From shipyard to sale room

Now is a good time to invest in Brazilian shipping or build Brazilian flag vessels. Godofredo Mendes Vianna, partner at Rio de Janeiro-based Law Offices Carl Kincaid, explains why

BRAZIL has a well-defined and well-regulated legal system for the financing of shipbuilding, It also currently offers some of the lowest interest rates and most extended payment terms on the market, in addition to various tax and other benefits. These are particularly attractive for anyone looking to invest in Brazilian shipping companies and/or build Brazilian flag vessels in Brazil.

The Merchant Marine Fund

The Brazilian government has developed a special programme for the financing of Brazil’s shipbuilding industry. The programme is funded by the Merchant Marine Fund (FMM) and operated by the Brazilian Development Bank (BNDES). In order to increase the Brazilian merchant and offshore fleets and aid the recovery of the Brazilian shipbuilding industry, the programme, and related legislation, have undergone substantial modifications.

In accordance with Article 26 of Law 10.893/2004, FMM resources will first and foremost be available to Brazilian shipping companies for the financing of up to 90 per cent of the value of construction, modernisation and repair projects. Secondly, the resources will be available to shipping companies and shipyards for the training and development of skilled manpower. Thirdly, the funds will be applied to the shipyards for the Brazilian shipping companies and for vessel exportation.

The National Monetary Council recently established interest rates of between 2.5 per cent and 5 per cent per year with a payback term of between 10 and 20 years. The guarantees required by BNDES are equivalent to 120 per cent of the financed amount and usually include mortgage or fiduciary property on the financed vessel, corporate collaterals, bank guarantees, assignment of earnings, etc. The loan instalments are in Brazilian currency or US dollars pro-rata to the revenues generated by the financed project.

In respect to the repayment of loans to BNDES, it is important to stress that Law 10.893/2004 allows the payment to be made through AFRMM – a tax on the freights payable by the importers and by cargo interests, due on the discharge at any Brazilian port and deposited monthly in a special account of the Brazilian shipowners, issuers of the respective bills of lading.

The beneficiaries of such credits are the Brazilian shipowners engaged in merchant activities, transporting goods from abroad into Brazilian territory or between Brazilian ports. The account is controlled by the Merchant Marine Fund and the credits are available to Brazilian shipowners exclusively for (a) acquiring new vessels built at Brazilian shipyards, (b) upgrading, converting, repairing or drydocking at Brazilian shipyards, (c) the repayment to BNDES of the loans related to the construction, upgrading or repair of Brazilian vessels.

The AFRMM paid by the cargo consignees applies to domestic navigation on a 10 per cent basis and to deep sea navigation on a 25 per cent basis. The tax is levied on freight generated by Brazilian flag merchant vessels and foreign vessels chartered by Brazilian shipping companies.

Projects presented by or involving Brazilian shipping companies have priority in the FMM but in order to establish a Brazilian shipping company, there are certain legal requirements. While the company can be fully controlled by foreign investors, the administrator must be a Brazilian citizen or a foreign individual holding a permanent Brazilian visa. The company can be incorporated as a corporation or a limited liability company but it must have an office within Brazilian territory.

Antaq (Federal Government Agency for Inland and Ocean Transportation) issued Resolution 193 on November 19, 2002, stating that to obtain authorisation to operate as a shipping company, the following requirements must be fulfilled:

1. ownership or bareboating of a Brazilian flag vessel of the same type for more than a year;
2. a minimum net worth of (a) $2,760,000 for ocean navigation, (b) $2,070,000 for domestic navigation, (c) $870,000 for maritime support (offshore/supply vessels) and port support navigation, and
3. positive equity level.

However, if the objective of the company is initially not to operate but to exclusively apply for FMM financing and the construction of a Brazilian flag vessel at a Brazilian shipyard, owning or bareboating a Brazilian flag vessel beforehand is not required.

The Brazilian flag

The Special Brazilian Register (Registro Especial Brasiliero) or REB, applies to Brazilian flag vessels and foreign vessels chartered under bareboat to Brazilian shipping companies after their flag or origin has been suspended. Registration under REB is optional and supplementary to the traditional Maritime Ownership Register (Registro de Propriedade Maritima) or RPM. One of the reasons for separating the registers is that while the REB deals only with merchant vessels, the RPM applies to all types of vessels, including tourism and fishing vessels which, if above a certain tonnage, must be registered with the RPM.

The REB was created as a second domestic registry to provide Brazilian shipowners with certain commercial, fiscal and labour benefits that they would be entitled to under convenience flags. The REB was conceived as an alternative to the old system of the so-called Fully Owned Foreign Subsidiary, which was preferred by most Brazilian shipowners and would have allowed the registration of their vessels at countries such as Panama and Liberia, clearing them from the heavy fiscal and labour dues. REB vessels enjoy a number of fiscal privileges when it comes to construction, conversion, modernisation and repairs. They also enjoy other benefits related to insurance and reinsurance, crewing, fuel prices and labour agreements.

However, the Navy Minister has vetoed this solution in the past on the grounds that it would de-nationalise the Brazilian merchant navy. The REB was created, therefore, to grant benefits to Brazilian flag vessels and respective owners to better compete with foreign flag ships.

Bareboat chartering

A Brazilian shipping company involved in coastal navigation and/or inland navigation, and/or maritime support navigation, is entitled to charter foreign vessels under REB bareboat. These vessels must be similar to the Brazilian vessels it already owns and up to 50 per cent of the gross tonnage of such Brazilian vessels, in addition to at least one vessel of the same type, size and tonnage.

If the same Brazilian shipping company has newbuildings ordered at Brazilian shipyards, under REB it is entitled to charter foreign ships up to twice the total tonnage under construction for a maximum period of 36 months. If a Brazilian shipowner does not have availability of Brazilian tonnage or newbuildings under construction at a Brazilian shipyard, he is only entitled to charter foreign vessels if there are no Brazilian vessels available in the domestic market.

In cases such as this, the Brazilian charterer is obliged to circulate the proposed charter conditions among the Brazilian shipping companies and obtain authorisation from Antaq. Only when it is a request for the time charter of tanker vessels for the transportation of oil and hydrocarbons and the national tanker fleet is insufficient, is Antaq able to grant authorisation regardless of the restrictions above.

Maritime liens and ship mortgages

Maritime liens in Brazil are governed by the Brazilian Commercial Code and the 1926 Brussels Convention. In order to enforce their rights in Brazil against a Brazilian flag vessel, foreign creditors must have a mortgage deed duly registered at the Maritime Court. This is a legal requirement when exerting such rights, particularly when imposing the mortgage upon other creditors and third parties that might also hold credits against the same vessel.

If the judicial action is against a foreign vessel, the only requirement is to present the mortgage contract and register it at the vessels’ registry in the flag of origin. The document must be duly legalised at the local Brazilian embassy or consulate and translated into Portuguese by a sworn public translator. It should be noted that, in Brazil, privileged credits, such as mortgages, attach to the vessel and follow it wherever it goes, regardless of whether ownership is transferred by means of private, voluntary sale.

The judicial sale of vessels in Brazil follows the same general rules as assets biddings. Court bidding acts are conducted by the public auctioneer who charges 2-5 per cent of the sale. The minimum initial bid is indicated by the judge based on the accounting report. The vessel cannot be sold at the first auction for a smaller amount than it’s official appraisal. However, at the second auction, 10-20 days after the first one, the vessel may be sold provided that the sale price is not considered by the court to be a vile amount (limit of 40 per cent of the appraised value).

The highest bidder deposits 20 per cent of the bid in cash or by certified check immediately following the auction, with the balance to be paid within a certain number of days. If the residual amount is not paid, the auction may be aborted and the vessel offered to the next bidder. Once the sale is complete, the judge will release an order of sale and the bidder will register the property of the vessel at the Maritime Court. In accordance with Section 477 of the Brazilian Commercial Code, any claim on the vessel on the date of sale will be extinguished.