In April 2021, non-profit organization International Masters of Gaming Law (IMGL) launched a global magazine dedicated to this branch of the legal activity. The very well respected association includes gaming attorneys, regulators, educators, executives and consultants from around the world who are dedicated to education and the exchange of professional information and advice. This year, under presidency of Marc H. Ellinger, IMGL will be attending ICE London show. In April 11-12th, it will coordinate IMGL Masterclasses and roundtables, while the traditional reception will be on April 12th at the Merchant Taylors’ Hall. Besides, the Spring Conference of this entity will take place on Seattle (U.S.) on April 27-29th, and the Fall Conference will occur on September 14-16th in London (UK).
BRAZIL, THE GAMING MARKET THAT EVERYONE IS WAITING FOR
Latest edition of the IMGL Magazine is focusing on gambling business transformation. Among the attractive content of the magazine, there is a wonderful article: Gambling Regulation in Brazil: wake-up call for a dormant giant, from very experienced Brazilian lawyers Luiz Felipe Maia and Maria Luiza Kurban Jobim (FYMSA Advogados). The nascent Brazilian market is on the cusp of legalization and these IMGL members scrutinize here, exclusively for G&M News readers, the highlights of the development and evolution of an online gaming and sports betting market about to be legalized, which will generate billions of dollars in revenue, the creation of thousands of jobs, and the generation of investments from several global gambling companies.
With the largest consumer base in Latin America and a proven propensity for gaming, the prospect of the Brazilian government legalizing gambling is an enticing one. After several false starts, 2022 looks set to be the year when this sleeping giant awakes. As well as analyzing what looks set to be legalized, our purpose with this article is to provide you with basic information about doing business in Brazil. It includes the formal requirements of creating a Brazilian company and the main aspects involved in Brazilian Corporate Law, a broad brush review of the Brazilian Taxation system and how that would relate specifically to gambling products. We will also address Consumer and Data Protection rules and Anti-Money Laundering (AML) principles so that, by reading this article, you can have the basic understanding of the infrastructure needed to operate in the upcoming Brazilian market.
Brazil is often referred to as a dormant giant in the world of gambling as, apart from a few exceptions, gambling is still off limits for most Brazilians. Those exceptions include (i) government-run lotteries which are offered as a kind of public service; (ii) authorized horse race betting, a practice that has been consistently regulated and legal for private operators throughout Brazilian history, and (iii) skill-based games, such as poker and fantasy games, which are deemed lawful. Nevertheless, Brazilian’s passion for games and betting suggest the market potential goes way beyond the strict limits put in place up to now. A glance at the Esports environment, a proxy for gambling, reveals that Brazil already ranks as the third largest customer base worldwide with more than 30 million players. This shows the appetite among Brazilians for gaming entertainment and provides support for the forecasts of dramatic market expansion once gambling is legalized.
Efforts to regulate gambling date back several years, as various Brazilian authorities have worked consistently to make progress. There are now two comprehensive bills, each in one of the Brazilian Legislative Houses, the Senate and the Chamber of Deputies, which aim to legalize the broad sweep of gambling activity. In 2015, LOTEX, the instant lottery, was created by Law 13,155 and led to a frustrated privatization attempt in the following years. In 2018, Law 13,756 included sports fixed-odds betting as a lottery modality to be operated by the private sector once the Ministry of Economy regulates it. Expectations are that regulation will be enacted in 2022, in time for the FIFA World Cup, providing a high-profile launch platform for the new activity. Similarly, the general prohibition against operating games of chance, as prescribed by the Brazilian Misdemeanor Code, is being challenged in the Judiciary. The enforceability and accordance of this ban with the new constitutional order are to be decided by the Supreme Court. The Court is being asked to determine whether the prohibition of gambling, which is based on a Decree-Law from 1941, complies with the constitutional precepts concerning free enterprise and fundamental freedom. In September 2020, the same Supreme Court ruled unconstitutional the federal monopoly on lottery operations. As a result, Brazilian States were found to have the right to operate all the lottery-style games authorized under federal law. The federal government retains the exclusive constitutional competence to create new lottery modalities, while the States and the Union share the right to operate the games and regulate such operations.
Doing business in Brazil
- Formation of a Brazilian Company: formalities and requirements
i. Brazilian Limited Liability Company
The Limited Liability Company (LLC), usually known as “Limitadas” or “Ltda” in Portuguese, is Brazil’s most common type of business entity. These legal entities are regulated by the Brazilian Civil Code and are equivalent to LLCs in the U.S. and EU in many ways. The foundational document to establish an LLC is the article of association, which must be registered at the commercial registry in the state where the company is headquartered. This document must define the company’s membership interests (usually called “quotas”), the responsibilities of the directors and managers, rules of operation and business purposes, among others. Directors are not required to be resident in Brazil; however, they must appoint a local resident individual as attorney-in-fact, the legal representative of the company, who can receive a summons. Recent changes to corporate laws allowed single-director LLCs. The main advantages of LLCs are that they are simple to form and operate, and they are subject to fewer obligations as compared to a corporation (in Portuguese, “sociedade anônima” or “companhia”). It is easier to define and address the rights and duties of directors and set out tailor-made rules for managers to make decisions with less bureaucracy. The law gives the freedom to define rules among the company’s investors, including disproportionate distributions of profits, managers’ remuneration, and the LLC’s management rules. An LLC can usually be incorporated in 10 business days. The new draft presented in December 2021 to update Bill No. 442/91 from the Chamber of Deputies aims to require operators to be incorporated as a corporation. Alternatively, in the Senate, the bill requires all legal entities to publish their balance sheets according to the Brazilian Corporate Law.
ii. Joint-Stock Companies (or corporations)
The other common type of company is a joint-stock corporation, usually known only as a Corporation. As is common in most jurisdictions, these entities are regulated extensively and subject to more complex bureaucratic rules regarding governance, conflict resolution, and corporate organization. A Corporation is governed by its articles of incorporation, which must be registered at the commercial registry in the state where the company is headquartered. The incorporation of a corporation is made by the approval and registration of the minutes of the shareholders’ meeting that approved the by-laws at the commercial registry of the respective state. This charter provides for several matters, including the appointment of directors and managers, the company’s activities and purposes, and the allocation of capital stock, among others. The capital stock is divided into shares that can be privately held on a closed corporation or publicly listed on the stock market. Shares can be in different classes providing advantages or restrictions to shareholders, including with respect to voting powers. Therefore, corporations are usually suited to more sophisticated and capital-intensive businesses since the law provides more mechanisms to raise funds, such as the selling of securities and public offering of shares. Corporations must have at least two shareholders, either individuals or legal entities, who are not required to be residents in Brazil. In line with recent changes to corporate laws, corporations can now have a single officer (“director”), an individual but not necessarily a resident of Brazil. As well as foreign shareholders, the officer must appoint a local resident individual as attorney-in-fact, the legal representative of the company, who can receive a summons.
a. General Aspects
Gaming companies are taxed through corporate income tax (IRPJ) and social contribution on net profit (CSLL) at a combined general rate of 34 percent. The CSLL rate is 9 percent. The IRPJ rate is 15 percent, plus an additional surcharge of 10 percent applicable to taxable income exceeding 240,000 BRL (USD 45,700) per year. The effective tax rate may vary according to the tax regime adopted by the Brazilian legal entity to calculate the IRPJ and the CSLL, which can be either the real profit regime or the presumed profit regime. Companies with overall revenues above 78 million BRL (USD 14.87 million) in the preceding fiscal year are mandatorily subject to the real profit regime. Under the real profit regime, taxation is levied on the accounting net profit, adjusted by the combination of non-deductible expenses and the exclusion of specified amounts. The Program of Social Integration (PIS) and the Contribution for the Financing of Social Security (COFINS) are calculated on the gross revenue under a non-cumulative system, at rates of 1.65 percent and 7.6 percent, respectively, and allow the deduction of credits from acquisitions. In the presumed profit regime, services are taxed at 32 percent of the company’s gross revenues. The PIS and COFINS do not allow the deduction of credits however, the rates are lower: 0.65 percent and three percent, respectively. Besides the ordinary corporate taxes, gambling activities may also be subject to other specific taxes. The new draft of Bill No. 442/91 from the Chambers of Deputies intends to create the Contribution for Intervention in the Economic Domain (CIDE), replacing PIS and COFINS, at a fixed rate of 17 percent of GGR. Another bill from the Senate creates the same CIDE at a rate of 5 percent of GGR, but in this case, PIS and COFINS are still due. Winnings are also subject to taxation. When the game’s outcome depends on the participants’ performance (e.g., poker), that prize is deemed as remuneration for work, irrespective of whether the prizes are payable in cash or in the form of goods and services. Accordingly, when a Brazilian company pays a prize to an individual residing and paying taxes in Brazil, that prize is subject to the withholding of personal income tax calculated based on progressive tax rates that range from 0 BRL to 27.5 percent withholding tax. When the prize is not dependent on the participant’s performance (e.g., lottery games, draws, etc.), it is subject to an income tax at a flat and non-deductible rate of 30 percent. Bill No. 442/91 draft decreases the income tax rate to 20 percent, allowing the deduction of all bets made in the previous twenty-four (24) hours.
b. The importance of the definition of the place of business:
Tax on Services
In addition to the aforementioned federal taxes, gambling is also subject to a municipal tax on services, ISS. The tax is levied on gross revenues and its rate varies from 2 percent up to 5 percent, depending on the municipality where it is headquartered. The decision as to where to place the headquarters of the company is therefore a crucial one.
- Applicable legislation
a. Data Protection Law (LGPD)
The Brazilian General Personal Data Protection Law, also known as “LGPD”, is a cornerstone of the Brazilian legal framework. It establishes a unified set of rules that all entities (public, private, NGOs, and even individuals) must observe in activities involving the processing of personal data and these apply to gambling operators. The law is relatively recent and has been in force only since 2021. In many respects, it resembles the European General Data Protection Regulations (GDPR). LGPD requires a lawful basis for processing personal data. Every operation must comply with its principles as set forth by Article 6 of the LGPD, including purpose, adequacy, necessity, free access, data quality, transparency, security, prevention, non-discrimination, and accountability. As LGPD relates to duties such as privacy by design, the extent of KYC and marketing policies must comply with the fundamental rights of the data subject set by LGPD.
b. Consumer Law
Consumer protection is a paramount value in Brazilian legislation, reflected in the Consumer Code (CDC). The main goals of this legislation are (i) to protect those subjects that are vulnerable to exploitation, the consumers, and (ii) to curb unfair competitive practices among suppliers/operators. During the 1990s, when bingo was allowed in Brazil, the CDC was applied in several situations. Basic demands dealt with over-indebtedness, misleading offers, and transparency issues. CDC effectiveness relies on multiple enforcement bodies such as the PROCONs (state consumer protection agencies), and courts that have been quite active and sensitive to consumer demands. In practice, to facilitate these goals, procedural rules such as the reversed burden of proof and material rules such as strict liability and corporate veil piercing have been adopted. There are no legal costs involved in filing a consumer claim of up to forty times the minimum wage (48,480.00 BRL, or USD 9) and no lawyer is required when the amount under discussion is under twenty times the minimum wage (24,240.00 BRL, or USD 4,5). As a result, litigation is frequent. If plaintiffs are not successful, they do not face any expenses and the company still bears the cost of its lawyers, since there are no filing fees at the Small Claims Courts (JEC). This kind of cost must be accounted for before starting to do business in Brazil. Another critical consequence of the existing legal framework for consumer protection is the application of the rule outlined in article 39, item IX of the Consumer Protection Code to gambling operators. It prevents the supplier of services from refusing to provide services directly to those willing to acquire them upon prompt payment. This specific rule may hinder operators’ capability to refuse bets and exclude players and can impact the possibility of risk control.
c. Anti-Money Laundering (AML) framework
Under the Brazilian AML framework, money laundering is defined as the act of hiding or disguising the nature, origin, location, disposition, remittance, or ownership of property, goods, rights, or values arising directly or indirectly from a criminal offense. To prevent financial crimes, the Financial Activities Control Council (COAF) is responsible for pursuing, investigating and sanctioning any activity related to money laundering crimes. To prevent money laundering and the financing of terrorism, the Ministry of Finance has already established procedures to be adopted by entities that distribute money or goods through the operation of lotteries. Other gaming modalities yet to be regulated will likely be subject to specific AML requirements. Currently, all prize-winners must be identified and all prizes recorded, including prize description, related amounts, and handover dates. The winners’ names, identification documents and personal addresses must also be recorded. Entities that distribute money or goods through lottery operations are legally required to communicate suspicious transactions to COAF. This includes the payment of more than one prize to the same person, the payment of a prize based on the maximum allowed bet for the game type and any unwillingness by the client or others involved to provide information, or the provision of false information, among other hypotheses.
Brazil is going through a critical moment in the gambling regulation process. Considering the proximity of the deadline for its regulation to be enacted, several alternatives have been developed simultaneously. Two comprehensive bills are on the National Congress’s agenda, besides initiatives that intend to regulate integrated resort casinos specifically. At the Senate, Bill 186/2014 is ready to be put to the vote on the floor. Recently, in the second half of 2021, a special commission was created at the Chamber of Deputies to revise Bill 442/91, which is now called the “Gambling Regulatory Framework.” During one of the last voting sessions of the year, after a fierce negotiation with evangelical representatives, the majority of the Deputies approved a request for urgency. Now, Bill 442/91 can be put to the vote directly on the floor, without the need for other commissions to deliberate. Voting is expected to take place in mid-February 2022, when we hope the dormant giant can finally wake up.