On April 24, 2019, Complementary Law No. 167 was enacted, which provides for Empresa Simples de Crédito[1] (ESC), a new kind of company that will operate in the credit market business for the purpose of providing loans, financing and discounts of negotiable instruments in a simpler fashion to individual micro-entrepreneurs and small businesses.
The law is the result of a bill of 2015 and aims to enable a wider range of small businesses and entrepreneurs to have access to credit facility at lower and more competitive rates, which will allow, on the other hand, interested entities without the same size as financial institutions to operate and invest in this industry.
Small business owners have always found it hard to get credit facility. According to studies of SEBRAE[2], which played a major role in the formation of this kind of company, although 95% of the companies in the country are small businesses or individual entrepreneurs, less than 18% of the credit granting in 2018 were assigned to them. Besides, the percentages of small businesses (MPEs) (30%) and individual micro-entrepreneurs (MEIs) (55%) that do not have even a relationship with banks are still large, not to mention those that, although they may have such relationship, had their loans denied by such institutions (20%).
Considering such figures, this niche has an incredible potential for those that are interested in operating and investing in it. It is expected that about 20 billion reais will be invested in small businesses through these ESCs and that more than 300 ESCs are formed by the end of 2019.
Empresas Simples de Crédito (ESCs) are not banks or Sociedades de Crédito Direto[3] (SCD) or Sociedades de Empréstimo entre Pessoas[4] (SEP) either, which is the case of several Fintechs, or the newly regulated Sociedade de Crédito ao Microempreendedor e à Empresa de Pequeno Porte[5] (SCMEPP). Unlike all these companies, the ESCs are not subject to the authorization of the Central Bank of Brazil (BACEN) to operate and will not be supervised by the institution, although the latter may access data from the operations performed by the ESCs for statistics and macroprudential control of credit risk.
Although they deal in a simpler fashion with credit granting, the ESCs can use the guarantees under their contracts, as well as chattel mortgage, as provided for in the law, and are subject to the rules in order to ensure transparency and avoid frauds, such as the obligation to register the agreements of operations with a registry entity authorized by BACEN or the Brazilian Securities and Exchange Commission (CVM), financial transactions only through deposit accounts owned by the ESC and the client, as well as prohibition of collection of any charges and other amounts other than the remuneratory interest under the contracts.
Check out the requirements for formation and operation of such companies, among other aspects:
• Territorial Boundaries: The ESC may only operate in the city of its main place of business or in neighboring cities;
• Who qualify to be a member or holder: only individuals, and the same person may not be part of another ESC;
• Corporate forms: Only formation of limited-liability proprietorship (EIRELI), Limited Company or Individual Entrepreneur is allowed;
• Capital: there is no minimum or maximum limit, but it must be fully paid in currency in the beginning or in future contributions to capital;
• Purpose: The purpose of the ESC must be exclusive, and the corporate name adopted must be accompanied by the phrase “Empresa Simples de Crédito,” with no word or purpose that reminds those of a financial institution;
• Resources of agreements: All operations must be carried out with the company’s own resources, and capital-raising is prohibited, which, incidentally, will be defined as a crime if committed. Besides, the total value of the transactions may not exceed the value of the paid-in capital.
• Taxation: Although the gross revenue of the ESC may not exceed R$ 4,800,000.00 (four million eight thousand reais) p.a., a limit set for Small Businesses by Lei do Simples Nacional[6], it may not adopt this tax regime, except the taxable profit or presumptive profit regime. In the latter regime, the tax base of the corporate income tax (IRPJ) and the social contribution tax on net income (CSLL) will be 38.4% of the gross revenue of the ESC’s activities. It is worth emphasizing that the operations performed will also be subject to the normal tax on financial transactions (IOF) or the reduced rates, in the case of clients choosing Simples Nacional.
• Violations: Breach, for instance, of the limit of the annual gross revenue is not established in the Complementary Law, which is expected to occur in a subsequent regulation. However, breach of the following provisions set forth in Article 1, paragraph 3 of Article 2, in Article 3 and in the head provision of Article 5 of Complementary Law No. 167/2019, is defined as a crime by law, punishable by 1 to 4 years in prison plus fine, among other violations:
– To operate outside the territorial boundary established;
– To operate not in accordance with the purpose, i.e., to carry out operations not stipulated in the Agreement;
– To engage individuals other than those expected (individual micro-entrepreneurs and small businesses), as well as direct and indirect federal public administration entities and foundations, entities from any of the three branches of the federal government, of the Federal District or municipalities;
– To raise, receive and or use third party resources, directly or indirectly;
– To collect charges, rates and other amounts other than the remuneratory interest stipulated;
– To fail to submit the copy of the agreement to the client.
Undoubtedly, this new legal structure comes at just the right time, although we are still facing crises, which requires greater support to these important players of the country’s economy as a means of promoting formal working and developing their small businesses, creating new business opportunities and investing in this financial sector, once so restricted to large institutions.
[1] Simplified Credit Enterprises
[2] Brazilian Service of Support for Micro and Small Enterprises
[3] Direct Credit Companies
[4] Peer-to-peer loan Companies
[5] Micro-entrepreneur and Small Business Loan Company
[6] Medium and small enterprises under a unified national taxation system