The enactment of two resolutions in March 2005 by the National Monetary Council of the Central Bank of Brazil (BACEN) brought significant changes to the Brazilian exchange market and the foreign exchange control regulations. The resolutions also lifted many of the restrictions imposed on transfers of funds used to acquire shares of foreign entities.
Before the enactment of the two resolutions, BACEN had placed severe restrictions, both upon residents as well as local employers on remitting funds outside of Brazil, including funds that would be used to acquire shares of foreign entities.
Brazilian companies that belonged to foreign economic groups were allowed to make transfers overseas through authorized banks for the purpose of acquiring stock issued by the foreign parent company on behalf of their employees without prior approval. These transfers were limited to $20,000, or an equivalent amount in other currencies, for each employee for a period of 12 months. Remittances above this amount required prior authorization by the Central Bank. The applicable legislation also set out that when the employment relationship between the Brazilian entity and its employee terminated, the corresponding investment held by the employee abroad (that is, the shares) had to be written off (sold) and any funds resulting had to be repatriated immediately to Brazil.
The new changes make participation in employee share plans offered by foreign parent companies much more flexible and less burdensome for the local employing entity. The details are summarized below:
Transfers of foreign currency used to acquire shares of foreign entities are no longer limited to the $20,000 threshold, or an equivalent amount in other currencies, for each employee for a period of 12 months.
The employee itself is now allowed to make transfers of foreign currency to acquire shares of foreign entities. Previously, the transfers had to be made by the Brazilian entity on behalf of its employees. The option of having the local entity making the transfers of currency is still allowed by the new foreign exchange controls regulations. In such case, the local entity is required to present to the commercial bank effecting the remittances the employee's name, their taxpayer register number (CPF), the amount remitted for each employee as well as the employee's authorization for the remittance.
Upon the termination of the employment contract between the employee and the local entity, the employee is no longer forced to sell its investment abroad and repatriate the funds back to Brazil.
The local employing entity is no longer subject to the burdensome compliance rules previously imposed by the now revoked circular 3013. Under the latter, the local entity had to provide significant documentation to the central bank, including the proof of the effective investment of the amounts remitted in the foreign company's capital and annual statements with respect to the status of each employee's investment in the plan, which included the amount of dividends paid in cash or in stock.
Lastly, in addition to the foreign exchange control changes, the Brazilian tax authorities issued on June 15, 2005 Provisional Measure 252 which increased the limit on the capital gains exemption for individuals from R$20,000 ($8,300) to R$35,000 ($14,500).
In this regard, if the proceeds from the sale of the shares acquired through the employee share plan or any other assets of similar nature exceed R$35,000 in the month of sale, the capital gain would be subject to tax at a rate of 15%. If the sale proceeds for the month do not exceed R$35,000, individuals are not liable to pay capital gains tax. The new R$35,000 limit is solely applicable if the shares are sold in stock exchanges. If the shares are sold outside stock exchanges the capital gains exemption remains at R$20,000.
Nélio Weiss (nelio.weiss@br.pwc.com) and Philippe Jeffrey (philippe.jeffrey@br.pwc.com), São Paulo
