Turning back the clock, the Brazilian government tightens land rights legislation.
BY PAULO SERGIO FRANCO
AND SCHEILA SANTOS
According to Brazilian government records, the amount of land owned by foreigners in Brazil is three times the size of the megalopolis of São Paulo. Of the 572 million hectares that are listed by the National Land Reform Institute (INCRA) as registered to foreigners, some 4 million hectares are registered to foreign individuals, although it is estimated that the real figure could be as much as five times larger. Still, it is corporations that account for the lion’s share of all foreign landholdings.
The lands to which foreign companies have staked claim, for the most part, are not in the Amazon region, where land ownership is highly regulated by various government agencies, but rather in the fertile Midwest and Southeast regions of the country, most notably in the state of Mato Grosso. Agribusiness firms from Asia, Europe, the Middle East and North America have invested in the production of grains, sugar cane and cotton, in addition to eucalyptus forests for the pulp and paper industry. In some areas in the Brazilian Midwest, foreign investment is credited with boosting the price of land by as much as 300 percent.
Soaring land prices are not the only contentious issue. The lack of detailed information about land purchases by foreigners has revived an old debate about the need for greater government oversight of land ownership across the country. The fear is that, under the current legislation, the government lacks effective controls to monitor the purchase or leasing of lands by Brazilian firms, whose ownership or management control may, in fact, be held by non-residents.
According to a recent legal opinion approved by the Brazilian Attorney General, whose job it is to interpret laws and the constitution when there are doubts or legal disputes, the acquisition of landholdings without the prior knowledge of the Brazilian government could potentially lead to one or more of the following undesired consequences:
1) An expansion of farming activity beyond lands zoned for agriculture and into environmentally protected or land conservation areas; 2) An increase in land prices and land speculation, leading to higher costs of expropriation under the national land reform program; 3) The illegal sale of publicly owned land; 4) The use of the proceeds from money-laundering activities, drug-trafficking and prostitution to purchase land; 5) An increase in the falsification of land titles; 6) A proliferation of illegal front men in land deals; 7) An increase in biological piracy in the Amazon region; 8) An unregulated increase in the production of ethanol and biodiesel; 8) The purchase of lands bordering on other countries, thus putting at risk Brazil’s national security.
Debate in Brasilia over these inherent risks led [then-president] Luiz Inacio Lula da Silva to endorse the ruling and, as a result, limit the sale of land to foreigners or to Brazilian companies controlled by foreign interests to a maximum of 5,000 hectares. In addition, lands owned by foreigners cannot exceed 25 percent of the total land area of any municipality.
The ruling, which provides an updated interpretation of Law 5709, is based on the principal of national sovereignty over economic activity. According to the government, the ruling also took into consideration the underlying economic and social context, more specifically the rise in commodity prices, the world food crisis and the global development of biofuels.
Until this new ruling was handed down, all companies based in Brazil and established under Brazilian law could buy land without restriction, even if they were majority-owned by foreign investors. The new interpretation, in effect, establishes that Brazilian firms in which foreign investors have a controlling stake will be treated the same as non-resident individuals and foreign multinationals.
What this means, in practice, is that all land purchases must now be recorded in special files in the real estate registries in each state and that land purchases by foreign-owned companies must be reported to the state department of justice, as well as the federal Ministry of Agricultural Development.
When promulgated in 1971, Law 5709 was inspired by the national security ideology of the military government in power at the time, an ideology which is hardly relevant today. Instead of re-instating the law via a legal opinion, which does not reflect Brazil’s current economic and political reality, the government should have debated the issue in Congress for debate in order to update and improve the legislation. Unfortunately, this was not the chosen path.
Attorney General Luis Inacio Adams said the government is not concerned about a potential decline in foreign investment as a result of this new ruling. According to Adams, foreign companies will simply have to adapt to the new rules if they intend to continue purchasing land in Brazil. One solution, he suggested, was to avoid the restrictions by associating with Brazilian partners. “There are a number of suitable legal options to resolve these situations,” said Adams.
The new rules can be challenged in the courts, of course, as the legal opinion does not have the full force of the law, although it does take full effect for the federal government and all federal government agencies, which makes it a significant obstacle to new business.
Companies that are affected by the ruling could argue in the courts that land purchases be subjected to the jurisdiction of INCRA, as the Brazilian constitution does not discriminate between companies owned by Brazilian citizens and companies owned by foreigners. There are sure to be legal challenges based on the principal of equal rights and buttressed by international agreements that guarantee reciprocity of investment rights by individuals and companies of various countries.
As for land purchases that have already been made and that could be subject to the new restrictions, they are protected, in theory, by constitutional principals of property rights, firmly established law and acquired rights. However, there is some talk that land purchases could be annulled if they were found to exceed the restrictions of the new law or were fraught with other irregularities.
In our opinion, the Brazilian government, indeed, should have full information and complete oversight of any significant land purchase by foreign individuals or foreign companies, just as laws mandate similar oversight in other countries, including the United States. On the other hand, it is important that the law provide foreign investors legal protection, with clear rules that are in tune with global economic realities and that do not discriminate against investors for the simple reason of being foreign.
In this respect, we believe that the government and Congress should immediately begin discussing a number of changes to the legislation in order to dispel the uncertainties created by the Attorney General’s ruling. Law 5709 should be revised and updated to bring it into harmony with current national and global realities. The primary goals of this process should be, first, to provide investors with legal guarantees and, second, to promote investments that generate, jobs, revenue and taxes.
Despite a prevailing mood of pessimism and a number of critics, who warn that the government’s new attitude will put a stop to foreign land acquisitions in Brazil, it is our conviction that foreign investors, who are prepared to operate within the law and whose goal is to acquire lands to produce revenue and jobs, will find ample space and the necessary legal assurances to operate freely. It is clear, however, that the legislation will have to evolve in order to provide legal comfort to foreign investors, while at the same time providing adequate government oversight, as is the case in any developed economy.
Paulo Sérgio de Moura Franco, who specializes in corporate law, is a partner in the Brazilian law firm FRANCO Advogados (www.francoadv.com) in São Paulo. Scheila Santos is a law student, currently interning with FRANCO Advogados. This article is republished with permission from Kroll Tendencias, Kroll’s monthly newsletter.