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BRAZIL: An Introduction to Brazil

Overview: Brazil
Adriana Simões

Brazil Opens the Doors of its Domestic Aviation Market to Foreign Investment

The Brazilian aviation sector has always been strictly regulated by the relevant authorities, especially with respect to granting permission of foreign investment in Brazilian national airlines and air transportation companies, with restrictions in place since the 1960s, when Decree Law No. 32/1966 (the “Brazilian Air Code”) was sanctioned.

Along the same lines as the previous Brazilian Air Code, Federal Law No. 7,565/1986, known as the Brazilian Aeronautics Code (“BAC”), provided that the concession or authorisation for operation of air services should be granted solely to legal entities registered in Brazil with at least four-fifths (4/5) of their share capital with voting rights held under the ownership of Brazilian citizens.

On December 13, 2018, the Provisional Measure No. 863 (“PM No. 863/2018”) was issued to amend the BAC and modify the conditions for granting concessions for scheduled air transportation services and the authorisation for on-demand air transportation and specialised services. As amended by PM No. 863/2018 – which was later converted into Federal Law No. 13,842, enacted on June 17, 2019 – the BAC now allows unlimited foreign investment in Brazilian air companies, such as airlines and air taxis, provided that they are incorporated under Brazilian law, with head offices and management located in Brazil.

The opening of the market for unlimited foreign investment is key to increasing competition within the air transportation sector in Brazil. It is expected that this recent open air transportation market policy should contribute to the continuing development of the industry, as it creates opportunities for the entry of new sources of investment in the country and motivates foreign players who currently have reduced equity stake in Brazilian airlines – limited by the previous legal framework – to double down on their investments.

Evidence thereof was rapidly seen when the Brazilian National Civil Aviation Agency (“ANAC”) granted the concession for the first airline (Globalia Linhas Aéreas) whose share capital comprises entirely foreign capital. Furthermore, ANAC has indicated that it is discussing with other interested investors, which supports the significance of the changes brought by Law No. 13,842/2019.

The market trends that followed PM No. 863/2018 are indicative of a new paradigm for airline corporate organisational structures. Previously, foreign investors needed to preserve Brazilian controlling interest, which gave rise to complex corporate structures to comply with the former rules. Now, corporate structures can be simplified, thus eliminating perceptions of regulatory risks that might still discourage foreign investors.

Additional changes were brought about to improve the flexibility of Brazilian air regulations, such as (i) the elimination of the requirement for commercial airlines and related companies to submit their articles of association/incorporation for mandatory approval by ANAC, brought by Law No. 13,842/2019 and (ii) modifications to the scope of air services to provide a more favourable regulatory framework that enables new commercial arrangements, as per the ANAC Resolution No. 526/2019 “air services remodelling” process.

• Taxes 

The aviation industry in Brazil is subject to a high tax burden, which may impact the possibility of initiatives and investments for the development of the air sector in reaching their full potential. One of the most sensitive aspects related to the development of Brazilian civil aviation is the pricing of kerosene jet fuel (aviation turbine fuel, “ATF”), as it may represent up to forty percent of the costs incurred in the operation of an aircraft. The challenges linked to its pricing involve not only the current market concentration for distribution of ATF, but also the high tax burden on its acquisition.

Given the relevance of this issue, in 2019 state tax authorities across Brazil identified initiatives to review the current tax burden on the Brazilian Goods and Services Tax (“ICMS”) levied on the acquisition of ATF, which may vary significantly from state to state and may even reach the level of twenty-five percent depending on the state where the aircraft refuels. In general, the initiatives are proposals to reduce the ICMS tax rate on such transactions, conditional upon the fulfilment of certain obligations attributed to the taxpayers.

In the State of São Paulo, for instance, a programme has been proposed to apply a reduced twelve percent rate – from an original of twenty-five percent – to airlines that comply with the relevant requirements. Similar initiatives exist to reduce ICMS tax rates in other states throughout Brazil, with minimum rates of five percent to ten percent depending on the region in which the ATF acquisition transactions are carried out.

• Infrastructure 

Following an initiative that started in 2011 and based on the guidelines established by the Brazilian National Privatisation Council (“CND”), the federal government included airports in the Brazilian National Privatisation Programme (“PND”) to improve airport services. Consequently, the administration, expansion, maintenance and operation of the airport infrastructure included in the PND started being carried out through concessions to the private initiative, easing the burden on the Brazilian Airport Infrastructure Company (“INFRAERO”) in operating the airports granted to the private sector. As such, ANAC became responsible for the implementation and monitoring of these privatisation processes.

The good results of the first round of concessions (at Brasília, Guarulhos and Viracopos airports) led the federal government to auction twenty-two more airports, through different rounds of concessions between 2011 and 2019, with the highest bid being the criteria used for the designation of the winning concessionaires. The terms of such concessions vary between twenty and thirty years, with the possibility of extension for subsequent five-year time periods.

Organised in regional blocks for the first time (Centre West, Southeast and Northeast), the fifth round of airport concessions – which took place in 2019 – included twelve airports. Two more rounds are expected to occur within the next few years to auction all airports currently under the control of INFRAERO, including Congonhas (São Paulo) and Santos Dumont (Rio de Janeiro) airports.

• Cape Town Convention 

In 2012, Brazil ratified the Cape Town Convention on International Interests in Mobile Equipment (“CTC”) and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment (the “Aircraft Protocol”). Specifically, Brazil has made a declaration as a contracting state to apply Article XI, Alternative A, of the Aircraft Protocol, which grants it the power to determine a fixed waiting period during which aircraft lessors and other creditors may not seek to repossess their aircraft objects (i.e., airframes, engines and helicopters).

Article XI of the Aircraft Protocol states that the debtor shall return possession of the aircraft object to the creditor no later than the earlier of (i) the end of the waiting period, i.e. thirty calendar days, as specified by Brazil in its declaration as a contracting state; or (ii) the date on which the creditor would be entitled to possession of the aircraft object had Article XI not been applicable. In the second case, as a rule, this means any provisions under local law or the contractually stipulated date.

In this regard, Article 199 of the Brazilian Bankruptcy Law (Law No. 11,101/2005) states that the rights of lessors under aircraft lease agreements are not subject to suspension under any circumstances. Consequently, the rule in effect prior to the adoption of the CTC by Brazil was that bankruptcy cases did not stay the rights of lessors.

In 2018, one of Brazil’s largest airlines filed for in-court corporate reorganisation proceedings. Briefly after the motion for reorganisation was filed, the court granted an injunction to prevent ANAC from suspending the airline's permissions to operate and determining the stay of repossession claims filed by lessors. However, after a subsequent motion filed by a lessor, the bankruptcy court partially modified the decision limiting the suspension to thirty days, subsequently adhering to the waiting period adopted by Brazil. This period was later extended by court orders, violating the CTC.

After several appeals filed by lessors, the final decision on the subject was that of the São Paulo State Court of Appeals, which determined that the lessors were granted repossession of the leased aircraft/engines. Although the thirty-day period had already expired, the São Paulo State Court embraced the legislative and political position of Brazil, duly authorising lessors to repossess the aircraft/engines.

This decision could arguably strengthen the application of the CTC in Brazil in the future. In addition, Ordinance No. 527 was enacted by the Brazilian Ministry of Infrastructure on August 5, 2019, ratifying that air services operations must be performed under the terms of international conventions, treaties, and agreements to which Brazil is a party, expressly including the CTC. This is an important precedent that honours legal certainty and predictability of aircraft financing operations, strengthening Brazil's international commitments.

• Conclusion 

In recent years, Brazil’s interest in fostering the expansion and consolidation of the national aviation sector is growing, with infrastructure investments, flexibilisation and revision of standards and regulations to create more favourable environments for business development. Together with the overall growth of the industry, the Brazilian aviation industry shows signs of an even more promising upward trend in the (near) future.

About the Author: 

Adriana Simões - Adriana specialises in aviation law, focusing on contractual and regulatory matters. She has solid experience in commercial contracts, tax and corporate law, concerning aviation and substantial knowledge in the rules issued by the National Civil Aviation Agency (ANAC). Her experience includes drafting purchase and sale agreements for aircraft and aircraft equipment, aircraft financing and leasing in the commercial and business aviation sectors. She is a member of the Aviation Working Group (AWG) and of the Aviation Law Committee of the International Bar Association (IBA), as well as the Brazilian Bar Association Aeronautical Law Commission, São Paulo Section (OAB/SP) and of the Brazilian General Aviation Association (ABAG).