A Brazilian tax regulation that was promulgated in 2016 has taken effect in ways that are now affecting aircraft lessors and lenders to Brazilian carriers.(1) The full impact of the new rules is still unclear; however, lessors and lenders to Brazilian operators should begin to prepare to comply with the new requirements.
The changes relate to Companies Register of the Central Bank of Brazil (CADEMP) registration numbers and National Registry of Legal Entities (CNPJ) registration numbers. For any non-Brazilian party to receive payments from Brazil in US dollars (or any currency other than Brazilian reais), the payee usually needs both registration numbers. In an aircraft lease transaction, this is usually the lessor. The Brazilian operator needs these numbers each time it remits a payment, except for leases with a duration of less than 360 days. Without the numbers, the Brazilian obligor cannot remit rent or loan payments in US dollars.
A CADEMP number is a registration number provided by the Brazilian Central Bank. One of the standard condition precedent documents in most cross-border aircraft leases is a Brazilian Central Bank registration called a 'registration of financial transaction' (ROF). In relation to aircraft transactions, the aircraft lessee needs the lessor's CADEMP number in order to obtain a ROF. Once registered in the Brazilian Central Bank system, the lessor's CADEMP number is used to obtain a CNPJ number. The CNPJ registration must be made with the Brazilian Revenue Service (SRF). Although the foreign entity may not be subject to Brazilian tax, it must still obtain a tax identification number (ie, a CNPJ number) to receive payments from Brazil.
These registration requirements are not new. Foreign parties have had to obtain CNPJ numbers for aircraft leases (among others) for approximately 14 years. The procedure to obtain these registration numbers has varied over that time. Previously, a CNPJ number could be obtained without the knowledge of the registrant. Thus, many aircraft lessors may still be unaware that CNPJ numbers have been obtained in their names. These numbers could be obtained by an airline needing to remit payments or by a lessor's or lender's law or accounting firm.
Applications to register are made online and the persons filing the application need not submit original documents to complete this process. All that is needed is the full name, address and other basic details of the entity being registered and some evidence of the company's existence. Increasingly, cross-border leases to Brazilian carrier areas are structured through Irish and Swedish companies. Those companies can download a corporate certificate from the company register website. Once an application has been submitted online, the CADEMP and CNPJ registration numbers are usually issued on the same day or one business day later.
In 2016 new rules promulgated by the SRF increased the burden on registrants. Those rules initially took effect for companies registering after 1 July 2017. Companies registered after 1 July 2017 must comply with the new rules within 90 days of the date of issuance of the CNPJ registration number. Companies that obtained CNPJ numbers prior to 1 July 2017 must comply with the new rules by 31 December 2018.
The new rules now require a foreign company with a CNPJ number to submit to the SRF information relating to the entity's ultimate beneficial owners (UBOs), alongside the following documents:
- a certified copy of the bylaws, articles of association or partnership agreement (or corresponding document) or, alternatively, a complete extract issued by the corporate registry;
- a power of attorney appointing a person resident in Brazil to represent the entity in matters involving the SRF, including powers to receive summons in relation to any SRF procedures and to manage the assets of the entity in Brazil;
- in some cases (as explained below), certified incumbency evidence demonstrating the authority of the signatory of the power of attorney;
- a certified copy of the power of attorney's identifying document; and
- a certified copy of an identification document of the person appointed as the agent.
If the notary specifically attests to the signatory's corporate authority in the notarisation affirmation, no additional incumbency evidence is required. However, if the notarisation attests only that the person's signature is genuine, a corporate document confirming the signatory's powers to represent the company (usually the minutes from a shareholder or board meeting electing the directors and officers) will also be needed.
Any document not written in Portuguese must be accompanied by a translation prepared by a Brazilian pubic translator. Such translations are called 'sworn translations'. Any evidence sent from outside Brazil must be notarised. In addition, if the country from which such evidence emanates is a party to the Hague Convention relating to the Legalisation of Documents, the evidence must be apostilled. This currently includes jurisdictions such as the United States, the United Kingdom and Ireland. If the jurisdiction does not adhered to the Hague Convention, the document must be consularised (ie, legalised) by the Brazilian consulate responsible for that jurisdiction. This currently includes jurisdictions such as Canada and Singapore.
These documents must be scanned and submitted to the SRF through an online system. No originals will be retained or even presented to the SRF. The foreign entity must also inform its current shareholders and officers if none of the above documents contain information on the UBOs. The SRF requires no legal formalities such as notarisation or apostille. In principle, a simple report should suffice.
As mentioned above, the new rules also require registrants to provide information on UBOs. This information is submitted to the SRF using an online form. In order to complete the form, the SRF requires each UBO's date of birth, country of birth and country of residence.
With respect to this requirement, the SRF's rules have defined a 'UBO' as:
- a natural person who directly or indirectly holds, controls or has significant influence over (ie, holds more than 25% of the company's capital stock (directly or indirectly) or holds or exercises preponderance in the company's decisions and the power to elect the majority of the officers therein) the company; or
- a natural person on whose behalf a transaction is conducted.
Due to the difficulty in identifying UBOs in some cases, the SRF amended the new rules in August 2017 to include the possibility of stating that no natural person falls within the SRF's definition of a UBO.
As these rules were implemented only recently, there is relatively little information concerning the uncertainties surrounding the SRF's requirements. For example, some companies have internal rules prohibiting the issuance of powers of attorney in excess of stipulated periods. It is unclear whether the SRF will accept powers of attorney with such limited terms. Another uncertainty relates to the requirement that the agent be authorised to manage the assets and rights of the registrant in Brazil. Most foreign aircraft lessors would not expect to give local Brazilian agents any substantive decision-making authority relating to the disposition of leased aircraft; however, this power is an express requirement of the SRF regulation. It is unlikely, but nonetheless conceivable, that the agent might be ordered by the SRF to exercise their authority to take certain actions (eg, tendering an aircraft to the SRF as part of an investigation). If the agent were to fail to comply with such an order, they may be held personally liable for contempt of an issued order.
Further, although most non-Brazilian lenders and aircraft lessors dealing with Brazilian borrowers and lessees are not currently liable for Brazilian tax, if those rules change during a loan or lease term, the agents could potentially be held personally liable for the tax liability if it is unpaid.
Finally, non-compliance with the new rules period could result in suspension of a CNPJ registration number. Such suspension might prevent aircraft operators from making payments under previously registered and approved leases or borrowers from paying loan instalments.
Despite having been approved in 2016, the new rules implement significant new reporting requirements concerning the identification of lessor entities' UBOs and increase the document disclosure requirements on lessors and lenders in cross-border aircraft finance transactions. There are also several important uncertainties arising from the new rules that may be clarified in the coming months, as the 31 December 2018 compliance deadline approaches.
For further information on this topic please contact Kenneth D Basch or Bianca Neves at Basch & Rameh by telephone (+55 11 3064 8599) or email ([email protected] or [email protected]). The Basch & Rameh website can be accessed at www.baschrameh.com.br.
Endnotes
(1) The rules described in this update are contained in Brazilian Federal Revenue Service Normative Instruction 1634/2016.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
