Resolution CMN No. 351 — Lowers the Regulation Governing Financial Leasing Operations

RESOLUTION NO. 000351

THE CENTRAL BANK OF BRAZIL, in accordance with Article 9 of Law No. 4,595 of December 31, 1964, makes public that the MONETARY COUNCIL NATIONAL, in a session held on November 12, 1975, considering the competence conferred upon it by Law No. 6,099 of September 12, 1974,

RESOLVES:

To issue the attached Regulation, which governs financial leasing operations, defines competence, and regulates the activities of companies authorized to conduct such operations.

Annex.

Brasília-DF, November 17, 1975

Paulo H. Pereira Lira
President

REGULATION ATTACHED TO RESOLUTION NO. 351, OF 17.11.75, WHICH PROVIDES FOR FINANCIAL LEASING OPERATIONS.

CHAPTER I

Of the Practice of Financial Leasing

Art. 1 Financial leasing operations, with the tax treatment provided for in Law No. 6,099 of September 12, 1974, are exclusive to legal entities registered with the Central Bank, which have as their exclusive corporate object the practice of financial leasing operations, and to the financial institutions referred to in Article 12, in the case of the specific operations treated therein, observing the provisions of this Regulation.

CHAPTER II

Of Constitution

Art. 2 The functioning of the legal entities referred to in the preceding article depends on authorization from the Central Bank.

Art. 3 The legal entities referred to in Art. 1 must be constituted as joint-stock companies, and the same conditions established for the functioning of financial institutions in Law No. 4,595 of December 31, 1964, and subsequent legislation relating to the National Financial System shall apply to them insofar as applicable, and their corporate name must obligatorily include the expression "FINANCIAL LEASING".

Sole Paragraph. The expression "FINANCIAL LEASING" in the corporate name is exclusive to the companies governed by this Regulation.

Art. 4 For the purpose of authorization for the functioning of the legal entities referred to in Art. 1, hereinafter referred to as lessor companies, it must be proven the existence of a technical department properly structured and directly supervised by a director, along with a commitment to its maintenance.

CHAPTER III

Of Capital

Art. 5 Lessor companies shall be subject to a minimum capital of Cr$5,000,000.00 (five million cruzeiros), of which at least 50% (fifty percent) must be fully paid at the time of constitution or the adaptation request referred to in Art. 29 of this Regulation, and the remainder within a maximum period of 1 (one) year.

Art. 6 Within a maximum period of 2 (two) years, counted from the date of authorization for functioning, the fully paid minimum capital must be Cr$10,000,000.00 (ten million cruzeiros).

Art. 7 Lessor companies may, with prior authorization from the Central Bank, install branches in the country, up to a maximum of 10 (ten), based on the regulatory minimum capital.

Sole Paragraph. Authorization may be granted for the functioning of branches in a number greater than that provided for in this article, provided there is an additional capital contribution of Cr$1,000,000.00 (one million cruzeiros) over the capital of Cr$10,000,000.00 (ten million cruzeiros) for each new branch.

CHAPTER IV

Of Leasing Contracts

Art. 8 Financial leasing contracts shall be formalized by public or private instrument, in which the following specifications must obligatorily appear, at least, under penalty of nullity:

a) description of the goods that constitute the object of the contract, with all characteristics that allow for their perfect identification;

b) the value of the payments to which the lessee company shall be subject and the method of payment by determined periods, not exceeding one semester;

c) the expiration date of the leasing contract;

d) the right of the lessee company, upon expiration of the contract, to choose between returning the good, renewing the contract, or acquiring the leased goods;

e) the criterion for adjusting the value of the payment, if agreed upon, allowing the transfer to the lessee of the exchange rate variation, in the case of goods acquired with resources from loans in foreign currency;

f) granting to the lessee the option to purchase the leased good, with the price for its exercise or the criterion usable in its fixation to be established, admitting:

1. the guarantee of residual value;

2. the adjustment of the agreed price or the guaranteed residual value;

g) the expenses and additional charges that shall be borne by the lessee or the lessor;

h) other additional responsibilities that may be agreed upon, resulting from:

1. improper or inappropriate use of the leased good;

2. insurance provided for covering risks of the leased goods;

3. damages caused to third parties by the use of the good;

4. burdens arising from defects in the leased goods;

i) conditions for the renewal of the contract and for the eventual substitution of the leased good with another of the same nature that better meets the convenience of the lessee;

j) the right to inspect the goods subject to leasing and to require the lessee company to take indispensable measures for the preservation of the functionality and integrity of said goods.

Art. 9 Financial leasing contracts must have a minimum term of 3 (three) years, except in the case of vehicle leasing, in which case the minimum term may be 2 (two) years.

Art. 10 In financial leasing contracts, the purchase option granted to the lessee company may only be exercised at the end of the contract term.

Sole Paragraph. The operation shall be considered as an installment sale if the purchase option is exercised in violation of the provisions of this article, that is, before the end of the financial leasing contract term.

CHAPTER V

Of Leasing Operations

Art. 11 Only immovable goods and movable goods of national production classifiable in fixed assets, acquired by the lessor company for the lessee's own use in its economic activity and meeting the latter's specifications, may be subject to leasing.

Sole Paragraph. Only goods of foreign production that the Monetary Council National may enumerate may be subject to leasing.

Art. 12 Operations of leasing contracted with the seller of the goods themselves or with legal entities linked to them shall be exclusive to investment banks, development banks, and savings banks.

§ 1st The operations provided for in this article shall also comply with the following general rules:

a) they shall be limited to 2 (two) times the sum of the realized capital and reserves of the financial lessor institution;

b) in the case of investment banks, leasing operations of immovable goods shall not exceed half of the limit provided for in the previous letter;

c) they shall invariably have, as the price for the purchase option by the lessee company, a value equal to the residual book value of the good.

§ 2nd The National Housing Bank may authorize real estate credit companies and savings and loan associations to conduct the operations provided for in this article, when relating to immovable goods.

Art. 13 Lessor companies constituted in accordance with this Regulation and financial institutions authorized to conduct the financial leasing operations provided for in Art. 12 may directly contract loans abroad, with a view to obtaining resources for the acquisition of goods intended for leasing.

Art. 14 The equivalent in cruzeiros of the resources entering the country in the manner of the preceding article, while not applied in the acquisition of goods intended for leasing, shall be delivered by the lessor company to the Central Bank, for the purpose of constituting a remunerated deposit of the loan, in the name of said company.

CHAPTER VI

Of Operational Limits

Art. 15 In accordance with the provisions of Resolution No. 53 of May 11, 1967, financial institutions and lessor companies must allocate at least 50% (fifty percent) of the global value of their financial leasing operations to companies that have their headquarters in the country and possess social capital majority-owned, directly or indirectly, by native Brazilians, or naturalized residents domiciled in Brazil.

Sole Paragraph. Operations contracted with lessees domiciled abroad are excluded, for the purpose of calculating the limitation provided for in this article, provided that the leased goods are produced in the country.

Art. 16 The passive operations of lessor companies, considering all their liabilities, including those arising from the transfer of official resources and any credits from affiliates, shall not exceed 15 (fifteen) times the amount of their respective fully paid capital plus reserves.

Art. 17 For the purpose of calculating the limit of passive operations provided for in the preceding article, obligations corresponding to interest accruing, for the period exceeding the current semester, are excluded, with the prefix monetary correction of the referred operations not considered in this reservation.

Art. 18 For the purposes of Art. 16, in the calculation of fully paid capital and reserves, the following general criteria shall be observed:

a) the following shall be computed as reserves:

1. legal reserves (Art. 130 of Decree-Law No. 2,627 of September 26, 1940);

2. those approved by a General Shareholders' Meeting;

3. those constituted by determination of law or statutes;

4. provisions for credit risks;

5. balances, if any, of Undistributed Profits or at the Disposal of the Assembly;

6. resources arising from the collection of premium on the subscription of shares of the company's capital, which constitute excess capital;

7. a portion of deferred revenues, fixed at the discretion of the Central Bank;

b) from the amount of fully paid capital and reserves, the following shall be deducted:

1. operations of abnormal course recorded or to be recorded in the company's own accounts in the financial statements, at the discretion of the Central Bank;

2. balances, if any, of pending losses;

3. shareholdings in affiliated or interdependent companies.

Art. 19 Financial leasing operations must be diversified, such that no single client is responsible for more than 10% (ten percent) of the total applications of the lessor company and that, in the general average of applications per company, such responsibility does not exceed 5% (five percent).

Art. 20 Goods acquired by financial institutions for the practice of financial leasing operations that are exclusive to them, in accordance with the provisions of Art. 12 of this Regulation, shall not be counted for the purpose of calculating the immobilization limits of the institution.

Art. 21 The fixed assets of the lessor company, for own use, added to permanent participations (affiliated or interdependent companies), shall not represent more than 30% (thirty percent) of its fully paid capital plus reserves.

Art. 22 The total of credits, loans, or guarantees, granted in national or foreign currency to affiliated or interdependent companies that register as lessor companies, shall be subject, cumulatively, to the following conditions:

a) the financing shall be carried out at the costs normally charged by the financial institution in operations of the kind carried out with third parties;

b) it shall not represent more than 50% (fifty percent) of the realized capital and reserves of the financial institution authorized to function in the country;

c) it shall not exceed 50% (fifty percent) of the total liabilities of the lessor company.

Art. 23 The liquidity of lessor companies, when not held in cash, may be invested in public debt securities, bills of exchange accepted by financial institutions, debentures, debentures convertible into shares, real estate letters, or time deposits with or without the issuance of a certificate.

Art. 24 Lessor companies are prohibited from co-obligating themselves by acceptance, guarantee, surety, or any other form of guarantee, excepting, only, eventual co-obligations resulting from the credit assignments admitted in Art. 28 of this Regulation.

CHAPTER VII

Of Affiliation and Interdependence

Art. 25 For the purposes of Art. 2, § 1st, of Law No. 6,099 of September 12, 1974, and this Regulation, an affiliated or interdependent company is considered:

a) in which the lessor company participates, directly or indirectly, with more than 10% (ten percent) of the capital;

b) in which directors or administrators of the lessor company and their respective relatives up to the 2nd degree participate, jointly or individually, with more than 10% (ten percent) of the capital, directly or indirectly;

c) in which shareholder(s) with more than 10% (ten percent) of the capital of the lessor company participate(s) with more than 10% (ten percent) of the capital, directly or indirectly;

d) that participates with more than 10% (ten percent) of the capital of the lessor company, directly or indirectly;

e) whose directors or administrators and their respective relatives up to the 2nd degree participate, jointly or individually, in more than 10% (ten percent) of the capital of the lessor company, directly or indirectly;

f) whose shareholder(s) with more than 10% (ten percent) of the capital also participate in the capital of the lessor company with 10% (ten percent) or more of its capital, directly or indirectly;

g) whose Board of Directors, in whole or in part, are the same as those of the lessor company, except for positions held in collegiate bodies, such as a Board of Directors or similar, provided for in the company's statutes or internal regulations, provided that their holders do not exercise executive functions, with prior hearing of the Central Bank.

CHAPTER VIII

Of Audit and Accounting Standards

Art. 26 Lessor companies shall be subject to the following general accounting and audit standards:

a) operating revenues and expenses arising from active and passive operations shall be recorded as follows:

1. Leasing Revenues

Leasing revenues shall be recorded as leasing revenue the payments provided for in the leasing contract.

2. Leasing Expenses

Leasing expenses shall constitute the depreciation portions of leased goods or goods intended for leasing, as well as financial charges incident on passive operations contracted.

3. Leasing revenues and expenses shall be recorded exclusively based on the accrual basis, in function of the expiration periods of the operations that gave rise to them. Revenues and expenses of a specific fiscal year shall be accounted for as effective in that year, regardless of their receipt or payment.

b) the use of the accounting standards now defined shall be made without prejudice to the observance of the provisions of Art. 14 of Law No. 6,099 of September 12, 1974, namely:

"It shall not be deductible, for the purpose of calculating taxable income for income tax, the difference between the residual book value of the leased good and its selling price, when the purchase option is exercised."

c) mandatory independent audit, in the manner provided for by Resolution No. 220 of May 10, 1972, and complementary regulations;

d) regardless of the appropriate accounting records, in the explanatory notes to the company's balance sheets - as determined by item XVI of Title 4 of Chapter II of the Regulation attached to Circular No. 179 of May 11, 1972, of the Central Bank - information on the actual financial situation of the lessor company shall appear, in addition to others that the Board or the Independent Auditors of the company deem convenient.

Art. 27 Companies admitted to the capital market - thus considered financial institutions, public joint-stock companies, companies that launch their own securities to public offering, and those whose securities are negotiable on Stock Exchanges - when participating in leasing contracts as lessees, regardless of the rules to which they are obliged by current regulation, insofar as it refers to accounting and audit standards, shall proceed as follows:

a) registration, in the clearing account system, of the leased goods, highlighting the price fixed for the purchase option and also the obligations incurred as a result of the contracts signed;

b) in the explanatory notes to the companies' balance sheets, the information referred to in the previous letter shall appear obligatorily;

c) registration in a differential account, as operating cost or expense, of the payments actually paid or credited as a result of the financial leasing contract.

CHAPTER IX

Of General Provisions

Art. 28 Investment banks, development banks, and savings banks may acquire from lessor companies their credit rights arising from financial leasing contracts, through instruments of credit assignment.

Sole Paragraph. Real estate credit companies and savings and loan associations, provided they are authorized by the National Housing Bank, may also acquire credit rights arising from financial leasing contracts, in the manner of this article, when relating to the leasing of immovable goods.

Art. 29 Companies that were already effectively conducting financial leasing operations shall have a deadline until May 15, 1976, to request their registration with the Central Bank.

Art. 30 In the cases of the preceding article, for accreditation as a lessor company, in addition to the conditions and documentation required by current regulation, an audit report - certified by an Independent Auditor registered with the Central Bank - demonstrating the company's financial situation, which shall not be lower than the minimum capitalization level fixed in Art. 5 of this Regulation, must be presented.

Art. 31 The norms in force for financial institutions in general shall apply to lessor companies, insofar as it concerns the exclusive competence of the Central Bank for granting the authorizations provided for in item IX of Art. 10 of Law No. 4,595 of December 31, 1964, as well as for approving the taking of office and the exercise of any positions in the administration of said companies, including in consultative, supervisory, or similar bodies, in accordance with the aforementioned legislation and subsequent regulation.

Art. 32 The Central Bank shall issue complementary instructions necessary for the execution of the provisions of this Regulation, including determining specific standards of audit and accounting applicable to the operations in question.