Leasing: a History of Success in Brazil
It is estimated that leasing started in Brazil in the 1960s, before any special regulation, based on the liberty of contracting conferred by the Brazilian Constitution and Civil Code. In this unregulated environment, the new product developed, increasingly attracting a great number of companies that needed a new way of financing to obtain equipment necessary for expanding their businesses.
The absence of specific regulations helped encourage leasing in the beginning, but later started to create problems when the new finance tool that had already gained a certain relevance in the largest Brazilian cities of São Paulo and Rio de Janeiro.
The main problem resided in the fact that existing tax regulation did not allow deductibility of expenses related to rent payments if such rent, in fact, hid a sale of the rented equipment, and by doing so evaded the payment of taxes on sales. The Brazilian Federal Revenue wanted to prevent fraudulent use of the rent structure to hide the true intention of the parties to contract a sale of the rented equipment in installments. Accordingly, due to the lack of a legal definition of the leasing transaction and its similarity with a rent transaction, there were fears that the deduction of payments made under leasing transactions would not be accepted as deductible expenses by the Federal Revenue, which would consider such payments as installments for acquiring goods.
On 12 December 1974, Brazil enacted its first law relating to leasing transactions: Law 6.099. The law was the first one to characterize a leasing transaction (“arrendamento mercantil”) and it deals, almost exclusively, with the tax aspects of leasing.
The definition for a leasing transaction set forth in Law 6.099 says: “Commercial lease is deemed to be a transaction carried out between two legal entities, for the purpose of leasing of goods acquired from third parties by the lessor, for use by the lessee and pursuant to the latter’s specifications.“
This new law was a milestone for the leasing industry in Brazil. The fact that the law concentrated on tax issues is very understandable, since in those days this was the main obstacle preventing the leasing industry’s growth in Brazil. The viability of leasing, like any other finance product, depends upon the comparison between its cost and advantages, including taxes, compared with the cost and advantages of all other finance possibilities that would grant financiers and clients the same objective results.
Law 6.099 rendered more legal security for the product, ratifying the tax advantages for both lessor and lessee: the leasing company (the lessor) being able to deduct as its own expense the depreciation of the leased good; and the lessee being able to deduct all the cannons paid to the lessor under the leasing transaction as deductible expense for the calculation of its taxable net profit. Individuals, however, which later were admitted to be lessees by Law 7.132/193, never could (and still cannot) deduct cannons paid to leasing companies to reduce their income tax.
With that safe harbor in place, leasing companies began attacking a second major obstacle to the development of leasing in Brazil: cultural rejection by those who preferred to own the property of the financed good rather than lease. Leasing companies recognized the importance of their sales forces in promoting the value of leasing transactions with potential lessees. As a result, the volume of leasing transactions and the number of leasing companies in Brazil increased greatly in the following years.
Leasing companies in Brazil are considered to be financial institutions, thus licensed to operate by the Central Bank of Brazil. Brazilian leasing companies must meet requirements of minimum net worth (today R$7m, approximately US$3m), and are under the Central Bank’s supervision, control and inspection.
Being considered a financial institution also requires leasing companies to respect the rules of Law 4.595, 1964, the main regulation for finance institutions in Brazil. One of the rules contained in the law, which also exists in the Brazilian Constitution, requires a Presidential Decree prior to approval in cases where the incorporation of a financial institution involves capital participation by a foreign investor.
In 1983, Brazil enacted Law 7.132, which amended Law 6.099, establishing, among other things, that leasing agreements contracted between a foreign lessor and Brazilian residents should be registered with the Central Bank of Brazil.
Using its power to regulate leasing, the Central Bank of Brazil in August 1996 enacted Resolution 2.309, consolidating all the rules relating to leasing transactions. This important resolution sets forth which Brazilian companies can carry on leasing transactions as lessors, giving the parameters for the incorporation of such companies (which are required to be “sociedades anônimas” – corporations – and shall contain in their corporate names the expression “Arrendamento Mercantil”). The resolution also defines the types of leasing transactions permitted (financial and operational). Resolution 2.309 is detailed to the point of listing the minimum terms that should be covered in the leasing agreement, discussing the possible object of leasing transactions, possible lessees, subleasing, and possible funding sources.
Law 6.099/74, together with amending Law 7.132/83 and Central Bank Resolution 2.309/96, constitute, until the present date, the core of the legislation concerning leasing in Brazil. There are additional regulations that are important to mention:
| Federal Law 6.099, of December 12, 1974 | On the tax treatment of commercial lease operations and other measures. |
| Federal Law 7.132, of October 26 1983 | Amends Law 6,099, of 12 December 1974, “on the tax treatment of commercial lease operations and other measures”, and Decree-Law 1,811, of October 27th 1980. |
| Central Bank Resolution 2.309, of August 28, 1996 | Disciplines and consolidates norms relative to commercial lease operations. |
| Central Bank Resolution 2.465, of February 19, 1998 | Amends the Regulation attached to Resolution 2,309, dated Aug. 28th, 1996. |
| Central Bank Resolution 2.493, of May 7, 1998 | Sets conditions for the transfer of credits to special purpose corporations. |
| Central Bank Circulating Letter 2.436, of June 30, 1994 | Reasonability of considerations – On assets and liabilities operations subject to minimum terms performed in the financial marketplace, their respective compensations and consolidating norms in this respect. |
Brazil’s leasing sector has grown consistently since its beginnings in the 1960s. It has demonstrated strength and sustainability, overcoming huge obstacles like the hyperinflation period during the 1980s (achieving 3 per cent inflation per day) and several economic plans intended to end such inflation.
Today, the leasing sector in Brazil is at its peak. Inflation has been controlled to more acceptable levels due to the Real Plan of 1994, and the industry has overcome the maxi-devaluation of the Brazilian currency that occurred in 1999, negatively affecting leasing transactions indexed in foreign currency (mainly US dollars).
According to numbers furnished by The Alta Group Latin American Region, the volume of leasing assets in Brazil was an estimated US$5,215,970 in December 2004, more than 30 per cent of the total amount of leasing assets in all of Latin America. Chile and Mexico, which ranked second and third in Latin America, had a volume of US$3,312,665 and US$1,733,203, respectively. Of the 10 leasing companies ranked with the greatest volume of leasing assets in Latin America, Brazil has four: Cia Itauleasing de Arrendamento Mercantil (US$1,433,538 – first place); Safra Leasing (US$980,342 – third place); Bradesco (US$577,526 – sixth place) and IBM Brasil Leasing (US$419,919 – eighth place). The volume of assets of these four Brazilian leasing companies (US$3.411.537) represents almost half of the total amount of leasing assets of all the top 10 leasing companies that were ranked.
The perspective for the near future is impressive for Brazilian standards. The leasing sector, confident of an important increase in its volumes, was the main factor for the tremendous increase in the volume of public offers of debentures (commercial papers) in the Brazilian security market in the first semester of 2005. The market totalled R$24bn (approximately US$10bn) in the first semester of 2005, compared with R$2.1bn (approximately US$865m) in the first semester of 2004. The leasing sector alone was responsible for R$15.5bn of the total volume of public offers of debentures in the first semester of 2005. Those numbers are very expressive if we take into account information from ANDIMA (the Brazilian Association of the Finance Institution), which estimates that in 2003 and 2004, the leasing sector was responsible for only 2.8 per cent and 1.04 per cent, respectively, of the total amount of debenture public offers of two years to contract.
According to articles published in the newspaper O Estado de São Paulo and Valor Econômico of 6 July 2005, the directors of ABEL (the important and active Brazilian association of leasing companies) expect the sector to grow between 30 per cent and 40 per cent. It is because of this high expectation that leasing companies are registering with CVM (the Brazilian Security and Exchange Commission) programs for the offering of debentures in amounts never seen before, making use of one of the best sources of funding to finance new leasing transactions.
Based on the past history of the leasing industry in Brazil, the level of legal stability that the product acquired along those years and the recent numbers, we expect the sector to have important and consistent growth in the future, following its destiny of success in Brazil.