Brazils Legal System As its full name indicates, Federative Republic of Brazil, Brazil is organized as a union of states, municipalities,

and the Federal District (i.e., Braslia, Brazils capital). The union cannot be broken and in any manner separated. Brazil is a typical civil law country. Its legal system is codified. Based on specific authority, laws are enacted by the federal, state and local legislatives. Court decisions are based on those laws and, if there is not such laws, decisions are based on analogy, customs and general legal principles. Even though court precedents are not binding except for the relevant parties involved, more and more case law influences the Brazilian judicial system. Brazils Constitution provides for specific legislative authority of federal, state and local governments thus avoiding conflicts. With due regard to principles contained in the Federal Constitution, legislative authority of the federal government is higher than that of state governments, which in turn is higher than local or municipal governments. Forms of Doing Business in Brazil Introduction. As a general rule, nonresident investors can invest in any business in Brazil. As an exception to the general rule, Brazil still has a few regulated activities requiring local interest ownership or control. These include certain media and telecommunications services. In these areas, nonresident investors usually choose to enter into joint ventures with Brazilian individuals or entities. Evidently nonresident investors oftentimes choose joint ventures not only in restricted areas but also as a means to quickly join in a going concern. Formal Presence. Investors can have a formal presence in Brazil by organizing a branch, representative office or agency of a nonresident entity, or a local company. Branch, Representative Office, Agency of a Nonresident Entity. Investors can freely organize entities in Brazil with the sole exception of branches of nonresident entities: these are still linked to the former Corporation Law (Decree No. 2.627 of September 26, 1940) and require the prior approval of Brazils President. Not only is the process lengthy (e.g., 6 months), it is entirely discretionary. Moreover, branches may generate adverse liability and tax consequences and, in practice, are usually discarded. Local Companies. Investors can usually organize a company in Brazil without the need of any prior governmental approval. Most nonresident investors have found advisable to organize one of the following two forms of companies: sociedade annima ("SA") where liability is limited to the invested capital amount and sociedade limitada (limitada), which is a rather flexible form of a limited liability company or LLC. The basic requirements of an SA are as follows:

Shareholders. There must be at least two; no residency or nationality requirement applies. Capital. At least 10% of the stated capital must be paid in at the time of initial incorporation. No minimum is required except to carry out certain regulated activities (e.g., banking, insurance and export/import -- trading companies). The SA capital is divided into shares, which may be represented by stock certificates. Depending on the rights they afford, shares may be common or preferred. Preferred shares are non-voting as a matter of law, though they may acquire voting rights in certain circumstances. Management. At least 2 officers (diretores) must manage an SA; they must be residents of Brazil. No Board of Directors (conselho de administrao) is required unless the SA trades its shares in the stock exchange or in the over-the-counter markets, issues debentures, or has authorized capital. Nonresidents of Brazil can be members of the Board of Directors provided they empower a local attorney-infact resident to receive summons locally. Audit. SA by-laws must contemplate a shareholders' auditing committee (conselho fiscal); it may become operational at a shareholders' meeting. If the auditing committee becomes operational, then its annual report to the shareholders must be published along with the SA's financial statements, except if the conditions mentioned in the following item are complied with. Meetings and Publications. Shareholders' meetings must be held at least once a year to approve the SAs financial statements. Calls for meetings must be published unless all shareholders are present. Minutes of meetings also must be published. Closely-held SA with less than 20 shareholders and whose net equity is R$1 million maximum are not required to publish their financial statements, balance sheets, auditing committee's annual reports and other relevant information, provided that certified copies of those documents and minutes of the shareholders meeting are registered with the Commercial Registry.

The basic requirements of a limitada are as follows: Quotaholders. There must be at least two; no residency or nationality requirement applies. Capital. No minimum is required either upon organization or to carry out business, except for specific activities. Limitadas do not qualify to carry out certain regulated activities (e.g., banking, insurance). A limitadas capital is divided into quotas; unlike SA shares, quotas are not represented by stock certificates but instead are simply noted in the articles of organization.

Management. Limitadas are managed by the quotaholders themselves, if residents, or by one or more managers appointed by the quotaholders. Nonresident managing quotaholders must delegate their daily managerial powers to Brazilian resident individuals (so-called delegated managers). Audit. Limitada may have an auditing committee (conselho fiscal); if it becomes operational, the auditing committee must audit the financial statements. Meetings and Publications. Quotaholders' meetings must be held at least once a year to approve the financial statements. Calls for meetings must be published unless all quotaholders are present. Minutes of meetings must be regitered with the Commercial Registry. Limitadas are not required to publish their financial statements, balance sheets, auditing committee's annual reports and other relevant information. Foreign Exchange Controls

Introduction. Law No. 4,131 of 1962 (the Foreign Investment Law), as amended, regulates nonresident investments in Brazil. This law requires nonresident investments to be registered with the Central Bank of Brazil (the Central Bank) to enable the nonresident investor to pay dividends abroad or to repatriate capital in foreign currency. The Foreign Investment Law provides for broad rules governing earnings reinvestment and payment of royalties and technical assistance fees. Investments. Nonresident investments under the Foreign Investment Law include: Direct cash equity investment. Imported in-kind capital contributions (e.g., machinery, equipment, technology). Capitalized foreign-currency funds that can be repatriated. Transfer of foreign-currency funds to Brazil. Registration of Foreign-Currency Investments. Once the Brazilian recipient receives the funds, the in-kind contributions or the credits, it must register the investment electronically with the Central Bank. Registration is made in the currency in which the funds were actually transferred to Brazil or the investors currency in case of machinery or technology. Registration is required for payment of dividends in foreign currency, reinvestment and repatriation. Registration of Brazilian-Currency Investments. Nonresident investors may also choose to invest in local businesses in Brazilian currency. The Central Bank registers these investments if the relevant funds were in a bank account that the nonresident investor has maintained in Brazil in accordance with the regulations in force.

Reinvestments. After-tax profits not otherwise paid may be reinvested in the same or in a different company in Brazil. Reinvestment is also registered electronically with the Central Bank in the currency of the investor's country. Dividends. The Foreign Investment Law enables the Brazilian company to pay dividends corresponding to all after-tax profits belonging to the nonresident investor. Capital Repatriation. Upon certain transactions (e.g., divestment, capital reduction), the foreign-registered investment can be repatriated. Repatriation is tax-free up to the amount of foreign currency registered with the Central Bank. If the nonresident investor sells its equity interest to a local buyer in Brazilian currency for a price in excess of the amount registered with the Central Bank, the balance (i.e., capital gain) can also be repatriated (subject to Central Bank approval) but it is subject to capital gains, withholding income tax. Loans. Foreign-currency loans are no longer subject to Central Bank approval but principal repayment conditions and interest rates must fall within a certain range the Central Bank accepts, and which varies from time to time. Loaned funds must be used in economic activities and the relevant financial terms and conditions must be commensurate with those prevailing in the international market.

Importing into Brazil Import Licensing. Imports into Brazil are subject to government controls from at least three sources: the Secretary of Foreign Trade (SECEX), which supervises registration and licensing, the Central Bank of Brazil, which approves payments of financed imports, and Brazils Revenue Service (the IRS), which reviews valuation for customs purposes. Because of their nature, certain products must be specifically controlled and can be imported only after approval by certain agencies. These include arms and ammunition (Army), herbicides, pesticides and beverages (Ministry of Agriculture), and narcotics, human blood and food (Ministry of Health). SECEX may deny import licenses if it has sound reasons to believe that the imports could threaten free trade, manipulate prices, jeopardize Brazils trade balance, constitute dumping or unfair competition, or risk the economy. SECEX may also deny import licenses for products of countries that discriminate against Brazilian products. Taxes and Duties. Imported products are subject to the following taxes and duties: Import tax due on the CIF import amount at ad valorem rates; Federal excise tax due on the import amount grossed up by the import tax, also on selective rates; State sales and service tax due on the import amount grossed up by the import tax and the federal excise tax at rates which vary but are usually 18%; and

Maritime transport fee due on the freight cost, usually 25%.

Freight. As a general rule imports can be transported by Brazilian or non-Brazilian flag carriers. There are exceptions to this general rule (e.g., imports affording tax exemptions) where Brazilian flag carriers are required. Insurance. Coverage of imported products must be provided by insurance companies organized in Brazil. Brazilian importers may contract only FOB or C&F terms, not CIF or C&I, because the amount corresponding to the insurance may not be transferred abroad. Latin American Integration Agreement. Brazil is a member of the Latin American Integration Association (LAIA or ALADI) created by the Treaty of Montevideo of August 12, 1980. ALADI members enjoy mutual preferential duty treatments. ALADI members include Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. Southern Cone Common Market (MERCOSUR). Brazil is also a MERCOSUR member, a treaty that has functioned as a free trade zone and customs union. It allows most products and services to circulate among its members free from tariff and non-tariff barriers; it provides for a common external tariff (tarifa externa comum or TEC) for most products that member countries import from non-MERCOSUR countries. Exporting from Brazil Export License. SECEX and the Central Bank also have authority over exports. Exporters must register with SISCOMEX. Once registered the exporter may export by simply reporting the transaction to SECEX without any further approval. Export Incentives. The Program for Exports Finance (PROEX) finances exporters who may also enjoy exemption from federal excise tax, state sales and service tax, and gross revenue (welfare) taxes. Drawback Incentive. There is another export incentive, the so-called Drawback System (Comunicado SECEX No. 21 of July 11, 1997). It is a deferral or exemption from taxes on imports of raw materials, semi-finished and finished products, parts, pieces and components used to manufacture products for exports. Antitrust Brazils Constitution contains principles maintaining and encouraging free enterprise and competition. The principles aim at protecting the economy as a whole. Enterprise is a synonym of competition, which has the implicit meanings of the pursuit of an advantage, victory, or reward and fight, challenge, contest, rivalry as well as struggle for survival in which the stronger competitors in each given market win. The idea of rivalry and

aggressiveness thus requires State control to contain and punish abuses. However, before punishing abuses, the principal State duty is to preserve free competition, capable of generating economic growth. In Brazil protection of the economic order is contained in Law No. 8,884 of June 11, 1994 (the Antitrust Law). Antitrust enforcement is incumbent upon Conselho Administrativo de Defesa Econmica CADE (Administrative Council of Economic Defense) who entertains cases after receiving the economic opinion of Secretaria de Acompanhamento Econmico SEAE (Economic Supervisory Department) and the legal opinion of Secretaria de Defesa Econmica - SDE (Economic Defense Secretariat).

Consumer Protection Introduction. Brazils Consumer Protection Code (Federal Law No. 8,078 of September 11, 1990 -- the Code") provides for legal principles and requirements applicable to consumer relations in Brazil. Inter alia the Code regulates product and service liability, contractual clauses, commercial practices, advertising and relevant information about products and services to consumers. The Code also includes rules on civil procedure for individual and collective claims, including class actions, and administrative and criminal sanctions. Suppliers and Consumers. Definitions. The Code defines supplier as a private or public individual or entity, Brazilian or foreign, who manufactures, assembles, creates, builds, transforms, imports, distributes or markets products or renders services to consumers. The Code defines a consumer as any end-user (whether an individual or an entity) who acquires or uses products or services. Accordingly, the Code governs not only retail sales to consumers but also sales of products and services to manufacturers who are as well treated as consumers when they are end-users of products and services. This is an important (and controversial) approach at business relationships that differentiates the Code from consumer protection laws of other jurisdictions. Consumers Rights. The Code includes the following among basic consumers rights: Protection of life, health and safety against risks related to the supply of hazardous or harmful products and services; Right to proper information regarding the correct use of products and services; Right to clear and correct information regarding quantity, characteristics, composition, quality, price and potential risks of products and services; Protection against misleading and abusive advertising and coercive or unfair business practices; Amendment of contractual clauses which are excessively burdensome; Effective protection from damage or compensation for property damage; and Access to courts of law and administrative agencies to protect consumers' rights.

Information and Advertisements. The Code provides that suppliers liable for any and all information and advertisement regarding their products or services. The Code also contains specific provisions prohibiting misleading or abusive advertising. Potentially hazardous or dangerous products and services are required by law to bear clearly visible and adequate information about any risks of usage. The information must be in Portuguese. The manufacturer, producer, builder, service provider or importer, regardless of nationality, is strictly and jointly liable for damages caused by insufficient or inadequate information on the use and risk factors associated with the product, as well as if damage is a direct result of services rendered or of the product's defective design, manufacturing, construction, assembly, formula, manipulation, presentation or packaging. Contractual Rights and Protection. Specific provisions under the Code ensure consumers contractual rights and protection. The Code provides that certain clauses will automatically be deemed invalid if included in a contract, if they: Limit the suppliers' liability; Restrict the consumers' right to return products or services and to reimbursement; Transfer the suppliers' liabilities to third parties; Shift the burden of proof to the consumer in the event of litigation; Create excessive disadvantages to the consumer; and Require the consumer to bear costs of collection. The Ministry of Justices Economic Law Department included new clauses that will be deemed automatically invalid. They include: Preventing consumers from taking advantage of a more favorable event, in accordance with a contractual guarantee term; Imposing sanctions in case of delay in complying with an obligation or default by a consumer; Electing a Court to resolve disputes arising from consumer relations, other than courts of jurisdiction where the consumer lives; Hindering, reducing or impairing enforcement of the Consumer Protection Codes rules on disputes arising from air-transportation agreements, which time bars hospitalization other than those prescribed by a doctor. Product Liability. The Code provides for two types of product liability: liability resulting from damages caused by the product (Section 12), and liability resulting from qualitative or quantitative defects of the product (Section 18). Liabilities resulting from damages caused by the product. The manufacturer, producer, builder, or importer, regardless of nationality, will be held both strictly and jointly and severally liable if the consumer incurs damage resulting directly from the product's defective

design, manufacture, construction, assembly, formula, manipulation, presentation, or packaging. They will be held liable if the damage is a direct result of the services rendered or of insufficient or inadequate information regarding the product's use and risks. In addition, if the damage is caused by a component or device that was incorporated to a product or service, the manufacturer, builder or importer and the third party responsible for such incorporation will be held both strictly and jointly and severally liable, unless they can evidence that they did not market the product, the defect deemed as cause of the damage does not exist, or the damage resulted from the consumer or a third party's exclusive fault. Liabilities resulting from qualitative or quantitative defects of the product. Suppliers (individuals and entities, regardless of nationality, who perform activities of production, assembling, creation, construction, transformation, importing, exporting, distribution, or commercialization of products or services) are jointly and severally liable, regardless of fault, for qualitative or quantitative defects of products. For the purpose of this provision, a product is considered defective when it presents qualitative or quantitative changes that make the product inadequate or unfit for its ordinary purpose, diminish the product value, or result from differences between the product and the related data of packages, recipients, labels or publicity messages, unless these differences are inherent to the product's nature. The Code also provides for administrative and criminal penalties that may be applied against suppliers (e.g., seizure and destruction of products, penalties and imprisonment). Warranty. The Code provides for two different kinds of warranty: the legal warranty and the contractual warranty. The legal warranty is comprised of a series of Code provisions that provides for a minimum set of consumer protection requirements, including the imposition of strict civil liability for damages caused by the product or service or for the product's imperfections, which may not be disclaimed as a matter of public policy that cannot be waived. When a product is covered by legal warranty, the consumer can demand replacement of defective parts. If the supplier does not correct the imperfection within 30 days from the consumer claim, the consumer may choose to demand replacement of the product by another of the same kind, or immediate reimbursement of the amount paid without prejudice to his right to recover losses and damages, or proportionate price reduction. Contractual warranties are those suppliers offer at their own discretion. They are deemed complementary to legal warranties and must be stated in (clear) Portuguese. The relevant warranty document must be standardized and adequately clarify exactly what the warranty covers (including form, term and place where it may be honoered, and charge to the consumer). Statute of Limitations. The Code provides for time limits during which consumers can enforce legal warranty rights and raise product liability claims against suppliers.

30 days for non-durable and 90 days for durable products and services from delivery date for immediately and easily verifiable defects; The same as above from the date concealed defects are revealed; and 5 years for claiming damages caused by a defective product or service to third parties.

Limitation of liability. The Code clearly admits no contractual provisions limiting or excluding supplier's responsibility for adequacy of, or damages caused by, products or services. The only exception relates to consumer agreements between legal entities where they can limit the amount of supplier's indemnification in certain justifiable situations.

Labor The 1943 Consolidao das Leis do Trabalho ("CLT") contains the basic labor rules governing formation and termination of employment contracts, severance indemnity, mandatory bonuses, fringe benefits, and the like. The CLT has been complemented and modified by federal legislation and federal and local case law on labor and social security matters. As a result, Brazil now has two severance indemnity systems: the 1966 "FGTS" or "new" system, and the "CLT" or "old" system. Though Brazil's 1988 Constitution revoked the CLT system, it still applies to those Brazilian employees (including expatriates who have been employees of the parent company or of related business entities) who chose it before the Constitution was enacted. But the FGTS system governs most employment relationships in Brazil. "FGTS" Severance System. Under the FGTS system, an employer must make monthly deposits into a blocked bank account opened in the name and on behalf of each employee (the "FGTS account"). Each such deposit is in an amount equal to 8% of the employee's monthly compensation (including base salary, regular fringe benefits and the like). The employee's FGTS account is made part of a specific fund managed by a Brazilian government agency and earns interest. The employee has access to his/her FGTS account only under limited circumstances (e.g., marriage, purchase of a home). If an employer unilaterally terminates an employment relationship without "just cause" (as defined in the CLT), or if the employee unilaterally terminates an employment relationship for cause, the employer must pay to the employee severance indemnity in an amount equal to 40% of the total amount deposited in the employee's FGTS account. (Any amounts withdrawn from the FGTS account during the employment relationship must also be taken into account for purposes of calculating the 40% severance indemnity.) The employer pays the indemnity directly to the employee (by depositing the relevant amounts in the FGTS account) together with any other severance-related payments. An addition amount of 10% (penalty) is due to the tax authorities in case of termination of employment relationship without just cause.

If an employer unilaterally terminates an employee for just cause, or if an employee unilaterally terminates an employment relationship without cause, the employer will not be liable for any severance indemnity payment to the employee. If termination is a consequence of the employer's and the employee's mutual fault or force majeure, and provided a labor court recognizes either of these two (rare) causes for termination, the employer must pay the employee severance indemnity in an amount equal to 20% (rather than 40%) of the total amount deposited in the employee's FGTS account. "CLT" Severance System. Under the CLT system, Brazilian employers also had to open an interest-bearing bank account and deposit into such account 8% of the employee's monthly compensation. The CLT account was also managed as described above, but it remained in the employer's name. The CLT system of severance compensation distinguishes between "tenured" and "untenured" employees (employees under the FGTS system do not become tenured). The CLT defines tenured employees as those who have worked for the same "economic group" (e.g., companies owned by the same shareholders or interests within or outside Brazil) for 10 years or more. Brazilian labor courts, however, have consistently held that an employee should be deemed tenured whenever he/she has worked for the economic group for at least 9 years. Other Severance Payments. Generally, other severance-related payments also must be made to an employee upon termination of an employment relationship. For example, the employee may be entitled to receive accrued vacation pay, year-end bonus (so-called 13th salary), and other accrued bonuses. Thus, the total severance-related payments to an employee vary depending on the circumstances of each specific case (including the relevant Collective Bargaining Agreement). Economic Group. Brazilian labor law includes the concept of economic group in the liability area. Companies of the same economic group, in Brazil or abroad, are liable for contingencies and liabilities that any of them may have with employees, even if they have no direct relationship with the employee. Outsorcing. Brazilian labor law generally accepts outsorcing if the relevant activities are secondary (and not core or primary) company activities. Unions. The Federal Constitution provides for specific rules related to unions activities of both employers and employees. Corporate transactions. The CLT guarantees employees rights regardless of the employers structure. Corporate reorganizations, mergers and acquisitions (both stock and asset deals), joint ventures and similar transactions do not affect such rights.

10

Visas Introduction. Work permits and visas for expatriates to work in Brazil are granted by the Ministry of Labor. There are different visas: transit, tourist/business, temporary, permanent, courtesy, official and diplomat. Below we comment on the most common visas. Tourist/Business Visa. This visa is obtained at the Brazilian Consulate of the applicants residence. It is valid for 5 years but the nonresident can stay in Brazil only for 90-day periods; extensions for an equal period can be obtained in Brazil, if before the original term expired. In any 12-month period a visitor cannot stay in Brazil more than 180 days. The holder of a tourist/business visa cannot work or be paid in Brazil. Temporary Visa. This visa is issued to business executives, teachers, scientists, technicians and other professionals (including students). It is obtained at the Brazilian Consulate of the applicants residence. It is valid for up to 2 years and can be renewed for an equal period. After 4 years a temporary visa may be converted into a permanent visa (see below). Holders of temporary visas cannot have management powers in a local company (for which a permanent visa is required). To apply for temporary visas the professionals must evidence their qualification or work experience compatible with the activity they will perform by presenting diplomas, certificates and statements of entities where they studied and worked. Permanent Visa. This visa is issued to nonresidents who are transferred to a company of the same economic group in Brazil and who will be a director or manager as evidenced by the companys Articles of Organization. The company must have foreign registered capital of at least US$200,000. With a permanent visa, the expatriate's worldwide income will immediately become subject to Brazilian taxation. This visa is granted by the Ministry of Labor for up to 5 years; the holder may not leave and stay away from Brazil for more than 2 years at a time. Accompanying spouse and children cannot work while in Brazil. If nonresidents are married to a Brazilian or have a Brazilian child, they can obtain permanent visas at the Brazilian Consulate of their residency before entering Brazil or at the Ministry of Justice if the nonresident is already in Brazil. Restrictions on Brazilian Companies. Regardless of the type of visa, Brazilian labor law requires companies with 3 or more employees to follow the rule whereby Brazilian employees must be and account for at least 2/3 of total employees and payroll. Exceptions are Portuguese citizens, nonresidents living in Brazil for more than 10 years with a Brazilian spouse or child, and if no comparable qualified professional is available in Brazil.

11

Brazilian companies cannot hire expatriates without proper visas and work permits. Violation of this rule will subject the company to penalties and its officers to criminal sanctions. Brazilian Citizenship. Aliens may qualify for Brazilian citizenship after 4 continuous years (or less, in certain circumstances) of residence in Brazil it they are 21 or older, read and write Portuguese, is a professional or earns enough to support themselves and families, have no criminal record, and are in good health (this requirement is waived if the foreigner has lived in Brazil for more than 2 years).

Intellectual Property, Licenses, Transfer of Technology Overview of the Brazilian Industrial Property Code Introduction. The Industrial Property Code (Law No. 9279 of May 14, 1996) (the IP Code") is the primary law for trademarks and patents. It provides for registration and legal protection of trademarks, patents, industrial designs and geographical indications by Brazils Patent and Trademark Office (literally, National Institute of Industrial Property -"INPI"). It also has provisions on unfair competition and crimes and other violations arising therefrom. It further provides for registration of licensing, transfer of technology and franchising agreements. The IP Code is an updated collection of rules; it is adapted to the World Trade Organization (WTO)s requirements relative to laws related to industrial property rights (commonly referred to as TRIPS). Brazil is a member of WTO and several other international conventions and agreements with a view to protect industrial property (e.g., Paris Convention, Patent Cooperation Treaty). Patents. Inventions and utility models are not protected by patents if they are immoral, contrary to good customs, public security, order and health. Similarly, substances, materials, mixtures, elements or products of any kind (including the modification of their physical-chemical properties and processes for their obtainment or modification), resulting from the transformation of the atomic nucleus, cannot be protected by patents. Living beings, in whole or in part, also cannot be patented, except for transgenic microorganisms which present the prerequisites of patentability and provided that they are not a mere discovery. Transgenic micro-organisms are organisms (except for the whole or parts of plants and animals), which express, by means of direct human intervention in their genetic composition, a feature the species do not obtain under normal circumstances.

12

The IP Code eliminated former restrictions on the patentability of chemicals, pharmaceuticals and food products and processes. Requirements. Creations are protected by patents if they are novel, inventive and fit for industrial use. To be protected by a patent the creation must be new (i.e., not included in the state of the art). State of the art includes everything that has become public (by written or oral description, usage or other means), in Brazil or abroad, before the application is made. If during a period of 12 months before the application date there is disclosure, it will not harm the patent application, if the inventor or third parties disclose the subject of the patent. An invention is actually inventive if to experts in the particular field of endeavor it does not obviously result from the state of the art. A Utility model is inventive if it does not ordinarily result from the existing state of the art. The other requirement for protection is that the patent must be considered capable of industrial application (i.e., used or produced industrially). Priority. A priority right is granted to the application filed in a country which is a treaty country with Brazil or which is a member of an international organization to which Brazil is a member. Documents, Proceedings. Patent applications must be supported by a petition, specification of the invention, claims, drawings (if any), abstract of the invention and evidence of fee payment. If the application involves biological material, to enable the practical reproduction of the object of the application by the examiner, such material must be submitted to the agency authorized by INPI or appointed through an international agreement. Once filed, the patent application will be kept under secrecy for a term of 18 months; then it will be published. Publication may occur sooner at applicants request. Review of application must commence 60 days from publication, provided that the applicant has requested the examination within a term of 36 months from the date of filing of the patent application. After publication, and until the end of the examination period, third parties may submit to INPI documents and information that may be relevant to the decision (including documents and information opposing grant thereof). After the examination request, and whenever INPI so requires, the applicant must submit within 60 days the searches for prior art, and examination results for the granting of the same application in other countries when a priority right is claimed and other documents are required for review. The examiner must then opine on the application, if it can be granted, its consistency with the type of protection claimed, reformulation or division thereof and technical requirements. If the opinion is unfavorable to the patentability, if the application is

13

formally incorrect, or if the examiner requires further action, the applicant will be notified to reply within 90 days. Failure to comply will result in definitive shelving. If the application is accepted, an official fee must be paid and the application is granted. Validity. Patents for inventions are valid for 20 years; patents for utility models, for 15 years. The starting date is the date of filing. Validity terms will never be less than 10 years for an invention and 7 years for a utility model, as of grant date, except if INPI is prevented from deciding as a result of force majeure or court orders. Scope of Protection. The patent provides protection to its owner against the unauthorized manufacture, use, marketing, sales or importation of the patented product or process or product directly obtained from a patented process, by third parties, except when the unauthorized use is for non-commercial or experimental purposes that do not harm the patent owners economic interests. Otherwise, indemnification will accrue as of the date of its occurrence, including the period of exploitation prior to the date of grant. Third party good faith exploitation of a patent before the application is filed entitles the party to continue the exploitation under same form and conditions at no cost. Administrative and Judicial Invalidity. At the administrative level, a patent may be declared invalid in the event of formal flaw in the registration process. The invalidity proceeding may start by INPI or a third party with legitimate interest within 6 months from the date of grant. In these proceedings the patent owner may answer within 60 days. With or without an answer the examiner must opine and another 60-day term will commence for claimant and owner to reply. After this term INPIs chairman must decide the proceedings, thus ending the administrative level. In addition to administrative, any time during the patent validity term can INPI or a third party file a judicial invalidity suit before a Federal Court. Voluntary and Mandatory Licenses. Patents may be assigned or have its use voluntarily licensed to third parties. The license agreement must be registered with INPI to be effective against third parties but such registration is not required for purposes of evidencing the patent use. A patent owner may request INPI to offer to third parties a license for its use. Such a voluntary offer may not be for a license on an exclusive basis. The advantage of putting a patent for voluntary license is that, during the period in which the patent is placed under license offer through INPI, the cost of the annuity is reduced by 50%. INPI may impose mandatory patent licensing if the patent holder enforces its rights in an abusive manner so decided by an administrative or court decision.1 When a patent is not fully exploited (other than for reasons of lack of economic viability) such patent may also
1

To date there is no record of any such decision.

14

become subject to mandatory licensing. Such licenses may be requested only by an interested third party who is technically and economically qualified to efficiently exploit the patent. The products resulting from such licensing must be earmarked mostly for the domestic market. Public interest and national emergency, declared by the Federal Government, may create a mandatory license when the patent owner or its licensee does not meet the need, but without prejudice to the owners r ights. Mandatory licenses will be granted only on a non-exclusive basis and sublicensing is not allowed. If licensee does not commence exploiting the mandatory-licensed patent within a year, the owner may request cancellation thereof. Addition Certificate. The new patent law also contemplates protection for an improvement or development introduced in the subject matter of the invention by granting an Addition Certificate, which is added to the patent. The certificates validity shall coincide with the patents validity. Termination of Patent Rights. The following will terminate patent rights: termination due to lapse of time, failure to pay annual dues, forfeiture for failure to cure the abuse or misuse of the patent, and the failure to appoint a local attorney in fact to receive summons. Annual Fee. Regardless of actual granting of a patent, payment of the annual fee is due as of the third year following the filing date; thereafter, the fee must be paid annually. Reactivation of the application or patent may be requested upon payment of a specific fee and within three months following the shelving/extinction of the application/granted patent due to lack of timely payment. Creations pursuant to Employment or Service Agreements. As to inventions and utility models that occur during employment or service relationships, the creation belongs exclusively to the employer when the creative activity is implied in the employment agreement. If the employer contributed to the employees creation by providing resources and other means used in the creation, even if the creation was not the employees duty contained in the employment agreement or naturally resulting from it, such employer will be entitled to one half of the ownership rights and to the exclusive exploitation license. The patent owner employer, at its discretion, may grant the employee (author of the creation) participation in the profits resulting from the patent exploitation (yet the participation is not incorporated in the employees salary).

Industrial Designs Creations that can be registered. An industrial design is a bi-dimensional representation (ornamental assembly of lines and colors) or tri-dimensional object (ornamental plastic form) which may be applied to a product, affording a new and original look in its external configuration, and which may be used for industrial production. Creations having a purely

15

artistic nature are not considered industrial designs. Industrial designs are protected by registration and, as a result, are not considered a patent. Requirements. The requirements to register an industrial design are novelty and originality. Novelty is defined as for patents (see above). The exemption term during which disclosure of the design will not be deemed to include it within the state of the art is 180 days. Originality is defined as an original and distinct visual configuration when compared to other, previously known objects. Common or ordinary forms of an object, or those of a technical or functional nature, are not deemed to be industrial designs. Immoral designs do not qualify for registration. Registration Process. After filing, the application will be immediately published and registered, unless a term of secrecy has been claimed. Aspects of novelty and originality are not reviewed before registration. Upon publication, the applicant may ask novelty and originality review; if the examiner finds that the creation lacks such requirements, administrative invalidity proceedings will be initiated. Judicial invalidity actions may be proposed before a Federal Court at any time during the registration validity term. Registration is valid for 10 years and may be renewed for 3 successive periods of 5 years each and a fee must be paid every 5 years. Trademarks. Any visually perceptible, distinctive sign that is not prohibited by law qualifies for registration as a mark. The IP Code has enabled registration of tridimensional trademarks but is silent on registration for audio or olfactory trademarks. Marks are divided into 3 categories: products or service marks, certification marks and collective marks. A product or service mark is the trademark used to distinguish a product or service; a certification mark is used to assert compliance of the product or service with certain standards of quality or technical specifications; a collective mark is used to identify products or services originated from members of a certain group. Trademarks are registered for 10 years and can be renewed for other 10-year terms. Marks that cannot be registered as Trademark. The following may not be registered as marks: official public, domestic, foreign or international escutcheons, coats of arms, medals, flags, emblems, badges and monuments, their designation, shape or imitation; any isolated letters of the alphabet, numbers or date (except under a stylized form); any expression, figure, drawing and other signs which are immoral, offensive or discriminative; designations or acronyms of public entities (except when requested by the respective entity); the reproduction or imitation of the main element of a corporate name or title of a place of business; signs commonly used to describe the nature, nationality, weight, value, quality and time of production of a product or service; advertisement slogans, colors and their designation (except under a peculiar and distinctive form); false indications of geographical origin; the name of an event, except when authorized by the

16

entity promoting the event; reproduction or imitation of an official currency (whether domestic or foreign); civil names or signatures, except upon consent of the holder of the right; the names and titles of literary, artistic or scientific works protected by copyright (except upon consent of the owner); technical terms used in connection with the product or service; reproduction or imitation of a mark belonging to a third party for identical, similar or related products (except upon consent of the author or owner); common or necessary form or packaging related to the product; forms protected by industrial designs belonging to third parties; the reproduction or imitation of a mark with which the applicant, by virtue of the activity in which it is engaged, could not evidently be unfamiliar. Famous and well-known Marks. Special protection shall be afforded to a mark registered and deemed famous in Brazil, covering all classes of products and services available under Brazilian law. The mark that is well-known in the field of activity where it is used, as defined under the Paris Convention, is also afforded special protection, regardless of whether it was previously filed or registered in Brazil. This also holds true for service marks. Priority. A right of priority is afforded to applicants in Brazil as stipulated under the Paris Convention, or by inter-governmental agreements which extend recognition to the applicants home registration. Requirements. The applicant may be an individual, a private or a public entity. The applicant may only claim classes related to the business activity in which it is engaged, directly or through controlled companies. The applicant for a collective mark must be a legal entity representing the relevant group; it may have a business purpose differing from the activities in which the members are engaged. With regard to certification marks, the applicant may only be a person without commercial or industrial interest in the certified product or service. Registration Process. After filing application is published and the examiner has not yet reviewed if the mark can be registered; third parties seeking to prevent the marks registration may file an opposition within 60 days. Once the opposition term elapses, review will take place. If no opposition was filed, the examiner will accept, issue an official action to correct the application or provide the required documents, as the case may be, or reject the application. Failure to comply with an official action will result in shelving the application. If accepted, the certificate of registration will be issued and a fee must be paid. Registration may be cancelled through administrative invalidity proceedings when a mark is granted in violation of the law. Such invalidity proceedings may be initiated by INPI or interested third parties within 180 days from grant. INPIs chairman will decide the case, thus terminating the administrative instance.

17

In addition to the aforesaid administrative proceedings, INPI or third parties may seek court action to cancel a trademark registration. The statute of limitations for such an action is 5 years from the registration date. A trademark application or registration may be transferred or licensed. Geographical Indications. INPI will register geographical indications, which are defined as either those geographical names of countries, cities or regions which became known as centers for the extraction, production or manufacture of a certain product or the rendering of a certain service, or those geographical names that are used to designate a product or service qualities or features present only or essentially in the particular geographical environment. However, the name of a geographical region which has become commonly used to designate a product or service will not be considered a geographical indication. Only those manufacturers or service providers who that are actually established in the geographical area can use the corresponding geographical indication. Parallel Imports. Parallel imports or gray-market imports is defined as non-authorized importation of a product (legitimate and legally protected by a patent and/or trademark) by a party other than the legitimate holder of such patent and/or trademark, authorized licensees or distributors. In this event the patent owner may stop the import, but it cannot stop the use, marketing and sales of such product when the import was made by the patent owner himself, or with the owner's consent. The patent owners right to oppose those imports is limited in the event the patent owner itself imports the patented product instead of manufacturing it in Brazil or when a mandatory licensee imports the patented product during an allowed importation period of one year as of the license grant. With regard to trademarks, the same principle applies. Further, if the owner of a patented product bearing a trademark registered in Brazil decides to exploit the patent by importing such product, then a third-part import of the product may not be blocked based on the trademark. Parallel imports of gray products are not a crime. The only available action is thus civil lawsuit aimed at preventing the illegal imports and, possibly, obtaining indemnification for losses and damages. Exhaustion of Industrial Property Rights. The patent/trademark owner's industrial property rights are exhausted when he first sells such patented or trademarked product within the domestic market. Such rights are not exhausted when the first sale is placed in the international market, with the exceptions noted above.

18

Crimes Against Industrial Property. As a general rule, the protection afforded to a patent, a trademark, or an industrial design allows the owner to prevent a third party from manufacturing, using, reproducing, offering for sale, selling or importing the object protected by the patent, or obtained by the patented process, or bearing the trademark, or embodying the industrial design, without the owners consent. Such right equally exists against those who contribute to prohibited acts practiced by third parties. The penalty (fine or imprisonment from 3 months to 1 year) is increased by 1/3 to the penalty imposed when the violating party is a sales representative/agent, an authorized individual, company representative, partner or employee of the patent/registration owner or its licensee, and also if the violated trademark is famous, well-known, certified or a collective mark. Among other remedies applicable to the particular case, the owners may seek search and seizure of such products, indemnification for losses and damages, injunctive relief stop manufacture of counterfeited products,. Reproduction and deceiving imitation of official domestic or foreign symbols, or the sale or offering for sale of products bearing such symbols, or their use with economic purposes without authorization, on a trademark, corporate name, insignia or advertising slogan, and the untrue geographical and other false indications may constitute crimes subject fine or imprisonment of 1 to 3 months. Unfair Competition. A false statement, the disclosure or employment of fraudulent means for the purpose of obtaining an advantage, the diversion of clientele, the deliberate misleading of the consumer and use without consent of a third party's corporate name, packaging or confidential information, bribery, and other fraudulent acts mentioned in the law are defined as acts of unfair competition resulting in fine or imprisonment of 3 months to 1 year. The above mentioned acts, as well as other acts of unfair competition not defined as crimes, are subject to civil lawsuits and may entitle the damaged competitor to losses and damages.

Intellectual Property Licenses, Transfer of Technology Introduction. Most agreements encompassing licensing and transfer of patented or unpatented technology, know-how, trademarks and technical assistance should be registered with INPI. If INPI does not register these agreements, the owner of the industrial property cannot claim royalties or other consideration, and payer will be denied Brazilian tax deductions otherwise available. Failure to obtain INPI's registration also presents difficulties in enforcing the agreements against third parties. As a general rule, agreements with payments in foreign currency must also be registered with the Central Bank.

19

Guidelines for Technology License and Transfer. As a general rule INPI should not interfere with payments for royalties, trademarks, technology, and technical assistance fees. If the parties choose to provide for fees in excess of what the law allows as a business, tax deductible expense, they are free to do so, as long as their actual deduction remains within the legal parameters. For income tax purposes, deductibility of payments is limited to a certain percentage of net sales (as specified in the law), which varies depending on the specific products covered by the transaction, and royalties may not exceed 5% of net sales for patents and1% of net sales for trademarks. However, the law limits allowable fees for related companies (e.g., parent-subsidiary or similar relationship). The maximum limit is equal to what the law allows as a maximum deduction and maximum foreign-currency payment by subsidiaries to controlling companies abroad. That amount is 5% of net sales, unless specific regulations call for a lesser amount (which shall be no less than 1%). Agreements INPI Accepts. INPI usually accepts the following agreements: Patent license agreements. The term is restricted to the remaining life of the patent. Depending on the subject matter (as noted above), Brazilian patents are valid for 15 or 20 years from the date of application. Patents of invention have a term of 20 years and utility models, 15 years. Trademark license agreements. As in the case of patent license agreements, the term of a trademark license cannot exceed the trademark validity. Although trademark registrations are valid for only 10 years, the holder can renew it for successive 10-year periods. Tax deduction of royalty payments for trademark licenses is capped at 1% of the licensee's net sales (see comments above). Technology transfer agreements. INPI registers agreements in which the owner transfers unpatented know-how or technology applicable to the manufacture of goods, parts or components. Specialized technical services agreements. This category includes agreements in which a person or entity performs particular services (e.g., engineering projects or programs for the assembly, installation and operation of industrial equipment) for another person or entity. Payment in such cases must be calculated on the basis of daily or hourly fixed rates for work actually rendered. Franchise agreements. The trademarks involved in a franchise arrangement must have been applied for in Brazil before the corresponding franchise agreement is executed. Law No. 8,955 of December 15, 1994 governs franchise agreements. Among other requirements, franchisors intending to operate in Brazil must send an Offering Circular to franchisees before signing any agreement or receiving any payment. Consulting Services and Professional Services Agreements. Payments abroad are allowed for consulting or professional services of a technical, financial, legal or administrative nature without prior specific approval from INPI or the Central Bank, provided that the payments are not for transfer of technology.

20

Copyright Fees. Copyright fees may also be paid abroad. The regulation for such transfer is less strict than the rules covering the payment of royalties and technical assistance fees. Payments for copyright licensing may be based on a percentage of net sales or on a fixed price for each copyrighted item. At least in principle the agreement is not subject to prior review by any agency, although as part of its foreign exchange control duties the Central Bank routinely reviews the amounts of such payments, which must be within international parameters. Certain types of copyright fees must be approved by governmental agencies, such as those related to audiovisual works. Withholding Income Tax. Royalty payments to nonresident licensors related to licenses for copyrights and use of rights, technology transfer and technical assistance are subject to withholding income tax of 15% based on the gross royalty paid (except where tax treaties allow a lower rate). Service payments not involving transfer of technology (e.g., consulting services) are subject to withholding income tax of 25%. The tax may be borne by licensor or licensee. Contribution for Intervention in the Economic Domain. This contribution (CIDE") was created on December 29, 2000 by Federal Law No. 10,168. CIDE Is levied at 10% upon payments related to licenses for use of rights, technology transfer and technical assistance; the rationale is to stimulate Brazils technological development. The Brazilian party must pay CIDE based on amounts paid, credited, delivered, used or remitted to nonresident beneficiaries as of January 1, 2001. Financial Tax. A financial tax of 25% was imposed on the net remittance of royalties, technical assistance fee payments and copyrights to nonresidents but since June 1997 it has been reduced to zero. Software. Software is protected under specific statute. The Software Law currently in force is Law No. 9,609 of February 20, 1998. It affords software copyright protection. Software fees may thus be paid to the program owner as described in the copyright section above. Also, software, maintenance and customization fees may be paid abroad without any prior approval. Information Technology Law - Incentives The Information Technology Law No. 8,248/91 created tax incentives with a view to attract foreign companies, as opposed to the previous activity of the exportation of goods or their commercialization via distribution contracts with local agents. These incentives continued in effect through December 31, 1997. However, federal excise tax exemption of information technology and automation goods and their respective accessories, parts and spare parts that accompany the same in

21

normal quantities continued in force through December 14, 2000, provided that the products contained a certain local value added compatible with the features of each product, which would be achieved as a result of the fulfillment of the Basic Production Process (PPB) defined by the Ministry of Science and Technology and Ministry of Industry, Trade and Tourism. The maintenance and use of federal excise tax relating to raw materials, packaging and intermediary products used in manufacturing of the products noted above continued in force. To benefit, companies were required to invest at least 5% of gross sales (resulting from the trade of information technology products or services in the domestic market) annually in R&D in Brazil, of which at least 2% would be applied in arrangements with research centers, agencies or official/acknowledged Brazilian educational establishments. Law No. 10,176/01 maintains the tax benefits granted by Law No. 8,248/91 but providing for the gradual reduction of the federal excise tax benefit by December 2009, when the benefit will be repealed altogether. Moreover, there is federal excise tax exemption by December 31, 2001 for certain regions in Brazil (North, Northeast and Midwest) and its gradual reduction also by 2009. As a quid pro quo for the gradual reduction, Law No. 10,176/01 also provides for the gradual reduction of the 5% investment in R&D noted above by 2009. See the following tables: South and Southeast North, Northeast and Midwest

Until December/2000 exemption Until December/2003 exemption 2001 95% reduction of the IPI2 due 2002 90% reduction of the IPI due 2003 85% reduction of the IPI due 2004 80% reduction of the IPI due 2004 95% reduction of the IPI due 2005 75% reduction of the IPI due 2005 90% reduction of the IPI due 2006 to 2009 70% reduction of the IPI 2006 a 2009 85% reduction of the IPI due due 2010 benefit extinguished 2010 benefit extinguished

South and Southeast 2001- reduction of 5% 2002 reduction of 10% 2003 reduction of 15% 2004 reduction of 20%
2

North, Northeast and Midwest 2001 reduction of 0% 2002 reduction of 3% 2003 reduction of 8% 2004 reduction of 13%

IPI is the Portuguese accronym for federal excise tax. 22

2005 reduction of 25% 2006 to 2009 reduction of 30%

2005 reduction of 18% 2006 to 2009 reduction of 23%

Privatization Since the mid 1990s Brazil has commenced a privatization process bas ed on the National Privatization Program (NPP) launched in 1990. The major purpose of such program is to transfer to private enterprise productive state-owned companies and operation of public services. The goal is thus to provide renewed investment in companies and activities privatized, bring infrastructure to state-of-the-art and stimulate competitiveness and business capacity of the various sectors of the economy. Some states are also aggressively privatizing and promoting deep changes in Brazils economic structure, thus redefining the State roll in the economy. Companies of several sectors are being privatized (e.g., the railway system, iron, steel and mining companies and, principally, telecommunications and state-owned electric power companies). Privatization is expected to continue during the next years with special emphasis on electric power.

Public Bids, Concession of Public Services Introduction. The general regulations on public bidding procedures and concession of public utility services area applicable for a number of industries, such as Oil & Gas, Power, Roads, Mining, Water Sewage, Waste Treatment, and Telecommunications, among others. In Brazil, except for some specific cases the Government must contract or purchase by means of public bidding ensuring, thus, equal conditions to all bidders. General rules on public bidding and administrative contracts for works, services, purchases, sales and leases within the jurisdiction of the Federal Government, States, the Federal District and Municipalities, including their direct administrative bodies, autonomous government entities, public foundations, state-owned companies, mixed-capital companies and other entities (the Public Administration), are set forth under Law No. 8,666 of June 21, 1993 (the Bid Law). However, state-owned companies and mixed-capital companies that are engaged on the exploration of economic activity of manufacturing or commercialization of goods or rendering of services are allowed to have simplified bidding process provided that said process is created by law and it is conform the main principles set forth in Law No. 8,883/94. Concession/Permission of Public Services. Concession and Permission contracts which involve both the Public Administration and third parties, shall necessarily be preceded by

23

bidding according to the Bid Law. On February 13, 1995, specific legislation on this matter was enacted under No. 8.987 (the Concession Law). Both concession and permission are forms of delegation for the rendering of services, made by the granting authority to the legal entity or consortium of companies that demonstrates capacity for performance thereunder, on its own account and for a definite period of time, with total or partial or without the construction, maintenance, remodeling, extension or improvement of any works of public interest. in such a way that the investment of the concessionaire is remunerated and amortized by means of the exploration of the service or work for a definite period of time. In principle, any entity able to meet the preliminary qualification requirements may submit a proposal. The bidding is designed to guarantee the observance of the constitutional principle of equality, legality, morality, publicity, judgment in accordance with objective criteria, and compliance with the invitation notice as well as its major purpose is to select the proposal that is most advantageous for the Administration . Thus the bidding notice may not contain any conditions that may restrict or hinder in any way the competitive nature of the bidding. In this sense, preferences or distinctions between bidders based on nationality, domicile, or other conditions irrelevant to the object of the bidding are forbidden. Establishing differentiated treatment between domestic and foreign companies is not allowed either. However, the Bid Law does set a preference criterion for Brazilian companies of national capital, where there is a tie between proposals. The Concession Law, in turn, gives preference to proposals presented by Brazilian companies. The main events of termination of a concession are: Expiration of the contractual term; Expropriation; Forfeiture (by the Public Administration, by means of administrative process, for failure by the concessionaire); Rescission (by the concessionaire, by means of a law suit, for contractual breach by the Public Administration); Annulment (for any illegality in the bidding which precedes the concession); and Bankruptcy or termination of the concessionaire. Termination of the concession entails reversion to the granting power of all revertible assets, rights and privileges, as established in the contract and in the original public invitation notice. In this event, the Public Administration is also entitled to take over the service and relevant premises in order to allow its continuity. However, termination for completion of the contractual term or expropriation obliges the granting power to proceed with prior surveys and appraisals in order to determine the indemnification due the concessionaire for the investments made.

24

Telecommunications Introduction. The Brazilian telecommunications sector began to be privatized in 1995 once the Federal Government realized that it would not be able to make the investments needed to keep up with emerging technology. The privatization was made possible thanks to an amendment in the Brazilian Constitution, which allowed private entities to invest in telecommunications services under licenses granted by the Federal Government. The amendment also called for a new law to establish the general rules of the telecommunications sector and the creation of a specific regulatory agency ("ANATEL"). This law was enacted in July of 1997 (Law No. 9,472/97). Licensing. Companies need licenses to engage in any form of telecommunications services. Licenses are granted through a concession, permission, or authorization. Concessions, contractual in nature, are generally used for complex services considered to be of public interest (where the obligation of universal service is present). Fixed telephony services rendered by the now privatized companies that composed the Telebras system is one example. Authorizations are granted for services where the obligation of universal service is not present. Almost all services fall today under the latter classification, including cellular service, paging etc.. Permissions are used only in exceptional circumstances, and for a temporary period of time. Telecommunications-related licenses are most often non-exclusive in nature. Concession terms vary from 10 to 20 years, depending upon the nature of the service and level of investment, and are generally renewable for one or more additional periods. For authorizations, term is undefined. In principle, public bidding is required for the granting of a concession, while it is only required for the granting of an authorization when demand exceeds availability or when the use of radio frequency is involved. The particular licensing procedures for each type of service need to be reviewed on a case-by-case basis. There are still several restrictions to the obtaining of license for telephony services in Brazil. The provision of mobile and fixed telephony is still restricted to a group of companies that currently owns the appropriate licenses. In 2002, when, according to the applicable legislation, any company will be entitled to render any service, a new era of competition shall start. The incumbent fixed telephony operators however, must comply with their obligations of quality and universal service in order to benefit from this liberalization. Competition. Nowadays, all telecommunications services are carried out by private companies, including fixed and mobile telephony services. The government project for the sector aims at establishment of an environment of free and fair competition among telecommunications services providers. In the fixed telephony service there is a duopoly currently in place, with two operators in each of the four regions in which the country was

25

divided. One is the incumbent company originated from the privatized state-owned company, and the other is the newcomer, also called "mirror" company. With regard to the mobile cellular telephony service, there are already two companies operating in each state of the country, using either CDMA or TDMA technologies. ANATEL has recently granted four additional licenses (GSM 1.8 GHz) to increase the level of competition, resulting in four competitors in each state of the Northern and Northeast Regions and three competitors for each state for the rest of the country. Bid for 3G licenses are expected to occur in 2003. With respect to private network services, the competition is already installed, with many operators exploring the main regions of the country. Restrictions on Foreign Investment. Decree No. 2,617 of June 6, 1998 established that the only requirement for the rendering of telecommunications services is that the company and its immediate shareholders be located in Brazil and organized under the laws of Brazil. However, a few restrictions still apply for specific services. The following chart evidences current restrictions (aside from those stated on Decree 26/7/98) on foreign investment in connection with licensing: No restrictions. General Rule: Fixed Telephony, Cellular Telephony, paging, trunking. Foreign investment limited to 49% of voting Cable TV capital Only Brazilian ownership Radio and television broadcasting Restriction to cross ownership. In order to guarantee a competitive environment, the Brazilian regulations are very concerned about cross ownership in the telecommunications sector. As a general rule, licenses that operate a service in a given region are prohibited from obtaining additional licenses or acquiring companies that operate the same service in the same region. The same restriction applies to any shareholder that has actual control power on a determined licensee. The operator is subject to several penalties if it fails to comply with this cross ownership requirements, being the cancellation of the license the most severe. To guarantee the compliance with the cross ownership rules, the Law establishes that any acquisition of a telecommunications services provider must be submitted to prior approval by ANATEL. Fees and Taxation. All telecommunications services are subject to fees collected by ANATEL for licensing and inspection based on a number of factors, such as the specific

26

type of service, the number of stations, space used in the radio frequency spectrum, among others. The main tax for telecommunications services if the sales and service tax ("ICMS"), collected at the state level; depending on the State it varies from 25% to 33% of the total price charged for the telecommunications service. The taxable event is broadly defined to include the generation, transmission, retransmission, repetition, amplification or reception of communications of any nature. As a practical matter, taxes are not imposed on call originating outside of Brazil unless they are collect calls. Internet Providers. The provision on Internet service is classified as value added service, which means an activity that adds value to a telecommunications service. Since Internet is not a telecommunications service, Internet Service Providers (ISP) are not subject to licensing before ANATEL.

Electric Power Introduction. Unlike other infrastructure industries in Brazil, the power industry began in the late 1800s as a private investment. It was not until the early 1950s, due to a post-war nationalization wave, that the sector became predominantly state owned. Almost fifty years later, the Brazilian federal and state governments are carrying out one of the world's largest privatization programs in the power sector, and all restrictions to foreign investment have been lifted. Together with the privatization program, Brazil is remodeling its regulatory framework to accommodate such privatization. Public utilities must comply with new rules of concession; independent power producers are expected to compete for customers; an independent regulatory agency was created to monitor the industry; and a spot market is expected to be fully operative by 2006. Industry Overview. Owing to its geography, which is naturally privileged in potential water energy sources, currently 90% of Brazils energy comes from hydroelectric plants and only 10% from other sources. Thus, a strong effort is being made by the Government to stimulate the development of conventional thermal sources (more common, which use the burning of fuel such as oil and firewood or natural gas). Co-generation is also being stimulated, which is simply the concomitant generation of electric power and vapor, widely used in certain industrial activities. Other alternative power generation sources such as solar, aeolian (produced by the force of the wind) and biomass (residues resulting from natural or human transformations) are still developed on a relatively small scale in Brazil, but are gradually drawing attention. Insofar as nuclear power is concerned, even before the execution of the agreement with Germany for the creation of the Brazilian Nuclear Program in 1970, Brazil had already built the Angra-I plant in partnership with the USA. The program originally foresaw the

27

construction of 8 more nuclear plants, but only Angra-II was built and recently started, and only Angra-III, which is in the study phase, may be erected in the future. Power generation installed capacity in Brazil currently amounts to approximately 64,300 MW. Due to the boom in consumption probably resulting from the economic recovery, consumption reached a record 55,753 MW in April 2000 and as reservoir water levels are below the needed levels and due to the lack of investments, a Brazil is facing a collapse of its electric energy system which shall probably continue in 2002 up to the start up of new thermal plants. Power production must be increased by at least an additional 40% by 2004, i.e., approximately 26,000 MW more, to meet growing demand. Of these 26,000: 13,000 MW depend on some 50 new hydroelectric plants (whereas it takes on average 6 years to build one); 11,000 MW will be generated by the Priority Thermoelectric Program enacted on February, 2000 by the Ministry of Energy through which 49 plants will be built and commence operations between 2001 and 2004 so as to achieve by the year 2009 a hydro/thermo ration of eight/twenty percent, relying on financing support from the National Social Economic Development Bank (BNDES); and 2,000 MW will be imported from Argentina and/or other countries.

The Priority Thermoelectric Program shall increase the participation of the natural gas in the national energetic matrix from 3% to 10%. New sources of gas supply (mostly from Argentina and Bolivia) and the recent abolition of the state monopoly on upstream prospecting will certainly foster thermal expansion. Of Brazil's approximately 200,000 km of transmission lines are owned by public federal, state and municipal governments. Given the unique features of hydropower, most plants in Brazil are interconnected to regional systems and are subject to control of their respective dispatch by the National System Operator ("ONS"), which is responsible for the dispatch, schedule and planning of generation, as well as for coordination and management of the transmission grid. Such interconnection/coordination allows power plants to participate in power pools through which they can trade excess capacity, thus reducing waste. The country is divided in two interconnected systems - the South/Southeast/Center/West system and the North/Northeast system. In addition, several "isolated", non-interconnected systems exist, mostly in the far north. In 1999, with the implementation of the North/South Transmission Lines, the former systems were connected, creating a National Interconnected System, which handles approximately 98% of the Brazilian power market. The Interconnected System is now operated by the ONS. For the use and interconnection to the Brazilian Interconnected Basic Grid, agents must execute two agreements: one for the interconnection to the grid (Contrato de Conexo Transmisso - CCT) paying the correspondent fees, and another for use of transmission

28

lines of the grid (Contrato de Uso do Sistema de Transmisso - CUST), also paying the use fees established by ANEEL. The exploration of the transmission line system is also opened to the private sector by means of the grant of authorizations for the operation and maintenance. The purpose of the authorization is two-fold: to expand the national market' supply capacity and to allow all industry agents free access to the Brazilian Interconnected Basic Grid. Concessions, authorizations. In accordance with the Federal Constitution3, it is incumbent upon the Union to legislate and exploit, either directly or by means of authorization, concession or permission, electric power services and the energetic exploitation of water courses, in articulation with the States in which the potential hydroenergetic sources are located. For the exploitation of the energy generation activity in hydroelectric or terminal plants with potentials of, respectively, 1MW and 5MW, the Federal Constitution4 des not require an invitation to bid process, being sufficient a previous communication to the competent federal body. Grants to the private sector may be on an onerous basis in favor of the Union. The concessions for electric power generation will be for the time it takes for the amortization of the investments, limited to 35 years reckoned from the execution date of the respective contract. This term is renewable for a maximum equal term, at the discretion of the conceding power, under the conditions established in the contract. Concessions for the transmission and distribution of electric power follow the same rules contained in the foregoing paragraph, but the respective term is limited to 30 years. In the table below it is possible visualize when a concession, or authorization or permit are required for the exploitation of a hydroelectric plant (UHE) or thermoelectric plant (UTE). Restructuring. In 1995 the Federal Government began an extensive restructuring program of the Brazilian electric sector, with the objective of replacing the monopolistic system with a free competition system. In this context, the state monopoly gave way to a competitive regime between the private economic agents, especially in the power generation and marketing areas, while the transmission and distribution activities continue subject to greater, still required, regulation. The new model Brazil has adopted is based on the following changes: The divestiture of the electric sector by the separation of the power generation, transmission and distribution activities; Free marketing of power by market agents;
3 4

Constitution Article 21, XII(b) Constitution Article 176, Paragraph 3

29

Creation of the Wholesale Power Market (MAE); Creation of the National Electric System Operator (ONS); and Creation of the Independent Producer figure.

With the objective of implementing the new policy for the sector, the Federal Government created the National Electric Power Agency (ANEEL). The principal functions of this Agency are to: Implement government policies for the sector; Promote invitations to bid for contracting concessionaires, for the provision of public electric power production, transmission and distribution services and the exploitation of hydraulic potentials; Regulate the services and inspect its provision; Apply penalties; Intervene in service renderings in certain situations determined by law; Confirm rate readjustment and reviews; and Provide a competitive environment. There is no regulatory restriction preventing free foreign participation in the capital stock of electric power companies. However, one of ANEELs greatest challenges, for the implementation of the new electric sector model, is to restrict the concentration of economic groups that may adversely affect the countrys competitive environment. The Electric Power Wholesale Market (MAE) was created by Law No. 9,648/98 with the objective of realizing purchase and sales transactions of electric power in the interconnected electric systems. MAE operates by means of commercial rules and apportionment criteria of previously defined administrative costs, also serving as a forum for solving any controversy between the trading agents. MAE is composed of numerous members including electric power distributors, generators and marketers and is considered a key component of the new electric sector model by the market. MAE was set up to operate as a type of stock exchange where short -term electricity purchase and sales contracts are traded between the parties. As for the coordination and control activities of electric power generation and transmission operations in the integrated systems, Law No. 9,648/98 instituted the National Electric System Operator (ONS). The Principal duties of ONS are: Planning and programming of the operation and centralized expedition of generation; Supervision and coordination of the electrical system operation centers; Supervision and control of the national interconnected electro-energetic systems and international interconnections; Contracting and administration of the electric power transmission services and respective access conditions, and ancillary services.

30

The restructuring also provided for an 8-year transition period, starting 1998 and ending 2005, during which the energy negotiated under bilateral supply agreements are being gradually diverted to and negotiated by means of bilateral agreements at MAE. The strong awareness of the need to protect the environment, beginning in the 80s, which, notwithstanding its merits, caused and continues causing a series of difficulties for the expansion of the energy infrastructure, to this day, is one of the great challenges to be faced in generation, distribution and transmission of electric energy. IPPs and Self-Producer. It is worth mentioning that the new reformulation of the electric sector created the figure of the independent power producer (IPPs), that is, the corporate entity or companies united in a consortium that receive a concession or authorization from the conceding power to produce electric power with the aim of marketing all or part of the power produced, at their expense and risk. This figure is an evolution of the self-producer, whose permit to sell electric power to third parties was theretofore cautiously provided for in the legislation. IPPs and Self-Producer do not receive concessions or permits to render public services. Rather, they receive authorizations (or specific concessions to explore water resources) that merely allow them to produce, use or sell electric energy. The IPP is subject to its own operating and commercial rules, observing the provisions in law and in the concession or authorization contracts. The IPP may sell part or all of its output to customers to: the public electric power service concessionaire; certain consumers, whose tension and charge characteristics are set forth in law; consumers belonging to industrial or commercial complexes, to which the independent producer also supplies vapor from the co-generation process; group of consumers, irrespective of tension or charge, under conditions previously adjusted with the local distribution concessionaire; and any consumer that demonstrates to the conceding power that it has not been assured supply by a local concessionaire within the period of 180 days from the date of the respective request. The Self-Producer may sell or trade any exceeding energy it is unable to consume. IPPs and Self-Producers are not granted monopoly rights. With the exception of specific cases, they are also not subject to price controls. The IPPs, in particular, compete with public utilities and among themselves for large customers, other public utilities, pools of customers or any customer that is unattended by a public utility. The law provides for a gradual enlargement of the range of free customers that may purchase from IPPs. The existing generating companies that are being privatized will be converted from the public utility to the IPP regime. Nevertheless, most of their existing output (the so-called old energy) shall be subject to the regulated regime of the Initial Contracts for the transition period ending in 2005.

31

Project sponsors and lenders are well advised to pay particular attention to the intricacies of current law when negotiating or reviewing project documentation. In addition to the above mentioned authorization deed, the rights and obligations of IPPs are stated in the power purchase agreements (PPAs) they execute with customers. Power Trader Agent. Emerging in this new scenario is the power trader agent, which tends to grow in an accelerated manner. The trader agent is simply a company that purchases the electric power produced by the generators and sells it to free consumers (customers currently with a more than 3 MW demand and that can choose their suppliers). As opposed to the power distributor companies, the agents have no distribution assets like sub-stations, transformers and transmission lines, enabling them to maintain a slim and competitive structure. In order to render the marketing viable, the infrastructure needs to be rented subject to a transport fee. The agents can also differentiate their services by providing technical support services. Privatizations and Invitations to Bid. To date approximately 60% of the electric power distribution companies have been privatized, 20% of the hydroelectric generation companies, and almost none of the companies from the transmission area. The only federal generating company privatized, was the company resulting from the splitup of Eletrosul, called Gerasul, which was acquired by a Belgian group. The Government now studies a new model for the privatization of the other three federal generation companies: FURNAS, CHESF and ELETRONORTE, promised for the coming years. New concessions for the construction of transmission lines are continuously being awarded to the private sector. Due to the lack of energy and the urgency for new transmission lines the Government has recently decided to award new concessions to the public owned companies do avoid bidding process that would cause more delays. Investments. Owing to the expressive increase in demand for electric power in the Country, reduced investments, the moderate number of constructions to be completed over the next few years, and the shortage of rain, Brazil is currently passing through a power rationing and blackouts may occur in certain points of the Country. Considering the deficient electric power generation allied to abundant existing water resources, and the tendency of an increase in other methods of generation, we may conclude that this is a particularly favorable moment for investments in the electric sector. Furthermore, among the Latin American countries, Brazil is expected to attract the greatest volume in investments over the next five years.

32

Real Estate

Introduction. According to Brazilian legal principles questions related to property are governed by legislation of the place where the property is situated. Thus, Brazilian laws rule immovable properties located in Brazil. Pursuant to the Brazilian Civil Code, assets are divided into two broad categories: movables (i.e. personal) and immovable assets. The title of movable assets is transferred, in principle, by means of its deliver to the acquirer. Transfer of title of immovable assets, on its turn, only occurs upon registration of the act that transferred it or the rights thereto, with the relevant Real Estate Registry. Immovable assets category encompasses the land together with its surface and all accessions, constructions and improvements attached to or forming part of the land, the air space above the land and the subsoil. However, waterfalls and also mines and products from the subsoil are considered separate assets from the land. The exploitation of mineral resources and hydroelectric power are subject to authorization from the federal government, according to the Brazilian Federal Constitution. In furtherance, although certain assets are physically moveable (i.e. machinery and equipment used at industrial manufacturing and ships) they are construed under the Brazilian Civil Code as immovable assets, by means of a legal fiction. The rights related to immovable assets (including real estate properties) are divided into the right of possession and the right of ownership. The right of possession is the personal right arising from the ownership or dominion over the property. The right of ownership is the right of an individual to use, enjoy and dispose the property. Some restrictions may apply to such right, such as in cases of creation of easements, expropriation of the property by government authorities or in case of creditors composition, insolvency or bankruptcy. Also, restrictions may apply in case of national interests. In addition, the use of the property may be subject to zoning and construction limitations as provided under the relevant laws. Acquisition of properties. In Brazil the transfer of title to a property only occurs upon registration of the act which transferred it, or the rights thereto, with the relevant Real Estate Registry. For registration purposes, every property must be registered at the specific Real Estate Registry having jurisdiction over the area in which the property is located. Such registration is made under a specific enrollment (matrcula) that lists all data in respect of the property, including details of the current and former ownership of the property, the existence of liens and mortgages and easements.

33

Typically, a property is transferred upon the registration of the purchase and sale agreement executed by buyer and seller at the matrcula of the property at the Real Estate Registry. For purposes of transferring title, the purchase and sale agreement must be executed in a public format, by means of a public deed executed before a notary public. A property may also be acquired by inheritance, usucapio or accession (the enlargement of the land arising from the conveyance of parcel of the soil through natural causes). In such cases, the court order granting the rights over the property is the instrument to be registered at the Real Estate Registry. Provided the matrcula of the property is the relevant document which details the relevant data of the property, any document, act or instrument which may modify, extinguish, transmit or create rights related to the property, must also be registered. Hence, to be perfected and valid before third parties, a mortgage or a lien over a property shall be registered. Restrictions to foreigners. Brazilian laws restrict the acquisition of a property within any rural area larger than 3 rural blocks by a foreign individual resident in Brazil or by a foreign entity authorized to execute its activities in Brazil. Except if the acquisition is due to inheritance rights, foreign individuals resident abroad may only acquire a rural area if he/she undertakes to reside in Brazil and start exploring the area within three years from the acquisition. The size of a rural block varies depending upon the region and the state in which it is located. Other restrictions may apply to foreigners in case of properties located in areas considered as of national security. Restrictions to foreigners are not applicable in case of collateral of rural properties, provided that in this case actual title to the property is not transferred, but only a security interest is created for the benefit of the foreigner creditor. Condominium. Several individuals or entities may be jointly entitled to the right of ownership in relation to the same property. In this case, a co-ownership (or condominium) will be deemed construed among the different owners, and each of them will be entitled to all rights associated to a specific ideal portion (frao ideal) of the property. The costs associated to the maintenance of the property (i.e. housekeeping and security) are shared among the members of the condominium. In case of a condominium, any of its members may exercise all rights of ownership, except those which are not consistent with the indivisibility of the property. Therefore, the entire property can not be transferred without the agreement of all the condominium members. The rights and obligations attributed to condominium members are generally governed by Brazilian Law No. 4,591 of December 16, 1964.

34

Taxes. The transfer of a property is subject to Real Estate Transfer Tax (ITBI). ITBI rates vary in accordance to the city in which the property is located and is calculated upon the actual value of the transaction or the appraised value of the property, whichever is higher. According to Brazils Federal Constitution, ITBI does not apply to real estate transfers pursuant to corporate mergers or contributions to paid-in capital. Additional state or local taxes may be levied on the property transfer. Real Estate Lease. Urban real estate lease agreements for both residential and commercial purposes (including the lease of premises located in shopping centers) are governed in Brazil by Law No. 8,425 of October 18, 1991 and also by the Civil Code. According to the law, among other obligations, upon execution of a lease agreement landlord must deliver the leased property to tenant in condition of use for the purposes set forth at the agreement. Moreover, landlord is liable for any damage or defects in the leased property prior to the lease and also, if that is the case, for the payment of the extraordinary condominium fees charged during the lease term (in other words, for the expenses necessary to maintain the structure and safety of the real estate). Tenant shall be responsible, amongst other obligations, for the correct and timely payment of the rent, charges, duties and ordinary condominium fees, if that is the case; the use of the real estate according to the purpose set forth at agreement; and returning the real estate at the term of the lease in the same condition tenant received it, except for the regular wear and tear. Further, tenant shall give landlord notice of any damage or defect which falls into landlord's obligations to repair. Contractual conditions with respect to the lease term, rental and improvements in the property may be freely negotiated by the parties. Notwithstanding, in Brazil it is typical to provide that tenant shall be responsible for the payment of the property tax levied on the leased property during the term of the agreement. According to the price adjustment rules today in force, the rent may be monetarily adjusted for inflation every 12 months as of its effective date. Rental should be adjusted in accordance to one of the various Brazilian inflation indices (e.g., IGP of Fundao Getlio Vargas). Regardless of the annual adjustment for inflation, according to Article 19 of Law No. 8,245/91, after 3 years of the lease term, any of the parties may request in court a revision of rental of non-residential premises, in order to adjust it to the market price. When a non-residential lease exceeds 5 years, the tenant has the right to have an automatic renewal of the lease (if some conditions are met, i.e. maintain the purposed use of the leased premise) and cannot be removed from the leased property unless for specific defaults. The rent for the lease extension is negotiable and if the parties cannot agree on the amount, the rental amount will be determined in court.

35

In case of sale of the real estate, tenant has the legal right of first refusal (if such right was not waived under the agreement). If tenant does not exercise such right, and only if the agreement provides that it shall continue in force in case of sale to third parties, the agreement was entered into for a fixed term, and if it is registered before the relevant Real Estate Registry, then the new owner of the real estate must comply with the agreement. The law also provides for different types of collateral landlord may request as security for tenant's compliance with the agreement (unless rental is paid in advance). They are a deposit equivalent to the maximum of three rents to be deposited into a savings account during the term of the lease, a personal guarantee extended by an individual or an entity (it may be replaced by a bank guarantee), or an insurance policy covering compliance of tenant's obligations. The law does not permit more than one type of collateral for the same lease agreement. During the lease term, landlord may not demand repossession of the property except if by mutual agreement with tenant, in case tenant breaches any contractual or legal obligation, if tenant does not pay the rent and other duties or if urgent repairs in the leased property have been ordered by the a public agent. Tenant, however, has the right to terminate the lease before its term, subject to the payment of the contractual penalty established by the parties on a pro rata basis, taking into account the elapsed term of the agreement. In the event of an expropriation of the property by public authorities, landlord and tenant may both seek indemnification from the expropriating authority, unless otherwise provided under the lease agreement. Shopping Mall Lease. In Brazil, shopping malls are incorporated under a condominium arrangement ruling the use of private areas (or the leased premises), access to every shopkeeper or tenant to its common areas. Thus, subject to the comments above with respect to the obligations regarding ordinary and extra ordinary condominium fees, both landlord and tenant shall bear the costs for the maintenance of the common areas of the center in good safety, order and cleanliness condition, including public rest-rooms, parking areas, entrances, exits, sidewalks, ways, alleys and trash collection. Furthermore, typically there are four documents associated with the landlord-tenant relationship with regard to the ruling of use of private and common areas in a shopping mall: the Declaratory Deed of General Norms Regulating the Functioning, Utilization and Lease of the Shopping Center; the Internal Rules of a Shopping Center; the Shopkeepers Association rules; and the specific lease between the landlord and the individual tenant. The Declaratory Deed sets forth the development, construction and basic operating rules for the center, and is a registered document with the incumbent Real Estate Registry. Provided the Declaratory Deed is registered it has priority over all subsequent documents such as individual leases, whether such leases are registered or not. If there is a conflicting clause between the Declaratory Deed and the individual lease, the clause in the Declaratory Deed

36

takes preference, unless the lease specifically references the conflicting clause and specifies the difference. It is not sufficient to state in the lease a general clause, that in case of conflict between the two documents, the lease clause applies. Each conflicting clause must be specifically enumerated and referenced in the lease for the clause to apply.

Environment Environment preservation was included in the worlds list of duties initially in 1972, with the meeting held in Stockholm. From such date, the environment has become one of the most important points to be considered by all countries, as the continuity of humanity depends on its preservation. Another key point concerning the environment is that there are no geopolitics borders to pollution, what makes the protection and preservation of the environment an international duty. Governing Laws. In Brazil, the environmental protection is regulated by Constitution, by federal, state and municipal laws, international treaties and the provisions of Mercosur. According to Article 225 of the Federal Constitution, every person has the right to an ecologically well-balanced environment. Its preservation and protection is a responsibility of the Public Power, as well as of the entire community. Furthermore, it considers the environment an asset for the common use of the people, which, as such, can not b e appropriated and is extra commercia. Competency. The rules of competency shall be duly examined previously to the application of environmental legislation, especially when considering that some states, as So Paulo, have edited state environmental legislation previously to the federal legislation, as herein explained. With the system of the division of competency amongst federated states, the exclusive competency of an administrative nature for matters related to the environment (Article 21, XVIII) to plan and promote permanent protection against public calamities, especially droughts and floods; (XIX) to institute the national water resources management system and define the criteria for granting of the right of use; (XX) to institute policies for urban development, including housing, basic sanitation and urban transport; (XXIII) to operate nuclear services and facilities of any research and mining, the enrichment and reprocessing, industrialization and trade of nuclear ores and their by-products; and of a legislative nature (Article 22, IV) waters, energies, information technology, telecommunications and radio broadcasting; (XI) traffic and transport, and (XIV) Indian populations was incumbent upon the Union. The protection of the environment, the control of pollution in any of its forms, the preservation of forests, fauna and flora, in a general manner, also became the

37

administrative authority of the States, Federal District and Municipalities, being, thus, common (Article 23 and paragraphs). Moreover, it was incumbent upon the Union, concurrently with the States and Federal District, to legislate for forests, hunting, fishing, fauna, the conservation of nature, protection of the soil and natural resources, protection of the environment and pollution control (Article 24, VI). With regard to the state competency, concurrent competency refers to whenever more than one federative body is conferred the power to legislate on a determinate matter While the common competency shall await a Supplementary Law for the definition of responsibilities, the concurrent competency already carries within it the rules of division between the political bodies. Besides the common competency in conjunction with the Union, Federal District and Municipalities, for administrative actions in the protection of the environment, the State also has a concurrent competency with the Union to legislate for forests, hunting, fishing, fauna, the conservation of nature, protection of the soil and natural resources, environmental protection and pollution control (Constitution Article 24). Thus, it is incumbent upon the States to complement the federal rules, without overstepping that which complies with their distinct attributes, that is, precautions and conditions particular to their region. Therefore, the State does not have exclusive authority over environmental matters, only the remaining matters, that is, any matter not contained in the constitutional text. In the infra-constitutional legislation, especially Law No. 6,938/81, which instituted the National Environmental Policy, environmental licensing plays a vitally important role for controlling potentially polluting activities, through the prior installation and operating licenses. When it comes to municipal competency, besides the common administrative competency with the Union, States and Federal District (Constitution Article 23, III, IV and VII), the municipal competency covers all the prerogatives directly oriented to matters of local interest (Constitution Article 30, I). In such case, the competency will be total if regulatory rules do not yet exist for the matter, and supplementary, if there are general rules of the Union and supplementary rules of the States. This possibility of the Municipality supplementing the federal and state legislation was already acknowledged by the infra-constitutional legislation, as mentioned in art. 2 of Law No. 6,938/81, which established that the Municipalities may draw up supplementary and

38

complementary regulations and standards related to the environment, provided the federal and state regulations are observed. A proposal for an Environmental Protection Code is pending in the Congress, aiming to consolidate all federal legislation regarding environmental issues. Such Code would define the scope of liability for financial institutions and would maintain strict liability for polluters. Following the federal initiative, the State of So Paulo is also discussing the implementation of an environment code. Environmental Licensing. The most important of all the environmental control mechanisms is the environmental licensing. Through the licensing the Public Administration, in the exercise of its prerogatives, establishes conditions and limits for the performance of certain activities. The Environmental Pre-Impact Study (EPIA) and the respective Environmental Impact Report (RIMA) are environmental licensing instruments. The EPIA basically operates in the sphere of the discretionary power of the Public Administration. Its role is of a broader scope than the RIMA, which it embraces in itself. The EPIA includes the study of the pertinent scientific and legal literature, the fieldwork, laboratory analyses and the actual text of the Report. The RIMA, on the other hand, will reflect the conclusions of the EPIA, being evident that the EPIA precedes the RIMA. Disassociated from the EPIA, the RIMA looses its validity. The activities that depend on the Environmental Impact Study and Environmental Impact Report are described in Article 2 of CONAMA Resolution No. 1/86. Decree No. 99,274/90, which regulates Law No. 6,938/81, determines the types of environmental licenses. Article 19 states that The Public Authority *+ will issue the following licenses: Prior License (LP) in the preliminary phase of the activitys planning, containing the basic requirements to be satisfied in the localization, installation and operation phases, observing the municipal, state and federal plans; Installation License (LI) authorizing commencement of installation of the business/enterprise in accordance with the specifications stipulated in the approved executive project; Operating License (LO) authorizing, following the necessary verifications, the start up of the licensed activity and the operation of its equipment, in accordance with that set forth in the Prior and Installation Licenses. The installation and operation activities of certain activities for telecommunications companies, i.e., cannot be commenced prior to the issuance of the aforementioned licenses, under penalty of functional liability and other sanctions. (Penalties range from the opening of an administrative proceeding, to pecuniary penalties resulting from violations of the environmental legislation).

39

Overall, it is incumbent upon the State environmental agency to license the activities that are considered as actually or potentially causing significant environmental degradation. However, Article 4 of CONAMA Resolution No. 237/97 provides that it is incumbent upon the Brazilian Environmental and Renewable Natural Resources Institute (IBAMA) to conduct environmental licensing of undertakings and activities of a significant national or regional environmental impact, to wit: Located and developed jointly in Brazil and in a borderline country; In territorial waters, the continental shelf, the exclusive economic zone, in Indian territory or in units of conservation of the Unions domain, located or developed in two or more States; Whose direct environmental impacts extend beyond the territorial limits of the Country or of one or more States; Relating to radioactive material; and Military bases and endeavors. Environmental Law has the task of establishing rules that indicate how to verify the needs for the use of environmental resources. The desire to use such assets or the technological possibility of exploiting them does not suffice. It is necessary to establish the reasonableness of this use, and to deny such use when the use is unreasonable or unnecessary, even if the assets are not currency scarce. The Federal Constitution, upon establishing the protection of the environment among the General principles of economic activity, confirmed the necessity of changes in the accrual of capitals, altering the standard and concept of development. It should be pointed out that Law No. 6,938/81 bring rules of a clearly economic nature, mainly in articles 2 and 4 of the respective items, to the extent that it places the need of licensing for potentially polluting activities, through its EPIA, RIMA, and RAIS instruments. Therefore, the Brazilian Environmental Laws do not intend to hinder technological or economic development, but simply aims at harmonizing environment and development, in the direction of the so-called sustainable development. The biodiversity shall be preserved without impeding the development of countries or the use of resources in a sustainable manner, concomitantly assuring the dignity of humans and human rights. Furthermore, it is emphasized, the development can no longer be obtained at any cost, and its cost has to be weighed against the benefit it brings and against future commitments. Civil, Administrative and Criminal Liability. Law No. 9,605/98, regulated by Decree No. 3,179/99, provides for the criminal and administrative sanctions derived from conducts and activities harmful to the environment. Such law imposes severe criminal punishment on individuals and legal entities that contribute to environmental damage, including officers, controllers, board of directors, managers and employees of legal entities.

40

The law provides for crimes against fauna, flora, pollution crimes, crimes against urban order and historical sites and against environmental administration. For the violations of an administrative nature, the law under examination presents the following sanctions: admonishment; simple fine; daily fine; seizure of animals, products and by-products of the fauna or flora, instruments, utensils, equipment or vehicles of any nature used in the violation; destruction or disuse; suspension of the p roducts sale and manufacture; embargo of the works or activity; demolition of the works; partial or total suspension of the activities; restriction of the following rights: suspension of registration, license or authorization; cancellation of registration, license or authorization; loss or restriction of incentives and tax benefits; loss or suspension of participation in credit lines in official financing agencies; prohibition of contracting with the Public Administration for up to 3 years. As innovations, it brought the non-utilization of imprisonment as a general rule for individual criminals, penal liability of legal entities and the enhancement of the intervention of the Public Administration, through authorizations, licenses and permits. For the administrative violations, the fines applied range from R$50 to R$50,000,000. The law also provides for piercing the corporate veil in any situation where the existence of a legal entity is a barrier to the recovery of damages caused to the environment. It is important to stress that the reparation of an environmental damage, of a civil nature, does not depend on the fault of the perpetrator of the action or on negligence (the liability is strict). However, as below mentioned, the imposition of a criminal sanction requires the demonstration of fault. Consequently, it is not the polluters conduct that is subjectively considered, but the occurrence of a result prejudicial to man and the environment. Law No. 6,938/81 confirms the strict liability, providing Article 14, paragraph 1, that the polluter is obliged to indemnify or repair the damages caused to the environment and the third parties affected by its activity, irrespective of the existence of fault. The criminal environmental liability was created by Law No. 9,605/98. In the criminal sphere, the responsibility does not go beyond the figure of the agent that perpetrated such act. Those who contribute to the practice of the crimes set forth in Law No. 9,605/98, will be subject to the penalties imposed, to the extent of their fault, including the director, officer, member of a board or technical body, auditor, manager, agent or agent mandatory of a legal entity who, being aware of the criminal conduct of others, fails to prevent its practice, when it could have been avoided. The reception of the penal liability of the legal entity in such law shows that there has been the perception of the role of companies in the contemporary world. In recent

41

decades pollution, intensive deforestation, hunting, predatory fishing and others are no longer practiced on a small scale. Environmental crime is principally corporate. Both individuals and private corporate bodies and public corporations can be incriminated. The field of private corporate bodies also includes associations, foundations and unions. Both the direct Public Administration and indirect Administration may also be held criminally liable. Those who in any way contribute to the practice of the crimes set forth in Law No. 9,605/98, will be subject to the penalties imposed, to the extent of their fault, including the director, officer, member of a board and technical body, auditor, manager, agent or agent mandatory of a legal entity who, being aware of the criminal conduct of another person, fails to impede its practice, when he or she could have acted to prevent such (Article 2). Thus, legal entities will be held administratively, civilly and criminally liable, as provided in the law, when the violation is perpetrated by a decision of its legal or contractual representative, or of its collegiums body, in the interest or benefit of its entity. The liability of legal entities does not exclude the liability of individuals, perpetrators, co-perpetrators or accessories to the same fact. Mercosur. With regard to Mercosur, the concern of its Environmental Protection is to resolve cross-border pollution issues such as the contamination of rivers by mercury used in gold mining; erosion due to deforestation; problems in monitoring national parks; illegal transportation by river of toxic waste; among others. Since the directives proposed by the Commissions of Mercosur are not self-implementing, member states must enact domestic legislation to put the directives into action. Taking all the environment exposition into consideration, the conclusion is that the environment is, undoubtedly, a new opportunity for business development. It must be considered in any new investment or strategy planning of a company, as for the quality of its products and its clean production, as for the important marketing instrument. Not only does the environment contribute to achieve sustainable development, it also ensures competitive advantages.

42

Sales Representatives and Distributors Sales Representatives or Agents. The Brazilian legal concept of a sales agent is rather broad, including practically any independent agent who works as an intermediary in the sale of products or services. Given the size of the country, many companies employ sales representatives so that they may best take advantage of Brazil's vast potential market. As a result, a number of rules have been established, creating an extremely protective environment for sales representatives in Brazil. General Requirements. Law No. 4,886 of December 9, 1965, as amended by Law No. 8,420 of May 8, 1992, regulates the activities of independent commercial representatives ("sales agents") in Brazil. The law provides that sales agents are individuals or legal entities that, without the existence of an employment relationship, are responsible for negotiating commercial transactions and soliciting purchase proposals or orders on behalf of one or more persons (the "principals"). Certain minimum protection is provided to these non-employee sales agents, along with the same general principles of labor laws for the protection of employees. The law requires that sales representative agreements in Brazil include general terms and conditions of the representation, a general or specific identification of the products or articles on which representation is based, the term (definite or indefinite) of the representation, the territory, the nature (exclusive or non-exclusive) of the representation and the duties and responsibilities of the contracting parties. Brazilian law does not prohibit an agency contract for a fixed term. However, a contract in force for a fixed term may be renewed for an indefinite term, only. Likewise, an agency contract executed by the same parties within 6 months after termination or expiration of another agent contract shall necessarily be in force for an indefinite term. On the other hand, the sole difference between an agent and an employee is that the latter works under the command of the employer. The giving of orders by principal to agent, as well as the payment of benefits typically due to employees such as Christmas bonus and vacation, could characterize an employment relationship between principal and the agent. Thus, so as to avoid such claim and its heavy economic burdens, it is if crucial relevance that the represented company includes the following restrictions in all its agency contracts: sales agents must always be established as a company formed by at least two partners; principals must avoid giving orders directly to the partners of the representative company or to its personnel. Also, these same orders must be restricted to the performance of the obligations of the sales agent. Indemnification. The law also provides for the indemnification of sales agents upon termination of a contract by the principal without "just cause" or by the agent with "just cause." The conditions calling for indemnification are clearly favorable to and protective of sales agents, setting the minimum amount at one twelfth (1/12) of the agent's total

43

compensation during the term of representation, in case of indefinite term representation contracts. In case of termination of a fixed-term contract, the indemnification shall be equal to the monthly average of the commissions paid until the date of termination, multiplied by one half (1/2) of the number of contractual months, as set forth in Law No. 8.420/92. Apparently there is a typo in Law No. 8,420/92 as the indemnification should be the average commission calculated as above, multiplied by one half of the number of the remaining months of the contract. However, thus far such typo has not been corrected. Furthermore, in case of indefinite term contracts, if the contract is terminated without cause, the terminating party is required to give 30-day advance notice of termination or to pay a compensation equal to 1/3 of the commissions earned by the agent in the past 3 months. Exclusivity of Representation. The agent is also guaranteed exclusive right to the zone of activity specified in the contract, unless otherwise stated. This exclusivity means that the agent is guaranteed the whole commission for that region, even if the sales are carried out by the company itself. The agent is not prohibited from representing other companies with the same or similar products in that zone unless otherwise agreed with the company. Venue Court. Judgment of controversies arising from the contract shall be discussed before the venue court of the agents domicile. Distributors. Law No. 4,886 of 1965 applies only to sales agents. Distributors who purchase products and resell them in their own name and for their own account are not afforded the specific protection outlined in Law No. 4,886, nor are they provided with a means of indemnification by law. There being no specific legislation protecting distributors, distribution agreements are governed by the Brazilian Civil and Commercial Codes. In the event of breach of a definite term contract before the end of the contractual term, the breaching party may be liable for damages. These damages include direct and (sometimes) indirect losses, but not punitive damages. Due care should be exercised whenever terminating a distribution agreement with a Brazilian party contracted for an indefinite term. It is recommended that the terminating party give as much prior notice as possible (e.g., three to six months), so as to allow the other party sufficient time to reorganize its business and to eliminate any basis for damages for unreasonable termination. The manufacturer cannot under any condition impose the produc ts resale prices on the distributor, because such procedure constitutes an infraction against the economic order. The manufacturer may, however, suggest the final prices for the product, without this constituting an obligation for the distributor.

44

One exception to the absence of specific legislation covering distribution agreements is Law No. 6,729 of 1979 (as amended by Law No. 8,132 of 1990), which regulates the distribution of automotive vehicles in Brazil. This statute is very specific and is only enforceable with respect to Brazilian automotive industry distribution agreements.

Arbitration In Brazil, the arbitration institute is regulated by Law No. 9,307/96. The innovation brought by such law consists in two aspects: it ratified the validity of the arbitration clause, establishing a specific regime for this institute and it simplified the execution of procedure of arbitral awards, exempting them from homologation by the Supreme Court of Brazil. Moreover, the principle of independent will was firmly established as the parties are allowed to choose the applicable law of litigation. According to such legislation, individuals and entities that are legally qualified to enter into agreements may resort to arbitration to settle disputes concerning their property rights. The legal rules governing arbitration may be freely established, including general principles of rules, custom, usage and international trade rules. Therefore, the Brazilian legislation on arbitration opened a new alternative for foreign investors to avoid local decisions from courts, preventing them from the high judiciary costs and bureaucratic proceedings. Disputes subject to arbitration are analyzed by specialists, with greater celerity and more flexible procedures. The parties may, by mutual agreement, define the procedure for selecting arbitrators and, so, the arbitration may be subject to the rules of a given institutional arbitration organization or specialized entity. An arbitrator is the counterpart of a court, as a matter of fact and of law. The final decision on an arbitration procedure is not subject to appeal or to validation by the judiciary system. The attorney is not an obligatory party of the arbitration system, the parties may put forward their claim through their attorneys but will at liberty to designate other persons to represent or assist them. The arbitration procedure is similar to the judicial procedure; it consists of a report, ground for decision, ruling and issuance of award. According to the referred law, in order to be recognized or enforced in Brazil, a foreign arbitration award shall be subject to the provisions set forth by the international treaty executed with the interested country, with due regard for the Brazilian legislation. In the

45

absence of such a treaty, however, a foreign arbitration award will only be subject to confirmation by the Supreme Court of Brazil. Regarding foreign judgments, they may be recognized and enforced in Brazil, by the Federal Supreme Court and the competent Brazilian lower court, irrespective of the existence of reciprocity from the part of the country from which such judgment is originated or a specific international treaty or convention between the country of origin of the judgment and Brazil. In addition to the restriction, the recognition will depend on the confirmation that the judgment is not contrary to national sovereignty, public policy or good custom. Various Arbitration Chambers are being created in Brazil, such as the Chamber of Mediation and Arbitration of So Paulo, linked to FIESP Federation of Industries of So Paulo, in which a significant number of arbitration procedures are underway. Last but not least, in July 1998, the Agreement on International Trade Arbitration of Mercosur was signed in Buenos Aires and it shall be in force with only one more ratification, as Argentina did ratify it on January 2000.

Insurance Governing Laws. The National System of Private Insurance was created by Decree-Law No. 73 of November 21, 1966, regulated by Decree No. 60,459 of , dated March 3, 1967, which instituted the National Council of Private Insurance (CNSP) and the Superintendence of Private Insurance (SUSEP), delegating regulatory authority to such organisms. Provisional Measure No. 1,940-17 of June 1, 2000, modified the composition of CNSP. CNSP is composed of government authorities and is responsible for establishing the principal rules for the organization and operation of insurance companies in Brazil. Its main attributions are: institute the private insurance policy; regulate the constitution, organization and functioning of the insurance companies, as well as to impose penalties; determine the main characteristics of the insurance and reinsurance agreements; establish the main lines of the reinsurance operations; prescribe the criterions to the implementation of Insurance and Reinsurance Companies. SUSEP is the CNSP regulatory and implementing agency, subordinated to the Ministry of Finance, responsible for implementing operational standards, monitoring compliance and imposing penalties for insurance and reinsurance companies in Brazil. There should also be mentioned another member of the National System of Private Insurance in Brazil: the Brazilian Institute of Reinsurance (IRB). IRB is a m ixed-capital entity responsible for all reinsurance, coinsurance and retrocession in Brazil. Due to the

46

privatization, IRB is currently undergoing severe transformation. Although IRB attributions were modified by an ordinary law (Law No. 9,307/96), the system remains the same as such law is under constitutional judgement in the Brazilian Supreme Court. The insurance rules and regulations are divided into two categories: life insurance and non-life insurance, consisting of all casualties and property insurance. Health insurance and retirement funds are regulated separately. The Ministry of Finance and SUSEP implemented in 1992 an Insurance Guideline Plan, which liberalized certain legal restrictions. Such guidelines were adopted to deregulate insurance operations while maintaining strict control on financial solvency, promote competition in the insurance market, end the monopoly over reinsurance activities and open the sector to foreign investment. With regard to the verifying of solvency and reserves of insurance companies, such mechanisms were strengthened. In Brazil, an insurance company must be organized in the form of a stock corporation and may not conduct any business other than insurance. The management of insurance companies must be conducted by professionals with proved experience and a university degree, according to CNSP Resolution No. 6/87, in addition to the non-existence of charges with criminal offense. Furthermore, insurance companies are not subject to the Brazilian general bankruptcy legislation, they are subject to specific liquidation rules. The license authorization for operation shall follow the procedures determined on Circular No. 122/00 from SUSEP. According to such rule, a license application shall be submit to SUSEP, along with an operation plan indicating its location and types of insurance activity to be held. The referred application and the documents evidencing compliance with specific measures are reviewed by the Minister of Finance (as the President of the CNSP), who, afterwards, grant the final authorization. With regard to the minimum stock capital required for operating an insurance company in Brazil, CNSP Resolution No. 23/1992 determines fixed and variable portions, related to locality and insurance segment. It is important to note that, prior to the submission of the application to obtain the authorization to implement insurance activities in Brazil, 50% of the capital (equivalent to the minimum capital required by the Resolution above mentioned), must be paid, either in cash or in Brazilian Government bonds and must be deposited in an escrow account in the name SUSEP until the final license is granted. The remaining 50% of the stock capital must be deposited within 1 year from the issuance of the final license. The operational requirements are determined by CNSP Resolution No. 8/89, which determines that insurance companies must prove compliance with the mandatory solvency ratios imposed by such Resolution. Operational and technical limits exist according to the level and type of insurance coverage provided.

47

SUSEP, through its agents, execute periodic inspections for reviews and financial statements audits on offices of the insurance companies and those of its brokers. Mediation of insurance sales must be performed by individual or firm insurance brokers legally licensed to negotiate and conclude insurance policy contracts. The application and registration of brokers in Brazil are a duty of SUSEP, following the rules set forth on Decree-Law No. 73/66. With relation to reinsurance, the aforementioned Decree-Law, the 13th Constitutional Amendment and Law No. 9,932/99 provide that the reinsurance activities are regulated by CNSP and that SUSEP is responsible for the attributions and duties previously delegated to IRB. Due to an action for unconstitutionality declaration presented by the Brazilian Labor Party in the Supreme Court, Law No. 9,932/99 is still not in force, which means that IRB is temporarily controlling the reinsurance market. A minimum stock capital is required from Brazilian Reinsurers, as well as it must be 50% paid up upon incorporation and the remaining must be paid within one year from the licensing act. The applicable legislation to reinsurers is the same as to insurance companies. Finally, Brazilian reinsurers have the possibility to operate in two different bases: as an admitted reinsurer subjected to registration with SUSEP; or as an eventual reinsurer not subject to registration with SUSEP.

Oil and Gas On August 6, 1997, the Brazilian Congress approved Law No. 9,478/97, known as the Petroleum Law, which regulates the determinations established in Constitutional Amendment No. 9 of 1995, and relaxes the State monopoly for the activities of exploration, development and production of oil and natural gas. This law further establishes the conditions for the exercise of the other economic activities of the monopoly related to the import and export of oil, oil products and natural gas, oil refining, natural gas processing, and the transportation of oil, oil products and natural gas. The Petroleum Law also created an agency (Agncia Nacional do Petrleo -- ANP) as the responsible body to regulate, contract and inspect the economic activities of the petroleum industry, including to: implement, within its sphere of influence, a national oil and natural gas policy, based on the national energy policies, and the terms of Chapter 1 of the Law No. 9.478/97, with emphasis on the guarantee of the supply of oil products throughout the national territory and the protection of the consumers interests as far as the price, quality and availability the products; promote studies to delineate Blocks for the purpose of licensing of exploration, development and production activities;

48

regulate the conduct of geological and geophysical services applied to petroleum exploration, in particular the acquisition of data to be commercialized on a nonexclusive basis; carry out and promote tenders for oil and natural gas exploration, development and production licensing, and to enter into and monitor agreements for these activities; authorize the activities of oil refining, natural gas processing, transportation, import and export of oil, oil products, and natural gas in the form established in Law No. 9.478/97 and accompanying regulations; establish criteria for the calculation of transportation tariffs and arbitrate related disputes as provided in Law No. 9.478/97; directly or through agreements with the States and the Federal District, inspect the main activities of the petroleum industry, as well as to apply the administrative sanctions and remedies provided in the Law, regulations, or contracts initiate eminent domain or condemnation activities in areas necessary for or and natural gas exploration, development and production, or the construction of refineries, pipelines and terminals; facilitate good practice in conservation and the rational use of or, or products and natural gas and the preservation of the environment; stimulate the research and the development of new technologies in the exploration, production, transportation, refining and processing sectors; organize and maintain the various information and technical data relating to petroleum industry activities; consolidate annually the information on the national reserves of or and natural gas provided by the concessionaires, and to be responsible for its proper disclosure and dissemination; inspect the adequate operation of the National System of Fuel Stocks and of the completion of the Annual Plan for Strategic Fuel Stocks, mentioned in Article 4 of the Law No. 8.176 of February 8,1991; coordinate with the other regulatory groups of the energy sector on matters of mutual interest, including technical support to the National Energy Policy Board (CNPE); regulate, authorize and inspect activities related to the national supply of fuel, either directly or through coordination with other State, Federal or Municipal bodies;] regulate and inspect the activities of distribution and resale of petroleum products and alcohol fuels; communicate to the Conselho Administrativo de Defesa Econmica (CADE) any violations to the economic order, observed in the course of the ANPs activities, that appropriate preventative or corrective measures can be taken by the pertinent legislature.

ANP in accordance with Law 9.478/97 of August 6,1997 has already carried out by public tender the 3 rounds for the Licensing of Blocks for the exploration, development and production of oil and natural gas. ROUND 1. On December 1998, the ANP launched the first licensing round. This Round was concluded on September 24,1999 when 11 companies signed Concession Agreements for 12 exploration blocks. In total, 21 bids were made on the 12 blocks awarded, from 14

49

companies representing 6 countries, exposing a total of R$ 487 million (approximately US$ 286 million). 11 companies, representing 6 countries, succeeded in winning at least one block, with signature bonuses totaling R$ 321 million (approximately US$ 189 million). ROUND 2. In mid 2000 ANP launched the second licensing round, Brazil Round 2, for contracting exploration, development and production activities for or and natural gas. This Round offered 23 blocks: 13 located in five offshore basins and 10 located in five onshore basins comprising a total area of 59,271 km2. ROUND 3. On the end of 2000 ANP, by means of Round 3, awarded contracts to companies or consortia of companies to carry out exploration, development and production activities of oil and natural gas on 34 out of 53 blocks.

Health Laws, Products Controlled by Public Health Agencies Introduction. Health laws fall under the realm of Administrative Law and are meant to regulate matters related to: the prevention of diseases, contagion and proliferation of transmissible illnesses; the production and commerce (import, transport, storage and distribution) of foodstuffs, pharmaceuticals, cosmetics, personal hygiene products, medical equipment (appliances, instruments and materials for medical and hospital use) and home sanitation products (insecticides, cleaning products); hygiene of public and other establishments where economic activities are carried out; potability of water; environmental clean-up; migration control and health requirement compliance of ports, airports and border areas; and the practice of certain public health professions and occupations. National Agency of Health Requirement Compliance (ANVISA). In the end of 1998, beginning of 1999 the National Agency of Health Requirement Compliance (ANVISA) was created. The ANVISA is a special government agency under the Ministry of Health, with administrative and financial autonomy and is in charge of executing the actions and measures of the National System of Health Requirement Compliance (SNVS). SNVS is a group of actions and measures taken by the government in order to protect public health in general by controlling the sanitary conditions of production, commerce and services related to health. ANVISA started its activities on April 26, 1999 upon the publication of its Internal Statutes. The Ministry of Health continues to formulate the national health requirement compliance policy and to establish the general directives of the SNVS, and also monitor and evaluate the execution of same. ANVISA, on the other hand, is responsible for the

50

execution and coordination of this policy and other directives, and is in charge of supervising each one of the steps of the production and commerce of products related to health, including the processes, input materials, technologies and establishments related to such products and services, as well as any other activities which are part of its organizational purpose. A Health Requirement Inspection Tax started being charged on May 10, 1999 and it is assessed on various services to be provided by the ANVISA, such as product registration, issuance of authorizations, approval of import / export operations, etc. Micro, small and medium companies may obtain discounts from 15% up to 95% on these taxes, depending on their annual invoicing. Foodstuffs. In theory, Decree-Law No. 986/69, the basic law in force regulating foodstuffs under the Federal Constitution, gives the Ministry of Health the authority to register and inspect food products. Nevertheless, a few laws have been passed giving the Ministry of Agriculture the authority to classify and register certain products such as beverages and a few types of food (especially that of animal or plant origin). In actuality, a grey zone has been formed between the authority of these Ministries, and in many cases the same products may be classified, registered and inspected by both. Each business or industrial division of a company in the food business must have an Operating License issued by the State Health Agency or by a local agency when authority is decentralized. In order to obtain this License, each division is first inspected by the health authorities in order to verify compliance with local health requirements, which establish the minimum conditions for each division to exercise each type of activity (production, storage, commerce or transport of foodstuffs). In order to simplify bureaucratic procedures and focus its attention on inspection activities, ANVISA exempted several types of foodstuffs from registration (approximately 70%) and the remaining part may only be exposed to consumption if duly registered before Ministry of Health / ANVISA. In the performance of their activities, foodstuff producers (including packagers, dividers and transporters) must follow the Proper Production Practices, which are a collection of procedures established by federal and State laws to ensure sanitary quality in food. ANVISA will be in charge of issuing the Certificate of Proper Production Practices. All foodstuffs are subject to Control Analysis. For imported products, this occurs at the time of customs clearance. If the foodstuffs are produced in Brazil, this step occurs during approval for consumption. This Control Analysis is performed by laboratories accredited by Brazilian authorities and is designed to verify the conformity of the products with the standards of quality and identity established by the Ministry of Health / ANVISA or Agriculture, as applicable. In addition to the Control Analysis, the health authorities may,

51

at any time, take a sample of the food product offered for sale or consumption and send it for Inspection Analysis, which is a process similar to Control Analysis. Pharmaceuticals, Cosmetics, Personal Hygiene Products, Medical Equipment and Home Sanitation Products. Pharmaceuticals, cosmetics, personal hygiene products, medical equipment and home sanitation products are also subject to Health rules. These items may only be produced and sold (or imported, distributed, stored and transported) if they are first registered with the Ministry of Health / ANVISA. In such case, ANVISA also exempted low risk cosmetic and home sanitation products (classified as level 1) from registration before the Ministry of Health. Thus, lipsticks, some types of shampoos and soaps, home cleanser, among others are no longer subject to registration. In order to apply for a product registration or exemption of registration, the producer, importer or merchant must have an Operating Authorization or a Special Operating Authorization (related to the type of product or activity) issued by the Ministry of Health / ANVISA. To obtain this Authorization, it is first necessary to present an Operating License of its facility. Similar to companies dealing with foodstuffs, each division of companies producing, importing and selling pharmaceuticals, cosmetics, personal hygiene products, medical equipment or home sanitation products must be compliant with the corresponding health requirements. The divisions are first inspected by the health authorities to verify compliance with the minimum requirements (type of floor, ceiling, measurements, ventilation, zoning, etc.) established by the laws of each State or municipality. As such, only those companies established in Brazil may obtain an Operating License and Operating Authorization, and subsequently apply for registration of their products with the Ministry of Health. Another important requirement is the need to hire a duly certified professional (e.g. chemist, pharmacist or engineer, depending on the type of activity the company carries out) to act as the technician responsible for the company and its products. This professional, as well as the producer or importer, must also be affiliated with the respective regulatory council for the area of activity to be performed in Brazil. Each type of product is covered by numerous guidelines, mostly administrative rules issued to regulate production, commerce, importation and registration procedures and documentation. Over one thousand administrative rules are issued by ANVISA, which makes this branch of Law an extremely dynamic one, faced with the ever-growing need to keep in line with applicable international standards and maintain compatible standards with other countries, especially those in Mercosur.

52

Other Products Under Health Rules. Cigarettes, beverage, human plasma, vaccine, vitamins, functional foodstuff, controlled drugs, toxics among others are also products regulated by Ministry of Health/ ANVISA. Labelling, Packaging and Advertising. Labelling and packaging for products under health rules are also issues of great importance. In addition to generic labelling standards established in the Brazilian Consumer Protection Code, or even in administrative rules issued by the Ministry of Health or Agriculture, many types of products are already covered by specific labelling rules. These rules have been constantly updated in order to adapt to new technological concerns, such as the migration of packaging waste to the products themselves. Advertising materials of products mentioned herein are also subject to health rules and its use depends on ANVISAs prior approval. Violations and Criminal Aspects. With respect to penalties, in addition to the inspections held by the appropriate authorities, producers, importers and merchants of products subject to health requirement compliance which do not comply with the pertinent health rules are also subject to civil and criminal action. In this vein, two new laws in the criminal sphere have recently been passed (Law No. 9.677/98 and Law No. 9.695/98) which establish severe punishment for those causing damage to public health in general. This may happen, for example, as a result of selling products beyond their expiration dates, by adding raw materials which have not been authorized or which have been tampered with, by selling products without the pertinent registration or having incorrect labelling. Violators are subject to fines, the closing of their establishments and even imprisonment. With respect to the sanctions applicable to the crimes against public health, such as search and seizure of property and judicial disposal of same, the ANVISAs powers were expanded to include the right to attach bank accounts held by violators as well as any company owners and managers responsible.

Insolvency Introduction. Brazilian law divides local legal entities in two categories: commercial companies and non-commercial (or civil) entities. The distinction between commercial companies and non-commercial entities is based on their activities. Commercial companies must register their corporate acts with the State Commercial Registry of their jurisdiction; non-commercial entities are required to have their company acts registered with the appropriate Civil Notary Public Office. In classifying a Brazilian entity, however, Brazilian courts look to substance over form. For instance, if a civil entity actually engages in commercial acts (e.g., buy-sell activities), such an entity should be treated as a commercial company.

53

Options for Insolvent Brazilian Entities. Under Brazilian law, only commercial companies are subject to bankruptcy. Conversely, non-commercial entities (as well as individuals) are subject to an insolvency proceeding regulated by the Brazilian Code of Civil Procedure. The insolvency proceeding is inspired by the bankruptcy law; most of its provisions are thus similar to the ones contained in the bankruptcy law. Bankruptcy for Commercial Entities. Under Brazilian bankruptcy law (Decree No. 7.661 of June 21, 1945 the "Bankruptcy Law"), a commercial company that becomes insolvent or whose liabilities are greater than its assets may file for either bankruptcy or concordata. Concordata is a procedure somewhat similar to the Chapter 11 reorganization in the U.S. whereby the insolvent entity and its creditors enter into an agreement to repay debts. As both bankruptcy and concordata are judicial procedures, they must be filed in the court with proper jurisdiction. Jurisdiction is proper in the court district where the head offices of the company are located. Bankruptcy may be filed by the insolvent company or requested by a creditor. In contrast, concordata may be filed only by the insolvent entity. Bankruptcy. The most significant legal consequences of the entry of bankruptcy include: The bankrupt company must cease all activities, close its facilities and terminate all employees. All debts of the bankrupt company will have their maturity dates accelerated and will become payable on the date the court declares the company bankrupt. A court-appointed trustee ("Trustee") lists all the company's assets the assets are then appraised by an expert appointed by the court and sold at a public auction. The Trustee pays the company's creditors according to the classification of their debts the Bankruptcy Law requires payment of the liquidated assets according to the following order of preference: first, wages and employment-related debts; second, tax debts; third, debts secured by collateral (e.g., mortgages, pledges, liens); and finally, unsecured debts (debts not secured by collateral). The Trustee may terminate all agreements that obligate the bankrupt company. All transactions the bankrupt company performed within 60 days before either the declaration of bankruptcy or the publication of the first notice of default, that result in a reduction of the company's assets, are presumed to be fraudulent and the competent court may consider them null and void. The court also may void transactions conducted before this 60-day period. In this case, however, fraud no longer is presumed but must be proven by means of a separate judicial procedure. Upon request of the Trustee, the court may commence a criminal inquiry to investigate any crimes the managers or officers of the bankrupt company may have committed. The Bankruptcy Law lists the actions that are considered criminal for bankruptcy purposes and provides for up to 4 years of incarceration. The criminal actions listed in the Bankruptcy Law include, among others: excessive expenditures incurred by the companys managers or officers, and their families; excessive expenditures incurred by the company; dilapidation of the company's assets in an attempt to obtain financial resources and postpone bankruptcy; preferential treatment of certain creditors in prejudice of others; destruction of the company's

54

books; forgery of the companys accounting books and similar documents; significant losses in risky transactions. If the court finds that the bankruptcy is fraudulent (see bullet above), the managers and officers of the bankrupt company will be barred from engaging in commercial activities for 5 years.

The bankrupt companys financial obligation to its creditors is not limited to the amount obtained from the public sale of its assets. Following the conclusion of the bankruptcy proceeding, the company remains liable for the remainder of the company's debt for 5 years, if the general manager of the bankrupt company did not commit any crime related to the bankruptcy (see same bullet above); or 10 years, if the general manager of the bankrupt company committed such a crime. Concordata. To qualify for a concordata, an insolvent company must prove, among other things, that its administrators did not commit any crimes to defraud creditors and that it holds assets equaling at least 50% of its unsecured and privileged debts a privileged debt consists of debt preferred for payment under the Bankruptcy Law, such as labor, social security and tax obligations. When filing for a concordata the company must list its creditors and propose an alternative plan for payment (Bankruptcy Law Art. 156). The alternative plan includes the promise for cash payments at up to a 50% discount of the outstanding debt if the plan considers up front payments or a renegotiation (or reorganization) of the unsecured, unprivileged debts if the plan considers installment payments; depending on the timing of the plan, the discounts vary.5 The concordata plan must conclude within 2 years. During this period the company must continue its normal course of business. However, the court having jurisdiction over the concordata will appoint a Trustee to supervise the company's businesses while the plan is outstanding. If the company fails to comply with the payment schedule the court approved, the concordata should be converted into bankruptcy. Because, as noted, labor-related debts are privileged under the Bankruptcy Law, they are not subject to renegotiation if a company files for concordata. The concordata thus does not directly benefit the insolvent company by allowing it to reduce or renegotiate its debts vis-avis its employees or any other privileged creditors. Moreover, if the company becomes insolvent as a direct consequence of its debt with employees or other privileged creditors, it will not qualify to receive the benefits of a concordata. Insolvency Proceeding. Under Brazilian law, a non-commercial entity (or an individual) who becomes insolvent or whose liabilities are greater than its assets is subject to the civil insolvency proceeding set forth in the Brazilian Code of Civil Procedure. To file for insolvency,
5

Discounts: 60% if in 6 months; 75% if in 12 months; 90% if in 18 months; and 100% if in 24 months. If in 18 or 24 months, at least 2/5 of the total debts must be paid within the first year.

55

the entity must commence the proceedings before the civil court having jurisdiction over its head offices. Similar to bankruptcy proceedings, either the insolvent entity or the creditors whose credits are unsecured may initiate the insolvency proceedings. However, the law is unclear as to whether a privileged creditor would qualify to initiate such proceedings. There is jurisprudence and case law maintaining both possibilities. The entity filing for insolvency must present to the court a detailed list of its creditors, specifying the amount and the nature of each debt. The entity also must present a detailed list of its assets, with an estimate of their value. The entity must yet detail the causes that justify filing for insolvency. Even though the law does not specifically require that an entity declared insolvent cease its activities, the legal consequences are very similar to the ones applicable to bankruptcy. The court will appoint a Trustee to liquidate the company's assets and pay the creditors. The creditors will be paid according to their debt classification. The order of preference to pay the debtors is the same adopted by the Bankruptcy Law. If the amount obtained with the sale of the entity's assets is enough to pay all the entity's debts, or if the trustee settles all debts with the creditors, the court ends the insolvency procedure. If, however, the entity's assets do not suffice to pay all of its debts, the insolvent company remains responsible to pay such debts for 5 years. This means that if during this 5year period the insolvent entity or if they are considered personally responsible its shareholders or quotaholders acquire any assets, such assets will be subject to collection. After this 5-year period, the insolvent entity may request that the court extinguish its liabilities. The creditors can challenge the request by proving that the company acquired assets sufficient to pay for either part or the entire debt. The provisions regulating the insolvency proceedings are silent with respect to criminal investigations. This means that applicable Brazilian criminal laws apply to crimes related to the insolvent entitys management or any other crimes related to the insolvency proceedings.

Taxes Tax Treaties. Brazil is a signatory of treaties to avoid double taxation with a few countries. Following the basic OECD model, the treaties provide for tax reductions on income such as royalties, interest, compensation, dividends and profits. The countries are with Argentina, Austria, Belgium, Canada, China, Czechoslovakia (now Czech Republic and Slovakia), Denmark, Ecuador, Finland, France, Germany, Hungary, India, Italy, Japan, Korea, Luxembourg, the Netherlands, Norway, the Philippines, Spain and Sweden.

56

Local Taxation. Introduction. Brazil has traditionally had a complex tax system. This section summarizes the most significant taxes affecting businesses in Brazil, non-Brazilians personal income, and related matters. Corporate Income Tax. Most businesses are required to pay corporate income tax, which is computed at a 15% rate on adjusted net income. Annual net income in excess of R$240,000 (approximately US$100k) is also subject to a 10% surtax. According to Law No. 9,430 of December 30, 1996, taxpayers may choose to calculate corporate income tax quarterly or annually. If it is calculated quarterly, it must also be paid quarterly. Based on the quarter net income, corporate income tax is levied at a 15% rate plus 10% surtax on net income in excess of R$60,000 per quarter. If instead it is calculated annually, taxpayers are required to anticipate monthly payments based on estimated income. Most companies pay monthly estimated income at 8% of monthly gross revenue plus capital gain and other revenues and positive results. Based on this monthly result a 15% rate applies plus 10% surtax on estimated income in excess of R$20,000 per month. Companies who choose the annual method of calculation pay monthly anticipations and, at year-end, further pay the balance due or are entitled to reimbursement (corresponding to the difference between the amount paid monthly and the amount calculated based on actual annual income). Yet another method used to calculate corporate income tax is the presumed method. In it corporate income tax is calculated quarterly and, for most activities, is 8% of gross revenue. Depending on the specific industry, other rates apply as a matter of law (e.g., 32% for most service providers). Based on the presumed income, a 15% rate applies and a 10% surtax is levied on presumed income in excess of R$60,000 per quarter. If the taxpayer selects this method to pay corporate income tax, the taxpayer is subject to no adjustment based on actual annual income. Not all taxpayers, though, can select the presumed method. Rather, only taxpayers who meet the following requirements6: revenues earned in the prior taxable year must not exceed R$24 million Profits, capital gains or other earnings cannot be foreign-source income (e.g., from export transactions); Finance companies or equivalent entities (as defined by law, such as factoring companies) cannot select presumed method; Companies cannot have tax benefits (e.g., tax exemption or income tax reduction); and
6

Until 1998 companies with direct equity interest by nonresidents could not select the presumed method but this restriction was repealed as of January 1, 1999.

57

Companies cannot have paid income tax calculated on a monthly, estimated basis;

Net operating losses (NOLs) generated in a taxable period can offset taxable income of subsequent periods. Though there is no statute of limitations for NOL use, offset is limited to 30% of taxable income (i.e., for each R$1 of income R$0.70 must be paid in cash even if the taxpayer has NOL). Until 1996 dividends paid to nonresidents were subject to a 15% withholding income tax, except for Japanese residents that were subject to the treaty rate of 12.5%. According to Law No. 9,249 of December 26, 1995, profits generated after January 1, 1996 are no longer subject to withholding income tax. Earnings and dividends generated before January 1, 1996 are still subject to withholding income tax at the prevailing rates of the years earnings were generated; this holds true even if the dividends are paid after 1996. Social Contribution Tax. Most entities are required to pay social contribution tax on net income. This is a true corporate income tax surcharge levied at the rate of 8%. Since January 1, 2000, the social contribution tax has been levied on a worldwide basis (i.e., the taxpayer's foreign-source income also became subject to this tax). On May 1, 1999, the 8% rate was temporarily increased to 12%. But on May 5, 2000 it was reduced to 9% and is expected to reduce again back to the original 8% as of December 31, 2002. The reason this tax is taxed separately from the corporate income tax is because it is paid to the social security system, and not to the Federal Administration. Tax basis for the social contribution tax is the net income specifically adjusted for purposes of this tax. Similarly to the corporate income tax, taxpayers may choose to calculate the social contribution tax quarterly or annually. If annually, the taxpayer must pay monthly on an estimated basis. Law No. 9,316 of November 22, 1996, provides that the social contribution tax is no longer deductible from net income for purposes of calculating the corporate income tax. So-called social contribution tax negative basis (i.e., NOLs) can be used to offset taxable income from subsequent periods yet limited to 30% of taxable income. Similar to NOLs for corporate income tax purposes, negative basis may be used to offset future taxable income without statute of limitation. The combined true corporate income tax rate in Brazil (i.e., corporate income tax and social contribution tax) is currently 34%; it should go down to 33% after January 1, 2003). Interest on Equity. Law No. 9,249 enacted in 1995 provides that Brazilian companies can pay or credit to its equity holders interest on equity, provided that the company has retained or current-year earnings and that the total amount of interest paid does not exceed 50% of the earnings. In addition to capital, basis to calculate the amount of interest on equity includes reserves (other than reappraisal reserves).

58

Interest rates used are based on the so-called government-monitored long-term interest rate (Taxa de Juros de Longo Prazo -- TJLP); interest rates are prorated. Expenses for the local payer are business, deductible expenses for corporate income tax and social contribution tax. Interest payments are subject to withholding income tax of 15% (accrued to equity holders or capitalized). Withholding Income Tax on Payments Abroad. As a general rule, payments to nonresidents are subject to withholding income tax. Until December 31, 1998, payments to nonresidents for services provided to Brazilian residents and payments to nonresident individuals for work compensation were subject to the general withholding income tax rate of 15%. Article 7 of Law No. 9,779 of January 19, 1999 increased the then prevailing 15% to 25%. The higher 25% rate for payment of services does not apply to interest on loans and to other types of payments that are not deemed to be services and that are subject to specific rules. For these, the lower, 15% withholding rate still applies. Article 8 of Law No. 9,779 increased from zero or 15% to 25% the rate for virtually all income payments to nonresidents of low-tax jurisdictions. Brazils IRS has listed the countries deemed to be low-tax jurisdictions. They are American Virgin Islands, Andorra, Anguilla, Antigua, Netherlands Antilles, Bahamas, Bahrain, Barbados, Barbuda, Belize, Bermuda, British Virgin Islands, Cayman Islands, Channel Islands (Jersey, Guernsey and Alderney), Cook Islands, Cyprus, Costa Rica, Djibouti, Dominica, Gibraltar, Granada, Isle of Man, Labuan, Liberia, Liechtenstein, Madeira (Portugal), Malta, Marshall Islands, Mauritius Islands, Monaco, Monserrat, Nauru, Nevis, Nieui, Panama, Saint Kitts, Saint Vincent, Samoa Islands, San Marino, Santa Lcia, Seychelles, Tonga and Vanuatu, Turks and Caico Islands. Contribution on Intervention of Public Property ("CIDE"). This is a recent contribution that became effective from January 1, 2001. It is due by Brazilian companies who: Hold licenses of use; Acquire technological knowledge (know-how); or Have entered into agreements to transfer technology with nonresidents. CIDE is owned by Brazilian companies but only if the other contracting party is a nonresident. The rate is 10% of the amount paid, credited, delivered, used or remitted monthly to nonresidents. It is due by the last business day of the fortnight following the month the royalty or fee was paid, credited, delivered, used or remitted abroad. CIDE was created to support a new social program (Programa de Estmulo Interao Universidade-Empresa para o Apoio Inovao): interaction between universities and companies to stimulate technological development. The program will be implemented via 59

scientific and technological research programs between universities, research centers and the productive sector. Gross Revenue Taxes. These are two: COFINS, at the rate of 3% and PIS at the rate of 0.65%. Their basis is monthly gross revenues of any kind (with only a few exceptions). They are paid to the welfare system. In 1999, if the taxpayer had taxable income 1% of COFINS paid could be used to offset the social contribution tax payable in the same period. However, principally due to its complexity, as of January 2000 this offsetting system was repealed. Import Duties. Import duties are payable at customs on an ad valorem basis. The rate varies depending on the type of product imported. As noted in the section Importing into Brazil above, imports are also subject to federal excise tax and state sales and services tax (see below). Export Tax. An export tax is due at the time of export. The tax is applied on an ad valorem basis to a limited list of products (e.g., certain sugar products, chemical products and leather). The tax rate varies depending on the type of product exported. Federal Excise Tax. The federal excise tax (Imposto sobre Produtos Industrializados) is a tax levied on manufactured products as they leave the plant where they are manufactured. It is also due on imported manufactured products at the time of importation or resale by the importer. Federal excise tax rates vary depending on the products nature: the more essential the lower the rates, which are contained in a specific tariff table. Though technically not a true value-added tax, the federal excise tax has certain typical elements of a value-added tax. As an example, manufacturers of manufactured products may credit the federal excise tax paid on imports and to local suppliers of raw material, intermediary products, wrapping and packaging materials used to manufacture the final product. The taxpayer actually pays to the government federal excise tax corresponding to the difference between the credited and the debited amounts. Financial Tax. A financial tax is levied on foreign currency exchange transactions entered into to transfer funds abroad for services, including technical assistance fees and royalties for the use of trademarks and patents. The local payer of funds is the taxpayer. This tax is collected by the commercial bank in Brazil at the time the transaction is closed. Currently, however, this rate is zero but the federal administration may increase it at any time. The financial tax is also due on currency exchange transactions designed to loan funds to Brazilian residents and/or to make certain investments in Brazil. Depending on the specific case, the rates vary from zero to 5%. Credit card and similar charges are subject to a 2% rate.

60

In addition to currency exchange transactions, the financial tax also applies to financial transactions involving credit, insurance and securities. Provisional Tax on Banking Transfer (Contribuio Provisria sobre Movimentao ou Transmisso de Valores e de Crditos de Natureza Financeira). Law No. 9,311 of October 24, 1996 created this tax to exist only temporarily. In 1999 it was extended until June 2002. From June 17, 1999 until June 16, 2000 all bank transfers or withdrawals of currency (e.g., cashing checks and wire transfers) were subject to this tax at a 0,38% rate. From June 17, 2000 until March 11, 2001, the applicable rate was reduced to 0,30%. Starting March 12, 2001, the rate will once again increase to 0,38% until June 17, 2002, when it should end. State Sales and Services Tax. Similar to the federal excise tax, this state tax is another almost-true value-added tax on sales and certain services. It is payable upon imports into Brazil and sale or transfer within Brazil; it is also payable upon certain communication and intra- and interstate transportation services. The rates and tax benefits vary from state to state and they also depend on the specific transaction (e.g., intra- or interstate sales of goods, communication or transportation services). Currently, ordinary rates in the State of So Paulo are 12% on transportation services, 18% on products imported, sold or transferred, and 25% on communication services. Other rates may also apply depending on the specific product or service. Rates may also vary for interstate transactions: they are usually 7% but can be 12% depending on the state of destination; the rationale is the following: the more developed the state, the higher the rate. Similar to the federal excise tax and to VAT existing in most European countries, the system adopted for the state sales and services tax system enables the taxpayer to offset the tax paid in acquiring goods and services against the tax due on subsequent taxable transactions. The difference is the amount owed to the State government. Since November 1, 1996, importers/purchasers may book a credit for tax paid on imports and on local purchases of fixed assets; this credit was not available until November 1, 1996. From January 1, 2000, the taxpayer can take a credit for tax paid on acquiring goods (other than raw material, intermediate products and packaging material) consumed in the taxpayers activities. In certain (but not all) states taxpayers with excess credits may transfer them. In the State of So Paulo, the regulations provide for three alternatives: Transfer credits to the taxpayers branches or offices lo cated within the State of So Paulo; Transfer credits to interdependent companies, as defined in the regulations; Use credits to pay up to 40% of purchases to a supplier of raw material or fixed assets.

61

Municipal Services Tax. Federal regulations list specific services to which a municipal services tax applies. Rates vary from zero to 5%, depending on the type of service and the particular municipality in which the party rendering the services is located. Real Estate Property Tax. The real estate property tax is a municipal tax levied annually at a 1% rate on the appraised value of real estate in the Municipality of So Paulo; rates vary in each Municipality. Real Estate Transfer Tax. This is a municipal tax on the transfer of real estate. The rates vary according to the actual transaction amount or the appraised property value, whichever is higher. In So Paulo there is a fixed rate of 2%. This tax does not apply to real estate resulting from corporate reorganizations (e.g., mergers, in-kind capital contributions). Personal Income Taxation. The regulations distinguish resident from nonresident individuals. As a general rule, a Brazilian national is automatically a tax resident while legally domiciled in Brazil or, if not domiciled in Brazil, upon his or her election to be treated as a resident for tax purposes. Payments for individual's work. Brazilian-source payments to nonresident individuals were subject to a 15% withholding tax rate and as of January 1, 1999 are subject to a 25% withholding tax. Expatriates. As of January 1, 1999, temporary visa holders are considered residents for tax purposes from the moment they enter Brazil to work under an employment contract. Accordingly, they must file annual tax returns that include their worldwide income and payments are no longer subject to the 25% withholding tax mentioned immediately above. Instead, because they are considered residents for tax purposes, they are subject to the domestic bracket system of up to 27.5%. Holders of temporary visas entering the country for any reason other than under an employment contract are also considered residents for tax purposes after a period of 183 days of stay during a period of twelve months from the entrance. Nonresidents. Expatriates treated as nonresidents are subject to Brazilian income tax only for local-source income (i.e., from Brazilian residents, whether individuals or entities). Brazilian-source income (from salaries, wages, investments, rents or otherwise) is subject to the standard 25% withholding income tax rate, or a lower rate for treaties. The tax is generally based on gross payments (i.e., with no deductions); it becomes due as the funds are credited, made available, used on behalf of, or effectively remitted to, the nonresident, whichever occurs first.

62

Residents. Brazilian residents are subject to Brazilian income tax on their worldwide income, at progressive rates which vary depending upon the specific bracket of their net overall taxable income. The current rates are as follows: fifteen percent (15%) for income between R$ 900.00 and R$ 1,800.00 per month, and twenty seven and half percent (27,5%) for income that exceeds R$ 1,800.00. Nevertheless, under certain conditions and provided the expatriate's country grants reciprocity, resident expatriates are allowed to offset their Brazilian tax liability with federal taxes paid abroad on foreign source income. Transfer Pricing. As of January 1, 1997, Brazil introduced specific transfer pricing rules (Articles 18 through 24 of Law No. 9,430) aiming at preventing undue allocation of income in international commercial transactions between related parties. The system adopted is one of determining the maximum amounts of deductible expenses and minimum amount of taxable income for Brazilian entities engaged in transactions with related parties abroad. The transfer pricing rules provide for three methods to determine maximum deductible expenses, costs and charges related to goods, services or rights imported from a related party: Comparable Uncontrolled Price; Resale Price Less Profits; and Production Cost Plus Profits. For exports, taxpayers will be subject to adjustments whenever the average sales price in such transactions is lower than 90% of the average sales price in the Brazilian market during the same period and according to similar payment conditions. If the average price with related parties is lower than 90% of that used with unrelated parties, the export income will be adjusted according to one of the following methods: Average Price of Export Sales; Wholesale Price in the Destination Country Less Profits; Retail Price in the Destination Country Less Profits; and Acquisition or Production Cost Plus Taxes and Profits. On April 30, 1997, Treasury Ruling (Instruo Normativa) No. 38 was issued to regulate Law No. 9,430 and corresponding transfer pricing auditing procedures. In any event the taxpayer has the burden of proof to demonstrate compliance with transfer pricing rules, otherwise the tax administration may start a case. Costs and average prices to which Law No. 9,430 refers must be based on either official information and reports from the importing or exporting country or research conducted by companies or institutions with notorious technical expertise. For goods, services and rights imported from a related party, the taxpayer must prove that the corresponding costs, expenses and charges do not exceed at least one of the three methods set forth by Law No. 9,430. Otherwise, the tax authorities may challenge the

63

exceeding deduction. The exceeding amount shall be added back as taxable income and will thus be subject to the corporate income tax at the rate of 15% plus surcharge of 10%. The 9% social contribution on adjusted income also applies on the exceeding amount for a combined total of 34%. Although Law No. 9,430 does not provide for adjustments to compare the taxpayers prices with prices adopted by other Brazilian companies that import or sell identical or similar goods, services or rights in the Brazilian market, Treasury Ruling No. 38 creates some guidelines for comparison purposes. The regulations define similar goods as those that meet all tests below: Have the same nature and the same function; Can mutually replace each other in the function for which they are made; and Have equivalent specifications. Related Parties. The following parties are deemed to be related to the taxpayer for transfer pricing purposes: The parent company domiciled abroad; The branch or agency domiciled abroad; The person or entity resident or domiciled abroad whose equity interest in the taxpayer affords control or affiliate status (as defined in the Corporation Law, Law No. 6,404 of December 15, 1976, as amended); The legal entity domiciled abroad that is characterized as a controlled entity or an affiliate to the taxpayer (as defined in the Corporation Law); The legal entity domiciled abroad when it and the Brazilian taxpayer are under common corporate or administrative control or when at least 10% of equity of each entity is owned by the same person or legal entity; The person or legal entity resident or domiciled abroad that, together with the Brazilian taxpayer, holds interest in the capital of a third entity, the total of which characterizes them as the latter's controlling shareholders or affiliates (as defined in the Corporation Law); The person or legal entity resident and domiciled abroad that is associated, in the form or a consortium or condominium (as defined by law) in any enterprise; The person resident in Brazil who is a relative up to the third family degree (as defined by the Civil Code), the spouse or companion of the Brazilian company's management or direct or indirect controlling shareholder; The person or legal entity resident or domiciled abroad who has exclusive rights, as agent or distributor, to purchase and sell goods, services and rights of the Brazilian taxpayer; The person or legal entity resident or domiciled abroad who has the Brazilian taxpayer as exclusive agent or distributor to purchase or sell goods, services or rights.

64

In accordance with Treasury Ruling No. 38, the taxpayer must inform in its annual income tax return whether it has had transactions with related parties in the relevant fiscal year, although the transactions per se do not have to be disclosed at this time. Methods Applicable to Imports and Export of Goods, Services or Rights Comparable Uncontrolled Price Method. This method is defined as the arithmetical average of sales price of goods, services or rights, either identical or similar, prevailing in the Brazilian or foreign markets, on transactions of purchases and sales, under similar payment conditions. In other words, the taxpayer shall compare its costs, expenses and charges of goods, services or rights acquired from a related party, during a given period of time, with such arithmetical average. If the costs, expenses and charges incurred by the taxpayer exceed the arithmetical average, the exceeding amount shall then be added back as taxable income. Although Law No. 9,430 is silent, Treasury Ruling No. 38 provides for some adjustments between controlled and uncontrolled prices. For identical goods, services and rights, Treasury Ruling No. 38 permits adjustments related to: Payment conditions; Quantities negotiated; Obligations related to warranty for the good, service or right; Obligations related to promotion of the good, service or right by means of marketing and advertising; Obligations for quality control, standard of services and health conditions; Agency costs in purchase and sale transactions carried out by unrelated parties; Packaging; Freight and insurance. For similar goods, services or rights, besides the adjustments listed above, the regulations permit the taxpayer to make adjustments relating to physical differences between the goods, services or rights taken into consideration for comparison purposes. Still with respect to the arithmetical average, only transactions carried out between unrelated purchasers and sellers will be taken into consideration for purposes to calculate such average. In addition, it is important to note that neither Law No. 9,430 nor Treasury Ruling No. 38 elects a preferred jurisdiction, whether local, state or foreign, in which uncontrolled prices are adopted in transactions between unrelated partie s. Thus, a taxpayer may take into account, for purposes to calculate the arithmetical average price of goods, services or rights, uncontrolled prices adopted in either local, state or nationwide markets, or in import/export transactions, as well as in transactions carried on outside the Brazilian territory. Resale Price Less Profits Method. Under the old rules and regulations enacted late 1996 and mid-1997, importers could not use the resale price method when imported goods or 65

rights were subject to another manufacturing process that would result in a new product. In these cases, the importer had to use one of the two remaining methods that is, the comparable uncontrolled price method or (foreign) cost-plus method. On October 7, 1999, the President of Brazil issued Provisional Measure No. 1,924/99 (that eventually became Law No. 9,959/00) introducing some changes to Brazil's transfer pricing rules. The most relevant change is the adoption of a new resale price method for imports of goods or rights that will be subject to another manufacturing process in the country. Under the new rules, there is a bifurcation of the resale-price-less-profit method, depending on whether the importer will submit the imported products to manufacturing process within Brazil. For imported goods or rights to be subject to a further manufacturing process by the importer or a related entity, the resale-price-less-profit method is defined as the arithmetical average of resale prices of goods or rights (in Brazil) less: Unconditional discounts granted7; Taxes and contributions; Imposed on sales; or commissions and brokerage fees paid8; A profit margin of 60% calculated over the resale price after deducting the above three items and the value added in the country. For goods or rights imported into the country and not subject to a manufacturing process locally, the old rules continue to apply. In this case, the resale-price-less-profits method is defined as the arithmetical average of resale prices of goods or rights (in Brazil) less: Unconditional discounts granted; Taxes and contributions imposed on sales; Commissions and brokerage fees paid; and A profit margin of 20% calculated over the resale-price-profit margin of 20% calculated over the resale price. The resale price to be considered for purposes of this method is the price adopted by the taxpayer in the wholesale or retail markets with unrelated purchases, with either individuals or legal entities. Differences in payment conditions can be adjusted according to the interest rate adopted by the taxpayer in its regular sales. Finally, as to profit margins, the regulations accept profit margins other than those set forth in the specific methods, provided the taxpayer proves them based on publications,

Unconditional discounts are those granted at the time resale takes place, provided they are expressly shown in the corresponding tax invoice. 8 Include all taxes included in the sales price, e.g., ICMS, ISS (Municipal Service Tax), P.I.S. and COFINS contributions (turnover taxes).

66

surveys or reports prepared by foreign governments, foreign tax authorities, or companies or institutes of notorious technical knowledge. Production Cost Plus Profits Method. The third method used to determine arms-length prices for imports of goods, services or rights is the production cost plus profit. It is defined as the average production cost of goods, services or rights, either identical or similar, in the country where they have been originally produced, and the taxes levied on exports in such a country and a markup of 20% calculated over the production cost. According to the regulations, the following items can be computed in the (production) cost for purposes of this specific method: Acquisition costs of raw materials, intermediary products and packaging material used in the production of the good, service or right; Costs of other goods, services or rights used or consumed in the production of the relevant good, service or right; Cost of the personnel used in the production of the good, service or right, including those for production supervision, maintenance and security of production facilities and corresponding social charges; Costs of rents, leases, maintenance and repair, and depreciation and amortization charges of the goods, services or rights used in the production of the relevant good, service or right; Reasonable losses in the production process, since admitted by the tax legislation in the foreign country. Therefore, to determine the maximum deductible costs, expenses and charges according to this method, the taxpayer is required to prove they do not exceed the production cost, plus taxes and a 20% profit margin in the country the goods, services and rights have been produced. The profit margin of 20% applies over the production costs before the taxes levied on exports. Methods applicable to exports of goods, services or rights. Average Price of Export Sales Method. This is the first method to determine the minimum taxable income in exports of goods, services or rights with a related party. As mentioned in item 1 above, the taxpayer must show that the export price in a transaction with a related party is higher than 90% of the average sales price adopted in the Brazilian market with unrelated parties. Therefore, this is the first condition for the taxpayer to avoid allocation of income based on the methods set forth by the transfer pricing rules. For this purpose, the sales price in the Brazilian market shall be considered net of unconditional discounts, state sales and services tax, municipal service tax and the gross revenue taxes (PIS and COFINS). The export price shall be considered net of insurance and freight expenses borne by the exporter.

67

In case the export price does not exceed 90% of the average sales price in the Brazilian market, the taxpayer is required to compute a taxable income equal to one of the four methods provided by transfer pricing rules. The Average Price of Export Sales method is defined as the arithmetical average of export prices adopted by the taxpayer or another exporter of goods, services or rights, either identical or similar, with unrelated parties, during the same period of calculation of the corporate income tax and under similar payment conditions. If the taxpayer does not export goods, services or rights to unrelated parties, the tax authorities may compare the taxpayer's export prices with those adopted by third parties that export identical or similar goods, services or rights. The concept of similar goods for exports is the same as the one described to imports. If the taxpayer does not carry out sales in the Brazilian market either, the regulations allow to take into consideration sales prices adopted by third parties. In an extreme situation, the taxpayer may face allocation of income based on comparisons made with exports prices and sales prices in the Brazilian market both adopted by third parties. Wholesale Price in the Destination Country Less Profits Method. The second method for exports carried out with a related party is the wholesale price in the destination country less profit method. It is defined as the arithmetical average of sales of goods, either identical or similar, adopted in the wholesale market in the country of destination, with similar payment conditions, after deducting the taxes computed in the sales price, charged in such a country, and a profit margin of 15% over the wholesale price.

Retail Price in the Destination Country Less Profits Method. This method is similar to the preceding method, except for the fact that it takes into consideration the retail price instead of the wholesale price. It is defined as the arithmetical average price of goods, either identical or similar, adopted in the retail market in the country of destination, with similar payment conditions, after deducting the taxes computed in the sales price, charged in such a country, and a profit margin of 30% over the wholesale price. Production Cost Plus Profits Method. This is an authentic cost plus method. Such method requires the Brazilian seller to recognize, at least, a profit margin of 15% (plus the costs incurred) for income tax purposes. It is defined as the arithmetical average acquisition or production costs of goods, services or rights exported, including the taxes levied on exports in Brazil and a profit margin of 15% over the sum of costs and taxes. One of the relevant questions to be yet defined is whether services rendered by Brazilian service renderer within our territory, to a foreign related party, would in fact constitute

68

(or not) an exportation under the transfer pricing rules, or whether the latter concepts/principles should only be applicable, for instance, to services rendered outside the Brazilian boundaries, representing, therefore, a clear and actual exportation. Application for Lower Profit Margins. On April 30, 1997, the Ministry of Finance issued Ordinance (Portaria) No. 95 that permits taxpayers to apply for a change of profit margins set forth in the transfer pricing regulations. The Ordinance only provides for general rules and does not specify how taxpayers should pursue. The proper regulations to change profit margins for transfer pricing purposes are set forth in Treasury Ruling No. 38. The Treasury Ruling provides that changes in profit margins can result from either the tax authorities or a taxpayers request. Although not clear, this provision would also in theory permit the tax authorities to increase profit margin percentages. To change profit margins, the taxpayer must file an application with the Treasury and provide certain documents. The Treasury Ruling also requires the taxpayer to indicate the term within which the new profit margin will be adopted. The reason is yet unclear, particularly because the taxpayer has the opportunity to change the current to a better transfer pricing method at the beginning of each fiscal year (in Brazil, January 1). As the application is filed, the Treasury analyzes the proposed profit margin, the term within which it will apply and the documents the taxpayer presented. The Ruling authorizes the Treasury to request further information and documents, if necessary. If the Treasury does not accept the profit margin proposed, it notifies the taxpayer. No appeal is available. If the Treasury accepts the profit margin and the term, the application is sent to the Ministry of Finance who notifies the taxpayer by means of an Ordinance. If the Treasury accepts the profit margin but does not accept the term, it shall propose a new term that the taxpayer must follow. Again, no appeal is available. Market Penetration. Transfer pricing regulations provide for special treatment when a Brazilian exporter will start selling its products in a new marketplace. In this case, the regulations permit an exporter to adopt lower sales prices than 90% of the average sales price in the Brazilian market. The Brazilian exporter, however, can only benefit from these special provisions if, in addition to a previously approved "exportation plan" presented to the Treasury, the exporter complies with certain legal conditions. Intercompany Loans. Also in connection with transfer pricing, Law No. 9,430 sets forth the minimum (taxable) and maximum (deductible) interest rates charged in intercompany loans falling outside the Central Bank of Brazil's jurisdiction: LIBOR for six months plus 3%. Brazilian borrowers can only deduct a maximum interest rate of LIBOR plus 3% paid to a non resident related party, while Brazilian lenders must recognize as taxable income, at least, the same interest, in loans extended to foreign related parties.

69

Safe harbors (applicable to exports only). Treasury Ruling No. 38 set forth two unclear provisions, which some have interpreted as safe harbor situations. The first case provides that the taxpayer that has a net profit originating from export sales to related parties, before income tax and the nine percent (9%) social contribution on adjusted income and, of at least 5% over such sales, can demonstrate its compliance with the transfer pricing rules only with the documents of the relevant transactions with related parties. The second case provides for the same consequence when the taxpayer shows net export revenues originating from transactions with related parties equal or less than 5% of its total net revenues. Such situations cannot characterize as true safe harbors, particularly because the tax authorities have the power not to accept the amount of revenues recognized by the taxpayer. Nevertheless, it is important to note that such provisions only apply to export sales of goods, services or rights. They do not apply to taxpayers carrying out imports of goods, services or rights with foreign related parties. Low Tax Jurisdictions. In addition to the rules applicable to transactions between related parties, the transfer pricing regulations set forth that such rules also apply to international transactions carried out with a person or legal entity, whether related or not, located in the so-called low tax jurisdictions. For transfer pricing purposes, a low tax jurisdiction is deemed to be the country that taxes income at a maximum rate below 20%. On December 29, 1999, the Federal Revenue Department issued Treasury Ruling No. 164 expanding and consolidating the existing list of locations deemed to be low tax jurisdictions for transfer pricing and withholding tax purposes. Again, on June 27,2000 the Federal Revenue Department issued a new Treasury Ruling No. 68/00 adding new countries to the list of low tax jurisdictions. The complete list is contained in subsection Withholding Income Tax on Payments Abroad above.

Revised 2009

70