What changes in the Foreign Exchange Market and in Foreign Credit and Foreign Direct Investment Transactions following the new law?

published on 01/20/2023 by Thiago Moliani   Law 14,286, enacted on December 29, 2021 (“Law 14,286/2021”), establishes, in article 5, item I, that it is the responsibility of the Central Bank of Brazil (BACEN) to regulate the foreign exchange market and its transactions and sets forth the types and characteristics of products, forms, limits, rates, terms and other conditions. The provisions of this law extensively revise the current requirements, but keep those used for supervision and statistical purposes, adopting the criterion of proportionality, which considers the values of the transactions, their purposes and the profiles of the individuals and companies that are party to them. The main changes resulting from the process were: 1. Bringing the handling of exchange transactions into line with other transactions made in the National Financial System (“SFN”), observing that, in the case of transactions with a client, the institution authorized to operate in the foreign exchange market must be able to prove to BACEN that the client consents to the agreed conditions. The Law sets forth the minimum information that must be included in the foreign exchange transaction and which must be sent to BACEN, and removes excessively prescriptive requirements concerning the subject, such as details on the signatures of the parties to foreign exchange transactions. 2. Simplification and rationalization of the process for classifying the purpose of foreign exchange transactions. Previously, institutions authorized to operate in the foreign exchange market were responsible for indicating the purpose (“nature”) based on client information, observing approximately 180 codes for transactions with clients, regardless of the value of the transaction. Now, the new Law establishes that the purpose will be indicated by the client, and reduces to ten the classification codes for foreign exchange transactions under fifty thousand US dollars (US$50,000.00), or the equivalent in other currencies, except foreign exchange transactions that need to be linked to foreign capital transactions reported in the BACEN system. Of these ten codes, eight will already be activated when the new regulation comes into effect and the remaining two, related to foreign credit transactions, are expected to be activated by November 1, 2023. For indicating the purpose of foreign exchange transactions in excess of this amount or those that, regardless of the amount, need to be linked to foreign capital transactions in the BACEN system, it is expected that, on November 1, 2023, the number of current codes for classifying the purpose of these transactions will be reduced by around half. This deadline is necessary due to the need for adjustments in the information systems of BACEN and institutions authorized to operate in the foreign exchange market. During this period, the current transaction classification tables, including the group code as part of the transaction’s purpose, will be maintained with specific modifications. 3. Institutions authorized to operate in the foreign exchange market may, according to their assessment, request or waive supporting information and documents for the course of transactions, considering the client’s assessment and the characteristics of the transaction. The provisions regarding the criteria to be adopted in relation to information and supporting documents for the purposes of preventing money laundering and combating the financing of terrorism (PLD/CFT) are now included in Circular 3,978, of January 23, 2020 (“Circular 3,978/2020”), which details the policy, procedures and internal controls to be adopted to prevent such illicit acts. Moreover, the text establishes that, if institutions authorized to operate in the foreign exchange market request the ancillary documentation, it must have it available to BACEN for a minimum period of ten years, as from the end of the fiscal year in which the contracting event occurs, or, as the case may be, the liquidation, cancellation or write-off of the exchange transaction. This period used to be five years, and the purpose of the modification was to make it compatible with Circular 3,978, of 2020. 4. Bringing the requirements for opening, maintaining, operating and closing accounts in reais for non-residents in line with those for resident accounts. The following exceptions remain, which have not been modified: (i) Necessity of maintaining these accounts with an institution authorized to operate in the foreign exchange market; (ii) Limit of one hundred thousand reais (BRL 100,000.00) per transaction in the case of a prepaid payment account in reais, except for transactions in exchange for the purchase or sale of foreign currency; (iii) Provision of information on aggregate amounts of credit and debit activity in accounts held by embassies and international organizations; (iv) Activity of interest of third parties limited to an account held by a non-resident institution subject to regulation and financial supervision in the country of origin, in which case the presentation of ancillary documentation must be assessed with the same criteria adopted in foreign exchange transactions and information must be provided about each activity. Changes in Provision of Information to the Central Bank of Brazil regarding Foreign Credit and Foreign Direct Investment Transactions We list below the main changes in relation to foreign capital in the country, in foreign credit transactions and foreign direct investment, as well as to the provision of information to the Central Bank of Brazil: I – Simpler, more concise rules, excluding requirements that are no longer necessary; II – Provision of information to BACEN regarding foreign credit and foreign direct investment only for a limited set of transactions, considering amount ranges and specific conditions; III – End of the requirement to provide information to BACEN regarding contracts between residents and non-residents concerning the use or assignment of patents, industry or trademarks, provision of technology, as well as those related to the provision of technical and similar services, foreign operating leasing and renting and chartering; IV – End of the restriction on remittances abroad for payments of principal and interest in foreign credit transactions in which there is no inflow of funds into the country, at the same time that it now requires the provision of information regarding foreign credit transactions with no inflow of funds, within certain criteria; V – Use of proportionality