The Lending and Secured Finance Review: Brazil


The Brazilian financial system is highly sophisticated and subject to the regulation and supervision of the Central Bank of Brazil. Brazil has faced boom-and-bust economic cycles throughout its history. In the early 2000s, Brazil benefited from rising commodity prices and political stability.

In recent years, however, the fall in commodity prices, the high level of government spending and corruption scandals led Brazil into a deep recession, and Brazilian GDP decreased 3.8 per cent in 2015 and 3.6 per cent in 2016.2

This bearish trend was reverted in 2017, 2018 and 2019, when the Brazilian GDP increased by 1 per cent per year; indices of consumer confidence – in both consumption and services – continued to improve, and the domestic interest rate decreased significantly. There was also an improvement in credit indicators, because of the combination of a decrease in portfolio risk and a greater credit supply, and this positive scenario led to an increase in lending activities; the volume of credit in the financial markets increased from 3.257 trillion reais in December 2018 to 3.470 trillion reais in December 2019,3 an increase of approximately 6.5 per cent. This result derives mainly from consumer credit, which rose approximately 11.7 per cent in 2019.4

In 2020, in view of the economic crisis brought by the covid-19 pandemic, Brazilian GDP decreased 4.1 per cent in comparison with 2019. In spite of this drop in Brazilian economic activity, the impacts on the financial sector were reduced due to the soundness of the banking system and the measures adopted by the Central Bank throughout 2020. In this sense, the liquidity of the banking system is at high levels, and does not represent a restriction on the performance of its operations or to ability to meet the demand for credit, the growth of which was supported by the emergency programmes and the low interest rate in the period.5

Legal and regulatory developments

Despite the past decades of banking services being concentrated among four large local banks (Itaú Unibanco, Bradesco, Banco do Brasil and Caixa Econômica Federal) and foreign-owned banks playing an important role mainly in corporate lending activities, the Central Bank is taking several actions to foster distribution of the almost 80 per cent of all credit in Brazil actually dominated by these local financial institutions.

The liberalisation of banking practice once started in 2018 with the regulation of 'lighter' financial institutions (credit fintechs) takes a step further on fostering competitiveness, efficiency, reduction of fund costs and, most of all, cooperation between entities. Nowadays, the Central Bank enhances a collaborative environment towards financial market development, that is to be the promise of a brighter future.

The earlier regulation of credit fintechs created two new types of financial institutions: the direct credit company (SCD) and the peer-to-peer lending company (SEP), which have smaller capital, regulatory and licensing requirements than traditional financial institutions.

As financial institutions, SCDs and SEPs (1) are free to charge any compensatory interest rates, without caps or limitations, being excluded from the restrictions imposed by the Brazilian usury law, (2) will have direct access to the credit risk data system of the Central Bank for credit purposes analysis and (3) may opt to have direct access to the Brazilian payment system, which allows the performance of domestic wire transfers and issuance of payment slips without the intervention of a traditional financial institution.

In addition, it is worth mentioning that a huge step regarding foreign investments in Brazil was taken in 2019: Presidential Decree No. 10,029 allowed the Central Bank to authorise foreign investments in local financial institutions. Former rules provided that such investments required a specific prior approval from the President.

Moreover, in May 2020, the National Monetary Council (CMN) and the Central Bank enacted Joint Resolution No. 1/20, which provided for the implementation of open banking in Brazil. In October of the same year, the Central Bank provided for the rules for the Controlled Testing Environment for Financial Innovations (Regulatory Sandbox), and, in November 2020, the Instant Payment System (SPI), the unique brand of the Brazilian instant payment (PIX), became fully operational, after starting its operations on a restricted basis.

It is also important to note that in October 2020 the Central Bank introduced changes to the rules applicable to payment institutions to establish a new modality of payment institution, the payment initiation service provider (or PISP), as well as new rules for the operation of issuers of electronic currency. Moreover, the regulatory agency also published a public consultation in order to make relevant changes to the foreign exchange framework in Brazil, in view of legislative initiatives that are currently under discussion in the Brazilian National Congress.

The following items will provide a more specific overview of the above-mentioned matters.


The business model of an SCD encompasses lending, financing and acquiring receivables exclusively through an electronic platform with its own financial funds. An SCD is prohibited from raising funds from the public or collecting deposits to be used in its financial activities.

The regulatory framework for SCDs is simpler than the regulatory framework applicable to banks and other financial institutions, considering that such institutions have a limited and less complex scope of activity (focusing exclusively on the extension of loans and financing, as well as on the acquisition of receivables, without leverage).

The regulation of credit fintechs originally allowed SCDs to sell the loans they originate to (1) other financial institutions, (2) receivable investment funds invested in exclusively by qualified investors and (3) securitisation companies that distribute securitised assets solely to qualified investors. As a result, credit securitisation structures are expressly available to SCDs as a funding alternative. Recently, the Central Bank changed this rule to allow credit fintechs to sell their originated loans not only to receivables investment funds, but to any types of funds, maintaining the requirement that such funds should be invested in exclusively by qualified investors.

ii SEP

An SEP is a financial institution that, exclusively through an electronic platform, brings creditors and borrowers together in a peer-to-peer lending arrangement. By so doing, SEPs will intermediate the borrower–creditor relations, thus engaging in a typical financial intermediation activity.

The regulation of credit fintechs has set a more robust regulatory framework for SEPs by regulating how the financial intermediation shall take place and determining specific mechanisms for managing the credit risks in these transactions, among other issues. The regulation makes it clear that, unlike SCDs, SEPs cannot carry out lending or financing transactions using their own funds (thus, underscoring the peer-to-peer nature of such activity). Further, as a rule, neither the SEPs nor their controlling persons and affiliates can directly or indirectly hold the credit risk inherent to loan transactions carried out by the SEPs.

Only individuals or legal entities resident and domiciled in Brazil may act as borrowers in transactions intermediated by SEPs. However, creditors may comprise the following:

  1. individuals;
  2. financial institutions;
  3. receivables investment funds invested in exclusively by qualified investors;
  4. securitisation companies that distribute securitised assets solely to qualified investors; and
  5. non-financial legal entities.

In the same way of the changes applicable to SCDs, SEPs creditors were furtherly allowed to comprise any types of investment funds, provided that such funds should be invested in exclusively by qualified investors.

Nevertheless, creditors other than qualified investors can lend up to 15,000 reais to one single borrower at the same SEP.

iii Open banking

Established by the CMN and the Central Bank's Joint Resolution No. 1/20 published in May 2020, open banking consists of standardised data and services sharing through the opening and integration of the systems, by financial institutions, payment institutions and other institutions authorised to operate by the Central Bank, as long as the client has provided consent.

In general terms, the new system aims to integrate the different digital innovations into the financial system to and to reduce the informational asymmetry among financial service providers, providing an environment for new business models and new forms of relationships between the institutions, as well as between the institutions, their clients and partners.

Therefore, one of the goals of open banking is to facilitate the access of information and increase the transparency between the institutions and their clients. In order to do so, the institutions shall maintain the security and privacy of the data and services shared in the context of open banking, maintaining the quality of the data, and providing interoperability among the institutions.

Additionally, the implementation of open banking will occur gradually. Joint Resolution No. 1/20 provides for a phased implementation, with each phase increasing the complexity of the system. The Brazilian open banking initiated its first phase on 1 February 2021, and the last phase is expected to conclude on 25 October 2021.

iv Instant payments

Through Circular No. 4,027/20, the Central Bank established the SPI and approved its regulation. It consists of centralised infrastructure for real-time gross settlement of instant payments that result in transfers of funds between its participants, which shall hold an instant payment account with the Central Bank.

The SPI admits two types of participation: (1) direct, characterised by the holding of an instant payment account and a direct connection of the participant institution to the SPI; and (2) indirect, whereby the participant institution does not hold an instant payment account and its participation occurs via a direct participant to the SPI that is responsible for registering the indirect participant to the SPI and that acts as its settlement agent in the SPI for instant payments.

Moreover, Central Bank Resolution No. 01/20 established PIX, the payment arrangement that regulates the provision of payment services relating to instant payment transactions. PIX is an open payment arrangement that allows money to be sent or transferred in real time, 24 hours a day, seven days a week and 365 days of the year. PIX allows payment among individuals, corporations and government bodies.

v Regulatory sandbox

As part of the Central Bank's 'Agenda BC#' initiative, which encourages innovations and increased competition in the financial market, in October 2020 the CMN and the Central Bank published regulations regarding the regulatory sandbox, which intends to allow businesses, including institutions that are not yet authorised to operate by the Central Bank, to test innovative projects related to matters under the supervision of the CMN or the Central Bank with real consumers.

The regulatory sandbox rules establish the conditions for the supply of products and services within the scope of the national financial system and the Brazilian payment system. The specific rules of the first cycle, such as duration period and number of participants, necessary documentation, criteria for the classification of institutions and the schedule of the registration, selection and authorisation processes of these entities was provided by the Central Bank in December 2020 and the regulatory agency focused on financial and payment innovations.

vi PISP and other payment institutions

The payment initiation service provider (PISP) was introduced in the Brazilian regulatory framework in 2020, after Public Consultation No. 77/20. In view of the results of this consultation, the Central Bank published Resolution No. 24/20, which amended Circular 3,885/18 and expanded the concept of a payment institution by adding a fourth category: the PISP, a payment institution that provides payment transaction initiation services without managing a payment account and without holding, at any time, the funds transferred in the provision of the services.

Moreover, Resolution No. 24/20 changed the thresholds applicable for the authorisation of other types of payment institutions. Under the framework formerly in force, payment institutions of any type should request authorisation to operate only when they exceed certain volume thresholds. Under the new framework, payment institutions that act as issuers of electronic currency (operating after March 2021) or as a PISP, or both, must obtain prior authorisation before operating, regardless of their transaction volumes.

More recently, in order to update certain rules and obligations applicable to payment institutions (including PISP) and the authorisation process, the Central Bank published Resolution 80/21 and Resolution 81/21. These Resolutions came into force in May 2021, and at that moment Circular 3,885/18 was revoked and Circular 3,681/13 was partially amended.

vii Foreign exchange market

In October 2019, the President of Brazil sent the Bill of Law No. 5,387, of 7 October 2019 (BoL 5,387/19) to the National Congress. The proposed bill encompassed provisions regarding Brazilian capital abroad and foreign capital in the country.

The main purposes of BoL 5,387/19 consisted in providing for the liberalisation of the Brazilian FX market, which faces a lot of regulatory complexity and inconsistencies. It proposed a change in the strategy adopted by the current FX rules in order to simplify and modernise the system and enhance innovation and competition. On 10 February 2021, the BoL 5,387/19 was approved by the federal House of Representatives and was remitted to the Senate.

If approved by the Senate without modifications, the BoL 5,387/19 is going to deeply alter the legal and regulatory frameworks pertaining to the FX market and, among other things: (1) consolidate current law and regulation on foreign exchange; (2) ratify, at the legal level, that foreign exchange transactions may be carried out freely (provided it is through entities authorised to operate in this market and subject to applicable rules); (3) allow assessment of foreign exchange transactions and related requirements based on the risk of each transaction (risk based assessment); (4) leave a broader range of matters under the authority and for regulation of the CMN and the Central Bank; (5) establish circumstances in which payments in Brazil may be agreed in foreign currency; and (6) create a threshold below which certain transactions will not have to be made through an entity authorised by the Central Bank to operate in the FX market.

The Brazilian Senate is still reviewing the BoL 5,387/19. The expectation is to have the bill approved in the first semester of 2021 and enter into force in the first semester of 2022. However, it is not possible to anticipate what amendments will be proposed to its final wording, if any.

viii Central Bank's Public Hearing No. 79 and the 'eFX'

In line with the purposes of the BoL 5,387/19 (i.e., simplifying and modernising the system and enhancing innovation and competition), the Central Bank published Public Hearing No. 79, which intends to provide certain specific amendments to the current FX rules in order to adapt such rules to new technologies and business models pertaining to payments and international remittances. These amendments shall be carried out within the scope of the currently effective FX regulatory framework (given that BoL 5,387/19 has not been approved yet).

One of the goals of the proposed changes to the FX regulatory framework is to allow payment institutions to operate in the FX market, as well as to expand the use of payment accounts in FX transactions. Another highlight of the Public Hearing 79 is the creation of a new framework for the payment institutions, international payment facilitators and other intermediaries or representatives operating in international payment transactions.

As per the proposed rules, these market participants shall fall into the general concept of an 'eFX'. An eFX can be either (1) an institution authorised by the Central Bank, or (2) an unauthorised legal entity that offers digital payment solutions. These two new legal entities would provide a different range of products and services, with the authorised eFX being able to provide a wider range than the unauthorised eFX. In either case, the rationale is to modernise and to enhance innovation and competition in Brazil's FX market.

ix Central Bank's autonomy

On 24 February 2021, Complementary Law No. 179/21 was enacted, establishing the purposes of the Central Bank and its autonomy, as well as regulating the appointment and removal of its president and directors. The purpose was to allow the Central Bank to pursue its objectives without political interference.

The main changes brought by Complementary Law 179/21 were that the Central Bank's president and its officers shall have determined terms of four years, even though they still need to be appointed by the President of Brazil and approved by the Senate.

Nevertheless, the new terms give more independence and autonomy in the decision-making process of the Central Bank's president and officers. The terms are arranged in a staggered way: the term of office of the president of the Central Bank will begin on the first day of the third year of the President's term, so that such terms will not overlap. Additionally, the new rule established specific cases in which the Central Bank's president and directors may be dismissed.

As per the enactment of Complementary Law No. 179/21, Brazil joins a group of countries that have autonomous or independent central banks, such as the Federal Reserve in the United States and the European Central Bank in the European Union.

Tax considerations

Financial operations carried out in Brazil are generally subject to withholding income tax (IRRF), which may be levied on a definitive basis or as an anticipation, and to the tax on credit operations, exchange and insurance, or on securities (IOF). In general, the revenues earned by Brazilian companies from financial operations are subject to the Social Integration Program Contribution (PIS) and the Social Security Financing Contribution (COFINS), while the results from these operations must compose the calculation base for the corporate income tax (IRPJ) and the social contribution on net profit (CSLL).

For financial institutions, the income and gains arising from their operations – including financial transactions – must also be part of the IRPJ and CSLL calculation basis. In general, financial institutions are required to calculate their profits according to the taxable income system, in which the IRPJ is levied on the taxable income at a rate of 15 per cent, plus an additional 10 per cent on the portion of taxable income that exceeds 20,000 reais per month or 240,000 reais per year.

For the CSLL, the same taxation system applies as for the IRPJ, and the rate applicable to banks of any kind is 20 per cent on the net profit before the provision for the IRPJ. More recently, on 1 March 2021, Provisional Measure No 1,034/2021 increased the CSLL from 20 per cent to 25 per cent and will come into force from 1 July 2021 to 31 December 2021.

It is also worth mentioning that the Brazilian National Congress is analysing a broad tax reform, which shall encompass dramatic changes to the national tax system, with the elimination or unification of certain taxes (such as PIS, COFINS, ICMS and ISS) and the possibility of creating new taxes, including taxes on financial transactions. There are other bills in Congress that seek to repeal tax exemptions on distributed profits and dividends, and to change or repeal laws relating to interest on shareholders' equity.

Credit support and subordination

i Security

This section provides an overview of the common methods of taking securities over different types of assets in Brazil.

The following methods of credit support are available:

  1. in rem guarantees;
  2. personal guarantees;
  3. contract bonds;
  4. standby letters of credit or demand guarantees; and
  5. avals on promissory notes.

A fiduciary sale or assignment, mortgages and pledges are in rem guarantees, which create a privilege over the collateral in favour of the creditor, with this being the asset granted in collateral bound to the secured obligation. In such cases, creditors do not have recourse against the guarantor that provided an in rem guarantee to collect outstanding amounts after the foreclosure of the collateral, unless agreed otherwise.

The most common types of in rem guarantees are the fiduciary sale, mortgage and pledge.

A fiduciary sale is a type of security interest pursuant to which the guarantor assigns to the creditor the title of certain assets. Therefore, the guarantor continues to have possession of the assets, still being liable for the duties of an escrow agent or bailee, or a trust in relation to them. Title of the asset granted in a fiduciary sale is only given back to the guarantor when the latter has fulfilled all of its obligations under the guaranteed credit.

The fiduciary sale was introduced in Brazil in 1965, but the applicable legal framework changed in the early 2000s with the enactment of a new Civil Code and other laws. These modifications fostered the use of fiduciary sale, which is currently one of the main credit support transactions, especially because of its bankruptcy remoteness feature. Because a fiduciary sale entails the transfer of the ownership of the underlying assets to the creditors, the creditors are not exposed to the risks inherent to a guarantor's bankruptcy.6 This is the main difference between a fiduciary sale and the other guarantees, which do not entail the transfer of ownership of collateral and, therefore, the creditor may be subject to bankruptcy apportionment of the guarantor.

There are two regimes applicable to fiduciary sales. On one hand, Law No. 4,728/1965 and Law No. 10,931/2004 regulate fiduciary sales within the scope of the financial and capital markets, expressly allowing the fiduciary sale of fungible7 and non-fungible property and credit rights. On the other hand, the Civil Code applies to fiduciary sales that are not within the scope of the above-mentioned markets. Although the Civil Code makes no provision regarding the characteristics of the asset given as collateral in a fiduciary sale, there are precedents of the Brazilian Superior Court of Justice (STJ) narrowing the fiduciary sale under the Civil Code to non-fungible assets.8 Because foreign lenders do not qualify as financial institutions under Brazilian law, it is disputable whether a transaction with such entities would qualify as a transaction within the scope of the financial or capital markets and, therefore, it is also disputable whether these entities could benefit from a fiduciary sale of fungible assets or credit rights.

Pledges and mortgages are also commonly used as collateral in lending transactions, with pledges being applicable to movable assets and rights (e.g., machinery, inventory, vehicles, credits and shares) and mortgages to immovable assets (e.g., real estate). Different from the fiduciary sale, in pledges and mortgages the guarantor keeps the title of the collateral and, therefore, creditors may be affected by the bankruptcy of the guarantor. In addition to that, pledges and mortgages are subject to multiple liens (first, second, third priority or more); therefore, the creditor may not necessarily receive a first priority security interest with respect to a particular asset if the asset has already been encumbered in favour of another creditor. Fiduciary sale is not subject to multiple liens, as it involves a transfer of ownership to the creditor.

Brazilian law does not provide any specific restriction on taking security over all or substantially all of the assets of a debtor or guarantor. Nonetheless, it is impossible to document such a security interest in a single document, as in rem guarantees need to be registered before different authorities depending on the type and location of the asset granted as collateral (registration with the competent authorities is a condition for perfection of such security interests).

Brazilian law forbids the creditor to keep or obtain title of collateral in the event of default (prohibition of commissoria lex), unless the guarantor grants express consent after the maturity date of the debt or its acceleration. In view of that, if the guarantor does not grant this consent, the collateral should be sold at a public auction, the proceeds of which will be applied to the payment of the principal and interest of the debt, judicial expenses and legal fees, provided that, in the case of attachment of quotas or shares9 requested by a creditor who is not a shareholder or partner (as the case may be) of the company, the company shall be summoned for the purposes of securing the right of first refusal of its shareholders or partners.10 In any case, the balance amount (surplus), if any, shall be returned to the guarantor.

ii Guarantees and other forms of credit support

Besides in rem guarantees, lending transactions may be secured by personal guarantees. Under Brazilian law, a personal guarantee is likely to be perceived as a surety and may be defined as a contract of a person or corporate entity by which one guarantees, in whole or in part, the performance of an obligation of someone else.

In summary, under Brazilian law:

  1. personal guarantees may encompass the principal amount and ancillary charges (monetary correction, interest and other fees);
  2. personal guarantees are granted by a guarantor and do not require the debtor's prior consent;
  3. if the personal guarantee is granted by a married individual, consent of the spouse is required; and
  4. the guarantor has a series of benefits granted by law, which are generally waived by the parties.

Contract bonds are a type of insurance wherein the insurance company guarantees the performance of the insurance taker's (the debtor's) underlying obligations under the lending agreement by providing the funds for the insured party to contract another company to perform the insured obligations. Local companies or individuals domiciled in Brazil shall take out insurance coverage before local insurers for risks run in Brazil. There are a few exceptions to this rule; for example, local companies or individuals are allowed to take out insurance coverage abroad if the insurance in question is not offered by local insurance companies.

Standby letters of credit and demand guarantees are also used to guarantee loan transactions. Brazilian banks and affiliates of international banks in Brazil in general do not issue standby letters of credit or demand guarantees for local transactions. These guarantees are usually issued in connection with cross-border transactions or by financial institutions headquartered abroad.

Promissory notes are documents that represent amounts owed. Although promissory notes are not considered additional guarantees for the payment of debts, they are used to represent amounts owed under the lending transaction, and the debt stated in the promissory note may be guaranteed by a third party by means of an aval guarantee. Any legal entity or individual may issue a promissory note or grant an aval guarantee (additional requirements may be applicable if the aval guarantee is granted by individuals).

iii Priorities and subordination

In the event of bankruptcy liquidation, certain credits are excluded from bankruptcy apportionment, such as assets granted in a fiduciary sale, post-petition claims and certain labour claims. After those credits are paid, the balance of the funds received from the liquidation of the assets must be used to pay the pre-petition claims, in accordance with the following order:

  1. labour-related claims, limited to 150 minimum wages per creditor, and occupational accident claims;
  2. secured claims, up to value of the collateral;
  3. tax claims, except for tax fines;
  4. special priority claims;
  5. general priority claims;
  6. unsecured claims;
  7. contractual penalties and monetary penalties for breach of criminal or administrative law, including tax law; and
  8. subordinated claims.

Exception is made for a fiduciary sale, which is bankruptcy-remote and is, therefore, not subject to this list of priorities.

Legal reservations and opinions practice

i Legal reservations

Lending transactions and collateral may be limited by the validity of the underlying obligation, because under Brazilian law guarantees are considered an accessory duty to the underlying obligation, and the nullity of the principal obligation causes the nullity of all the accessories obligations. These limitations are not applicable to independent guarantees, such as standby letters of credit, demand guarantees and aval guarantees on promissory notes.

In addition, bankruptcy, governmental intervention, extrajudicial liquidation, insolvency, fraudulent transfer, judicial and out-of-court reorganisation procedures may impact lending transactions and guarantees (an exception is made for the independent guarantees listed above and for contract bonds).

The Brazilian Bankruptcy Law governs the insolvency proceedings involving companies and corporations, and provides three procedures to address insolvency situations, as follows:

  1. judicial reorganisation;
  2. out-of-court reorganisation or prepackaged reorganisation; and
  3. bankruptcy liquidation.

Judicial and prepackaged reorganisations are similar, respectively, to Chapter 11 and prepackaged arrangements under the US Bankruptcy Code. Creditors holding pre-bankruptcy claims are subject to reorganisation and generally precluded to enforce their credit rights against the debtor. Initially, claims are also not enforceable during the stay period in a judicial reorganisation proceeding. Further, if the plan of reorganisation or prepackage plan is confirmed, creditors will be bound by the plans (payment terms and corresponding rights will be governed by the relevant instrument). In a bankruptcy scenario, creditors are subject to bankruptcy apportionment of the guarantor.

ii Opinions practice

Brazilian law does not require lenders or borrowers to obtain legal opinions to enter into loan transactions, but such documents may be used to ensure that directors and officers have complied with their fiduciary duties, and to provide comfort to borrowers entering into the transaction.

Legal opinions are mainly required in loan transactions involving large amounts. Creditors generally request debtor counsel to provide legal opinions on the corporate powers of the debtor entering the transaction; observations on financial covenants with other creditors; and opinions on legality and enforceability of the loan, and the relevant collateral or guarantees. Legal opinions are especially relevant if the loan is granted to a distressed debtor, because according to the Brazilian Bankruptcy Law and in the event of bankruptcy of the debtor, certain acts are ineffective with regard to the bankruptcy estate, whether the lender was aware of the counterparty's economic and financial distress, and whether the debtor intended to defraud creditors.11

iii Governing law and choice of jurisdiction

Governing law

In rem guarantees of assets located in Brazil must be governed by Brazilian law. Other agreements (including credit agreements secured by in rem guarantees of assets located in Brazil) may be governed by foreign law in a contract if there is a connection between the foreign law chosen and the places where the agreement could be enforced or the place where the parties to the agreements are based. Nonetheless, discussions on the applicable law are not broadly, technically and deeply assessed before the Brazilian courts. In the event of litigation in Brazil involving an agreement governed by foreign law, Brazilian courts tend to disregard foreign law and apply Brazilian laws to the case. There is a different scenario if disputes are solved by arbitration, because arbitration law expressly allows parties to freely choose the governing law.

Foreign awards (judicial or arbitral) can be enforced in Brazil without re-examination of the merits of the case, provided the decision is as follows: (1) final and unappealable; and (2) previously confirmed by the STJ.

This confirmation generally takes from six to 18 months to be granted and is available only if the decision fulfils certain formalities and if it does not violate Brazilian national sovereignty, public policy, or good morals and ethics. The STJ does not analyse the merits of the case to confirm a foreign award.

Choice of jurisdiction

Under Brazilian law, courts shall have jurisdiction (in addition to any other valid choice of jurisdiction that may have been made by virtue of contract) whenever:

  1. the defendant is domiciled in Brazil;
  2. the obligation must be performed in Brazil; or
  3. the fact under dispute has taken place in Brazil.

Besides the above, courts have exclusive jurisdiction in actions relating to real estate assets situated in Brazil. Parties may agree to submit disputes related to disposable rights to arbitration, but arbitration panels do not have the power to enforce a decision. The enforcement should be carried out by Brazilian courts.

Loan trading

Loan transactions may be structured as bilateral or syndicated loans. In both transactions, the agreement with the borrower is generally entered into only by one lender.

In syndicated loans, the lenders that provided the funding may freely trade their participation, providing notice to the syndicate leader. These transactions impact neither the borrower nor the guarantors. Nevertheless, the substitution of the syndicate leader does impact these transactions.

The sale of the transaction by the single creditor in a bilateral loan or by the syndicate leader in a syndicated loan may be made by assignment of the loan agreement, endorsement of the loan agreement or novation of the loan, depending on the terms and conditions of the original loan. In an assignment of a loan, the lender should notify the borrower of the assignment. This should not affect in rem or aval guarantees, but may cause the release of personal guarantees, contract bonds and standby letters of credit depending on the wording of the documents. In an endorsement, all the guarantees set forth in the endorsed document should survive the transaction. However, novation causes the release of all guarantees.

Other issues

i Enforcement

In Brazil, loan agreements can be judicially enforced if the debtor fails to comply with its loan obligations. The enforcement may be made through three different types of lawsuits:

  1. a summary or an enforcement procedure, where the judge may immediately order payment of the debt and the foreclosure of collateral. This lawsuit is available if:
    • ascertainable through simple calculation, certain and undisputable; and
    • the debt is represented by a document that qualifies as an extrajudicial enforcement instrument under Brazilian civil procedure rules;
  2. an ordinary collection action, whereby an order of payment of the debt and definitive foreclosure of assets can only be carried out after a final, unappealable decision is rendered (which would take from five to 10 years to be issued, depending on the complexity of the underlying credit transaction); or
  3. a monition action, which is similar to a summary procedure if the debtor does not file a defence, and which is similar to an ordinary collection action if the debtor files defence.

In view of these differences, loan transactions are usually structured to allow the lender to file a summary or an enforcement procedure to collect the debt or foreclose collateral, avoiding time-consuming ordinary collection and monition actions.

ii Agreements using a foreign currency

As a rule, agreements and obligations enforceable in Brazil must state the amounts due in Brazilian currency. Parties may state amounts in foreign currency in certain cases, such as obligations involving foreign parties. Nonetheless, any judgment for payment of a certain debt in foreign currency obtained in Brazilian courts should be payable in Brazilian currency in an equivalent amount on the date of actual payment. In the event of bankruptcy, all credits denominated in foreign currency shall be converted into local currency at the exchange rate prevailing in Brazil on the date of declaration of bankruptcy. In view of this, creditors must be aware that they hold an exchange rate risk in the event of bankruptcy.

iii Registration of foreign loans before Brazilian authorities

Cross-border loan transactions with a tenor greater than 360 days must be registered before the Central Bank registry of financial transactions (ROF). Registration allows the inflow and outflow of funds relating to the registered transactions, and shall be obtained in the name of the parties to the transaction (i.e., the lender and borrower). If the guaranteed transaction is registered before the ROF, the collateral or guarantee should also be registered to allow the guarantor to remit the funds abroad.

In addition to the ROF required by the Central Bank, the Federal Revenue Office requires that foreign entities carrying out transactions be subject to enrolment with the National Registry of Legal Entities. To obtain this enrolment, the foreign entity should also be registered with the Companies Register of the Central Bank through the Central Bank data system.

iv Limitations to lending and secured finance

Brazilian financial institutions are not allowed to grant loans, advances or guarantees; enter into derivative transactions; underwrite; or hold in their investment portfolio securities of any clients or group of affiliated clients that, in aggregate, give rise to exposure to a client or group of affiliated clients that exceeds 25 per cent of their regulatory capital.12

Government and government-controlled corporations are subject to borrowing limits and cannot grant guarantees without proper authorisation.

However, there is no limitation on borrowing by a non-regulated company or on it guaranteeing the borrowings of its subsidiaries or affiliates.

v Covid-19 considerations

In view of the covid-19 outbreak, the CMN issued several bailout rules to ease the impact of the pandemic on the Brazilian economy. In terms of systemic risk, there has been no sign that local or foreign financial institutions are facing liquidity problems like those occurring during the 2008 financial crisis. However, the current crisis may have an adverse bearing on the businesses of financial institutions, from an increase in cash withdrawals and in credit defaults to a slowdown in new business origination.

Additional measures of note were also issued:

  1. the reserve requirements (i.e., compulsory deposits) on time deposits were at first reduced from 31 per cent to 25 per cent, and further to 17 per cent. In March 2021, the Central Bank extended the period in which the 17 per cent minimum of reserve requirements will be in force, until November, 2021;
  2. the Liquidity Coverage Ratio (LCR) of banks was relaxed to provide the financial system with greater liquidity;
  3. the rules on provisioning were relaxed for the 'rollover' of existing credit transactions and to avoid an increase in bank provisions;
  4. the Capital Buffer requirement was reduced to expand the banks' ability to grant new credit transactions;
  5. repos on US$ denominated sovereign securities were entered into between the Central Bank and financial institutions to reduce market volatility on the markets where such securities are traded, and to offer greater liquidity in US$ to national banks;
  6. time Deposits Backed by Special Guarantees (DPGEs), replicating the model adopted in the past for deposits secured by the Credit Guarantee Fund (FGC); and
  7. the rules applying to Agribusiness Credit Bonds (LCA) were relaxed.

In December 2020, CMN's restrictions – enacted in the beginning of the covid-19 crisis – upon the distribution of dividends and payment of interest on equity by financial institutions were partially relaxed. Now, financial institutions can distribute their results, including in the form of anticipation, up to the higher of the following values: (1) the amount equivalent to 30 per cent of the net profit; and (2) the amount equivalent to the minimum mandatory dividend provided in its bylaws.

Moreover, in May 2020, the Brazilian government established Pronampe – the National Support Programme for Micro and Small Businesses. This programme aimed to guarantee financial resources for micro and small enterprises to enable them to maintain their services during the covid-19 pandemic and the resulting economic crisis. In May, 2021, the National Congress approved a bill of law in order to make Pronampe a permanent programme. The bill of law currently awaits presidential approval.

Outlook and conclusions

The legal, regulatory and market outlook has been significantly changing in the last years. During the past two decades, the Brazilian Social Democracy Party and the Worker's Party alternated in power in the federal government. These parties, however, were affected by Operation Car Wash corruption investigations, the impeachment of Dilma Rousseff in 2016, the imprisonment of Luiz Inácio Lula da Silva (President of Brazil from 2003 to 2010), the unpopular government of Michel Temer (President of Brazil from 2016 to 2018, recently charged for corruption and money laundering) and a series of corruption accusations involving many politicians. In the last quarter of 2018, Brazilians elected the candidate of the once tiny Social Liberal Party, Mr Jair Bolsonaro, as President. In addition, the Social Liberal Party became a congressional powerhouse, being the second party in number of seats in the Lower House of Congress.

In 2019, Mr Jair Bolsonaro, jointly with the Minister of Economy, Mr Paulo Guedes, prepared a Proposal for a Constitutional Amendment (PEC) to overhaul the Brazilian social security system. The Proposal was approved in October 2019 and enacted in November 2019. The pension reform provided minimum retirement ages to Brazilians of 65 years for men and 62 years for women, and it expects to represent a saving of about 1 trillion reais and a prevention on gross public debt rising (a cause of great concern in Brazil's economy). Given the demand for an increase of public spending in view of the covid-19 outbreak, however, the projections for a public debt decrease shall be subject to revision.


1 Bruno Balduccini is a partner, Lucas Cassoli Bretones is an associate and Felipe Takehara is a legal assistant at Pinheiro Neto Advogados.

2 Central Bank of Brazil.

3 ibid.

4 ibid.

5 Central Bank of Brazil's Financial Stability Report.

6 The Brazilian Bankruptcy Law: assets granted by means of fiduciary arrangements can have their foreclosure suspended for 180 days should the judge consider the assets as being 'essential' for the company's activities. An asset may be considered essential if the guarantor cannot perform its activities without it or when the performance of its activities is jeopardised in the absence of the asset. Brazilian courts tend not to hold financial assets and investments as essential asset, but this analysis must always be done on a case-by-case basis, as it depends on the business of the guarantor.

7 Regarded as commercially interchangeable with other property of the same kind.

8 Special Appeal No. 1.101.375, decided on 4 June 2013; Special Appeal No. 346.240, decided on 30 August 2002; and Special Appeal No. 97.952, decided on 6 April 2000.

9 Brazilian law presently in force does not expressly contemplate the creation of a pledge of quotas of a limited liability company. However, such a pledge of quotas has been accepted by Brazilian courts on the basis of provisions of law relating to the pledging of rights, contract rights and Law No. 6,404/76, as amended.

10 In certain cases, the transfer of shares or quotas may be subject to antitrust clearance and if the new, different, owner is a foreign entity, certain formalities before the Central Bank must be observed by the foreign entity.

11 The following acts are ineffective with regard to the bankruptcy estate: (1) payment by the counterparty within the bankruptcy legal term (up to 90 days as of the petition of bankruptcy) of debts not yet fallen due, by any means of extinguishment of the credit right, including by discount of the relevant instrument; (2) payment made within the bankruptcy legal term of debts fallen due and enforceable, in any way other than as provided for in the relevant contract; (3) creation of a security interest, including a lien, within the bankruptcy legal term, in the case of a debt contracted previously; if the mortgaged assets are given in a subsequent mortgage, the bankruptcy estate shall receive the portion otherwise applying to the creditor of the revoked mortgage; (4) acts performed free of charge during the two years preceding the decree of bankruptcy; (5) waiver of inheritance or legacy during the two years preceding the decree of bankruptcy; (6) sale or transfer of an establishment without the express consent of or payment to all creditors existing at the time, if the debtor has not kept sufficient assets to settle his or her liabilities, unless within 30 days there is no opposition by creditors after being duly notified by a court clerk or by an officer of the Registry of Deeds and Documents; and (7) registration of in rem guarantees and of property transfer, for a consideration or free of charge, or an annotation of real property made after the decree of bankruptcy, unless there is a previous annotation thereof.

12 For the purpose of this limit, the following public sector entities are to be considered as separate customers: (1) the government; (2) an entity controlled directly or indirectly by the government that is not financially dependent on another entity controlled directly or indirectly by the government; (3) entities controlled directly or indirectly by the government that are financially dependent among themselves; (4) a state or the federal district, jointly with all entities directly or indirectly controlled by it; and (5) a municipal district, jointly with all entities directly or indirectly controlled by it.

The Law Reviews content