it is rumored that the Federal Government or Congress may enact new rules in a not so distant future making it easier for foreigners to acquire rural lands in Brazil. Until then, different sorts of business organizations, contractual structures and governance rules could possibly be adopted to allow foreign investments in the Brazilian agribusiness to be carried out without the legal hurdles imposed on the purchase or lease of rural areas by foreigners. The best strategy may only be defined on a case-by-case basis and in view of one’s appetite for risk.
______________
1 Foreign natural persons who are not legal residents and foreign legal entities not duly authorized to operate in Brazil are prohibited altogether from purchasing or leasing rural land. There are exceptions to this rule related to diplomatic cases, which will not be discussed in this article.
2 The literal interpretation of the law in connection with such restriction was confirmed by an opinion issued by the Public Attorney Federal Office in 2008, which changed a previous interpretation that held that such restriction had been revoked.
3 The MEI is a unit of area, varying from 5 to 70 hectares. The INCRA is responsible for fixing the size of 1 MEI for each Brazilian region.
4 In case a natural foreign person wants to purchase or lease a rural area smaller than 3 MEI, authorization by the INCRA is not required. If such area is smaller than 20 MEI, authorization is required, though the filing of a use project is not mandatory.
______________
* Guilherme Leporace and Juliana Azevedo are respectively partner and associate of Lobo & Ibeas Advogados.
