Legal Insights From Brazil to Start Your Week

What you will be reading in this issue:

1. Private Credit?| 3 Actions to Reduce Reputational Risks for Securitization Firms and Fund Managers in Brazilian Capital Market Debt Offerings

2. Corporate?| Strategies to Avoid Conflict in Shareholder Departure from Startups or Consolidated Companies

3. Tax?| Brazilian Tax Reform: 3 Impacts That Technology Companies Doing Business in Brazil Should Pay Attention To

4. Credit Recovery?| Piercing the Corporate Veil as a Strategy for Debt Recovery: What Creditors Should Bear in Mind

5. Labor?| Labor Decisions in Brazil in Retrospect: 5 Topics for Companies to Understand 2024 and Prepare for 2025

Private Credit | 3 Actions to Reduce Reputational Risks for Securitization Firms and Fund Managers in Brazilian Capital Market Debt Offerings

With the growing volume of offerings of Brazilian Real Estate Receivables Certificates (CRI) and Agribusiness Receivables Certificates (CRA), securitization firm, structurers and fiduciary agents must take care of the reputational risks associated with the transactions.

Reputational risks are events that can negatively impact an organization's credibility in the eyes of the market, its employees and regulators, generating financial and brand liabilities.

In Brazilian capital market offerings, because they involve both the perception of trust and transparency, as well as more complex legal structures, multiple parties and high values, this type of risk is more evident and harmful if it materializes.

See below 3 actions in Brazilian capital markets debt offerings to mitigate reputational risks:

1. Perform Legal Due Diligence on the Debtor, Guarantors, Credit Rights and Guarantees: In debt offerings (such as CRI and CRA), it is essential to perform Legal Due Diligence on the debtor company, guarantors, the underlying credit rights and accessory guarantees.

With regard to reputational risks, the objective is to identify, in addition to the common aspects of legal due diligence, materialized and hidden, direct or indirect liabilities, inconsistencies in information and documentation, potential fraud, among other negative events which may significantly impact the feasibility of the offering.

2. Clearly Identify Relevant Risks in the “Risk Factors” Section of the Documentation: As determined by the Brazilian Securities and Exchange Commission (CVM) regulations, investors in capital markets debt offerings must be informed of the risks associated with the offering, which are generally described in the “Risk Factors” section of the Securitization Agreement and in the offering prospectus (for offerings to retail investors).

In this section, all risks identified in the legal due diligence and other audits performed must be described so that the investor, when making the decision to subscribe to the offering or not, has the information and a clear notion of the risk identified (e.g. tax liability that may materialize in the future, criminal investigation, etc.). The greater the transparency and detail provided to the investor and regulator regarding the identified risk, the greater the reputational protection of securitization firms, structurers, fiduciary agents and other transaction providers.

3. Perform Regular Post-Closing Monitoring (Surveillance): Another fundamental point is regular post-closing surveillance of the transaction. CRI and CRA offerings generally contain financial and non-financial covenants, liabilities with a risk of materialization during the offering term, among other points of attention, which need to be monitored regularly.

Once materialized, such events must be communicated to investors in the form of the Securitization Term. The lack of surveillance can generate significant reputational risk for securitization firms, structurers, fiduciary agents and other providers.

In this context, reputational risks linked to Brazilian capital markets debt offerings (such as CRI and CRA) can negatively impact the credibility of organizations. Having measures to mitigate or neutralize them is essential.

Corporate | Strategies to Avoid Conflict in Shareholder Departure from Startups or Consolidated Companies

The departure of a partner – spontaneously or by withdrawal – always brings insecurities to a company.

The most important thing about this movement is not to harm the company, making an exit that does not impact the business, and that also does not generate future discussions between the remaining partners and the one who left.

Although a dispute seems inevitable, there are objective ways to resolve the issue, allowing the departure of a partner to be a safe move. Two relevant issues must be addressed: the amount to be paid for the equity interest and the receipt, or not, of future profits.

There are 2 main ways to remove this insecurity in Brazil, using the relevant corporate instruments to set clear exit rules:

1. Articles of Association/Bylaws: as it is the document that brings the basic rules of the company, it may contain specific clauses on the departure of a partner and payment of assets, establishing calculation criteria for calculating the values of the equity interest, such as: historical value of the quotas, calculation of net equity, or through valuation. Here it is still possible to establish the form of payment to the withdrawing partner: in cash, in installments, or even by the delivery of the company's assets (tangible or intangible).

2. Partners/Shareholders' Agreement: in addition to the articles of association, the Agreement may provide for specific points for the exit, such as (i) details in the form of pricing of quotas in cases where the calculation will be made by valuation, especially in those in which multiple or specific discounts will be applied; (ii) the role of each partner within the company and the possibility of different forms of remuneration for the payment of future profits, depending on the position of this partner at the company.

It is essential that these documents contain clear and non-abusive rules, considering that Brazilian Courts understanding of the matter is that was established between the partners must be maintained, with no room for discussions on sensitive topics such as these and of high complexity.

In case these rules are not clear, the most recent understanding of the Brazilian Courts is that (i) for the payment of shareholding, the criterion must be expressly provided for in the articles of association, under penalty that, in case of omission, the amounts will be raised exclusively based on the equity value of the company, which may directly impact the business; (ii) in the case of future profits, these may only be included in the calculation basis of the dissident partner when expressly provided for.

Tax |?Brazilian Tax Reform: 3 Impacts That Technology Companies Doing Business in Brazil Should Pay Attention To

The approval of the Tax Reform in the National Congress signals profound changes in the Brazilian tax system, with direct impacts on the technology sector that provides services.

Software companies, startups and digital businesses need to prepare for a new scenario that will require strategic and operational adjustments.

Check out the 3 main impacts:

1. Increased Tax Burden: The unification of current taxes (PIS, Cofins and ISS) into the Tax on Goods and Services (IBS) and the Contribution on Goods and Services (CBS) represents a significant change. Today, the tax burden varies between 5.65% and 8.65% on revenue, but with the reform, taxation will now be levied on the added value, that is, revenue minus permitted costs and expenses, with estimated rates between 26% and 28%.

One of the major challenges for the technology sector is that relevant costs, such as payroll, will not be deducted when calculating tax credits. This could increase the effective tax burden for companies that offer digital services, such as SaaS (Software as a Service) and streaming platforms, resulting in higher operating costs and, possibly, in the passing on of prices to consumers.

2. Adaptation to Taxation at the Destination: Currently, taxation occurs, for the most part, at the place of origin, that is, in the municipality where the service is provided. With the reform, the rule will be changed so that the tax is collected at the destination, that is, in the municipality where the end consumer is located.

This change will require companies to adapt their systems to accurately track the place of consumption, generating the need for investments in technology and processes to report detailed tax information. The new rule increases the complexity of compliance and will bring significant operational challenges.

3. Full Non-Cumulativity: Currently, taxes are calculated by applying the rates directly to the companies' gross revenue. With the reform, the calculation will now consider the added value, that is, the revenue minus tax credits on the permitted operating costs. To achieve this, it will be essential to parameterize tax systems that can correctly identify and calculate these credits at each stage of the operation.

This change will require much more detailed control of incoming and outgoing transactions, including strict monitoring of invoices and expenses. In addition, it will be necessary to implement systems to guarantee compliance with the new rules and ensure the correct calculation of taxes, avoiding inconsistencies and penalties.

Despite the promise of simplification of the new tax system, the transition, scheduled for 2026, will bring significant challenges. Technology companies must start preparing now to minimize the impacts of this change and ensure their competitiveness in a more complex and dynamic tax scenario. Early adaptation will be essential for companies to adjust to the new requirements and take advantage of opportunities in a constantly evolving regulatory environment.

Credit Recovery | Piercing the Corporate Veil as a Strategy for Debt Recovery: What Creditors Should Bear in Mind

The piercing of the corporate veil is an important legal mechanism aimed at credit recovery and combating fraud.

It allows for the disregard of the separation between the assets of a company and those of its shareholders or managers, directly holding the individuals accountable for the obligations of the legal entity — or vice versa — in cases of abuse or improper manipulation of this separation.

This measure is primarily applied in cases of asset commingling, misuse of purpose, or fraud, where it is evident that the company was improperly used to harm creditors or conceal assets. The objective is to ensure obligations are fulfilled, protecting good faith and justice in commercial relations.

In Brazil, the piercing of the corporate veil can occur in 4 main forms:

1. Direct Piercing: The most traditional form, provided for in Article 50 of the Brazilian Civil Code, occurs when the assets of shareholders or managers are targeted to satisfy the company’s debts. This type is applied in cases of abuse of the corporate entity, characterized by misuse of purpose or asset commingling.

2. Reverse Piercing: In this modality, the opposite occurs: the company’s assets are targeted to satisfy the personal obligations of its shareholders. This is typically applied when there are indications that a shareholder transferred their assets to the company to evade financial responsibilities.

3. Indirect Piercing: In this case, the piercing targets affiliated, controlling, or subsidiary companies when it is evident that one company is being used as a tool for fraud or abuse by another company within the same economic group. The aim is to prevent these corporate relationships from being exploited to evade obligations.

4. Expansive Piercing: Expansive piercing occurs when the assets of third parties not formally linked to the corporate structure — such as hidden shareholders or "straw men" — are targeted. This modality seeks to prevent individuals from hiding behind intermediaries to avoid their responsibilities.

Each of these modalities addresses specific scenarios but shares a common goal: ensuring that abuse and fraud do not go unpunished and that creditors’ claims are met. Applied as an exceptional measure, it requires clear evidence of misuse of purpose, asset commingling, or fraud, emphasizing the importance of a well-structured legal strategy to achieve success in credit recovery actions.

Labor | Labor Decisions in Brazil in Retrospect: 5 Topics for Companies to Understand 2024 and Prepare for 2025

In 2024, decisions focused on issues that seek to balance labor relations, promoting legal certainty, protecting labor rights, and aligning national laws with international standards.

There is an effort on the part of the Judiciary and Legislature to adapt the rules to new social, technological, and economic demands, covering the following aspects:

1. Legal Security: Decisions such as the validation of the intermittent contract, the constitutionality of the Negative Certificate of Labor Debts (CNDT), and the modulation of effects in the Truck Drivers Law brought greater predictability and stability to companies and avoided billion-dollar retroactive liabilities.

2. Modernization and Adjustments to the Current Reality: Cases such as the recognition of the right to maternity leave for mothers in same-sex unions and discussions on protection against the impacts of automation indicate the adaptation of labor standards to social and technological changes.

3. Alignment with International Standards: The ratification of 82 ILO conventions demonstrates Brazil's commitment to adhering to global standards for decent work. These conventions play a crucial role in guiding public policies and, consequently, influence internal company policies as well as union negotiations.

This includes improvements in working conditions, facility upgrades, and employee training. Compliance with international standards can enhance an employer's market image, attracting conscious consumers, ethical investors, and global business partners.

4. Innovation in Benefits: In 2024, the first company in Brazil implemented menstrual leave as a workplace benefit, a topic also addressed in Bill No. 1,249/22 for application in the public sector. This initiative reflects a pioneering practice aimed at employee well-being, with a positive impact on the corporate environment. Moreover, it is a right recognized in several countries, aligning with international standards for promoting a healthy, inclusive, and equitable work environment.

5. Reconciling Rights and Economic Sustainability: Decisions such as the imposition of social security contributions on employment benefits and the union representation of micro and small businesses highlight concerns about fiscal matters and business realities.

Engaging specialized consulting services can be the key differentiator in interpreting the implications of these regulations, implementing necessary adjustments, and even identifying growth opportunities in an ever-evolving landscape. The end of the year is an opportune time to review processes, invest in training, and ensure that your organization stays ahead of the changes shaping the labor market.

Keeping track of the jurisprudential interpretations of higher courts allows for not only adaptation to regulatory changes but also the identification of trends for 2025. This ensures greater competitiveness, strengthens reputation, and aligns with modern and ethical practices in the labor market.