The aim of this section is to answer three main questions on the impact these new regula- tions have had, and continue to have, on foreign investors. First, to what extent are foreigners affected in their ability to acquire land in Brazil and Argentina? Second, is this regulation
162. Sebastian Premici, ‘Para Saber a Quién Pertenecen los Campos’ Pagina 12 (24 July 2013), <http://www.
pagina12.com.ar/diario/economia/2-225151-2013-07-24.html>.
163. Law 26.737(n 136) art 17°.
164. ibid art 18° (temporary clause).
165. ibid art 7°.
166. Decree 274/2012 (n 139) art 14°.
167. Pagina 12 (n 144).
solving the “problems” that were presumably caused by foreigners? And finally, how can for- eign investors circumvent these rules? Overall, the impact of these regulations on foreigners’
activities in these two countries may be moderated by the fact that two other methods to gain access to land remain: on the one hand, they can lease the land, on the other, it is perfectly pos- sible to get “access” to land using contract farming.168
1. IMPACT OF THe NeW RegULATORY FRAMeWORK ON FOReIgN PURCHASeS OF RURAL LAND
The new rule issued by the AGU and approved by the president of Brazil has provoked a lot of uncertainty about the purchase of land by non-Brazilians.169 Most commentators were expecting land prices to plummet because of decreased demand, due to a high number of for- eign investors being affected by the consequences of the legal opinion. Unexpectedly, accord- ing to a farmer’s newspaper, the exact opposite occurred: “that didn’t happen as local farmers, buoyed by record commodity prices and bumper crops, stepped into the breach buying land and forcing prices higher.”170 Indeed, Brazilian farmers are taking advantage of this “window of opportunity”171 and are frenetically buying up plots of land. Furthermore, prices are likely to skyrocket once foreigners know exactly what they are authorized to buy under the new conditions. As the limitations of Argentina’s law are very similar to those of the Brazilian regulation, one could have expected the same consequences. However, Argentine’s rural land prices reportedly shrank due to the large quantity of land available on the market caused by the
“absence” of foreigners following the enactment of the law.172
In Brazil, the new regulations did apparently slow down acquisitions by foreigners but this was probably more due to the legal uncertainties that they created with regard to foreigners’
possibilities than to the application of the regulations. Though it is early to find good data on this question, one newspaper did mention, on May 2011, that: “[A] t least 15 billion US dollars of foreign investment in Brazilian land has been halted since reinterpretation of real estate laws, according to two local agricultural analyst groups.”173 A document from the Agriculture, Cattle-ranching, Food and Sustainable Development Commission of the Brazilian Chamber of Deputies indicates that the two main sectors affected by this regulation were the agroforestry and the sugar-alcohol industries. The same document contends that the decrease in the size of investments in these sectors has generated important tax revenue losses.174 These observations
168. UNCTAD (n 31): Contract farming ‘[…] can be defined as non-equity contractual arrangements entered into by farmers with Transnational Corporation (TNC) affiliates (or agents on behalf of TNCs) whereby the former agree to deliver to the latter a quantity of farm outputs at an agreed price, quality standard, delivery date and other specifications.’
169. Riveras and Simaeo (n 90).
170. Stewart (n 90).
171. ibid.
172. Patricio Eleisegui, ‘Fin de Una Época Dorada: Se Extinguen Pooles de Siembra y Ahora Sobra Tierra en Argentina,’ iProfessional (Buenos Aires, 16 March 2013), <http://www.iprofesional.com/notas/169531-El- fin-de-una-poca-dorada-se-extinguen-los-pooles-de-siembra-y-ahora-sobra-tierra-en-la-Argentina>.
173. ‘Brazil considering leasing farm land to foreigners to circumvent sales restrictions’ (n 46).
174. Marcos Montes, Subcomissão destinada a, no prazo de 180 dias, analisar, e propor medidas sobre o processo de aquisiỗóo de ỏreas rurais e suas utilizaỗừes, no Brasil, por pessoas fớsicas e jurớdicas estrangeiras
show that something has to be done to address the current situation and explain that one goal of the new Brazilian government under Dilma Rousseff is to pass a new law regulating foreign farmland investments in a more efficient way. The government wants to attract capital and expertise in agriculture while still fending off speculators and foreign states, the idea being to foster land leasing rather than land purchases.
The recent change in the regulatory framework, albeit binding over all administra- tive bodies, only has consequences for the legal regime for transactions carried out by foreign-controlled Brazilian corporations. The opinion will have no effect on transactions that were closed before its publication. Nonetheless, current transactions may be affected by the 1971 law depending on how far they are towards completion (the date of reference is 23 August 2010, the date on which the opinion was issued).175 In the last 15 years, operating through Brazilian corporations offered foreign investors the opportunity to acquire large tracts of land in Brazil without having to worry about most of the legal restrictions contained in the 1971 law. Today, provided that they get the approval from the relevant administrative body, which is the INCRA or in extreme cases, the National Congress, foreigners operating this way can still acquire as much land as they could in the past. However, they must comply with the authoriza- tion regime depending on the area of land they are coveting. Because of these conditions, it is simply no longer possible to get more land through the intermediary of a subsidiary176 com- pany. In theory, however, it is possible for foreigners to acquire more land if the INCRA or the National Congress authorizes it, but we have found no information on the likelihood that such authorizations could in fact be granted.
2. eFFeCTIVeNeSS OF THe NeW RegULATIONS FOR SOLVINg FOReIgNeR-ReLATeD PROBLeMS
Unfortunately for the reader of this chapter, this section may be disappointing for the fol- lowing reasons. First and foremost, no impact study of the law is yet available, and the only evidence that exists in this area comes from newspaper articles. As the problems caused by foreigners can be debated and are surely not entirely of their own doing, it is difficult, at this stage, to see if these new regulations will solve them. Avoiding speculation was one of the most important goals of these regulations. However, we have seen that foreigners were investing in land and commodities not only by means of land purchases but also through land leases, or contractual arrangements. In addition, they control a large share of some commodities’ value chains.
The new framework in Argentina and Brazil provides a good tool for selecting investors as it compels foreign-controlled firms, and any other foreigners that want to buy land, to get the approval of the administrative authorities in the area concerned. Indeed, in Brazil, it is possible to view the return to the 1971 law regime as a means of selecting among investors, thus avoiding speculators. As written above, the authorization regime set forth in the law,
(SUBESTRA), Agriculture, Cattle-ranching, Food and Sustainable Development Commission, 22 May 2012, Chamber of Deputies of Brazil.
175. Daiuto and Lobo (n 99).
176. A subsidiary is generally defined as every corporation owned by the Multinational Enterprise (MNE) where it has at least 10% of the voting rights. Therefore, we consider in the next paragraph the situation of a Brazilian firm whose social capital is held from 10% to 49% by a foreigner.
requiring review from the INCRA or the National Congress, is a concealed way of targeting which investor can come into the country, namely experienced investors with good equi- table deals as opposed to speculators. This authorization regime is a useful tool for Brazil, which can then select which investors will operate within its boundaries, while screening out the others, such as speculators or SWFs.177 However, the efficiency of such a means is limited and not guaranteed because there is not a specific list of criteria to select investors (although agriculture projects have to respect some conditions to get an approval). As a matter of fact, the new regulatory framework allows the possibility to discriminate inves- tors to the extent that the administration wishes to enforce the legal regime for some foreign corporations and not for others.
However, in Argentina, the effectiveness of such a system is likely to be severely challenged in court. According to Sections 20 and 25 of the Constitution of Argentina, foreigners and nationals enjoy equal civil rights:
Section 20.—Foreigners enjoy within the territory of the Nation all the civil rights of citizens;
they may exercise their industry, trade and profession; own real property, buy and sell it; navi- gate the rivers and coasts; practice freely their religion; make wills and marry under the laws.
They are not obliged to accept citizenship nor to pay extraordinary compulsory taxes. They may obtain naturalization papers residing two uninterrupted years in the Nation; but the authorities may shorten this term in favor of those so requesting it, alleging and proving services rendered to the Republic.
Section 25.—The Federal Government shall foster European immigration; and may not restrict, limit or burden with any tax whatsoever, the entry into the Argentine territory of for- eigners who arrive for the purpose of tilling the soil, improving industries, and introducing and teaching arts and sciences.
The relevance of Section 25 for our subject is particularly striking when it says that the gov- ernment may not restrict European immigrants who arrive for the purpose of tilling the soil, improving industries, and introducing arts and sciences. However, the main point here is that the law creates a difference between foreigners and nationals regarding purchases of rural lands. This could be deemed unconstitutional by the Supreme Court of Argentina or the lower courts, rendering the limitation system ineffective. In addition, according to Section 124 of the Constitution, second paragraph:
Section 124.—(2nd paragraph) The provinces have original dominion over the natural resources existing in their territory.
This provision is problematic for the federal government too. If land is deemed a “natural resource,” it means that the Congress may not have jurisdiction to regulate land under this assumption. Thus, some have suggested that the law be enforced by each province (which has to expressly adhere to the law) within their own territory.178 It is difficult to explore these issues since no cases have questioned the constitutionality of the law. Nonetheless, it is important to take into account that this law may be challenged in courts on constitutional grounds, creating a risk for its own enforcement.
177. ‘Brazil clamps down on foreign ownership of agricultural land’ (n 88).
178. Slemenson (n 37).
What here seems contrary to investors’ freedom is actually recommended by international organizations in the guidelines on large-scale investments of farmland. Under Principle no. 4 of the “Principles for Responsible Agricultural Investment, that Respects Rights, Livelihoods and Resources”: “the most effective way to guard against speculation and ensure that contrac- tual arrangements regarding land use are respected is to reduce initial incentives to investors that may cause them to demand large amounts of land that they cannot effectively cultivate, by fixing reasonable taxes or rental fees, and by requiring significant performance bonds.”179 We found no indication that Brazil has put such a system into place. However, Brazil does have an index of productivity (for most crops) on the basis of which land may be found unproductive, and property can be withdrawn from owners whose lands are not producing enough.180 Most indexes, however, have not been updated since 1975 while agriculture yields have increased considerably: The disparity renders this obligation of producing a certain “standard” yield ineffective. At a minimum, the Brazilian administration has full discretion to implement the authorization regime for land rights acquisitions by foreigners. This may work as an effective tool to keep (foreign) speculators from buying land in the country as the administration is free to apply the limitations to speculators while leaving potentially good foreign investments out of its enforcement.
The biggest pitfall to the effectiveness of Brazil and Argentina’s regulations could actu- ally be their very purpose: They mainly address foreign acquisitions of land. However, a lot of foreigners are operating in Argentina in firms with mixed capital, both foreign and national, and are not using “traditional” property rights but rather leasing and other con- tractual arrangements.181 In Africa, the strategy is to buy the land or rent it over a very long-term, whereas in Argentina, firms from China, for instance, are instead teaming up with local firms in order to grow crops and secure their food supplies.182 Leandro Bona points out that by omitting leases, the law is clearly neglecting their importance regard- ing foreign investment in Argentina.183 The lease system, which is mainly regulated by Law 22,298, of October 1980, currently makes no distinction between nationals and foreigners, which makes it attractive for the latter. Some commentators also emphasize that, by not taking into account the various forms of land leasing, the law does not address the problem it was meant to, namely the acquisition of natural resources by transnational agribusiness corporations. Furthermore, by including only agriculture, forestry, and tourism, the law excludes strategic sectors such as oil, gas, and mining in which foreign corporations are predominant.184
179. RAI Principles (n 39) 12.
180. De Schutter (n 103).
181. Unión del Pueblo, ‘Análisis: ¿Qué problemas soluciona la Ley de Tierras?’ Contacto Politico (28 December 2011), <http://www.contactopolitico.com.ar/index.php?option=com_content&task=view&id=8200&Itemid=
309>.
182. Newbery (n 89).
183. Leandro Bona, ‘Un freno a la extranjerización: ¿Cual es eje?’ Pagina 12 (5 December 2011).
184. Unión del Pueblo (n 181).
3. POSSIBILITIeS FOR INVeSTORS TO CIRCUMVeNT THe LIMITATIONS
a. The Multiple Flaws of the Brazilian Regulation
i. Corporate Structures Contemplated by the Current Regulatory Framework in Brazil
The corporate structure at the heart of the debate is the foreign-controlled Brazilian firm.
Under the law of 1971, every Brazilian firm is subject to the limitations provided that they are directly or indirectly controlled by foreigners, the condition being that they have to own more than 50% of the social capital. However, the categories of corporations taken into account by the AGU in its 2010 opinion were broader. According to this interpretation, there are three criteria to determine whether a foreign company has a stake in a Brazilian firm under the law:
• the foreign company must have its headquarters outside Brazilian territory;
• the foreign company must hold a participation in a Brazilian company; and
• this participation must empower the foreign company to conduct shareholders’ resolu- tions, to appoint the majority of the managers, directors or administrators, and to conduct the corporate activities and direct the day-to-day activities of the corporate bodies.
As rightly noted by Daiuto and Lobo, this interpretation by the AGU extends and bends to some extent, the qualification of the foreign shareholder. For the foreigner, one of the ways one would seem to be able to circumvent the law today is to hold a stake of 49% in a Brazilian firm which would acquire the land. Today however, according to this new interpretation, such a company may be considered foreign and thus as included with in the scope of the law of 1971 if a shareholder’s agreement establishes that the foreigner controls the Brazilian company, with- out being a majority shareholder company.185
One may question how foreign control is going to be assessed. According to Daiuto and Lobo:
Although it is yet unclear, the authorities of INCRA implied that it was their intent that control reaches the highest level of the corporate structure. Since the authorization process requires that the majority shareholder of the Brazilian companies of foreign capital present their by-laws and incorporation documents, the participation of the foreign company will always be clear to the authorities and, therefore, they may require the documents of all the foreign companies until they reach the ultimate controlling shareholder.186
Less clear is how the Brazilian administration is going to assess foreign companies’ nationality in order to apply the limits on ownership related to an investor’s nationality (remember that an investor of a particular nationality cannot own more than 10% of rural lands belonging to a municipality). Note that the control of the corporate structure has not yet been fully applied because of the decentralized nature of Public Registries of Commerce and Real Estate Registry Offices.
185. Daiuto and Lobo (n 99).
186. ibid.
ii. Examples of Circumventing Schemes in Brazil
At a micro level, all our above remarks may have to be revisited. As a matter of fact, the sys- tem in place in Brazil is very common. Many countries apply a graduated process of project review in which projects are reviewed either locally, if they are small, or require ministerial, or parliamentary (in some cases even presidential) approval if their size is above predefined thresholds. Thus, a well-known method of circumventing these rules is to “bunch” projects below the cut-off point. For example, instead of buying 10,000 ha of land which will require approval from a specific agency in a country (approval is needed for amounts of land beyond 5,000 ha), an investor will submit four projects, each one for 2,500 ha, thus avoiding authoriza- tion requirements. In Mozambique, for instance, as indicated in a 2010 World Bank study, “one forestry project involved simultaneous submission of six land applications for a total of 28,000 ha to avoid the need for authorization by the Council of Ministers.”187
Another possibility for circumventing these rules is to set up a joint venture in which one or more foreign corporations own up to 49% of the shares and where Brazilians own the remaining shares. Indeed, as every foreign-controlled Brazilian corporation will be regarded as foreign under current legislation, the only possibility for foreign corporations is to rely on a joint venture with a “true” Brazilian firm (with more than 50% of Brazilian equity) and own only 49% of this corporate set-up. The corporation deemed by the authorities to be Brazilian can then purchase the land. Thanks to this system, foreigners can still buy as much land as they want to. Naturally, this also applies in the case of foreign individuals who would be willing to acquire land. If these solutions are not available, the only way for a foreign individual to get more land in Brazil is to become a habitual resident of the country. However, he will not be able to buy more than 50 MEIs without the approval of Brazil’s National Congress and below this amount, the acceptance (“prior review”) of the INCRA.
In order to have control over the lands acquired through a joint venture with Brazilians who hold the majority of the shares, some foreigners execute a management contract with them, specifying that they yield all their rights to the foreign company. This way, foreigners can tell the shareholders in their country that they own the land. There are a few examples of this, especially in the forestry sector. In one instance, documents relating to TFC (a foreign corpo- ration) show that they have full ownership of some investments in forested lands. Although they are the minority shareholders in the operation with a main shareholder in the region, the managers of this corporation argue that they are the owners.188 However, in March 2011, the AGU asked the Ministry of Development, Industry, and Trade to adopt some measures concerning the National Trade Registration. Indeed, the Boards of Commerce were asked to prohibit the amendment of any article that modifies the corporate control of companies which own rural Brazilian land and that would result in a shift of control to foreign entities or foreign individuals.189 It seems that the Brazilian administration is aware of this strategy and wants to impede foreigners who are concluding certain types of management contracts.
187. Deininger and others (n 3) 126.
188. Erica Fraga and Juliana Rangel, ‘Estrangeiro dribla lei para comprar terra no pais’ Folha (Sao Paulo, 15 December 2011), <http://www1.folha.uol.com.br/mercado/1016299-estrangeiro-dribla-lei-para-comprar- terra-no-pais.shtml>. On a side note, with the new regulations, the presence of foreign capital in land pur- chases is problematic. Thus, managers of the VBI Timberland Fund who want to obtain US$ 350 million from foreign clients are using loans to obtain the money instead of selling shares of their business to foreign inves- tors. Specialists say it would not be illegal because the financing would be accounted as a debt.
189. Daiuto and Lobo (n 99).