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May 08, 2019

Brazilian Government publishes the Provisional Measure of economic freedom

On April 30, 2019, the Federal Government issued the so-called “Economic Freedom PM (Provisional Measure)”. Published on the same date in an extra edition of the Federal Official Gazette, the Provisional Measure No. 881 (PM No. 881) establishes the “Declaration of the Rights of Economic Freedom” and deals with other relevant matters.

Through the referred PM, the Federal Administration seeks to reduce bureaucracy of the entrepreneurial activities, especially those at low risk, and, with minimum intervention from the Government, stimulate entrepreneurship and innovation.

The principles that guide PM No. 881 are: (i) presumption of freedom on the exercise of economic activities; (ii) presumption of good faith on the private entities; and (iii) subsidiary, minimum and exceptional intervention of the Government on the economy.

We have prepared a brief, yet preliminary, of the main topics of PM No. 881. Considering the materiality of the matter, some items bellow will be subject of specific analysis in newsletters that shall soon be published.

Declaration of the Rights of Economic Freedom

The Declaration of the Rights of Economic Freedom (DREF) establishes rules and principles to secure the protection of free initiative and free exercise of economic activity. It also deals with the functioning of the Government as regulatory and normative agent, as provided for in the Federal Constitution.

According to the DREF, it is the right of any person to promote low risk economic activity, in which private property is used exclusively, without the requirement of public acts for authorizing the economic activity. This initiative is especially relevant for the Brazilian startups ecosystem, because if its activities are considered within the concept of low risk, functioning permits and licenses – a bureaucracy that most of the times is considered excessive for these companies – will not be required. Worth stressing that the definition of “low risk activity” shall be subject of further regulation and such activities shall be mandatorily conducted at private properties.

Furthermore, among other legal provisions, the DREF brings meaningful innovations. Generally described, below are some examples of such provisions that we deemed material:

  1. Isonomic treatment of the public administration in relation to the exercise of acts of authorization of the economic activity, which shall be bonded to the same criteria of interpretation adopted in previous decisions;
     
  2. guarantee that the agreed upon by the parties on corporate business shall prevail over public order regulation, with some specific exceptions;
     
  3. the requests of public acts of authorization of economic activity, the private entity shall receive an express deadline for the analysis of the request and the silence of the authority after such deadline shall incur automatic approval of the request, except for specific situations;
     
  4. possibility of implementation, tests and offerings, whether for free or not, of new products or services without the need of previous authorization of the public power; such procedures should be done with restricted groups on private property, and may not involve restricted materials or offer risks to the public health or national security. This measure is designed especially to startups in their initial steps, which will be allowed to validate their products or services on an experimental basis without the bureaucracy related to authorizations and licenses, for instance.

Free Initiative Guarantees

In relation to the public administration, the PM No. 881 establishes that it is its duty, in the exercise of public regulation, to avoid abuse of regulatory power in order to improperly: impose requirements which benefit specific players (reserve de mercado), restrict the entrance of new national or foreign competitors in the market, demand technical specifications that are not necessary to achieve the desired purpose, increase the transaction cost without demonstrating related benefits of such increase, introduce limits to the free formation of companies or economic activities, among others.

Regulatory impact analysis

According to the new rule, proposals for the issuance or amendments to the normative acts of the federal public administration, that are of general interest economic agents, shall be preceded by the analysis of the regulatory impact, which shall contain information and data about possible effects of the normative act to verify the reasonability of its economic impact.

Amendments to the Brazilian Civil Code

PM No. 881 amended some articles of the Civil Code (CC) with material impacts.

Piercing the corporate veil

Some rules were introduced in relation to the requirements for piercing the corporate veil, which has been applied in both administrative and judicial spheres. The disregard of the legal personality, according to the Civil Code (CC), shall be applied to cases of “deviation of purpose” and “commingling of assets”. These concepts are now defined by the new text of the Article 50 of the CC.

The “deviation of purpose” is the fraudulent utilization of the legal personality with the purpose of damaging creditors and the practice of illegal acts of any nature. It was defined as well that it is not considered “deviation of purpose” the simple expansion or change of the original purpose of the specific economic activity of the company.

On the other hand, the “commingling of assets” was defined as the absence of real segregation of the assets of affiliates, characterized by: (i) repetitive payments by a company of obligations of its shareholders or managers, or vice-versa; (ii) transfer of assets or liabilities among entities without effective compensation; and (iii) other acts that affect the autonomy of the net worth of an entity.

The most importantly, the rule expressly establishes that the simple existence of an economic group, without the presence of the requirements mentioned in the Article 50 of the CC does not authorize the piercing of the corporate veil.

Investments Funds

A new chapter on Investments Funds was created in the Book III of the Brazilian Civil Code. Although it reaffirms the competence of the Brazilian Securities and Exchange Commission to regulate the investments funds, the new rule allows the funds to establish limitations to the liability of the shareholders to the amount of each share held at the fund, and, yet, authorizes the limitation of liability of the providers of fiduciary service to the fund.

Statement of Precedents of the Federal Tax Administration

PM No. 881 also dealt with the creation of a committee that will publish statements of precedents of the federal tax administration. The committee will be formed by members of the Administrative Council of Tax Appeals, the Special Secretariat of the Brazilian Federal Revenue, the Ministry of Economy and the Office of the Attorney General of the National Treasury. Such statements of precedents shall be observed in the administrative, normative and decision-making acts practiced by the referred public bodies.

Consolidated Precedents on Tax Matters

Furthermore, with amendments to Law No. 10.522, of July 19, 2002, the number of hypothesis in which the Office of Attorney General of the National Treasury is exempt from contesting and appealing, was significantly extended, as well as to withdraw from appeals filed in connection with tax matters that have consolidated precedents.

The Office of Attorney General of the National Treasury shall waive the practice of procedural acts, including withdraw from appeals already filed (i) when there is a precedent or legal opinion from the Attorney General of the Union that concludes in the same way of the request made by the private party, (ii) in relation to consolidated precedents by the Federal Supreme Court, on constitutional matters, or by the Superior Court of Justice, by the Superior Court of Labor, by the Superior Electoral Court or by the National Chamber of Uniformization of Jurisprudence whenever there is no possibility for the reversion of a thesis that is unfavorable to National Treasury, according to the specifications made by the Attorney General of the National Treasury, or, yet, (iii) when the monetary benefit aimed with the procedural act does not fulfill the criteria of rationality, economy or efficiency.

Digitalization of Documents with Tax Effects

PM No. 881 also allowed the possibility of the taxpayers to file documents with tax effects via microfilm or digitally, and in such case the microfilmed or digital document shall be considered equal to the physical document for all legal aspects. For such purposes, the techniques and requirements established in regulation to be published by the Federal Executive Power shall be observed.

Labor Law

The referred PM also brings consequences on the labor relations to the extent that it expressly declares that the labor legislation is a right of the individual as well as of legal entities, and the guarantee of such rights is essential to the economic development and growth of the country. Furthermore, the PM imposes the observance of its principles and its provisions in the interpretation and application of labor regulations, which represents a challenge and perhaps a utopia for the Labor Justice nowadays.

Processing

The PM shall be approved by the National Congress within 120 days, counted as from its publication in the Federal Official Gazette, being such deadline suspended during the parliamentary recess. Within six days after the publication of the PM, the parliamentarians shall propose amendments to it. The PM shall be analyzed by a Mixed Commission, composed by senators and representatives, for further voting by the House of Representatives and the Federal Senate separately. If the Congress approves the amends to the original text of the PM, the proposition shall be forwarded to the President for sanction or veto, whether partial or total. In case the PM is not approved by the Congress within the term of 120 days, it shall lose effectiveness and the Congress shall publish a legislative decree to regulate the legal relations arising from the period in which the PM was effective.

During the processing in the Congress, the representatives and senators shall analyze whether the PM meets the requirements of relevance and urgency and whether or not it deals with the matters prohibited by the Constitution (Article 62, paragraph 1), which: (i) are related to nationality, citizenship, rights and political parties, electoral law, criminal law, criminal procedure and civil procedure, organization of the Judiciary and the Public Prosecutor’s Office, the career and guarantee of its members, multiannual plans and budgetary matters; (ii) seeks the detention or seizure of assets, of popular savings or any other financial asset; (iii) are reserved for complementary law; and (iv) are disciplined with law project approved by the Congress and pending of sanction of the presidential veto.

Conclusion

The PM No. 881 brings significant advances in relation to the important topics in connection with economic activity as a whole. These innovations, if the conversion of the Provisional Measure into law is confirmed, will yet be subject to in the Judiciary Branch and will be subject to regulation of other public bodies. Nevertheless, PM No. 881 is subject to some criticism, including for bringing significant amendments to relevant topics by means of Provisional Measure, without the previous debate with market agents impacted by it and the National Congress.

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