Buying Property in Brazil - Chapter 12 from Legal Guide for Foreign Investors in Brazil
Source - http://www.braziltradenet.gov.br/cdinvestimento/?Idioma=I

Acquisition of Real Estate in Brazil

12.1. Introduction
Under Brazilian law, issues relating to property are subject to the law of the country where such property is located (lex rei sitae). Essentially, issues relating to real estate property in Brazil are governed by the Brazilian Civil Code (CCB).

The Brazilian Civil Code classifies assets by physical criteria, whereby they can be divided into two broad categories: movable assets and immovable assets. Movable assets are those that can be removed by external forces or by themselves, without causing their own destruction or devaluation. Immovable assets (land and buildings) are, by nature, immobile or fixed to the soil, and cannot be partially or totally removed without causing their own destruction or devaluation, i.e., without substantially altering or destroying them. Immovable property encompasses land, and anything that has been
naturally or artificially incorporated thereto.

Brazilian law further confers certain rights with the status of immovable assets for legal purposes. This is the case with deeds to immovable property, government stock incorporating an inalienability clause, and inheritance right to property though succession, even when inheritance is comprised only of movable assets. As a general rule, the owner of land also owns the subsoil. Therefore, a landowner may excavate to a reasonable depth for construction of basements or subterranean garages. The landowner cannot, however, prevent third parties from engaging in activities at depths that do not put his property at risk, provided that such activities are carried out in the public interest (e.g., excavation of subway lines, passages for conduits, etc.)

Land ownership rights, according to the Brazilian Civil Code do not encompass mineral deposits, mines and mineral resources, potential hydroelectric power sources, archeological sites, or other assets referred to in specific legislation. It thus makes a clear distinction between land ownership and rights to such elements of the subsoil as mineral and hydroelectric resources, which are considered Federal Government property. Thus, federal authorization or a license is required for exploitation of mineral and hydroelectric resources.

Air space is subject to similar rules. A landowner may build vertically on his land, provided he observes limitations foreseen in law (e.g., zoning rules). He may refuse construction by third parties on his land, or block the building of structures that may place him in jeopardy. He may not, however, interfere with activities taking place above a certain height, and that pose no risk (aircraft routes, installation of power lines at a safe height, etc.).

Foreign individuals or foreign-owned companies may acquire real estate in Brazil under the same conditions as Brazilian individuals or companies. However, according to Internal Revenue Service Order (IN) 200, non-resident individuals or organizations must be registered with the General Register of Corporate or Individual Taxpayers (CNPJ or CPF) prior to purchasing any real estate in Brazil. Furthermore, special conditions apply to ownership by foreign individuals or companies of property located in coastal or frontier zones, and in certain specifically designated national security areas.

Conditions relating to the purchase of rural land by foreign individuals or foreign owned companies are discussed in greater detail in item 12.3.3. Moreover, foreign individuals or foreign-owned companies may acquire rights in rem relating to immovable property.

12.2. Possession and Ownership

The two most significant concepts relating to real estate are the right of possession and the right of ownership:

Right of Possession
The right of possession stems from use of the land by an agent as if he were its owner. When said agent acting on his own behalf behaves as if he were the owner, he becomes assumes the right of possession. Possession thus implies the right to exercise certain powers typical of ownership, such as: the right to claim, maintain, or recover the possession of property, the right to its fruits (including rents and other incomes therefrom), the right to be compensated for necessary improvements effected, and the right to retain possession.

Possession ceases when, by voluntary or involuntary means, power is no longer exercised over the asset. This may occur when the property is forfeited by abandonment, by transference, by loss or destruction; if it becomes ineligible for purchase or sale, if possession is lost to third party, in the event of failure to maintain a claim or reinstate possession, or when the party legitimately in possession transfers his right to another, maintaining the asset in his power in the name of the acquirer (constituto possessorio).

Right of Ownership

The most relevant of all property rights, rights of ownership are defined by the Civil Code as the right of an individual to use, enjoy, and dispose of his goods, and to recover them from whoever may unlawfully have taken possession of them. It is an absolute and exclusive right.

Full right of ownership implies that all the legal powers (to use, enjoy, dispose of the asset and to recover it from whoever unlawfully possesses it) are concentrated in the same hands. Limited right of ownership implies that some such powers are in the hands of, and may be exercised by, another person. It should be noted, however, that in cases of joint ownership, or condominium, in principle, full ownership rights, rather than limited ownership, applies. Under a condominium, each co-owner has rights to an undivided fraction of the asset. As a rule, powers deriving from the ownership can be exercised simultaneously by all co-owners. Ownership rights may be restricted in the public interest, or in respect for the property rights of third parties, in the following situations:
- expropriation of real estate properties by the government (ownership of private property is transferred to the expropriating authority upon payment of fair compensation);
- restrictions on urban land use or zoning, including building codes, limitations on the location of industrial plants, established by a municipality master plan;
- restrictions imposed in the interests of national security, including limitations on the sale of private land in coast areas or within 150 kilometers of national borders
- the restrictions to the right of the proprietor to freely dispose of his goods, arising from insolvency, bankruptcy, or composition with creditors, with a view to protecting creditor’s rights.

12.3. Acquisition and Loss of Ownership

12.3.1. General Provisions
Under Brazilian law, ownership of real estate property is constituted upon the registration of the public or private instrument (deed) whereby the sale was accomplished at a Real Estate Registry in the jurisdiction where the property is located.

Any instrument involving real estate property that has not been duly registered at the respective Real Estate Registry is only binding only between the parties to the purchase/sale agreement and, thus, is not be enforceable against third parties.

Real estate property is acquired upon registration of the deed of transfer, which may be: (i) by the sale agreement signed by the parties; (ii) by accession (i.e., expansion of a property as a consequence); (iii) squatters rights (i.e., acquisition of ownership rights by occupation and possession over a certain period of time, in law); and (iv) by inheritance.

One of the principles that govern the real estate registration system the principle of priority, whereby the person who first registers a real estate property or presents deeds for registration has priority.

Any action which modifies, extinguishes, transmits or creates rights relating immovable properties must be registered with the competent Real Estate Registry. These include: (i) court decisions enabling undivided land to be divided among various owners; (ii) court orders winding-up the estate of a deceased person or division of property for composition with creditors; (iii) public auctions or adjudications; and (iv) rulings on separation, divorce, and annulment of marriage, when settlement rights in rem to immovable properties is involved. The main grounds for extinguishing real estate ownership rights are:
- expropriation, i.e., a unilateral act of public law whereby individual ownership is transferred to a government authority, upon prior payment of fair and compensation, in the public interest;
- transfer, meaning transmission to a third party, by a transaction inter vivos or as a legacy, for a payment or gratis;
- waiver (in the case of an heir renounces his inheritance rights); and
- neglect or destruction of the property.

12.3.2. General Considerations and Requirements Upon Purchase

Acquisition by inter vivos transaction of real estate property in Brazil entails a formal sales agreement between the purchaser and the seller.

If said property is acquired by an individual purchaser (as apposed to a condominium) then he/she has absolute title thereto. In the cases of multiple ownership (i.e., a condominium), each owner can exercise any rights of ownership not compromised by the indivisibility of the property (i.e., one party to the condominium can not sell the property without consent of all the other owners, and any revenues from sale of the property must be divided among them).

Prior to promulgation of the New Brazilian Civil Code, Law 4.591/64 provided for condominiums of apartments and/or offices, being an autonomous and independent unit of property, on a single piece of land. In this case, the indivisibility mentioned in the previous paragraph does not apply. Significant changes to Law 4.591/64 were introduced by the New Civil Code, including the introduction of fines on co-owners who fail to comply with their duties (i.e., paying condominium fees, not effecting construction work that might jeopardize the safety of the property, not to use the property in a manner that disturbs the peace, etc.)

Aside from specific requirements relating to the transfer of immovable property, Brazilian law requires for all types of contract, that parties to a sale agreement be capable of fulfilling the transaction. They must be of full legal age, in sound mental health, or duly represented.

12.3.3. Acquisition of Rural Land by Foreigners

Under Brazilian law, rural property ranges from rustic buildings to continuous areas, regardless of location, devoted to farming, agro-industry, or stock raising, whether in the hands of the private sector or under public land tenure policies. Acquisition of rural property by foreigners who have permanent residence in Brazil or by foreign companies authorized to operate in Brazil is regulated by Law 5.709/71.

This law stipulates that foreign individuals with residence in Brazil cannot acquire more than the equivalent of 50 units of rural land known as “módulos rurais”. The size of the “módulo rural” varies, according to the economic and environmental characteristics of the region in which the property is located, and the type of agricultural activity to be carried out.

Foreign individuals whose permanent residence is outside Brazil cannot acquire rural land in Brazil, except if acquisition is due to inheritance rights. On the other hand, restrictions to the acquisition of rural land by Brazilian companies under foreign equity control are now being challenged, since a 1995 Constitutional

Amendment eliminated the distinction between Brazilian companies and Brazilian companies under foreign equity control. However, restrictions on foreign individuals and foreign corporate entities authorized to operate in Brazil remain in force.

According to Law 5.709/71 foreign companies can only acquire rural land for the purposes of farming, cattle-raising, and industrial or settlement projects, and such projects must be specified in the company’s by-laws. Such projects must be approved by either the Brazilian Agriculture Ministry or the Department of Trade and Industry, as the case may be.

The President of Brazil may, by specific decree, authorize the acquisition of rural land beyond the provisions of the current law, in cases in which such property contributes toward priority projects under national development plans.

12.4. Taxation

Property Transfer Tax (Imposto sobre a Transmissão de Bens Imóveis – ITBI) is a tax assessed by municipalities, payable when real estate property or rights in rem to any real estate property (except those in guarantee) are transferred, or upon assignment of rights to acquisition of property, for any reason whatsoever, and in exchange for payment. For example, the rate assessed by the Municipality of São Paulo, under São Paulo Municipal Law 11.154, varies between 2% and 6%, depending on the value of the property.

ITBI is not assessed when the transfer of real estate property or of rights to any such property is used pay up capital of a company, results from any merger, consolidation, spin-off, or liquidation of the corporate entity, except when the purchasing company’s main activity is the buying and selling of such assets and rights.

12.5. Real Estate Investment Funds

Real Estate Investment Funds were established to provide funding for real estate development ventures, for subsequent sale, letting, or leasing. The Brazilian Securities and Exchange Commission (CVM) is responsible for authorizing, regulating and inspecting Real Estate Investment Fund operations and management.

Real Estate investment funds are currently engaged in raising funds for construction of shopping centers throughout Brazil. Previously, Pension Funds were the major investors in real estate projects, but currently they are investing indirectly, through the purchase of shares in real estate investment funds. Foreign individuals and corporations may acquire shares in such undertakings. Provided the foreign investment is duly registered with the Central Bank, remittance of gains and profits from the respective investment can be sent abroad. Capital gains resulting from such investments are subject to income tax (IR) at a rate of up to 20%, assessed upon disposal or withdrawing of Real Estate Investment Fund quotas.