On September 20, 2019, Law n. 13,874 was published, converting Provisional Measure n.881/2019 into law and instituting the Declaration of Economic Freedom Rights, cutting a red tape to the country’s economy to foster business activities nationwide.
Aiming to strengthen the free enterprise principle and develop a free market economy, the Declaration ultimately seeks to reduce bureaucracy of the entrepreneurial activities, especially those at low risk, and, with minimum intervention from the Government, as well as to stimulate entrepreneurship and innovation.
Below, you will find an overview of the key aspects of Law n. 13,874:
The Declaration of Economic Freedom Rights offers an interpretation guideline to all civil, corporate, economic, urban and labour laws regarding economic activities. On the one hand, it states that these laws are to be interpreted in a way that values the parties’ economic freedom and good faith, as well as the respect to contracts and investments; on the other hand, it establishes rules and principles to secure the protection of free initiative, including (i) the guarantee of freedom in doing business; (ii) presumption of t good-faith in all acts carried out before the governmental bodies; (iii) minimal, extraordinary and subsidiary intervention in economic activities; and (iv) acknowledgement that individuals and private entities are vulnerable before the government.
ECONOMIC FREEDOM RIGHTS
Law No. 13,874 sets a list of economic freedom rights deemed essential to foster the country’s economic growth, such as:
(i) the right to promote low risk economic activities, in which private property is used exclusively, without prior governmental approval or authorization;
(ii) isonomic and equal treatment from governmental bodies in their public acts for business clearance; and
(iii) the right to be informed by the competent governmental body, upon request for business clearance, of a definitive list of required documents and the respective deadline to receive a decision which, if exceeded, will imply in automatic clearance.
Among others, these rights aim to simplify the incorporation and development of new businesses in Brazil. It is a known fact that the creation of a company or subsidiary in the country depends on dealing with a massive red tape, as well as on dealing with an infinity of unforeseeable issues, including, more often than not, corruption. By simplifying this process, reducing the need for intervention and establishing an isonomic treatment – meaning that, henceforth, authorizations granted by government officials will become a binding precedent for similar cases –, the Declaration aims to bring longstanding problems faced by entrepreneurs in Brazil to a swift end.
Additionally, the Declaration assures that corporate and business transactions, as well as the parties’ autonomy, shall be respected by governmental acts and rules, which would only be applied subsidiarily to those set by the parties, except for public policies.
Another right set up by the Declaration is the right to develop and commercialize new services and products in Brazil, whenever Brazilian rules become outdated in comparison with internationally consolidated technology developments. This right seeks to protect the development of new technologies, whenever they fall short of a legal backing in Brazil.
The Declaration also imposed several duties and limitations to the government’s authority to regulate free markets, such as forbidding it to: (i) create market reserves to any market player, in detriment to the others; (ii) create rules that may difficult access of new players to the market; and (iii) increase transaction costs unnecessarily.
Law No. 13,874 also determined that any proposal to create or change rules on federal level shall be preceded by the analysis of its regulatory impact, in order to assess the potential effects of such regulatory act and whether such impacts are reasonable.
CHANGES TO THE CURRENT LEGISLATION
In addition, Law 13,874 also made several important amendments to existing laws, with material impacts:
• Brazilian Civil Code
Disregard Doctrine. Brazilian Civil Code was amended in order to increase requirements for piercing the corporate veil and reinforce its exceptional character. New wording of article 50 and its paragraphs incorporated the Superior Court of Justice (Superior Tribunal de Justiça) understanding regarding the matter and, even though the requirements for applying the doctrine remain the same (i.e., deviation of purpose, or mingling of corporate and personal assets), it is now required a proof of malicious use of the corporate structure seeking to harming creditors, in order to pierce the corporate veil.
Limited Liability Companies. The Law also allowed the incorporation of a single partner limited liability company (sociedade limitada), whereas previously a minimum of two partners was required.
Investment Funds. A new chapter on Investment Funds was created in the Civil Code. Despite reaffirming the competence of the Brazilian Securities and Exchange Commission (CVM) to issue regulations regarding investment funds, the new rules eased the incorporation of new funds by waiving the need of previous filing of the fund’s bylaw before Public Civil Registry Service as well as introduced the possibility that the fund’s bylaws: (i) cap investor’s liability at the value of their respective cota’s (share), whereas previously investors were illimited liable for the funds losses and negative returns; (ii) limit the liability to those rendering fiduciary services to the fund, both towards the fund and among themselves, with regard to fulfillment of their respective fiduciary duties ; and (iii) establish different classes of shares (quotas) with different rights and obligations and even distinct equities for each class.
Limitation to the “social role of contracts”. Another relevant modification limited the interpretation of the “social role of contracts” principle provided under article 421, by creating the principle of minimum intervention of the State in contractual inter parties relationships. Before the Declaration, the social role principle – which states that the enforcement of contracts shall factor into the best interests of society, beyond the interests of the relevant contracting parties – allowed the Judiciary Courts to frequently intervene in contracts and apply different interpretations to the principle on a case-by-case basis.
Interpretation in Business Relationship. The Law also introduced a principle under the terms of which all civil and corporate contracts shall be deemed to have been entered by the parties in an even and symmetrical basis in all its terms, including with respect to: (i) setting standards for contract interpretation, review and termination; and (ii) risk allocation.
• Corporations Act
In regard to corporations, the new Law eased the public participation in public offerings, by waiving the requirement that investors should execute the subscription list in case the offering is carried through electronic system managed by an entity approved by Brazilian Securities Exchange Commission.
• Tax Laws
From a tax perspective, the Law brought relevant changes to the interpretation and application of tax rules, aiming to substantially reduce tax litigation by the government and to prevent the tax authorities from constituting tax assessments on matters that have been subject to precedents acknowledged by the federal tax administration.
The new Law allows the Office of Attorney General of the National Treasury (“PGFN”) to waive its right to challenge decisions and file appeals or counterarguments not only on constitutional matters decided by the Federal Supreme Court (“STF”) or by the Superior Court of Justice (“STJ”) or the National Panel of Case Law Standardization under the General Repercussion Systematic process or “Repetitive Appeals”, but also in relation to (i) matters on which the PGFN or the Federal Attorney General’s Office (“AGU”) have already issued an Opinion; (ii) matters considered as binding by the federal tax administration; (iii) matters based on legal provisions declared unconstitutional by the STF, on the diffuse control level; and (iv) matters declared constitutional by the STF or decided by the STJ, the Superior Labor Court (“TST”), the Superior Electoral Court (“TSE”) or the National Panel of Case Law Standardization, within the scope of their jurisdictions, when there is no possibility of a reversal of the decision, in accordance with the criteria defined in an Act of the PGFN.
Moreover, precedents of the federal tax administration, to be issued by a committee consisting of members of the Superior Court of Administrative Tax Appeals (“CARF”), the Brazilian IRS, the Ministry of Economy and the PGFN, will bind all normative and decision-making acts issued by those office. As a consequence, tax auditors will not be allowed to constitute tax assessments on whose subject matter an appeal has been waived, with due regard for the provisions of the Opinion of the PGFN or the Opinion or Precedent of the AGU. In addition, they shall observe such matters when ruling on the official review of assessments or requests for refund of overpaid taxes.
The Law also prohibits the Administration from creating, under the pretext of tax enrollment, requirements that contradict the principle of free development of low risk economic activities.