The use In Brazil of Foreign Contractors’ International Experiences

The business opportunities in the infrastructure sector in Brazil, arising either from the investments needed to sustain the economic growth expected for the coming years, or from the projects that should be implemented to meet the country’s commitments for the Olympic Games and the World Cup are attracting the attention of a number of foreign contractors.

Opportunities can be identified in virtually all areas, such as transportation, energy, ports, utilities, airports, oil and gas, sanitation, amongst others, to clients from the public and private sectors.

Many international companies that already invest and operate in different countries have considerable expertise in implementing large projects. In many cases, the experience gained in projects implemented in other countries are exactly the factor that encourages the search for new projects in Brazil, or even certifies such companies to compete for projects in the country.

The international experience of a foreign contractor may also represent a significant competitive advantage, both (i) to enable the contractor’s participation in the respective project in good competition basis; and, (ii) to negotiate its association with a Brazilian company.

However, the use of these experiences in Brazil does not always occur automatically. Therefore, it is crucial that the foreign contractors pay attention to the rules they must meet in order to do so. The procedures applicable to allow the use of the foreign contractor’s previous experiences may vary depending on the market the company will act, type of target client, among other factors.

In general, foreign companies that invest in Brazil incorporate local subsidiaries, which, for legal purposes, are deemed Brazilian companies. The criteria used by Brazilian law to determine one company’s nationality considers the law under which the company was incorporated and the location of its headquarters and management and not the nationality of its shareholders.

Thus, the Brazilian subsidiary is regarded a legal entity different from its foreign parent company.

In infrastructure projects executed by private companies, or by public bodies under the concession of public services mode, the fact that the subsidiary is a legal entity different from its parent company generally does not restrict the use of international experiences gained by its shareholders.

When the client is from the private sector, since it is such entity that defines the rules for hiring the contractor, the client may consider sufficient for the purpose of demonstrating previous experience that the corporate capital of the subsidiary is held by a foreign contractor who has acknowledged expertise.

In the event of projects structured under the public services concession model, as those contracts are usually performed by special purpose companies, it is common for the respective request for proposal to set forth that, for the purpose of demonstrating proper experience, bidders may, regardless of their nationality, present certificates issued on behalf of other companies, such as its controlling shareholders.

However, in public works projects in which the services will include only the construction of the infrastructure by the contractor, the use of foreign experiences may be problematic. This may happen because, in general, the Brazilian subsidiary will not be able to use its parent company’s international experiences.
This usually occurs because Brazilian bidders, including those subsidiaries of foreign companies, must submit in the respective bidding process experience certificates that have been previously registered before the Brazilian Council of Engineering and Architecture – CREA, which, in turn, has no rule authorizing the record, on behalf of the subsidiary, of certificates issued to the foreign parent company, which is another legal entity.

Thus, the foreign contractors who wish to attend infrastructure construction projects in Brazil should bear in mind the fact that the incorporation of a Brazilian subsidiary does not guarantee that this company will be able to use its parent company’s relevant international experiences when attending public biddings in Brazil.

For this reason, before setting up the legal structure to be used in Brazil, the contractor should carefully examine the projects, clients and rules it will have to comply with in Brazil. Depending on the relevance of the international experiences to achieve the contractor’s strategic goals in Brazil, different structures can be arranged to serve as vehicle for participation in the infrastructure projects desired, which may even require the opening of a branch instead of a subsidiary.

1 – Branches and subsidiaries are different legal structures. The branch is not a legal entity different from its head offices. It is regarded as an extension of the foreign company operating in another place. The subsidiary, on the other hand, is a different legal entity.

Originally published by WorldTrade Executive, Thomson Reuters Law and Business Report, Volume 19, number 5, May 2011

Azevedo Sette Advogados