This content is from: Local Insights

Brazil: New INCRA procedures

Brazilian law provides that foreigners can only acquire or lease rural properties if previously authorised by the National Institute of Rural Settlement and Agrarian Reform (INCRA). The same restrictions apply to foreign controlled Brazilian companies. The limitations were imposed on the premise that the acquisition or leasing of large rural areas by foreigners (directly or via local subsidiaries), mainly for agribusiness or mining activities, must be restricted to protect Brazilian sovereignty as regards the country's land and natural resources.

In view of this, INCRA established various requirements that foreigners and foreign controlled Brazilian companies must fulfil before they can establish their rural activities. The same requirements apply to foreign controlled Brazilian companies. INCRA simplified these requirements in December 2017. This is a window of opportunity for foreigners and foreign controlled Brazilian companies to take measures to regularise their situation.

The main requirement concerns the size of the rural area. Foreigners and foreign controlled Brazilian companies may not own or lease, in aggregate, an area larger than 25% of the municipality. Furthermore, foreigners of the same nationality may not own or lease an area larger than 10% of the municipality. Other requirements are mostly of a bureaucratic nature, yet they can be very time consuming and costly to meet.

The restrictions and bureaucratic difficulties involved in obtaining INCRA's approval have fuelled alternative approaches to enable foreigners and their local subsidiaries to hold rights in Brazilian rural land. As Brazilian law only restricts ownership and leasing, other in rem rights are being used to achieve equivalent outcomes from an economic perspective. In particular, the creation of usufruct or of surface rights is a feasible structure for reaching such goals. Some sectors use a transfer of use contract, but their level of legal protection requires case-by-case analysis.

In international financings secured by Brazilian rural land, in addition to the borrower's proper title, real estate offices are also an important aspect of the process that merit attention. Documents involving in rem rights over real property must be filed with them and they check for compliance with legal requirements before registering the documents. Although there is no legal basis for doing so, some of them take the view that mortgages and fiduciary transfers of title in favour of foreign creditors must also be subject to the restrictions that apply to ownership or leasing by foreigners and foreign controlled Brazilian companies. They may take the view that foreign creditors could become owners of the property after a default (subject to following certain procedures). One could argue that the correct approach would be to consider that, in the eventuality of a foreclosure, the foreign creditor would not be able to acquire ownership over the asset unless the proper authorisations had been obtained. This should be taken into account to avoid delays in a transaction.

There is growing pressure from various sectors of the economy, especially the agribusiness sector, for the government to relax existing restrictions. They argue that more flexibility would increase the inflow of foreign investment and financings in the agricultural sector. The Brazilian government is pondering a change in the law to facilitate the acquisition and leasing of rural land by foreigners or their local subsidiaries. If the market-friendly government manages to pass such legislation, it would create important opportunities for business players in this sector.

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