Brazil’s Regulation of Foreign Investment in Large-Scale Land Acquisition

By Willi Künzli, Assistant Contributor

In the last decade, Latin America has experienced a rush of local and foreign-controlled companies buying up farmland. This is mainly due to four global crises: environmental, financial, energy and food.  The rush for the control of farmland is not exclusively an activity of the private sector. In fact, there are state controlled players (e.g., sovereign wealth funds), disputing farmland to ensure their respective countries’ food and fuel security.

Furthermore, the global concern related to the availability of food and cultivation areas called international attention to foreign investments in rural land acquisition. International Organizations, such as the United Nations and the World Bank, investigate the topic. Mr. Olivier De Schutter, UN Special Rapporteur on the right to food, provides additional information highlighting the situation:

“According to an estimate from IFPRI, between 15 and 20 million hectares of farmland in developing countries have been subject to transactions or negotiations involving foreign investors since 2006.”

This phenomenon deserves special attention in South America where large extensions of land combined with other region specific factors attract the attention of foreign investors.

A 2008 World Bank report entitled “Rising Global Interest in Farmland,” indicates high levels of technology and human capital, competitive land markets and a supportive investment climate as investor attractive factors in Latin American countries. Because Brazil is Latin America’s biggest economy and plays an important in role in the world commodities market, it is important to bring the attention to the latest developments in its regulation of foreign acquisition of rural land.

Global concerns that awakened international attention to the issue of foreign investment in large-scale land acquisition have also brought the attention of the Brazilian Government to the issue. Brazil took actions during the last five years to tighten control over acquisitions of land while the discussion about the legal framework to adopt is still ongoing.

In 1971 Brazil passed Federal Statute No. 5,709 (“Law 5,709”) which, among other provisions, restricts the extension of rural land that foreign-controlled Brazilian based legal entities are entitled to acquire. Law No. 5.709 established that non-Brazilians may acquire no more than fifty modules for indefinite exploitation (which size varies from 2 to 100 hectares, according to geographical, socioeconomic and ecological characteristics they share as well as the type of rural exploitation that they are best suited), and that a Brazilian legal entity under the control of non-Brazilians is to be considered a foreign legal entity for the purposes of acquiring rural land. Within the permissible land extension limits, additional approvals from regulatory bodies may be required depending on the extension of the relevant piece of land and the activity that will be developed on it. The same restrictions and regulations apply to the lease of rural land.

However, after the adoption of the Brazilian Constitution of 1988, the Brazilian Government, through its Attorney General, interpreted that the different treatment conferred to foreign-controlled Brazilian-based legal entities (as opposed to the treatment conferred to other Brazilian controlled legal entities) was unconstitutional and not enforceable. Brazilian Constitution of 1988 provides that no restriction shall be made between legal entities as to the origin of its capital and equity holders, with a few express exceptions. The vague language adopted in the 1988 Constitution text and the respective exceptions left room for debates and different interpretations in respect of the constitutionality of the restriction imposed on foreign-controlled companies in Law 5,709. The Attorney General’s interpretation in the early 1990s favored unrestricted foreign investment in Brazilian rural-land.

As a result of the above, no restrictions applied to the acquisition of rural land in Brazil if the purchaser was incorporated as a Brazilian legal entity, even if controlled by non-Brazilians. This interpretation was effective until August 2010.

In August 2010, the Brazilian Government decided to review its interpretation of Law 5,709. As of August 2010, Brazil’s Government interpreted that Law 5,709 was in line with the Federal Constitution of 1988 and its restrictions should apply to companies controlled by non-Brazilians. Land acquisitions implemented prior to August 2010 were not affected by this change and would remain valid; however, acquisitions implemented thereafter in violation of the limits that Law 5,709 established would be null and void.

International concerns related to food security, biopiracy, national security, sovereign power, new economic scenarios, land speculation, environmental concerns, among others, motivated the discussions since 2007 as well as the Brazilian Government’s change in interpretation, according to the Government’s Attorney-General.

The change in interpretation was not accompanied by widespread acceptance. Companies looking for authorization for transactions involving transfer of large extensions of land challenged the new interpretation in Brazilian State Courts by. State Courts ruled in favor of the companies and authorized transactions involving transfer between foreign controlled entities above the statutory limit (i.e., applying the former interpretation of the early 90s, as mentioned above). However, Brazilian state court case law serves only as reference in Brazilian jurisprudence and are not considered binding.

Moreover, Brazil’s Congress is debating a new legal framework to regulate foreigner’s acquisition of rural land. One of the main arguments brought in Congress to broaden regulation and provide incentives for foreign investment in land acquisition is that this kind of investment is a normal market phenomenon and has positive effects in reducing production costs. Furthermore, the text assumes that foreign investment increases productivity and creates employment opportunities, development of the affected regions, as well as technology and innovation.

However there is scarce empirical evidence and information available on the local impact of such investments in Brazil. How do these investments benefit local communities? Are these investments able to really economically and socially develop the regions? These questions remain without clear answers.

In sum, environmental, financial, energy and food concerns have triggered a high demand for cultivation areas in Brazil. The Brazilian Government attempted to control foreign investment in land acquisition by taking action and changing the interpretation of its domestic laws. Brazil’s legislative move towards a new regulation governing foreign investment in large-scale land acquisition shall continue to attract international attention.