Legal Framework for Foreign Exchange goes into effect

New regulation simplifies foreign currency transactions and grants the Central Bank more autonomy to regulate the market

By Jefferson Gonçalves

On December 31 of last year, the new Legal Framework for Foreign Exchange entered into force, simplifying foreign currency transactions in Brazil and introducing important rules on how to supply information to the Central Bank about Brazilian capital abroad and foreign capital in the country.

Signed into law at the end of 2021, the statute, along with its regulations, updates Brazilian foreign-exchange policies, bringing them more in line with the standards endorsed by the Organization for Economic Cooperation and Development (OECD).

The new provisions benefit both companies and individuals by reducing operational costs and risks arising from exchange rate fluctuations. In addition, the Central Bank (Bacen) was given more autonomy to issue new regulations. Check out below some of the new developments:

Permission for individuals to trade foreign currencies

Individuals are now allowed to buy and sell foreign currencies up to USD 500, without having to resort to banking institutions or exchange offices. The permission, however, is restricted to cash trading and requires both parties of the transaction to supply their Individual Taxpayer Numbers (CPF) and the issuance of a proof of purchase.

Although the practice has always been commonplace among people returning from abroad, the direct trading of foreign currency was considered a misdemeanor.

Threshold for declaring amounts in cash has been increased

Under the new rules, people travelling abroad are only required to declare amounts in cash exceeding USD 10,000 (roughly BRL 54,000).

Until then, upon entering and leaving Brazil, it was mandatory to declare amounts exceeding BRL 10,000 brought into or taken out of the country.

Foreign currency transactions made easier

The American dollar can now be used as the main currency in international agreements, doing away with the need for prior conversion to Brazilian reais. The new regulation also makes it possible to settle debts incurred by companies in Brazil using foreign currency.

Import-export businesses will be allowed to adopt the American dollar as their currency of choice to pay contract installments, without the need to use local currency. This change will reduce costs for companies, especially when carrying out long-term transactions.

Brazilian Central Bank in charge of regulating the foreign-exchange market

Since the entry into force of the new legal framework in 2023, the Central Bank of Brazil has gained autonomy to regulate the foreign-exchange market in the country. However, the entity had already been making the necessary arrangements in this direction as early as 2022, in a joint effort with the National Monetary Council to hold public consultations to pass new regulations.

Under the previous model, each proposed amendment had to follow the legislative process that ordinary statutes must follow, which requires an approval by the House of Representatives, then by the Federal Senate and finally by the Executive Branch, before a new rule could be signed into law. This rendered the whole process all the more time consuming.

Among the changes introduced by the rules that have recently been passed to regulate and complement the provisions set forth by the legal framework, the following stand out:

1. Abolishment of prescribed formats for foreign-exchange contracts




There is no longer a specific format legally prescribed for formalizing foreign-exchange transactions. It is now up to the financial intermediary to decide what type of document will be used for carrying out such agreements.




2. Ancillary documents not required for signing foreign-exchange agreements




Requesting or dispensing with ancillary documents to carry out foreign-exchange contracts of any nature will be left at the discretion of each intermediary institution, which should do so upon assessing the customer’s score, the characteristics of each transaction and the risks involved.




3. Party responsible for classifying the nature of transactions




Previously, the responsibility of classifying the nature of foreign-exchange transactions fell on banking institutions and brokerage firms, which relied on ancillary documents supplied to them to perform this assessment. With the new rules, this responsibility now rests with the contracting companies.

Banks will continue to provide support and will still have to check all information provided to them, but they will no longer be accountable to the Central Bank.




4. Reduction in the number of transaction classification codes




The new rules reduced the number of purpose codes for transactions.

In the past, there were roughly 15 natures and more than 140 purpose codes. Now, there are only 8 codes in place to indicate the purpose of general transactions of up to USD 50,000. As for foreign-exchange transactions exceeding USD 50,000 and for those subject to foreign capital declaration, there is a longer list in place, which can be found here.




5. Extension of the period for retaining ancillary documents:




The period for safekeeping documents that provide evidence and support for transactions has been extended from 5 to 10 years, so that they can be made readily available to the Central Bank, if needed.




6. Principal and interest on loans received abroad can be paid in other currencies using international accounts:




Companies will be allowed to use foreign currencies to pay principal and interests on loans received abroad through their overseas accounts.

As such, businesses will no longer be required to perform a Registration of Financial Transactions (“Registro de Operações Financeiras” - ROF) or to convert currencies into Brazilian reais before being able to send money abroad.




7. Updated definition of foreign credit




The definition of "foreign credit" has been updated by the Central Bank, as it has now come to include financial undertakings incurred by residents that did not give rise to any effective inflow of funds into the country. The authority also expanded the list of transactions that are subject to being registered, which now include private placements in the domestic market.




8. Relaxation of foreign capital registration




The new rules have simplified the registration of foreign capitals, with a focus on relaxing procedures related to small transactions. As a result, transaction costs are expected to be reduced, as the Central Bank will no longer collect data that is irrelevant for statistical purposes, cutting the red tape on those procedures and attracting investments to the country.

Among the new developments is the replacement of the old model of foreign capital registration with a new model of information provision. This will do away with the need for registering the entry of foreign capital in Brazil in advance, thus dispensing with the Electronic Declaratory Registry (RDE) and the Financial Transactions Registry (ROF).

Regardless of whether there is an inflow of resources into the country or if the resources are held abroad, all relevant information must be supplied by the responsible party in the following situations:




 

Event	Threshold beyond which information must be supplied
Foreign credit	Exceeding USD 1 million
Import financing	Exceeding USD 500 thousand with a payment schedule greater than 180 days
Pre-receipt of exports and foreign financial leasing	Exceeding USD 1 million with a payment schedule greater than 360 days
Foreign direct investment	Flows exceeding USD 100,000
Portfolio investment of non-residents in Brazil	Any amount




Events recorded prior to the rules’ publication date (December 31, 2022) must also be updated according to the table above.




9. Foreign direct investment and unification of statements




The definition of foreign direct investment has been updated to cover situations other than the direct ownership of domestic companies by non-residents. The concept now includes the ownership of economic rights by non-residents, stemming from an agreement or other lawful act, whenever the return on said investment is dependent on the business results.

In addition to updating legal definitions, the new regulations have also unified the census of foreign capital, the quarterly economic-financial statements, and the obligation to inform of the annual changes in the company’s shareholding structure.

The unified obligation, aptly named "Periodic Statement", must be filed every three months, every year or every five years. The schedule for submission depends on the total assets that the recipient of foreign direct investment held on the corresponding base date.

Expert Financial Support

DPC's Financial Management department provides consulting and operational support to clients in transactions involving international capital flows, which include loans and investments in companies of the same business group. You can rely on our support: dpc@dpc.com.br.