Brazil International Newsletter - Felsberg e Associados

Brazilian Regulation for Reinsurance Companies
(setting up in Brazil as an admitted reinsurer)

On February 1st, 2008, SUSEP (Private Insurance Superintendence) published Ruling (Circular) No 359 in the Official Gazette, establishing the procedures for the registration of admitted reinsurers in Brazil and for obtaining SUSEP´s authorization for opening a representative office (“escritório de representação”) in Brazil.

The admitted reinsurer, i. e., every foreign reinsurer with representative offices in Brazil, must be duly registered with SUSEP to operate within its territory and satisfy the following minimum requirements:

I - be incorporated under the laws of its home country for underwriting local and international reinsurance in the fields it intends to operate in Brazil and have operated in the country of origin for more than 5 (five) years;

II - have financial capacity of at least US$100,000,000.00 (one hundred million US Dollars);

III - have the following minimum ratings: (i) BBB if issued by Standard & Poor's, (ii) BBB if issued by Fitch; Baa3 if issued by The Moody's and B+ if issued by AMBest;

IV – appoint an attorney-in-fact residing in Brazil, with broad administrative and judicial powers, including the power to receive summons and notices.

Foreign reinsurers based in tax havens (i.e., countries and territories in which there is no income tax or income tax is levied at a rate lower than 20%) and in any country in which its legislation contemplates corporate ownership secrecy.

The admitted reinsurer must, in addition to the requirements outlined above: (i) maintain an account in foreign currency linked to SUSEP in the minimum amount of US$1,000,000.00 (one million US Dollars) for operating life/health insurance and US$ 5,000,000.00 (five million US Dollars) for operating in all fields, and (ii) regularly submit its financial statements.

The representative office of an admitted reinsurer must have as its only corporate purpose to act as a representative of the foreign reinsurer in Brazil and must have in its corporate name the expression “Representative Office in Brazil” (“Escritório de Representação no Brasil”).

Further, such office must be set up as a branch of the foreign reinsurer in Brazil or as a Brazilian subsidiary with: (a) minimum participation of 4/5 of the corporate capital being held by the foreign company, (b) establish in the company´s articles of association that its sole purpose is to represent the foreign reinsurer in Brazil, (c) follow the rules for the appointment of the members of its boards, and (d) the company´s officer must be the foreign reinsurer´s appointed attorney-in-fact residing in Brazil or an associate attorney-in-fact (“representante adjunto”).

Finally, SUSEP Ruling No 359/08 sets forth that the sporadic reinsurer may apply for the modification of its registration to one of an admitted reinsurer but to do so it must comply with the requirements for operating as an admitted reinsurer.

Law No. 11,638/07 - Alterations to Accounting Control Mechanisms of Corporations

Published on December 28, 2007, Law No. 11,638/07 has brought a series of alterations to Brazil’s Law of Corporations (Law No. 6,404/76), especially in what concerns the accounting control systems for activities undertaken by corporations.

Furthermore, Article 3 of the mentioned statute extended to large companies (sociedades de grande porte), even if they are not formed as corporations, the rules provided by law concerning the necessity for bookkeeping and preparation of financial statements, and the obligation to carry out independent auditing.

On this point, it should be made clear that a “large company” is a company or group of companies under common control which had total assets during the previous financial year of over R$240 million or gross annual income of over R$300 million.

In respect of large companies, the new law has generated controversy from legal and business experts over whether these companies should be obligated to publish their financial statements in the Brazilian Official Gazette and large-circulated newspapers.

The outcome of this controversy appears clear to us in that this obligation, and specifically that affecting large companies, was expressly excluded during the legislative revision process of Law No. 11,638/07.

Further, it should be stressed that upon its preliminary announcement of the alterations introduced by Law No. 11.638/07, the Brazilian Securities Exchange Commission (CVM), through the Formal Notice of January 14, 2008, confirmed the lack of any express reference as to the obligatory nature of the publication of financial statements by large companies, simply highlighting the obligations outlined in Article 3 mentioned above.

It is important to mention that this is not the first attempt at imposing upon companies not necessarily organized as a corporation the obligation to publish their financial statements, an example being Bill No. 2.813/00 which contemplates said obligation as concerns Brazilian limited liability companies. The mentioned Bill is currently undergoing examination by the House of Deputies where it has been for seven years, without a foreseeable date for its approval.

Amid the principal innovations brought about by Law No. 11,638/07, long awaited by accountants and already in use by the majority of the more developed countries, is the substitution of the Statement of Origin and Utilization of Resources (“DOAR”) for the Statement of Cash Flows (“DFC”). Publicly-held corporations have also been ordered to draw-up the Value-Added Statement (“DVA”), which up until now has been optional in accordance with item 8 of Official Letter CVM/SNC/SEP No. 01/00.

Another innovation outlined by the new legislation opens the possibility of creating statements specifically for tax purposes, in addition to the already existing accounts statements, with the intention of improving control over the examination of taxes owed by corporate entities. Previously, fiscal control was done separately through secondary tax records.

The form of control for permanent assets has also been altered, in that a new subgroup has been created, in addition to the fixed, deferred assets and investments: the intangible assets. This new group has arisen out of the segregation of fixed assets, as a means of separating the intangible assets from the tangible ones (fixed assets per se).

A new division was also created for the net worth accounts, as a means of substituting the “reevaluation reserve” with “equity evaluation adjustment”. Due to this alteration, the counterentry arising from the rises and falls in the values attributed to those elements of the assets and liabilities will be entered in the new record of equity evaluation adjustments. Previously, only the estimation of asset elements, based on technical reports, was accounted by way of the reevaluation reserve. It is important to note that the balances existing in the reevaluation reserves should be maintained until their effective realization or cancelled by the end of the 2008 financial year.

Further, in respect of net worth, the “accumulated profits and losses” account was extinguished. From the start of the period in which the new legislation will take effect, there will only exist the “accumulated losses” account, the profits moving under the control of the “profits reserve” account.

Similarly, the balance of the profit reserves may not exceed the capital stock. Under the terms of the new law, “in reaching this limit, the Shareholders’ General Meeting shall make a resolution on the allocation of the excess to the payment or increase of the capital stock or to the distribution of additional dividends to the shareholders.” (new wording of article 199 of Brazil’s Law of Corporations), which, in a sense, enables the shareholder to receive profits, in addition to the mandatory dividends.

The entries as capital reserves, a record also included in the net worth, were reduced, no more being able to be accounted under capital reserve the premium received in the issue of debentures, the donations and the subsidies for investment.

Additionally, the new legislation has brought new criteria in the evaluation of assets and liabilities in an attempt to update the accounting control within the reality of the contemporary market. Of all the alterations, two are worthy of particular attention. Firstly, those elements of the assets and liabilities arising from long term operations should be adjusted to the current value. Such methodology has already been accepted by the Securities and Exchange Commission itself (CVM Normative Ruling No. 346/00), but has never been widely used.

Another relevant point concerns the fact that there is no longer an obligation to amortize deferred assets within a maximum of ten years. From now on, the criteria used in determining the estimated lifespan of the sums registered as fixed, deferred and intangible assets, for the purpose of depreciation, amortization and depletion, should be periodically revised and readjusted. In the same manner, the “losses of the sums of applied capital [should be] registered when there has been a decision to interrupt the enterprises or activities for which they were destined or once it has been proven that they cannot produce results sufficient to recuperate the sum.”

Another important alteration brought about by the new legislation, given importance by the numerous corporate transactions that have been carried out, is the determination that the assets and liabilities of a corporate entity to be merged or arising from a consolidation or spin-off, are to be accounted by their market value should the operation be effected on an arm’s length basis and imply an effective transfer of control. Thus, if on the one hand, the rule under discussion aims at avoiding losses, mainly for minority shareholders of companies which are subject to a change of control, on the other, it will certainly affect the tax burden of these operations and, ultimately, price negotiations. The principal tax effect concerns the fact that accounting of the market value will possibly reduce the premium existent in these operations. This is due to the fact that because the premium is deductible for the calculation of Income Tax, the reduction of such premium will, therefore, imply a lower deduction of the cited tax.

Further, it is important to mention that the new legislation altered the requirements for the use of the investment evaluation method in affiliated companies by the net worth value (Equity Accounting Method or Método da Equivalência Patrimonial - “MEP”). Before the enactment of such law, the condition precedent for the use of the MEP evaluation was that the investment had to be considered relevant, i.e., (i) the sum of the investment in a controlled or affiliated company was equal or superior to 10% of the net worth of the investor; and/or (ii) the sum of the investment in controlled or affiliated companies, together, was equal or superior to 15% of the net worth of the investor.

With the recent alteration, it is enough for the investment to be in an affiliated company in which the investor has significant power, or in which it holds 20% or more of the voting capital or in a controlled company and in other companies which form part of the same group and which are under common control.

In view of the above, we can conclude that in addition to the simple alterations in the accounting control mechanisms of corporations and its effects on large companies, the recent alterations may have a serious impact on the companies’ tax system, a detailed examination of recent legislation and the possible repercussions on its main business activities being absolutely indispensable for each taxpayer.

It is important to stress that although the stated alterations have been in immediate effect since January 1, 2008, many of them will be subject to regulatory acts and supplementary technical orientations by government bodies and departments directly involved in accounting, corporate and fiscal matters, to which Law No. 11.638/07 allows the execution of agreements and conventions with organizations designed to study and release the principles, norms and models for accountancy and auditing, such as the CPC (Committee on Accounting Decisions or Comitê de Pronunciamentos Contábeis), in this way allowing an integration of the efforts striving for the correct interpretation and application of the new law.

Finally, specifically in respect of publicly-held corporations, the Formal Notice of January 14, 2008 issued by the CVM determines that such companies must release footnotes not only on their 2008 Quarterly Reports (Informações Trimestrais - ITRs), but also on their financial information ended December 31, 2007, of events contemplated in the new law that may influence such companies’ financial statements for the next financial year and, whenever possible, an estimation of the impacts of such events on the assets and results for 2007 or the relevance level over the 2008 financial statements.

Highlights on Tax Changes for 2008 – Consequences of the Non-extension of CPMF

Important tax changes were implemented in Brazil at the beginning of 2008 byvirtue of the CPMF tax not having been extended by Congress.

It should be noted that CPMF provided not only public revenues to the Federal Union but also information concerning flows of funds of taxpayers through bank accounts, a tool for triggering tax audits. CPMF was a tax imposed on all bank account movements and was levied at a 0.38% rate on each amount debited.

In this context, the Federal Government adopted the following three measures for 2008: (i) increase of 0.38% of the Financial Transaction Tax (locally known as“IOF”), which affected certain credit, foreign exchange and insurance transactions; (ii) increase the rate of the Social Contribution on Profits of Financial Institutions (“CSLL”) from 9% to 15%; and (iii) introduction of a specific report to be filed by financial institutions with information related to bank transfers of funds of taxpayers.

Measures “i” and “ii” above intend to maintain the same level of public revenues collected through CPMF in the past and the report referred to in “iii” allows the tax authorities to continue to have access to the financial movements of taxpayers through bank accounts.

The political party which prevailed in Congress at termination of CPMF and the National Confederation of Liberal Professions filed actions with the Brazilian Supreme Court to have the above-mentioned changes recognized as being unconstitutional. The Supreme Court is not required to rule upon such actions within a certain term, but has adopted a summary proceeding to speed up their final conclusion.

Before the Supreme Court renders its judgment in the above-mentioned actions, taxpayers should be aware of the specifics involving the recent changes in tax law, in order to optimize their tax burden or at least correctly project tax costs for 2008.

Updating of Economic-Financial Information in respect of Brazilian companies receiving foreign investments with the Brazilian Central Bank

The Foreign Capital and Exchange Bureau (DECEC) of the Brazilian Central Bank (BACEN) in accordance with Circular N 2997/2000, requires that all Brazilian companies whose equity interest is held by non-resident quotaholders/shareholders must update their economic-financial information on BACENs electronic system with information pertaining to the financial year of 2007.

Please do not hesitate to contact us should you require any assistance in updating such information on Bacens electronic system.

Deadline for Limited Liability Companies (Sociedades Limitadas) and Corporations (Sociedades por Aes) to hold Annual Quotaholders/Shareholders Meeting

In accordance with Article 1078 of the Brazilian Civil Code (Law No. 10406/02) and Articles 132 and 133 of the Brazilian Law of Corporation (Law No. 6404/76 and its amendments), Brazilian limited liability companies (Sociedades Limitadas) and Brazilian corporations (Sociedades Por Aes) must hold an Annual General Quotaholders Meeting (Reunio or Assemblia) and a General Ordinary Shareholders Meeting (Assemblia Geral Ordinria) respectively, every year, within four (4) months after the termination of the preceding financial year, in order to deliberate about the following matters:

According to Article 1072 of the Civil Code, a Sociedade Limitada must establish, in its Articles of Association, whether corporate resolutions shall be taken at a General Quotaholders Meeting called Reunio or Assemblia. Moreover, the first paragraph of Article 1072 requires that Sociedades Limitadas with more than ten (10) quotaholders must necessarily hold Assemblias 1.

The procedure for calling a Reunio is established by the companys Articles of Association. As for the Assemblia, the Civil Code determines that the manager of the company is responsible for calling such meeting. However, the Civil Code provides three (3) exceptions to this rule and authorizes the Assemblia to be called:

The company is required to publish, at least 3 (three) times, a call notice indicating the venue, date and time for the Assemblia, for addition to the meetings agenda. The first notice must be published at least 8 (eight) days prior, to the meeting with a second notice being published at least 5 (five) days prior to the meeting. If all quotaholders attend the Assemblia, the obligation to publish said notification and/or honor respective timelines may be waived.

Furthermore, management must inform, up to thirty (30) days before the scheduled Reunio or Assemblia, via written notification, that the following documents are available for the quotaholders examination: (i) management report regarding corporate transactions and major relevant administrative actions conducted in the preceding period; (ii) a copy of the financial statements; (iii) independent auditors report, if applicable; (iv) audit committee report, including dissenting votes, if applicable; and (v) other pertinent documents and topics included in the meetings agenda.

In addition, although not required by law, it is well known as a good corporate practice for a Sociedade Limitada to attach the approved companies Financial Statement to the Minutes of General Meetings.

Furthermore, the minutes of the Reunio or Assemblia must be recorded in the Book of Minutes of General Meetings, duly signed by all attending quotaholders and, also, shall be filed with the Commercial Registry.

The company is required to publish, for at least three (3) times, a call notice regarding the venue, date and time for the General Ordinary Shareholders Meeting, in addition to the meetings agenda.

The first General Ordinary Shareholders Meeting notice must be published at least eight (8) days prior to the meeting; if the meeting is not held, a second General Ordinary Shareholders Meeting with a call notice being at least five (5) days prior to the meeting 2.

Furthermore, management must inform, up to one (1) month before the scheduled General Shareholders Meeting, via written notification published as per instructions above, that the following documents are available for the shareholders examination: (i) management report regarding corporate transactions and major relevant administrative actions conducted in the preceding period; (ii) a copy of the financial statements; (iii) independent auditors report, if applicable; (iv) audit committee report, including dissenting votes, if applicable; and (v) other pertinent documents and topics included in the meetings agenda. The issued notification must state location(s) where shareholders may obtain copies of these documents.

The above mentioned documents, except those mentioned in the items (iv) and (v) above, must be published at least five (5) days prior to the scheduled General Shareholders Meeting.

Please note that if all shareholders attend the General Shareholders Meeting, the obligation to issue such notice and/or honor respective timelines may be waived. However, the publication of the financial statements prior to the General Ordinary Shareholders Meeting is mandatory.

Furthermore, if the financial statements are published up to one (1) month prior to the scheduled date for the General Ordinary Shareholders Meeting, such notice stating where the shareholders may obtain them is also waived.

A non-listed corporation with less than twenty shareholders and net worth under R$ 1,000,000.00 (one million Brazilian reais), may deliver a general shareholders meeting notice directly to each and every shareholder (provided as it holds respective delivery slips and honors the same lead time mentioned above). It may also waive the obligation to publish the documents stated in items (i) to (iii) above, provided as it files a certified copy with the Commercial Registry in addition to the minutes of the Shareholders Meeting.

Thus, the minutes of the General Shareholders Meeting shall be kept in the Register of Minutes of General Shareholders Meeting, and, also, shall be filed at the Registry of Commerce.

Please do not hesitate to contact us should you require assistance in calling and holding such meeting and drafting and filing the respective minutes.

1. The difference between the two meetings is that while the procedures for calling and holding the Reunio are determined by the quotaholders in the companys Articles of Association, the rules for calling and holding the Assemblia are regulated by the Civil Code, and are more complex and bureaucratic.

2. In case of public corporation, the first notice must be published at least fifteen (15) days prior, and, the second notice at least eight (8) days prior to the meeting, as per article 124, § 1, II of the Brazilian Corporate Law.

Felsberg e Associados Advises Pride International, inc. On us$ 1.5 Billion Contracts with Petrobras

The Rio de Janeiro Oil & Gas Department of Felsberg e Associados, coordinated by partner David L. Meiler has advised Pride International, Inc. during negotiations with Petroleo Brasileiro S.A. - Petrobras for the extension of the charter and service agreements for the semisubmersible drilling rigs Pride Portland and Pride Rio de Janeiro. Such deals represent a potential revenue to Pride International, Inc. of approximately US$ 1.5 billion in dayrates and bonuses, throughout the extension of the agreements.

Felsberg E Associados Advises Reem Advertising in R$1.5 Billion Real Estate Developer Transaction

Bracor Investimentos Imobiliários has just welcomed the arrival of four new partners. The company was created in 2006 by Equity Group (founded by Sam Zell) and the Brazilian entrepreneur Carlos Betancourt. After five months of negotiation, Bracor signed on December 18, 2007 to receive its new members: investment bank Morgan Stanley (USA), Berkley Capital Management LLC, a company of the American insurance group W. R. Berkley Corporation, a holding entity managed by Saudi Arabian group Olayan, and Reem Advertising LLC, a company managed by the Royal Group of the Abu Dhabi Emirate. Felsberg e Associados, lead by Partners Thomas Felsberg and Maria da Graça Pedretti and with the assistance of Associate Alberto Büll, advised Reem in this transaction.

With the introduction of these new investors, Bracor plans to invest an additional R$2 billion in Brazil’s corporate real estate market over the next two years. Today, Bracor’s portfolio exceeds R$1.5 billion with approximately 30 properties, with tenants such as Ambev, Alpargatas, Bosch Siemens, DHL, IBM, G.Barbosa and Firmenich.

Felsberg e Associados has provided legal representation to Bradesco Leasing S.A. Arrendamento Mercantil, in the capacity of issuing company, and Banco Bradesco BBI S.A., in the capacity of bank coordinator, on the registration of the public offering in the Brazilian market, of the 5th Issue of Non-Convertible Debentures, with the final sum of R$6,750,000,000.00, and also the filing of the Issuer's Securities Exchange Distribution Program, for the sum of R$10,000,000,000.00 with the Securities Exchange Commission.

The Felsberg e Associados team was coordinated by Vanessa Constantino Brenneke, under the supervision of Partner Thomas Benes Felsberg. Farley Menezes da Silva and Angélica Ramos de Frias worked as internal counsels at Bradesco BBI.

The 18-year old Brazilian soccer player Breno has transfered from São Paulo FC to Bayern Munich FC until 2012. Breno is the 31st Brazilian soccer player to play in the German Bundesliga. Brazilians represent the largest group of foreign players in the league.

Felsberg e Associados advised São Paulo FC in this transfer, the working team being Partner Carlos Miguel Castex Aidar and Associates Carlos Eduardo Ambiel, Marcel Santos and the intern Alexandre Miranda.

Felsberg e Associados Tax Department, under the supervision of Partner Paulo Sigaud, has recently received an important addition. Attorney Ivan Luiz Sobral Campos has become the tax partner of the Rio de Janeiro office, being responsibile for providing support to the growing demand for the tax services provided by the office in that city.

During the twenty years which his career has spanned, Ivan has played a large part in the activities of the so-called ‘Big Four’ consultancy companies, as well as legal companies, taking care of clients in a number of sectors including pharmaceuticals, telecommunications, petroleum, technology and beverages.

A law graduate from the Gama Filho University in Rio de Janeiro, he has been part of the teams at KPMG Auditing and Consultation, White Martins, Coopers & Lybrand Consultants and Veirano Advogados.