Brazil has been known for decades to have had strict foreign exchange controls. The government, through the Central Bank of Brazil, has maintained the exchange controls by restricting access to the commercial exchange market to individuals and companies engaged in international trade transactions, repatriation of capital, remittances of dividends, profits, royalties and service fees. Failure to comply with the exchange controls has, as a general rule, precluded the Brazilian payer from making remittances abroad in foreign currency.

On March 4 2005, the National Monetary Council (CMN) of the Brazilian Central Bank issued resolutions 3265 and 3266 setting forth important modifications to the Brazilian exchange market. According to the president of the Central Bank, the changes will turn the Brazilian exchange market into a more flexible one and, consequently, make the Brazilian market more competitive. The main changes set forth by the two resolutions can be summarized as follows:

Both Brazilian foreign exchange markets, the floating rate exchange market (Mercado de Câmbio de Taxas Flutuantes) and free rate exchange market (Mercado de Câmbio de Taxas Livres), will be unified into a unique exchange market. The free rate exchange market has been used mainly for import and export transactions and foreign investment, while the floating rate exchange market has been mainly used for transfers of funds from or to Brazil. Note that the applicable rates of both markets were unified in 1999.

The limit applicable to foreign transactions, that is, purchase and sale of foreign currency and international transfer of reais (local currency) has been abolished. The latter will have a positive outcome for Brazilian entities wanting to invest abroad. Before the publication of Resolution 3265, commercial banks were allowed to perform transfers to foreign countries, made by private non-financial legal entities as a Brazilian investment abroad (capital investment), up to a limit of $5 million or an equivalent amount in other currencies for a period of not less than 12 months. Remittances for an amount higher than the limit mentioned above (during a 12-month period) were subject to prior approval from the Central Bank at least 30 days before execution of the exchange agreement.

Additional restrictions will apply to international transfer of reais via an account known as CC5 Account. CC5 accounts allow individuals and companies to undertake international transfer of reais to bring funds to Brazil or send them abroad. CC5 accounts are maintained by non-residents where no foreign exchange takes place in Brazil as this account is maintained in Brazilian currency and the currency exchange occurs abroad. Such accounts have been used for payments of dividends, intercompany loan arrangements and to make funds available abroad. Many of these transactions were generally implemented via CC5 accounts of foreign commercial banks. As per Resolution 3265, this procedure (that is, remittance via CC5 accounts of foreign commercial banks) would no longer be allowed, as commercial banks will be prohibited to transfer reais abroad on behalf of third parties. Remittances of Reais exceeding R$10,000 ($3,600) continue to be subject to the filing of a declaration as to the nature of the remittance and the respective documents must be made available to the Brazilian Central Bank upon request. Nevertheless, the new amendments made to the Brazilian exchange market should considerably diminish the use of CC5 accounts.

Lastly, Resolution 3266 set forth that Brazilian exporters will have 210 days (rather than 180 days) to bring back to the country foreign currency revenues (that is, to liquidate the operation) from sales made abroad. The term is counted as of the date of shipment of the goods or the supply of services.

All of the abovementioned changes are applicable as of March 14 2005.

Nélio Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com), Sao Paulo