The new Brazilian legal FX framework
Paulo Marcos Rodrigues Brancher
Mattos Filho, São Paulo
Gustavo Salles da Costa
Mattos Filho, São Paulo
Leticia Raquel Leme de Jesus
Mattos Filho, São Paulo
Background to the FX framework
The Brazilian legal framework on foreign exchange and foreign investments (‘FX Framework’) was drafted at a time when foreign currency in the country was scarce, due to efforts to prevent the dollarisation of the national economy – for reference, the legal cornerstone of this framework, Law No 4.131, which is still in effect, was enacted in 1963. Therefore, financial regulators, such as the Central Bank of Brazil, and market participants, believed that the main foreign exchange laws in the country were outdated, unnecessarily conservative, and incompatible with a globalised economy.
To remedy these issues, and following pressure from the market, the Brazilian Congress began amending the FX Framework in the past few decades, but the changes were applicable to a plethora of laws and regulations, lacked cohesion and, to a certain extent, lacked coherence. As a consequence, the risk of legal insecurity to market participants has expanded, repelling foreign investment, due to the complexity of interpreting and applying such laws and regulations to robust transactions, which often requires extensive – and costly – technical and legal counsel.
In this regard, the current economic scenario in Brazil is focused on efforts to strengthen and debureaucratise market relations and simplify the process of foreign investment and foreign exchange, to and from Brazil – corresponding to a capital flow of nearly a trillion dollars, as of the first quarter of 2021.
New FX framework principles
As a consequence of the aforementioned efforts, and based on a Central Bank of Brazil initiative, Congress enacted Law No. 14,286 on 30 December 2021, which aims to unify the FX Framework, currently comprised of multiple disperse laws, as well as simplify and develop the foreign exchange and foreign investment process, according to the following main principles: (1) freedom of capital flow and foreign exchange transactions; (2) entry of the Brazilian economy into international markets; and (3) a reduction of bureaucracy and increased transparency during the execution of foreign exchange transactions.
Furthermore, the new FX Framework has the objective of improving the business environment, increasing foreign trade through proportionality and decreased regulatory risk, attracting foreign investment, and developing and diversifying financial and capital markets, among others.
It is noteworthy that Law No. 14,286 will become effective as of 30 December 2022, one year after its enactment, and is dependent on National Monetary Council and Central Bank of Brazil regulation to being in effect, as addressed below.
Main changes to the FX Framework
Given that Law No 14,286 aims to unify the FX Framework into one legislative document, it naturally incorporates provisions from previous laws on the matter. Nevertheless, the law also establishes the main guidance for financial regulators to implement specific policies, which in some cases presents changes to the FX Framework, such as the following:
Brazilian financial institution investments abroad: previously forbidden, the current legislation now allows financial institutions, incorporated in Brazil, to invest resources raised nationally or abroad, in foreign countries;
Foreign exchange primary market: the new law allows the entry and exit of up to $10,000 (or its equivalent in other currencies), without the intermediation of a financial institution authorised to operate in the foreign exchange market;
Peer-to-peer transactions: previously forbidden, the new law allows physical foreign exchange of up to $500 (or its equivalent in other currencies), between individuals, on a casual and non-professional basis;
Legal tender: the law establishes new cases in which the Brazilian real is not required as a payment method in the country, such as in agreements between exporters and entities with a grant or permission to explore the infrastructure sector, and grants power to the National Monetary Council to establish and regulate other exceptions involving legal tender;
Remittances registration: the new law implements the end of the registration requirement for the remittance of profits, dividends, interest and other remittances established by regulation;
Multinational royalties registration: the new law also ends the registration requirement for the remittance of royalties to parent companies abroad;
Lease registration: the new law marks the end of the registration requirement of lease agreements with a party abroad, as well as the previous Central Bank of Brazil request to terminate a lease with a party abroad;
Foreign exchange nature codes: previously a responsibility of the institution authorised to operate in the foreign exchange market, the new law shifts the responsibility to set the nature codes for the transactions to the institution’s clients;
Regulatory jurisdiction: the Central Bank of Brazil now has the power to regulate foreign exchange transactions and foreign currency swaps, as well as to regulate foreign exchange and securities brokers incorporation and operations – all previous competences of the National Monetary Council;
Non-resident bank accounts in Brazil: the new law establishes the requirements concerning the equal treatment of bank accounts held by residents and non-residents in Brazil; and
Reciprocal credit and debit: previously forbidden, ‘except in cases where the Central Bank of Brazil allows it’, the new law expressly authorises the regulator to establish reciprocal credit and debit transactions with a party abroad, merely shifting the understanding of this provision, although hinting that further clarity might soon be issued by the regulator.
As already mentioned, Law No 14,286 requires new regulations to be enacted by the National Monetary Council and the Central Bank of Brazil, which have already taken the first steps to formulate such rules. The financial regulators have released two public consultations on the main draft rules of Law No 14,286, regarding the foreign exchange market and foreign equity and debt investments, with the expectation that such rules will come into force by the first quarter of 2023, although, by law, it is required to be enacted by the date that Law No 14,286 becomes effective.
Later in 2022, it is expected that the National Monetary Council and the Central Bank of Brazil will issue a third public consultation regarding foreign investment in Brazilian capital markets, and other consultations throughout 2023 regarding the remaining aspects established by Law No 14,286 (ie, reciprocal debit and credit, leasing with a party abroad and legal tender flexibility, among others).
Law No. 14,286 is an important piece in the nationwide strategy to project the Brazilian economy internationally, in a post-pandemic world, with economic powers shifting. Thus, by simplifying and modernising the FX Framework, guaranteeing more transparent and efficient foreign exchange transactions, as well as allowing the free movement of capital, the Brazilian government aims to achieve an evolution in how the country trades and invests.
Furthermore, Law No. 14,286 will grant greater autonomy to the Central Bank of Brazil to regulate and obtain more data to identify possible improvements to the applicable regulations, placing Brazil in a more harmonised position with international standards.
Finally, Law No. 14,286 will enter into force by the end of the year, one year after its enactment, due to the large changes it will bring to the legal system. Therefore, it will be important to closely follow how market players react and adapt, in practice, when the law comes into force, as well as how regulation is tailored to comprise the FX Framework principles vis-a-vis the development of the national financial system.
 The National Monetary Council and the Central Bank of Brazil are deemed to be the main financial regulators in Brazil. The former is responsible for formulating currency and credit policies, aiming to create stability for the national currency and economic development - and is composed of the Secretary of Treasury, the Special Secretary of the Department of Treasury, and the Central Bank of Brazil President. The latter is responsible for the stability of the financial system by implementing National Monetary Council policies, and supervising financial institutions and other institutions authorised to perform financial and payment services.
 Foreign exchange transactions are categorised by nature codes, for different purposes, to allow institutions authorised to operate in the foreign exchange market to review and register each transaction accordingly, and the Central Bank of Brazil to better supervise the transactions.
 Public Consultation No. 90, issued on 12 May 2022, and Public Consultation No. 91, issued on 19 July 2022.