Several media coverages have shown recovery of the real estate market in some Brazilian regions. After four years of decrease, the numbers of the second half of 2019 and of the first two months of 2020 indicate that the Brazilian real estate market has left its negative stage behind. On the other hand, the Brazilian Real (BRL) has reached its lowest price in comparison with the dollar and euro.
These two elements combined (a newly recovered real estate market and a low BRL) make real property in Brazil attractive to foreigners once again, especially in the Southeast region (which embraces São Paulo, Rio de Janeiro, Minas Gerais, and Espírito Santo), where the economic recovery is more palpable.
The Brazilian legal system has specific rules concerning the acquisition of real estate by foreigners, whether onerous or gratuitous. Federal law # 5.709/1971, inspired by principles such as sovereignty and internal defense, sets forth specific rules for foreign persons (whether individuals or legal entities) who intend to acquire rural property. The general purpose of the law is to avoid that foreign persons control a significant part of the territory, or even areas of public interest, such as borders, and areas considered to be relevant for military purposes.
As a general guideline, limits are stricter in relation to legal entities than they are as to individuals, and the ranges are calculated upon the extension of the area, based on a measure referred to as “rural module”. Such rural module varies from 5 to 100 hectares. In the State of São Paulo, for example, a rural module equals 10 hectares. Tables below indicate the ranges for authorization in case of acquisition of rural properties by individuals and legal entities:
Table 1: individuals
Table 2: legal entities
The analysis of requirements made on behalf of foreign legal entities are also subject to additional documents, such as an Exploration Project (which shall be connected to the entity’s business purpose) to be presented to Brazilian Ministry of Agriculture. And, depending on the kind of activity to be developed, submissions shall be presented also to other public bureaus, such as the Ministry of Agriculture, Fishing and Supply; Ministry of Development, Industry and External Commerce; Ministry of Tourism; or even INCRA.
The requirements applicable to foreign legal entities may extend to Brazilian entities with foreign shareholders or managers, depending on their level of interference with the Brazilian entity.
There are other limitations, which relate to the total area of a given city or region (foreigners may own no more than 25% of the rural area of a city) or to the nationality of the foreign owners (persons of the same foreign nationality cannot own more than 40% of an area). Another relevant rule demands that a foreign individual becomes a Brazilian resident in order to be eligible to own rural property in Brazil. Legal residence may be obtained via enrollment with the National Enrollment of Foreign Individuals (RNE, in Portuguese), which also generates enrollment (CPF) with the Brazilian Federal Revenue.
However, becoming a Brazilian resident also applies for tax purposes, and Brazil taxes a resident's worldwide income, subject to applicable international treaties and to the reciprocity principle (whereby Brazil may grant a credit of or exempt the foreign tax paid, as long as the foreign country grants the same treatment to the Brazilian tax).
There are other factors that may impact the level of interference of the law in the acquisition of a rural real estate by a foreign person, and its critical to make sure a deal like this is in compliance with the law. Otherwise, such acquisition may be later deemed void, and expose the purchaser to the burden of having to sue the seller to recover the price paid.
Similar to the acquisition of a rural estate, the purchase of an urban property by a foreign person may also generate tax duties arisen from the ownership of an asset located in Brazil (which also requires enrollment with the Federal Revenue). Aside from that, owning an urban real estate is much less bureaucratic. No previous authorization or application for Brazilian residence are needed.
Purchasing either a rural or an urban real property demands attention to information regarding previous legal title and environmental, tax and administrative requirements related to the real estate. Problems related to previous owners or to the real estate may contaminate the deal and further expose buyer to losses, such as having to assume prior debts or fines imposed by local, tax, or environmental authorities.
Also, regardless of the location of the real property, federal law and court precedents say that the hereditary transmission of property located in Brazil shall be probated in Brazil, regardless of whether the heirs are Brazilian. This is certainly another factor to be taken into consideration, especially for family-managed companies or in the event parents are evaluating succession plans regarding family assets.
Professional advisory may diminish or reduce the bureaucracy in connection with the purchase of rural properties and provide owners with the necessary legal protection to preserve their companies’ or families’ assets, whether in the moment of the purchase or when the time comes to think of the transfer of such ownership.
By Gabriel Burjaili de Oliveira.