Luciana Bassani
Gameleira Pelagio Fabião Bassani, Rio de Janeiro
luciana.bassani@gameleirapelagio.com.br

Introduction

Since the Covid-19 pandemic, Brazilian contractual law has evolved considerably, by removing certain legal formalities and regulations that no longer have a place in a virtual and globalised world. Franchising legislation has undergone a similar evolution.

Brazilian legislation applicable to franchise agreements

In Brazil, the basic regulations applicable to franchise agreements were Law 8,955, dated 15 December 1994, and the general provisions of contracts in the Brazilian Civil Code (Law 10,406 of 10 January 2002). On 26 December 2019, the Bill Project 219/2015 was enacted into Law 13,966/19 (the ‘New Franchise Law’) and revoked the previous one.

The New Franchise Law

The New Franchise Law came into force on 26 March 2020, establishing new rules such as, (among others):

1. A broader concept of commercial franchise agreements, including the right to use other intellectual property rights by the franchisee and not only trademarks and patents, as well as the mischaracterisation of an end consumer or an employment relationship between the franchiser and the franchisee or their employees, as already recognised by the Brazilian case law (Article 1).

2. The possibility of public companies and non-profit organisations being parties to franchise arrangements (Article 2, section 2).

3. The possibility of subleasing the commercial property where the franchisee unit is located by franchiser to the franchisee, when either party will be entitled to propose the renewal of the lease agreement before Brazilian Courts, except in cases of default of the respective lease agreements or the franchise agreement (Article 3, sole paragraph).
In this sense, the New Franchise Law also established the possibility that the amount of the rent to be paid by franchisee to franchiser for subleasing the property could be higher than the amount that the franchiser pays the landlord in the original commercial lease agreement, since:

(a) it is expressly foreseen in the franchise disclosure document (FDD) and in the franchise agreement;

(b) the amount overpaid to franchiser in the sublease does not imply in an excessive burden to franchisee, ensuring the maintenance of the economic and financial balance of the sublease during the term of the franchise agreement.

4. Expressly allowing the contracting parties to elect an arbitration court to solve disputes related to the franchise agreement, ruling out previously existing controversies (Article 7, section 1).

5. Determine the delivery of the FDD in Portuguese and the need of a sworn translation for international agreements, defining national and international agreements (Article 7 and items), as follows:

(a) national agreements, those that produce effects exclusively in Brazil, which will be written in Portuguese and governed by Brazilian legislation; and

(b) international franchise agreements will be originally written in Portuguese or will have a sworn translation into Portuguese paid for by the franchiser, and the contracting parties may opt, in the agreement, for the jurisdiction of one of their domicile countries.

6. The increase of mandatory information to be indicated in the FDD, as detailed below.

Pre-sale disclosure requirements and mandatory information

The New Franchise Law sets forth several pre-sale disclosure requirements of the franchiser’s business to the prospective franchisees, which must be included in the FDD in clear, objective and comprehensive language, written in Portuguese as previously mentioned. The FDD does not need to be registered in any agency or with any governmental body for franchising purposes.

Article 2 of the Brazilian Franchise Law added more items as requirements to enclose with the FDD, compared to the previous Law. The FDD must contain the following mandatory information:

1. A summary of the background of the franchiser’s business.

2. Complete identification of the franchiser company and of all companies related thereto, and their respective inscriptions at Corporate Taxpayer Numbers.

3. Balance sheets and financial statements of the franchiser company for the two preceding years.

4. Indication of lawsuits related to the franchise that question the franchise system or that may compromise the franchise operation in the country, in which the franchiser, the controlling companies, the sub-franchiser and the owners of trademarks and other intellectual property rights are parties.

5. Detailed description of the franchise, general description of the business and the activities that will be performed by the franchisee.

6. Characteristics of the ‘ideal franchisee’ regarding previous experience, educational background and other characteristics that the franchisee must necessarily or preferably have.

7. Requirements regarding the direct involvement of the franchisee with the operation and management of the business.

8. Specifications regarding:

(a) estimated initial investment necessary for the acquisition, implementation and startup of franchise operations;

(b) value of the initial affiliation fee or franchise fee; and

(c) estimated cost of the facilities, equipment and initial inventory and respective payment conditions.

9. Clear information regarding periodic fees and other amounts to be paid by the franchisee to the franchiser or to third parties, detailing the respective calculation bases and what they remunerate or the intended purpose, specifically indicating the following:

(a) periodic compensation for the use of the system, of the trademark and of the other rights of intellectual property of the franchiser or over which they have rights, or, for the services provided by the franchiser to the franchisee (‘royalties’);

(b) payments for lease of the equipment or premises;

(c) advertising fee or similar payments;

(d) minimum insurance coverage amounts.

10. Complete listing of all the franchisees, sub-franchisees and sub-franchisers of the chain, as well as of all those who have disassociated themselves with it within the last 24 months, with names, addresses and telephone numbers.

11. The following shall be described with respect to the territory:

(a) if the franchisee is guaranteed exclusivity or a right of first refusal in any particular territory or activity and, if so, under what conditions;

(b) if the franchisee has the right to sell or render services outside its territory or provide such services outside Brazil;

(c) if there are and what are the territorial competition rules between franchiser units and franchise units.

12. Clear and specific information regarding the obligation of the franchisee to acquire goods, services or materials necessary for the establishment, operation or management of its franchise from suppliers designated and approved by franchiser; and the franchiser is required to provide a complete list of such suppliers to the franchisee.

13. Description of services and products offered to the franchisee by the franchiser, with respect to:

(a) support;

(b) supervision of the chain;

(c) services;

(d) incorporation of technological innovations to franchises;

(e) training of the franchisee and his employees, specifying its duration, content and cost;

(f) franchise manuals;

(g) assistance on the analysis and selection of the location where the franchise will be established; and

(h) layout and architectural standards of the franchisee's facilities, including physical arrangement of equipment and instruments, descriptive memorial, composition and sketch.

14. Information about the status of the franchised trademark(s) and other intellectual property rights related to the franchise system, which the franchisee will be authorised to use by the franchiser, including complete characterisation, with the registration or order number registered, with the class and subclass, before the National Institute of Industrial Property (INPI).

15. Consequences of the termination of the franchise agreement, including:

(a) the franchisee’s access to know-how of product, process or management technology, confidential information and industry trade, finance and business secrets that you may have access to depending on the franchise; and

(b) establishment of competitive activities with the franchiser.

16. Standard franchise agreement draft and, if applicable, the standard preliminary franchise agreement used by the franchiser, with complete text, including its respective exhibits, conditions clauses and expiration dates.

17. Indication of the existence or not of transfer or succession rules and, if so, what they are.

18. Indication of the situations in which penalties, fines or indemnities are applied and the respective values, established in the franchise agreement.

19. Information on the existence of minimum purchase quotas by the franchisee from the franchiser, or third parties designated by him, and on the possibility and conditions for refusing the products or services required by the franchiser.

20. Indication of the existence of a Council or Association of Franchisees, with the attributions, powers and mechanisms of representation before the franchiser, and details of the competences for management and supervision of the application of existing funds resources.

21. Indication of the rules for limiting competition between the franchiser and the franchisees, and among the franchisees, during the term of the franchise contract, and details of the territorial scope, the term of the restriction and penalties in case of non-compliance.

22. Precise specification of the agreement deadline and its renewal conditions, if applicable.

Failure by the franchiser to deliver such disclosure document at least ten days prior to the execution of the franchise agreement or the preliminary franchise agreement or any payment by franchisee renders the agreement voidable by franchisee and penalises the franchiser with the refund of all amounts paid by franchisee, as franchise fees and royalties, duly adjusted for inflation, according to Article 2, section 2 of the Brazilian Franchise Law.

The same consequences might be applicable in case the franchiser omits information required by law or disseminates false information in the FDD, including possible criminal sanctions, according to Article 4 of the mentioned law.

The following aspects are particular to franchise agreements under Brazilian Law, in addition to the general requirements and formalities mentioned herein:

(a)  the trademark and/or others intellectual property rights under the franchise agreement must at least be filed at the INPI;

(b)  the agreement needs to contain the main aspects of the franchise arrangement such as nature of the franchise, financial terms and conditions, applicable rules to termination and post-termination;

(c)  compliance with the New Brazilian Franchise Law, which refers to the delivery of the FDD to franchisee, as mentioned above;

(d)  submission of the term of receipt of the FDD to the INPI, duly executed by the prospective franchisee and indicating the date of receipt, besides the submission of the international franchise agreement, if recording is needed, as explained below.

Simplified foreign exchange controls and recording at the INPI

The recording of international franchise agreements with the INPI was indispensable for (i) the remittance of royalties abroad; (ii) to make the agreement effective against third parties; and (iii) qualify franchisee for tax deductions.

After the Certificate of Recording was issued by the INPI, the agreement needed registration at the Brazilian Central Bank (BACEN) for remittance of payments. However, due to Law 14,286/2021, which came in force on 30 December 2022, foreign exchange controls were simplified for certain situations, specifically related to payment in foreign currency of obligations performed in Brazil to entities domiciled abroad, including the registration requirement at BACEN for royalty remittances.

The above-mentioned Law 14,286/2021, which is still subject to regulation, not only excluded the need of registration with BACEN, but is also construed to have excluded the need of recording the agreement at the INPI to allow remittances of royalties abroad, as per the understanding of the majority of Brazilian scholars, provided that the payment of the respective income tax due, if any, is duly evidenced, according to the new wording of Article 9 of Law 4,131/62. Therefore, in view of the above, currently, the recording of the international franchise agreements with the INPI would solely intend to: (i) make the agreement effective against third parties; and (ii) qualify franchisee for tax deductions, provided that the Brazilian franchisee adopts the actual profit tax regime. In practical terms, at this stage, some commercial banks are still requesting the Certificate of Recording to enable remittance of royalties abroad, as this matter is still pending regulation, but this will probably change in the near future, due to the new legislation in force.

Royalties between parent company and its subsidiary

Law 14,286/2021 also eliminates the limitation on the amount of royalties that could be remitted abroad between a parent company and its subsidiary. Before entering in force, the remittance of payments abroad between subsidiaries and their parent companies, in amounts exceeding the deductibility limit for purposes of Corporate Income Tax (IRPJ) was forbidden, as per the percentages established by Ordinance 436/58 of the Ministry of Finance.

From now on, such restrictive rule no longer applies, due to the express revocation of Article 14 of Law 4,131/622 and the sole paragraph of Article 50, Law 8,383/91. Thus, the contractual parties, even if they are related for controlling corporate purposes, are now free to negotiate the percentage of royalties and payments they desire, which may, therefore, be higher than the maximum limit of five per cent provided for deductibility purposes by the above-mentioned Ordinance 436/58.

Transfer pricing rules for intangible assets transactions

The Provisional Measure 1,152 of 28 December 2022 changed the transfer pricing rules (PTs) for purposes of calculating the IRPJ and Social Contribution on Net Income of legal entities that carry out transactions with related parties abroad. This Provisional Measure is already in force but must be still approved by the National Congress to be converted into law and, therefore, have its validity confirmed.

The changes have already taken effect from 1 January 2023 for Brazilian companies that have chosen to apply the new transfer pricing rules. For others, the changes will be valid from 1 January 2024. This Provisional Measure represents a new legal framework for PTs, insofar as it aims to adjust national legislation to the standard established by the Organization for Economic Cooperation and Development. Briefly, according to the mentioned Provisional Measure, transactions involving intangible assets will be expressly controlled by PTs and the former prefixed limits for the deductibility of royalties, provided for in Ordinance 436/58, are expressly revoked.

Waiver of certain legal formalities

In addition, the INPI recently enacted the Ordinances INPI/PR 26 and 25, which entered into force on 7 July 2023, and published an official announcement on 1 August 2023 excluding certain mandatory formalities for recording licences, assignment of industrial property rights, technology transfer and franchising agreements.

Amendments include (inter alia):

• the signatures of two witnesses and the initials of the parties on all contractual pages are no longer required;
• there is no need to notarise nor apostille/legalise the agreements that are electronically executed abroad; and
• the acceptance of agreements electronically executed via digital platforms other than the ones certified by the Brazilian Public Key Infrastructure, commonly referred to by ICP-Brazil, which is a national digital certification.

Finally, Law 14,620 of 13 July 2023 was enacted and included, by means of its Article 3, the paragraph 4 in Article 784 of the Brazilian Civil Procedure Code. Such paragraph admits any type of electronic signature, if provided for by law, and waives the need of signature of witnesses when the extrajudicially enforceable instrument is constituted or attested by electronic means and its integrity is verified by a signature provider. As per Item III of the same Article 784, a private document executed by the debtor and by two witnesses is construed an extrajudicially enforceable instrument.

Conclusion

As shown above, many changes have occurred since 2019 and there is still much to be regulated and much to be discussed and interpreted among franchising practitioners and the Brazilian administrative and judicial spheres.