Brazilian Hong Kong: Proposal for a “free zone” to attract capital divides opinions

An Offshore Financial Center (OFC) in Brazil. The proposal comes from economist, professor and consultant Roberto Troster, who advocates a “financial free zone” in the country with its own rules for taxation, exchange rates and services, along similar lines to those already in place in places like Hong Kong and London.

According to the International Monetary Fund (IMF), CFOs are jurisdictions that offer operations primarily aimed at large organizations and high-net-worth investors who are not resident (but not exclusively) in the locations where they are located.

What is a financial free zone and where could it be created in Brazil?

CFOs or financial free zones are used as tools for tax optimization and asset protection, but they often raise suspicions of irregular practices, which is why some of them are called “tax havens”. Despite the controversy, international organizations recognize that they play a legitimate role in facilitating the flow of capital.

The model suggested by Troster would function as an extension of the National Financial System, with specific rules that would coexist with the current regulations, without the need to modify them. “It would benefit all agents involved in foreign trade,” he argues.

According to the author, São Paulo is the ideal city to house the CFO because, in his analysis, it concentrates all the necessary elements: consolidated physical infrastructure, specialized labor, international standard law firms and consultancies, as well as cutting-edge technology and support services.

The initiative has the support of experienced names in the sector. “The proposal is very good,” says Antonio Carlos Castrucci, former president of ABBC (Brazilian Banking Association) and former director of Febraban (Brazilian Banking Federation). “It should be seriously considered.”

The idea is also in line with recent positions taken by representatives of the Brazilian economic and financial sectors, who have been defending the need to create modern mechanisms to attract foreign investment and increase Brazilian competitiveness on the international stage.

Among them is Luiz Carlos Trabuco, former CEO of Bradesco, who says he believes in the importance of regulatory innovation as a decisive factor in attracting new investors to Brazil. In Trabuco's view, in order to compete globally, it is essential to have mechanisms capable of facilitating the entry and management of external resources, including the creation of specific and differentiated regulatory environments.

In a similar vein, former Central Bank President Roberto Campos Neto, although he did not directly address the CFOs proposal in the country, worked during his term to modernize the Brazilian financial sector. Within his vision of international market integration, Campos advocates greater regulatory flexibility.

Financial free zone in Brazil: advantages, risks and obstacles

Experts warn about some obstacles to the creation of a financial free zone in Brazil.

Gabriel Quintanilha, a professor at FGV Direito Rio, points out that Brazilian legislation needs to undergo major adjustments for this new structure to work properly. “The main challenges will be the complexity of the tax system, gaps in legislation, lack of transparency and compliance costs,” he says.

In this context, the entry into force of Law 14,754/2023, which in 2024 began to tax profits from investments made by Brazilians abroad, gave new impetus to supporters of the idea. The change in taxation rules may encourage asset managers and investors to bring their operations here.

Data from the Federal Revenue Service shows that, in 2023, Brazilians held around R$1.1 trillion in assets in the foreign market. Troster argues that it is possible that part of these resources will be transferred to a structure in Brazil, together with foreign trade operations and international transactions attracted to the country.

But not everyone shares the same optimism. Quintanilha believes that the return of assets to a CFO in Brazil may not be as attractive as it seems: “I don’t see any positive impacts regarding repatriation, especially due to the maintenance of dollar reserves as a strong currency.”

In addition to the legal challenges, the proposal raises concerns about its potential impact on competition. Analysts warn that without clear regulation, there could be practices that compromise a level playing field in the market. Small and medium-sized companies, already affected by high taxes and bureaucracy, could be at a disadvantage in the face of a regime more favorable to large capital flows.

Troster downplays this risk. He believes that competition would come from foreign agents, not domestically, and emphasizes that the proposed center for Brazil would allow for more agile operations, in Portuguese and at lower costs – which, he predicts, would especially benefit small and medium-sized exporters.

The consultant also points out possible indirect tax gains. Although direct taxation on CFOs is generally minimal or non-existent, there would be an increase in revenue from taxes on services and associated activities. This, according to him, reinforces the positive potential of the center for both the economy and public accounts.

Financial free zone requires strict monitoring, experts warn

Finally, the initiative also raises concerns about oversight and transparency. Experience has shown that CFOs, even when legally constituted in their respective jurisdictions, often operate outside of traditional internal control systems.

The criticism is reinforced by professor and writer Ladislau Dowbor, one of the leading scholars of the Brazilian financial system, who believes that such structures “should be abolished.” He claims that while ordinary citizens pay taxes, the “super-rich” use offshore companies to “circumvent” the tax system and concentrate wealth.

Troster counters, highlighting that the legal framework would include dispute resolution mechanisms compatible with international forums and would maintain high standards of oversight and transparency.

In the economist's assessment, the Central Bank would be responsible for supervision, with better conditions to monitor companies based here in the country than those located abroad. "The supervision existing in Brazil is among the most efficient in the world," says the author of the idea.