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Brazil holds strict rules regarding the acquisition of land by foreign investors, especially in rural areas. There are laws that limit the purchase of rural land to a certain number of acres, relative to a percentage of the city’s area, compelling the outsider company/individual to invest in certain specific projects in order to acquire the property. Some transactions are even dependant on Congress or Presidential approval.

In reaction to the limitations, companies are getting around the restrictions imposed mainly by the Law 5.709/71. The idea is not to buy the land itself, which is expensive and time-consuming, but to utilize the lands another way. The slow-paced authorization procedure given by the National Institute of Colonization and Agrarian Reform (INCRA) may just be the tipping point for companies that are eager to invest in Brazil to start looking for different answers. Big market players are choosing to avoid the conventional approach that involves buying rural lands in Brazil: State Grid (CHN) and Brookfield (CAN) being examples of this.  

The main alternative structures utilized by foreign companies in order to purchase Brazilian rural lands are:

1. Preferred Stocks: in this situation, the buyer has no voting right in the company’s board. This choice could be useful to companies that intend to focus on the financial aspect of the investments, instead of wanting full control over the Brazilian operation.

2. Surface Rights: the use and surface rights can be arranged with the Brazilian company that owns the land. There is a risk however, if the authorities find this to be an example of purchase simulation. An alternative method is to negotiate with the City Hall, so the zoning rules are changed in order to make the desired land to be marked as an urban location, instead of a rural one.

3. Convertible Debentures: Debentures are a traditional way for foreigners to get hold of a company’s control in Brazil and avoid the legal restrictions that apply. In this case, the buyer will acquire voting rights and can decide the future of the business. Some companies intend to convert the debentures in stocks in the future, hoping that the Congress will reform the current restrictions.

4. Rural Partnership: this involves the relation between a Brazilian company, the owner of the land, and a foreign company, the one that actually controls the operation. Again, the parties have to be careful in order to avoid carrying out what the authorities would deem as a purchase simulation.

5. Operation-Focused Investment: in this case, the company will focus its investments in the operation per say, while a Brazilian company owns the land. This do not require the purchase of the land, but there has to be trust between businesses in order to make the operation work properly.

Finally, it is good to inform that future changes in legislation are expected on the subject. The Bill of Law 4.059/12 intends to change the rules, in order to withdraw most of the restrictions regarding foreigner’s purchase of Brazilian rural lands. There is hope for the Project to be discussed in 2018, since it has become stagnated for years. Nevertheless, the foreign investor has to be cautious: every operation listed above carries some risks. Consultancy is mandatory in order to prevent problems in the legal and administrative departments, while the law is not changed.

For more on this, please refer to the ‘Valor’ Report.

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