Legal Insights From Brazil to Start Your Week

What you will be reading in this issue:

1. Investment Funds?| Duty of Diligence: Obligation #1 of Brazilian Fund Managers in Protecting Portfolio Assets

2. Business Contracts?| The Confidentiality Clause in Contracts with Key Partners as a Tool to Protect the Brazilian Company's Business

3. Tax?| Brazilian Federal Revenue Services (Receita Federal) Clarifies Rules for Taxation of Online Betting and Gaming

4. Credit Recovery?| 3 Key-Strategies for Creditors to Use in Brazilian Judicial Reorganizations

5. Labor?| Labor Force Overtime Hours in Brazil: How Companies May Reduce Labor Liabilities

Investment Funds | Duty of Diligence: Obligation #1 of Brazilian Fund Managers in Protecting Portfolio Assets

One of the key responsibilities of Brazilian fund managers in the face of default situations and asset depreciation within their portfolios is the duty to "act" diligently.

The current Brazilian economic scenario has once again placed funds such as FIDC (receivables), FIAGRO (agribusiness), FII (real estate), and FIP (equity) managers on high compliance alert, particularly concerning their fiduciary duty to act diligently in protecting the fund’s assets, in accordance with Brazilian Securities and Exchange Commission (CVM) Resolution 175.

Below is a breakdown of each investment fund class and the specific provisions of CVM Resolution 175 that mandate managers’ proactive stance in safeguarding portfolio assets:

1. Duty of Diligence of Receivables Investment Fund (FIDC) Managers: CVM Resolution 175, in Annex II, which specifically governs FIDCs, establishes that the manager is responsible for monitoring "the credit rights portfolio’s payment compliance and, concerning overdue and unpaid credit rights, ensuring that collection procedures are undertaken, provided that this last obligation does not apply in cases where exemptions are stipulated in the regulations."

As an investment vehicle that acquires credit rights, FIDC managers must closely adhere to CVM Resolution 175 and the terms of the fund's regulations to avoid liability for inaction or failure to exercise due diligence in protecting investors’ interests concerning portfolio assets.

2. Duty of Diligence of Real Estate Investment Fund (FII) Managers: FII managers must comply with the general provisions of CVM Resolution 175, which require managers to adopt conduct standards, including: (i) "exercising, or ensuring that all rights arising from the fund’s assets are exercised"; and (ii) "employing, in defense of unitholders’ rights, the diligence required by the circumstances, carrying out all necessary acts to ensure such rights, and undertaking applicable judicial, extrajudicial, and arbitral measures."

3. Duty of Diligence of Agribusiness Investment Fund (FIAGRO) Managers: In addition to the general obligations imposed on fund managers under CVM Resolution 175, Annex VI, which specifically regulates FIAGROs, mandates that managers must "ensure the preservation of the rural property’s land and environmental integrity."

4. Duty of Diligence of Equity Investment Fund (FIP) Managers: In addition to the obligations outlined in the general section of CVM Resolution 175, Annex IV, which specifically regulates FIPs, stipulates that FIP managers must ensure the proper safeguarding of assets, including: (i) "receiving, verifying, and keeping custody of documentation that evidences and confirms the existence of asset backing"; (ii) "ensuring that supporting asset documentation is maintained (...) updated and in perfect order"; and (iii) "collecting and receiving, on behalf of the share class, revenues and any other payments related to the custodied assets."

The analysis of CVM rulings and caselaw developments highlights the regulator’s increasing scrutiny over managers’ duty of diligence in overseeing portfolio assets, including the imposition of significant penalties on both legal entities and individuals.

Managers must remain vigilant regarding their fiduciary duties to act and document their actions in exercising fund rights, thereby mitigating compliance risks and potential liability before investors and regulators.

Business Contracts | The Confidentiality Clause in Contracts with Key Partners as a Tool to Protect the Brazilian Company's Business

Although confidentiality clauses are an essential element in contracts, their use in Brazil is increasingly indiscriminate, without the necessary personalization to guarantee the protection of strategic and sensitive information shared between the parties.

Understanding what the relationship is and in what contexts this clause will eventually be enforced is essential for its effectiveness.

Therefore, we highlight 3 fundamental precautions for creating a robust and effective confidentiality clause to be used in Brazilian contracts.

1. Mapping of Confidential Information: Even before starting commercial negotiations with the service provider, commercial partner, etc. It is essential that there is a careful mapping of what information the company needs to protect. It could be the customer portfolio, information about suppliers or even marketing strategies. Understanding what could impact the business is a key part of drafting the clause.

2. Construction of Specific Clauses: Once the sensitive points that deserve protection are well known, the next step is to define which clauses will be necessary to protect them. Just the confidentiality clause may be sufficient in many contracts, but some deserve special attention, and non-competition and non-enticement clauses can be essential to complement the objective of protecting the business.

3. Establish Sanctions: Unfortunately, simply preventing the sharing of information is not enough to prohibit unfair and unethical conduct. Clearly predicting which sanctions will be applicable, with heavy fines and, eventually, prediction of losses and damages is one of the essential requirements for the successful execution of the clause. Sanctions can even be more comprehensive, even providing for communication to third parties about non-compliance.

Whether in commercial agreements, partnerships or service provision relationships, this clause establishes clear limits on the use and disclosure of confidential data, preventing information leakage and unfair competition. In addition to strengthening legal security, its inclusion demonstrates commitment to transparency and the protection of the interests involved, making it an indispensable practice if well applied, specially considering that Brazilian courts does enforce confidentiality clauses.

Tax | Brazilian Federal Revenue Services (Receita Federal) Clarifies Rules for Taxation of Online Betting and Gaming

The Brazilian Federal Revenue Service (Receita Federal) has released new clarifications on the taxation of income obtained by individuals residing in Brazil from online betting and gaming.

With the significant growth of this market and the popularization of digital betting platforms, tax rules are becoming increasingly relevant for bettors.

The new guidelines establish differences in taxation according to the origin of the prizes, which directly impacts the way taxpayers declare and pay taxes.

1. Prizes from national sources: Income from betting and gaming that involves performance evaluation is considered "remuneration" and is subject to taxation at source based on the progressive monthly table of the Personal Income Tax (IRPF). The amount collected at source is considered an advance payment of the tax due in the Annual Adjustment Declaration (DAA).

2. Prizes from international sources: Income obtained through foreign platforms must be declared and taxed via the Carnê-Le?o tax return in the month in which it is received, with no possibility of deducting expenses or offsetting losses. This income must also be included in the DAA, ensuring tax compliance.

3. Fixed-odds bets ("bets"): For net prizes, after deducting losses in the same year, a 15% tax is applied whenever the amount exceeds the limit of the first band of the annual progressive table. The tax must be paid by the last business day of the month following receipt of the prize, without withholding tax.

The recent COSIT Consultation Solution No. 2/2025 reinforces the trend towards stricter oversight of the betting sector, establishing more detailed rules for each type of income. Despite advances in regulation, there is still room for questions and doubts, especially regarding the complexity of calculating and collecting taxes. Given the evolution of online betting, the adoption of new regulatory and legislative adjustments is expected in the coming years, with the aim of greater legal stability and transparency.

Credit Recovery | 3 Key-Strategies for Creditors to Use in Brazilian Judicial Reorganizations

In 2024, Brazil recorded an increase of approximately 61.8% in requests for judicial reorganization.

This scenario, triggered by a challenging economic environment with high interest rates, increased default, and restrictions on credit granting, requires a proactive stance from creditors to minimize risks and optimize the chances of recovering credits subject to judicial reorganization.

Below, we highlight three key tools that can be used in this context:

1. DIP Financing: DIP Financing emerges as a strategic tool, allowing creditors to provide capital to companies undergoing judicial reorganization, enabling the continuity of their operations. In exchange for this contribution, creditors can negotiate better payment terms and priority in receiving the credit, enjoying a privileged position in relation to other creditors.

However, granting DIP Financing requires a careful analysis of the situation of the company in judicial reorganization, in particular the risks of non-receipt of credit. This thorough analysis is essential to determine whether DIP Financing represents, in fact, an advantageous strategy, capable of maximizing the chances of credit recovery. Despite the risks involved, DIP Financing can be a powerful tool for creditors.

2. Expropriation of Assets and Assignment of Credit: Although the law establishes the protection of assets essential to the business activity of the company in reorganization, it is possible to structure negotiations with the company in judicial reorganization aiming at (i) expropriation of certain assets that are not essential to the production process, such as the isolated sale of production units or equity interests, and (ii) assignment of future credit rights of the company in reorganization. It is important to emphasize that these measures should be carefully analyzed and negotiated between the company in judicial reorganization and its creditors, under the supervision of the Judiciary.

3. Structured Operations: Structured operations, such as the securitization of receivables, offer creditors an innovative alternative to deal with difficult-to-recover credits. Instead of dealing with the complex and time-consuming process of judicial reorganization, the creditor can transform these credits into financial assets tradable in the market.

This strategy offers several advantages for the creditor. In addition to immediate liquidity, securitization allows the transfer of the risk of default to investors, reducing the need to provision losses with difficult-to-recover credits. Additionally, the operation improves the creditor's cash flow, freeing up resources for new credit operations and optimizing its financial balance sheet.

In view of the growing scenario of requests for judicial reorganization in Brazil, the adoption of effective credit recovery strategies becomes crucial for creditors. By implementing approaches strategically and adapted to each case, creditors can increase their chances of success in credit recovery in a challenging economic environment.

Labor |?Labor Force Overtime Hours in Brazil: How Companies May Reduce Labor Liabilities

This week, the Superior Labor Court (TST) released the most recurring topics in rulings throughout 2024.

Among the approximately 513,000 cases analyzed, overtime and intraday break violations topped the ranking, with 70,508 and 48,283 cases, respectively.

The main issues discussed include applicable divisors, suppression or reduction of working hours, calculation bases, residual minutes, and their impact on other salary components. Additionally, there was a 20% increase in the number of cases judged on this subject compared to the previous year, highlighting the impact of these matters on labor relations.

Given this scenario, strategic management of working hours becomes essential to mitigate risks and avoid unnecessary costs. Small errors, such as failures in time tracking or payroll configuration, can result in significant labor liabilities.

To minimize these risks, here are 5 best practices for more efficient management:

1. Bank of hours: In addition to the bank of hours, which can be negotiated with labor unions to compensate for employees' overtime, it is also possible to implement an individual written agreement, provided that compensation occurs within six (6) months (Article 59, §5 of the CLT). This approach helps reduce overtime costs and provides greater flexibility in working hours. However, careful management of time banks and compensation practices is essential to ensure compliance and avoid potential risks.

2. Review of Employees Exempt from Time Tracking: Managers, external workers, and remote employees are exempt from time tracking (Article 62 of the CLT). However, with technological advancements, it is important to reassess the risks of possible reclassification of these positions, especially if the company has means to monitor working hours. Errors in classification can generate hidden liabilities, including potential overtime claims and health-related impacts on workers.

3. Automation and Technological Control: The CLT limits overtime to two hours per day. Automated systems help monitor this limit, prevent violations, and reduce the burden on the HR team.

4. Accuracy in Overtime Calculations: Many labor claims arise from errors in overtime calculations. Implementing a thorough review of payroll settings and practices, with the support of accounting and legal consultancy, can reduce mistakes and ensure legal compliance.

5. Flexible Work Schedules: Flexible hours increase employee engagement and reduce absenteeism. Additionally, this strategy can minimize the need for overtime and, consequently, prevent labor liabilities.

The significant increase in labor lawsuits reinforces the importance of efficient working hours management. Companies that invest in structured policies, control technologies, and best practices not only reduce legal risks but also improve productivity and employee well-being.