Foreign capital in limited liability companies
Joaquim Manhães Moreira*
One of the uncertainties arising from the new Civil Code refers to the possibility of foreign capital participation in limited liability companies. The uncertainty stems from the provision of Article 1134 of the Code, which hinders foreign companies from engaging in business in Brazil, save if authorized by the Federal Administration, but allows them to hold shares in Brazilian joint-stock corporations.
The absence of any mention as to the their participation as quotaholders in limited liability companies has entailed certain difficulties, since a number of companies under the control of foreign capital have preferred to organize themselves in Brazil under this corporate form.
It should not be overlooked that until the New Civil Code became effective, the joint-stock corporation was accepted as a form of accommodating interests: (a) of public companies, desiring to obtain funding in the capital market; and (b) of private companies, with different shareholders holding major participations, as a form of joint venture.
The major foreign corporations generally have daughter companies in Brazil in which they detain full control, the other partners having a merely symbolic holding, as in the case of members of the executive board.
For many years, foreign capital, even when detaining full control of its Brazilian daughter companies, showed a preference for the joint-stock corporation form. Two factors brought about a change in this approach, at least by the representatives of major economic groups. One was the rather petty desire of certain financial officers, who desired to reduce the costs incurred with the publication of corporate acts. Another, more legitimate reason, was based on the desire to ensure a tax credit in their home countries against the income tax paid in Brazil.
In fact, if we take as an illustration US capital invested in Brazil, the tax credit is secured in the USA by consolidating the results of the controlled entities of the investing company, by corporate nature. Thus, an economic group which, under an international consolidation, found losses in its controlled companies organized as corporations, could not set off the tax paid by the recipient of its investments in Brazil, if the controlled company was organized as a corporation. This second reason led several major economic groups to adopt the limited liability form of organization in Brazil.
The difficulty generated by the new Civil Code has been dealt with differently by two main schools of thought. The first one recommends ignoring the rule contained in Article 1134. The advocates of this view claim that this provision already existed in the old Decree 2627/1940 (former law of corporations), and was merely copied into the new Civil Code as a result of an error of the legislator, who simply "forgot" that the new regulations cover other forms of company structure.
We do not feel this is the most reasonable approach, since a law cannot contain provisions that can simply be set aside based on a historical interpretation.
It would seem more reasonable to adopt the solution proposed by the second school of thought, which consists in making limited liability companies in which foreign capitals participate to adopt the provisions of the Law of Corporations as supplementary rules to its articles of associations, on the strength of the provisions of Art. 1053, sole paragraph, of the Civil Code.
Once such rules are adopted, the following provisions of Law 6404/76 would apply to the limited liability company:
- Those related to the shareholder meetings, calls, convening, recording and publication, as specified under Articles 124 through 137;
- Those related to the accounting criteria and records, as well as to drawing up and disclosing the financial statements to the public, as provided under Articles 175 through 188.
In our view, this means that a limited liability company with foreign participation in its capital stock is now required to publish acts and statements in the same fashion as required by private joint-stock corporations, in the official press and in a major newspaper in the city in which its head office is located.
This circumstance entails no interference with international tax planning, but only with the in the budget plans of financial officers of disputable efficiency, who saw fit to save mere pittances in order to demonstrate their capacity.
In the end, the winners are Brazil and Brazilian institutions, which have only to gain from a greater local transparency of these mammoth international economic groups.
* Specialist in Tax Law and in Corporate Law, partner of Manhães Moreira Advogados Associados, in São Paulo, Brasil