Analysis of the impacts of the sports betting MP from the perspective of five legal areas

The Federal Government has published Provisional Measure No. 1,182 on July 24, 2023^[1] (“MP”), which regulates fixed-odds bets, also known as sports betting. These bets can be carried out online or in person by purchasing a printed ticket before or during the actual event that is subject to the bet. According to Demarest’s experts from the Regulatory, TMT, Tax, Intellectual Property, Criminal and Financial areas, the MP sought to ensure that the relationships established between betting platforms and the general public are more secure and transparent, but also to contribute to increasing revenue and enabling the operation of sports betting operators in Brazil.

The MP established “real sports-themed events” as the event or act that includes sports competitions, tournaments, games or tests involving individual or collective human interactions, excluding those that exclusively involve the participation of minors under 18 years of age, whose outcome is unknown at the time of the bet and that are either promoted or organized.

The Ministry of Finance expects to collect around BRL 2 billion per year. Once the gaming market is fully regulated, the Federal Government estimates an annual revenue ranging between BRL 6 billion and BRL 12 billion.

The MP is effective immediately, but will lose its validity if it is not approved by the National Congress within 120 days.

1. Regulatory aspects

The MP establishes that the Ministry of Finance will be responsible for (i) authorizing, permitting and granting, standardizing, regulating, supervising and inspecting the operation of the fixed-odds betting lottery; (ii) regulating, inspecting and applying administrative sanctions; (iii) instituting administrative proceedings and applying administrative sanctions for violation of the provisions of the corresponding legislation, and (iv) establishing penalties and the administrative sanctioning process, which includes the degree and amount of the penalty to be applied.

Important topics concerning the regulation of sports betting were not addressed in the MP and will be subject to a subsequent regulation. The MP specifically established that (a) the Ministry of Finance will regulate the form and process by which concessions, permissions and authorizations will be granted for agents to operate the lottery modality of fixed-odds betting, and (b) the Ministry of Finance and the National Council for Self-Regulation of Advertising (“CONAR”) must act together to regulate communication, advertising and marketing actions, encouraging self-regulation and aiming at responsible betting.

Despite the need for a subsequent regulation, the MP has already established some important guidelines, including the subjective requirements for requesting a grant to operate fixed-odds betting lotteries, which are: Brazilian or foreign legal entities, duly established within Brazil and that meet the requirements included in the regulation to be published by the Ministry of Finance. Considering that, currently, the operation of sports betting operators within the Brazilian market is mostly carried out through companies headquartered abroad, using platforms hosted on international servers, these operators will need to incorporate legal entities headquartered in Brazil, which will be subject to inspection by the Ministry of Finance.

The lack of a grant for the operation of sports betting activities is, under the terms of the MP, an impediment to advertising these activities in Brazil. In order to comply with such determination, the MP established that:

• companies that spread advertisements or publicity must exclude irregular advertisements and campaigns, upon notification by the Ministry of Finance;
• Internet service providers (that is, telecommunication service providers responsible for providing access to the Internet) and Internet application providers (that is, intermediary digital platforms), must block websites and/or Internet applications relating to sports betting whose operators are not duly authorized to carry out activities in Brazil, upon administrative notification by the Ministry of Finance. This particular determination raises concerns in view of the principles and rules established in Law No. 12,965/2014 (“Brazilian Internet Law”);
• Sports management entities will prohibit, in the regulations of their competitions, sports practice organizations and athletes from using the names and brands of companies that offer or operate fixed-odds betting lotteries without a grant.

In order to avoid conflicts of interest and mitigate risks of manipulation of results, the MP established that companies licensed to operate sports betting lottery activities, their subsidiaries and controlling companies, cannot acquire, license or finance the acquisition of rights to sports events held in Brazil for broadcasting, transmission, retransmission, reproduction, distribution, availability or any form of exhibition of their sounds and images, by any means or process, in line with other existing restrictions. .

To the same end, the MP establishes that the partner or controlling shareholder of a company that operates fixed-odds betting lottery, whether individually or as part of a control agreement, cannot hold direct or indirect interest in soccer teams or any other professional sports organization, nor act as manager of a Brazilian sports team.

2. Tax aspects

The MP introduced important changes to the taxation of operations involving fixed-odds betting.

The new wording of article 30 of Law No. 13,756/2018 establishes that, over the proceeds from the collection of fixed-odds betting lotteries, subtracted from the prize paid and the 30% income tax withheld on the value of the prize, an 18% contribution will be levied, distributed as follows:

1. 10% as social security contribution;
2. 82% for basic education;
3. 55% for the National Public Security Fund (“FNSP”);
4. 63% for entities of the National Sports System (“SNE”) and athletes who have their names and symbols linked to betting; and
5. 3% for the Ministry of Sports until 2028, and, after such date, for the National Treasury.

The MP also establishes that, from the net amount collected, up to 82% of the proceeds will be used to cover the cost and maintenance expenses of the fixed-odds betting lottery operator. The limit provided for in the previous text was 95%. This limit may vary throughout the year, provided that the annual average meets the limit established in the legislation.

The MP repealed the provision for the social security contribution on the total proceeds of the collection in the amount of 0.10%, in the case of physical betting and 0.05%, in the case of virtual betting. This repeal becomes effective from the first day of the fourth month following its publication, as does the 10% contribution established by the rule. In turn, the requirement linked to the collection of the Inspection Fee due for the commercial operation of the fixed-odds betting lottery was maintained.

Operators must calculate and pay the fees on a monthly basis in the manner to be defined by the Ministry of Finance and the Federal Revenue Office of Brazil.

It is important to highlight that the MP did not expressly define what will be regarded as the “operator’s revenue for corporate taxation purposes” – the Corporate Income Tax (“IRPJ”), the Social Contribution on Net Income (“CSLL”), the Social Integration Program (“PIS”) and the Contribution for the Financing of Social Security (“COFINS”), and the Services Tax (“ISS”) -, and whether it will be only 82% or 100% of the amount collected minus the prize and income tax.

However, the text has maintained the Gross Gaming Revenue (GGR) taxation system. In general terms, the GGR represents the amount withheld by the operator and not the total amount collected as bets (turnover). This taxation method is compatible with the Supreme Court’s judgment of Subject 700, which provided for the levy of ISS on games and betting activities.

3. Financial aspects – payment methods

In order to ensure a more secure and transparent relationship between the platforms and the general public, the MP also introduced rules that have an impact on the market of payment methods.

This is because the MP introduced specific rules applicable to payment channels intended for placing bets and receiving prize amounts.

As a result, only institutions authorized to operate by the Central Bank of Brazil (both banks and regulated payment institutions) will be able to offer transactional accounts through which bettors will be able to carry out betting payment transactions, as well as receive any prizes.

According to the new regulation, payment institutions that have not yet achieved the minimum regulatory conditions for applying for an operating authorization before the Central Bank will be prevented from acting as financial settlement channels within the betting market.

A key point of the new legislation, the grant for consideration of concessions, permits or authorizations to operating agents to carry out fixed-odds betting activities is also expected to have an impact on the market of payment methods, and the Ministry of Finance will have to publish additional rules to regulate such granting proceedings initiated by domestic or foreign legal entities established in Brazil.

This regulatory criterion for the regular functioning of the operating agents within our market will cause important repercussions on the Brazilian Payment System, as new regulations must be published by the Central Bank in order to introduce adjustments in the functioning of payment arrangements. The purpose of this measure is to avoid payments intended for betting by unauthorized operators.

As a result, any failure to comply with the rules regulating the operation of the arrangement that the Central Bank is expected to publish will result in the exposure of financial and payment institutions proven to be infringing administrative provisions, in accordance with the provisions of Law No. 13,506 and non-statutory regulations.

4. Intellectual property aspects

The MP introduces important changes involving intellectual property rights, as follows:

• The Ministry of Finance will regulate the manner and process by which authorizations will be granted for all operators of the fixed-odds betting lottery modality to use: (i) the image, name or sporting nickname and other intellectual property rights of athletes; and (ii) the names, brands, emblems, anthems, symbols and the like of sports organizations.
• The proceeds of the collection will be reverted, as established by regulation of the Ministry of Finance together with the Ministry of Sports, to entities of the National Sports System and to Brazilian athletes or athletes linked to sports organizations headquartered in Brazil, in the event that their names, surnames, images and other intellectual property rights are expressly subject to bets, or to the national organization for managing the sport relating to the event, when the participants are not part of the National Sports System. 
• Sports management entities will prohibit, in the regulations of their competitions, sports practice organizations and athletes from using the names and brands of companies that offer or operate fixed-odds betting lotteries, in all their marketing properties that may be subject to an agreement on branding, without the grant provided for by law.
• Companies providing betting lottery activities cannot acquire, license or finance the acquisition of rights to sports events held in Brazil for broadcasting, transmission, retransmission, reproduction, distribution, availability or any form of exhibition of their sounds and images, by any means or process.
• The communication, advertising and marketing actions of the fixed-odds betting lottery will comply with the regulations of the Ministry of Finance, and self-regulation will be encouraged. Accordingly, CONAR can establish additional restrictions and guidelines to such recommendations. 
• Advertisements or publicity of websites or lotteries without a grant are prohibited, and the internet connection and internet application providers (as defined by the Brazilian Internet Law) are in charge of blocking or excluding such websites/applications, upon administrative notification by the Ministry of Finance.

As can be seen, some aspects involving intellectual property rights will still be subject to discussion, depending on directives not yet available. However, the changes introduced by the MP already represent important guiding elements for the practices that will be adopted and the possible conflicts of interest and discussions that will be faced.

5. Criminal aspects

From a criminal standpoint, it is important to highlight that fixed-odds betting was legalized under Law No. 13,756/2018 and differs from games of chance – the so-called gambling -, which remain illegal within Brazil, according to article 50 of the Criminal Misdemeanor Law (Law No. 3,688/1941).

The MP is an important step towards the regulation of this topic in Brazil, so that the Federal Government can further exercise its inspection authority, including the duty of the companies holding the authorization to report to the Financial Activities Control Council (“COAF”) all the necessary information about the bettors, in order to prevent money laundering and financing of terrorism.

^[1] On July 26, 2023, the MP was partially republished: article 33-B and its items – rectification of formatting errors (there were no qualitative changes).

Demarest’s Regulatory, TMT, Tax, Intellectual Property, Criminal and Financial teams are available to provide any further clarifications on the matter that may be necessary.