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An application window for Brazil’s first state-level sports betting licences closed on Friday (August 11), with Rio de Janeiro testing the limits of Brazilian lottery laws by enabling approved operators to accept bets from players across the country.

The state lottery of Rio de Janeiro (LOTERJ) first published a call for applications for sports-betting accreditations in April, but changed certain terms of the process last month to align with the Brazilian government’s so-called provisional measure altering the 2018 federal law that recognised fixed-odds sports betting as an approved lottery game.

As of last month, Rio’s revised application criteria includes a ban on licensed betting operators being owned by sports-team owners and a requirement that they become part of a formal integrity monitoring association, copying and pasting from the new federal legislation.

But the revised regime also now allows for operators accredited by the state to operate throughout Brazil, with licensees no longer required to block access to players outside Rio.

Instead, Rio-licensed operators must merely ensure players acknowledge that “the placing of online bets will always be considered to occur in the territory of the state of Rio de Janeiro, for all intents and purposes including fiscal and legal, regardless of the geolocation of the IP or device from which the bet originated”.

An original draft of the provisional measure for sports betting would have permitted Brazilian states to conduct lottery games and fixed-odds betting strictly for players who are physically located within their territories. However, no such language was included in the updated federal legislation that took effect upon its publication in late July.

Rio’s accreditation regime also was revised to expressly allow operators to offer online versions of any other recognised lottery games, including instant games, as well as games of skill.

In a , LOTERJ said the updated terms of its licensing system were necessary “to increase the economic viability of the process and the success of the operation of virtual lottery activities in the state of Rio de Janeiro”.

The state lottery also set a deadline of 15 days after the decree’s publication for operators to submit applications, having already awarded its first two accreditations to Rede Loto and PixBet. According to local reports, six further companies, including 1xBet, submitted applications before the deadline expired at 6pm on Friday.

Rio de Janeiro is not the only the Brazilian state moving forward with sports betting amid ongoing delays in establishing a licensing system at the federal level.

Paraná, a state of 11m people that includes the major city of Curitiba, is similarly reviewing licence applications from a total of eight operators that stepped forward under the state’s own accreditation regime. The state lottery of Minas Gerais, Brazil’s second most populous state after Sao Paulo, launched an online sportsbook earlier this year, although only for in-state players.

Litigation Likely

It is an open question whether operators licensed by state lotteries will lawfully be able to offer sports betting or other lottery games beyond the borders of that jurisdiction.

In a formal dated August 3, legal representatives of Brazilian national lottery operator Caixa Econômica Federal said it was challenging LOTERJ’s licensing process on various grounds, including a 1944 law that grants the federal government exclusivity to conduct lottery games on a national basis.

Another lawyer representing an unnamed interest filed a similar challenge, while also objecting to the short 15-day deadline to submit applications.

In its to Caixa's complaint, LOTERJ said Brazilian legal restrictions on the sale of lottery tickets do not apply to games offered by the internet and there would be no jurisdictional conflict as all transactions would be deemed to occur within Rio de Janeiro.

Ultimately, Rio’s proposal to allow bets from out-of-state players is sure to face litigation, said Luiz Felipe Maia, a Brazilian gambling law expert with the firm of Maia Yoshiyasu Advogados in Sao Paulo.

But unless the federal government steps in to restrict the offering of online games by state lotteries through new legislation, the principles of Brazil’s legal system will continue to apply and “any contract, including a betting contract, will be deemed to be executed where the offer is made”, Maia told VIXIO GamblingCompliance.

Rio’s state-level process comes as Brazilian sports betting approaches a critical legal juncture.

Although the federal government’s provisional measure is in effect, officials are not expected to move forward in implementing a national licensing system until the new legislation is ratified by Congress. It appears that will not happen, with federal lawmakers instead expected to incorporate the provisional measure into a separate bill and proceed through a different legislative process.

Brazil’s proposed federal regime as outlined in the provisional measure has attracted much industry criticism due to a headline tax rate of 18 percent of gross revenue that will rise to around 30 percent once other federal and local taxes are included.

Although licensing fees were not laid out in the provisional measure, federal officials have also said they plan to charge an upfront fee of R$30m, or approximately US$6m, for a national licence.

In contrast, Rio requires a fee of R$5m upfront and a monthly tax of 5 percent of gross betting revenue.

In a recent commentary on the federal government’s provisional measure, LOTERJ president Hazenclever Lopes Cançado said its high tax rate meant “the landscape has come to favour state lotteries, including LOTERJ”.