Co-working: the collaborative economy and the Brazilian real estate market

This article first appeared on the website of the Real Estate Committee of the Legal Practice Division of the International Bar Association, and is reproduced by kind permission of the International Bar Association, London, UK. © International Bar Association.

 

A long-term consequence of the 2008 financial crisis is that markets have innovated to focus more on sustainability, cost mitigation and collaborative business structures. In this changing world, asset-sharing became a natural development for the real estate business.

Complex, collaborative workspaces remedy an array of occupancy problems, such as empty desks, underused meeting rooms and substantial maintenance costs. In addition, co-working spaces with aggregated ancillary service packages help smaller companies and freelancers to focus on their main business activities while scaling up the administrative office services they are able to use. Such spaces also foster an environment of business development and cooperation among users.

The first shared workspace appeared in New York in the 1990s; collaborative spaces quickly became a here-to-stay trend. One recent survey indicates that, as of December 2017, 18,900 co-working spaces, with an average of 130 members per workspace, are operating worldwide. While the shared co-working market is still largely dominated by specialist companies, it is now engaging traditional real estate players.

In Brazil, co-working represents a disruption to the customary use of real estate property. Currently in Brazil there are more than 1,000 co-working spaces generating more than 5,000 direct jobs and more than one million indirect jobs.

Shared office services with tailored short-term contracts have benefited individuals, startups, small companies and even incubator affiliates of larger corporations. As this trend grows, one consequence being observed in Brazil is that long-term engagements (eg, lease agreements) are being replaced by flexible legal ties.

The current challenge in Brazil is to define the legal framework applicable to such collaborative workspaces, which combine concepts of short-term commercial leasing with service rendering – demanding a hybrid form of contract that is so far lacking any supporting legal framework.

A federal collaborative workspace bill, No 8.300/2017, now moving through the House of Representatives, aims to govern such co-working activity. The bill has not yet undergone formal review and amendment, but in its current form, it provides that a manager of a co-working space is a service provider and not a lessor.

The existence of this bill signals that Brazilian law views the co-working industry in much the same way that it views the hospitality sector: that is, the business activity is mainly a service rather than a lease relationship. One consequence of this approach is its impact on taxation.

With regard to tax levying and related fiscal obligations, it is important to highlight that service providers in Brazil are subject to a municipal service tax.

In addition, the recent São Paulo Municipality Law 16.757/2017, intended to tighten tax control on emerging businesses, established that co-working providers are deemed jointly and severally liable for the payment of services tax with regard to users of shared spaces that are not registered with the São Paulo municipal authority.

The latter law generated significant opposition given that co-working service providers would assume a supervisory role with regard to respective users as well as potential tax liability. The debate around taxation of the co-working industry is ongoing.

Contrastingly, it is interesting to note that the interpretation in bill 8.300/2017 – which treats co-working as a service – also aligns with co-working providers’ interests: the Brazilian Lease Law, 8.245/1991, is quite protective to lessees.

In general, while the Lease Law generally allows lessees to terminate a lease without cause during the lease term – subject to payment of a small penalty – termination by a lessor requires specific conditions, such as a contractual breach by the lessee, lack of guarantee, government determination of urgent need for works or specific circumstances in the case of a sale of the real estate asset.

There are also certain conditions under which a lessee has the right to the automatic renewal of the commercial lease in order to protect the goodwill of the business.

Therefore, the categorisation of co-working as a service in the bill is interesting from both the tax control and property management perspectives – although it should be remembered that this bill is not yet formally law.

While the formal approval of other laws is pending, the definition of the co-working legal structure depends on the contract structure and documentation covering the use of the facilities and the relationship between the users.

Considering the lack of legislation on the matter, it is prudent business practice to ensure that relevant contracts are well-drafted, including a detailed scope of services (if any) and use conditions, to help ensure that multi-users may operate in appropriate working conditions and to avoid disputes concerning each user’s licensing, employment and tax regimes.

It is widely accepted that because the concept of co-working itself is constantly expanding, the need for further directives is also growing.

Meanwhile, co-living projects in Brazil are taking baby steps. A project in São Paulo is integrating collaborative co-working spaces and temporary residences, mostly for freelancers and startup entrepreneurs wishing to have an establishment and network in the Brazilian financial capital.

In conclusion, although the collaborative economy is already a reality in Brazil, discussions about its impact and effects will continue for as long as the relevant tax treatment and legal framework remain uncertain.

 

CONTACTS:
Rafael Bussière
Partner of real estate
T: +55 21 3262-3048
E: rbussiere@cmalaw.com

Ana Beatriz Barbosa
Associate of real estate
T: +55 21 3262-3012
E: ana.barbosa@cmalaw.com