| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 3 | True VC/PE funds were made possible by Instruction 391/03 of 2003 by the Securities Commission (CVM). This created shareholding investment funds (FIPs, fundos de investimento em participacões), and there has been rapid expansion of fund activity under this framework. Prior to 2003, the few fund undertakings that existed were based on difficult efforts to adapt rules existing for stock investment funds (FIAs, fundos de investimentos em acões) (ABVCAP site 2007). Also, since 2004 Brazil has another special framework for VC funds under CVM 209, under which more than 20 funds have been created. |
| Tax treatment of VC/PE funds & investments | 3 | Foreign institutional investment on the equity market is now exempt from income tax and capital gains tax provided it does not come from entities registered in tax haven countries. For domestic institutional investment, the rate was reduced from 20% to 15% effective January 2005. Brazilian investors pay a 0.38% financial-transactions tax (contribuição provisória sobre movimentação financeira—CPMF), though they are exempt when they purchase Brazilian shares or invest in Brazilian derivatives or futures markets. Capital gains realized by non-residents individuals on investments registered with the central bank are subject to a 15% withholding tax. Dividends paid to residents and non-residents from profits accruing after December 31st 1995 are not subject to withholding tax and are not included in the taxable income of resident recipients. The effective tax rate on corporate income is 34% (slightly less for smaller companies), comprising a corporate income tax base rate of 15%, a 10% surcharge on monthly income exceeding R20,000 and a mandatory contribution to the social-security system regularly levied at 9%. Government funding and tax incentives for R&D-related activities exist. Deals must be carefully structured but double taxation can generally be avoided (November 2005 and January 2007 interviews; EIU, Country Finance 2006 and Country Commerce 2006) |
| Protection of minority shareholder rights | 3 | Improved protection for minority rights were contained in the 2002 Corporations Law: preferred, non-voting shareholders must receive dividends at least equal to common, voting shareholders, and preferred, non-voting shares may not exceed 50% of all shares. Under the CVM's corporate governance recommendations, the minority should have the right to include agenda items in general shareholders' meetings, and should have at least one representative on audit committees. Momentum for adherence to these standards is growing (see Corporate governance). The World Bank's Doing Business 2006 rates minority legal ability to challenge board decisions and transactions as moderate but ability to request audits and inspections as weak (EIU, Country Finance 2006, Country Commerce 2006; November 2005 and January 2007 interviews). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 3 | Insurance companies may invest up to 50% of reserves in variable-income instruments such as shares, which can be a restrictive requirement. Pension funds, whose participation in PE/VC activity is growing, enjoy more latitude; they may invest 60% of capital in stocks (EIU, Country Finance 2006; January 2007 interview) |
| Protection of intellectual property rights | 1 | EIU Risk Briefing score. Although there has been stepped up vigor in copyright enforcement actions and IPR protection is deemed by IT investors as fairly good, piracy in Internet and optical media products remains high. The process of registering patents and other intellectual property remains slow and cumbersome (US Country Commercial Guide 2006; January 2007 interview) |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 3 | A new bankruptcy law enacted in February 2005 is beginning to show positive results. It is in line with US Chapter 11 in giving insolvent firms breathing space to restructure debts; it creates 180-day window to negotiate restructuring deals with creditors inside or outside the court system, aims to reduce delays, gives creditors 30 days to respond to restructuring plans, and slightly increases creditors' rights. Where bankruptcy is inevitable, the law allows for more rapid proceedings, and includes the creditors in the liquidation process. Partner liability beyond capital shares is not a problem, except in cases of demonstrable negligence (January 2007 interview; EIU, Country Commerce 2006) |
| Capital markets development and feasibility of exits (ie, local IPOs) | 2 | Average of three EIU Risk Briefing scores. The availability of investment finance has long been restricted by tight monetary policy and high lending rates. Nevertheless, real interest rates now appear to be on a sustainable downward trend, and the domestic capital markets are gradually deepening. Even so, most local-currency loans are expensive and short-term. There are few restrictions on foreign firms gaining access to the Brazilian markets, but local institutional investors are not allowed to invest in foreign corporate bonds. The equity and corporate bond markets have strengthened in the past five years and in the long term will offer alternative financing opportunities for local and foreign companies. IPOs are expanding rapidly, thanks to capital market and corporate governance reforms and growing market capitalization. For now, however, markets remain small and relatively illiquid. |
| Registration/reserve requirements on inward investments | 3 | Brazil requires just simple on-line registration of forex transactions for record-keeping purposes only. The central bank requires registration of all investments (equity or debt) that foreign investors conduct in Brazil. Investors must register in order to secure their right to acquire foreign currency directly from institutions authorized by the central bank. This purchase is necessary each time the investor decides, for example, to remit dividends, pay interests or repatriate capital, or obtain foreign currency loans from authorized institutions. There are no reserve requirements (EIU, Country Commerce 2006). |
| Corporate governance requirements | 3 | In 2001 the Bovespa stock exchange created three new segments, each with progressively higher governance requirements; of the three, the Novo Mercado section requires the tightest standards (a company must issue only voting shares, must keep shares equivalent to 25% of own capital, etc). The Securities Commission (CVM), which has been granted greater oversight functions and financial independence in recent years, published voluntary, non-binding governance standards in 2002 and firms are requested but not required to report on their non-compliance, which is not punishable. Though the CVM has not published results of these reports, the corporate governance reform momentum has been growing, and the CVM's successful Bovespa Mais program provides stepping stone technical assistance for firms that wish to go public within a few years. Of the 33 IPOs since 2004, 23 were compliant with the strictest requirements of the Novo Mercado, and most of the rest with the Level II requirements. The World Bank's Doing Business 2006 rates board disclosure requirements, director liability and the ability of shareholders to file suit as moderate in strength (January 2007 and November 2005 interviews; EIU, Country Commerce 2006; OECD, Latin American CG Roundtable) |
| Strength of the judicial system | 2 | EIU Risk Briefing score. The Brazilian judicial system has traditionally been hugely unwieldy and slow, with courts sometimes taking eight years to reach a final decision. A Judicial reform law approved by Congress in 2004, following 13 years of discussion and obstruction by powerful vested interests, is expected to bring some improvements. The most important change for investors has been the introduction of the principle of binding precedent. Other changes include the creation of National Councils to regulate the judiciary and prosecution service, the ending of special holidays for the courts, a quarantine period for judges wishing to return to private practice and the federalisation of human rights crimes. The changes are only beginning to be tested, and some judges are still resisting some further changes to remove privileges and streamline the system. Wherever possible, businesses should avoid using the courts for settling disputes. If entangled in a legal dispute, local legal expertise--not only for interpretation of the law but also for navigation through the system--is essential. Alternative dispute settlement mechanisms via private arbitration, including recourse to international arbitration where specified in shareholder agreements, are available and function well despite the slowness of the courts (January 2007 interview). |
| Perceived corruption | 1 | EIU Risk Briefing score. Allegations of corruption within the judiciary and at high levels in government have proliferated in recent years. Although some of these allegations have reflected political rivalries, a number of high-profile cases have exposed that personal links between politicians, businesses and the judiciary frequently lead to abuse of privilege. There is some evidence that the degree of corruption has been increasing in recent years, particularly in areas where links have been established with the growing drugs industry. The PT government made a commitment to take on the vested interests of the judicial system and squeeze out corruption in the courts, but confidence in the ability of a PT-led government to improve transparency has been badly damaged by the corruption scandals that have engulfed the party since mid-2005. Even assuming greater momentum in the next few years, progress on this issue can only be slow and the effects of its efforts are unlikely to be dramatic in the short term. |
| Quality of local accounting industry/use of international standards | 3 | Companies listed on the Novo Mercado section of Bovespa must use GAAP. Elsewhere, international standards or transparent local standards, readily interpreted and moving in the direction of international norms, are used. International accounting companies are present and reliable. Given uneven professionalism and quality of SME accounting, investors must remain diligent (EIU, Country Commerce 2006; January 2007 and November 2005 interviews) |