Legal Insights From Brazil to Start Your Week

What you will be reading in this issue:

1. Agribusiness?| Legal Structures of CRAs: What Foreign and Brazilian Investors Should Pay Attention To

2. Tax?| Tax Benefit When Updating the Value of Real Estates In Brazil: How to Take Advantage of Reduced Income Tax Rates

3. Credit Recovery?| Creditors May Seize Commodities from Companies in Brazilian Judicial Recovery

Agribusiness | Legal Structures of CRAs: What Foreign and Brazilian Investors Should Pay Attention To

Brazilian Agribusiness Receivables Certificate (know as CRA) offerings are one of the main ways for agribusiness companies and cooperatives to raise funds in Brazil, but they have been in the news headlines in recent weeks due to events of default and judicial recoveries.

In this context, from a legal and credit perspective, are CRAs still attractive securities for foreign and Brazilian retail, qualified and professional investors, who want exposure to the agribusiness sector?

See below 5 essential points about these securities:

1. What is an Agribusiness Receivables Certificate (CRA)? CRAs are fixed income securities from the capital market, backed by receivables originated from agribusiness activities. They can be issued in reais or foreign currency;

2. What Type of Companies Can Raise Funds Via CRAs? Companies whose “main sector of activity” is agribusiness, which includes producers of agricultural commodities, trading companies, cooperatives, industries, among others related to agricultural products, inputs and machinery;

3. How Are CRAs Issued and Who Are the Investors Who Buy CRAs? There are 2 most commonly used methods for issuing CRAs: (i) “corporate” offerings, where the ag company issues a debt security (such as a debenture, Financial CPR) in favor of a securitization company, which will issue CRAs backed by the debt security, or (ii) “dispersed” offerings, where the agricultural company transfers receivables generated in its activity (such as barter, credit) to the securitization company, which will issue CRAs backed by such receivables.

In both cases, CRAs will be acquired by capital market investors, including individuals (who benefit from income tax exemption) and institutional investors;

4. Is there a Minimum Size and Term for CRAs? CRAs are tailored to the size of the borrowing company, the risk of the receivables portfolio, the business cycle, investor interest, and other market conditions. In recent years, there have been transactions ranging from BRL15 million to BRL2 billion, with terms ranging from 3 to 10 years;

5. What Legal and Credit Points Should Structuring Companies and Investors Pay Attention to in CRAs? In both (i) “corporate” CRA offerings (backed by the debtor’s debt instrument) and (ii) “dispersed” CRA offerings (backed by the debtor’s receivables generated from its activity), it is essential that structurers and investors assess whether the transaction will be “clean” or “secured”.

In clean transactions, the legal and credit structure is based on the liquidity of the issuer of the credit instrument (corporate CRA) and the payers of the receivables assigned (dispersed CRA). If there is default in these flows, investors will not be able to enforce collateral, except for the personal guarantees (aval or fian?a) that may have been granted in favor of the CRA. In short, clean transactions are based mainly on the financial soundness of the debtor and payers of receivables.

In secured transactions, the legal and credit structure is based on the liquidity of the payers, and also on the collateral package (e.g. rural land, warehouses, among others), which will contribute to the satisfaction of payment for investors. If there is a default in the payment flow, investors can use the secured assets to pay off the outstanding balance.

In short, CRA offerings remain one of the main ways of raising funds in Brazilian agribusiness, but structurers and investors must pay attention to the legal and credit structure of the offerings when making their decision to invest or not.

Tax | Tax Benefit When Updating the Value of Real Estates In Brazil: How to Take Advantage of Reduced Income Tax Rates

The Brazilian Internal Revenue Service (Receita Federal) has introduced a set of new rules that authorize the update of property values owned by individuals and legal entities.

This measure allows properties to be adjusted according to their current market value, providing, as an incentive, the application of reduced tax rates on the difference between the original acquisition value and the adjusted value.

However, to benefit from these provisions, attention must be paid to certain requirements established in the legislation. Below, we highlight the key points:

1. Rates for Individuals: The income tax rate will be 4% on the difference in the value of properties declared in the DAA (Annual Adjustment Declaration), significantly lower than the normal rates, which range from 15% to 22.5%.

2. Rates for Legal Entities: The update of non-current asset properties in financial statements will be taxed at a rate of 6% for Corporate Income Tax (IRPJ) and 4% for Social Contribution on Net Income (CSLL), instead of the combined rate of 34%.

3. Deadline for Enrollment: Taxpayers have until December 16, 2024, to opt for the update of their property values under the new legislation.

4. Mandatory Declaration: It is necessary to submit the Dabim (Declaration of Option for the Update of Property Assets), which is already available in the e-CAC.

5. Properties Abroad: Properties located abroad can also be updated, including those already adjusted through the Declaration of Option for the Update of Assets and Rights Abroad (Abex). Additionally, properties of controlled entities outside the country and trust assets can be updated, provided that the responsibility for the declaration lies with the individual taxpayer.

Taxpayers should be aware that if the property is sold before 15 years, the capital gain calculation will be adjusted in proportion to the time that has passed since the update. In this scenario, there will be no tax exemption for sales made in the first 36 months. Taxation will be progressively reduced over time, reaching full exemption only after 180 months from the date of update.

Credit Recovery | Creditors May Seize Commodities from Companies in Brazilian Judicial Recovery

In an important decision for agribusiness lenders, the Brazilian Superior Court of Justice (STJ) established that products cultivated by farmers undergoing judicial recovery do not fall under the concept of "essential goods," meaning they can be seized by creditors even during the stay period (the period in which executions are suspended against companies/farmers in judicial recovery).

In this case, farmers in judicial recovery had defaulted on soybean purchase and sale contracts and requested, during the proceedings, that the essential nature of the soy and corn grains produced and in production be recognized, as well as authorization to continue harvesting for the commercialization of these products.

The farmers' requests were initially accepted, recognizing the essentiality of the commodities for the reorganization proceeding, and consequently, the impossibility of seizure and expropriation by creditors outside the judicial recovery process.

Regarding the ruling of the STJ, it is worth highlighting two conclusions:

1.The grains cultivated and sold by the debtors do not constitute essential goods, as they are not used in the production process, and are merely the final product of the business activity carried out by them;

2.There is no legal impediment to such agricultural products being sold or removed from the producers' establishment to pay individual creditors outside the recovery process.

With this precedent, creditors of agribusiness companies in judicial recovery now have another option for satisfying their claims, provided they have active legal executions against the companies in recovery.