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Doing Business in Brazil

1. Why invest in Brazil?

Opportunities:

High return on invested capital
Stable economy with controlled public debt and inflation
Size of the domestic market (population of 186 millions people)
Competitive advantages such as climate, natural resources and labour workforce
Strong potential of sustainable growth in the coming years.
Brazil has borders with ten countries: Argentina, Bolivia, Colombia, French Guiana, Guiana, Paraguay, Peru, Suriname, Uruguay and Venezuela.
Brazil is a gateway to Mercosur
Brazil in is one of the BRICs countries: Brazil, Russia, India and China.
Brazil is expected to reach soon the well known "investment grade".
Brazil is peaceful and multiracial country.

Threats:

Historical volatility of the Brazilian currency (real)
Complex tax structure
Bureaucracy and corruption
High domestic interest rates
High crime rates
Cultural and language barriers

2. Type of Business Entities

The two most common forms of business entities in Brazil are the corporation called “Sociedade Anônima” (SA) and the limited liability company called “Sociedade limitada” (LTDA). The "limitada" is the most common corporate structure used by foreign investors, as limited liability companies have fewer bureaucratic requirements than Corporations (SA). Limited companies are not required to be audited or to publish financial statements. However, they cannot become public and raise capital through public offerings.

3. Main requirements for the constitution of a company in Brazil

The capital of the new company must be subscribed by at least two partners. No minimum capital is required by Brazilian law, except for companies with foreign controlled by non resident shareholders (SA) or quotaholders (LTDA).

Non resident foreign partners cannot administrate a Brazilian company and must be represented by a Brazilian citizen or a foreign individual resident in Brazil (with a permanent visa). In addition to that, non resident shareholders or quotaholders must obtain a tax identification number (called “CNPJ” for entities or “CPF” for individuals) form local fiscal authorities.

The bylaws of the new company must be registrated in the local Board of Trade (“Junta commercial”). Than several registrations must be performed. A Corporation (SA) must comply with several publication rules before starting its business.

The assistance of a local advisor is recommended for creating a company in Brazil, as a result of the bureaucracy and language barriers.

4. Exchange control and Foreign Investment

In Brazil, all cross-border currency transactions are controlled by the Central Bank (BACEN) which administers exchange-control policy and possesses the exclusive legal rights to operate in foreign currency. Foreign investment in the form of share capital or loans must also be registered in the Central Bank. There are no restrictions on the amount of dividends that can be distributed to foreign shareholders if the investment was duly registered in the BACEN.

Brazil does not restrict foreign ownership of domestic enterprises. However, foreign individuals and companies are restricted in certain sectors sucha as media or rural real estate.

Remittance of royalties and fees resulting from the use of patents, trademarks, technical assistance are authorized if the underlying intangible asset was registered in Brazil and in the country of origin. Agreements must be approved by the National Institute of Industrial Property (“Instituto Nacional de Propriedade Industrial” or INPI) and be registered in the Central Bank (BACEN). Non compliance with these rules may result in severe penalties.

The repatriation of share capital is not restricted if the investment was duly registered in the Central Bank. The repatriation is usually performed after the sale of the shares to a resident, a capital reduction or the liquidation of the company.

5. Intellectual Property

In Brazil, the National Institute of Industrial Property (INPI) is an agency of the Ministry of Justice which is dedicated to registration of intellectual property and technology transfer contract. According to current legislation, technology transfer contracts are classified as:

use of patents
use of trademarks
technology supply
technical and scientific assistance service
cost-sharing

6. Tax System

The Brazilian taxation system is very complex, with over than 60 different taxes and several Tax regimes. Companies may elect to pay Income taxes based on estimated earnings (“lucro presumido”) or based on actual taxable income. Taxes rules on estimated earnings (“lucro presumido”) are simplified but tax rates are higher. As estimated earnings are calculated on the basis of the turnover (estimated earnings), the election of this tax regime may be appropriate for businesses with very high margin rates. The assistance of tax advisors is strongly recommended.

In Brazil, corporate income taxes on actual taxable income represents around 34% and are composed of the three following elements, as follows:
• Corporate income tax (IRPJ) amounts to 15%
• A surtax of 10% is due on profits in excess of R$240,000 per year
• In addition to that, a Social Contribution Tax on corporate profits (CSLL) must be paid at a rate of 9%.

Small entities with gross revenues below specified amounts (below R$1,200,000) may follow simplified payment procedures (called SIMPLES) and reduced tax rates.

For more details see Taxation section.

7. Labor force

To preserve job opportunities for Brazilians, the government requires that 2/3 of the employees in any Brazilian company must be Brazilian citizens. In addition to that a minimum of 2/3 of the total remuneration of the company must be received by Brazilians. This declaration must be performed annually to the Ministry of Labour.

All workers must hold a blue work card (carteira de trabalho or carteira profissional) in which the terms of their employment contracts must be recorded.

Cost of labour force is represented by the following main elements:

Gross salary granted to the employee.
INSS tax (social security): 27,8% of gross salary.
FGTS tax (severance fund): 8,5% of gross salary.
13 months of salary must be paid to the employee according to Brazilian law
After each 12 months of employment, employees are entitled to 30 days of vacation. An additional bonus of a 1/3 of the salary must be paid to the employee during its vacation.

Brazilian legislation establishes that the maximum working week is 44 hours, spread over five or six working days. The working day may not exceed 10 hours that is 8 regular work hours and a maximum of 2 overtime hours. Overtime is paid at a premium rate of at least 50% of the regular salary.

Companies must perform monthly contributions to a severance fund called FGTS (see point 3 above). Contributions may be withdrawn by employees under certain circumstances, including retirement, unfair dismissal or acquisition of real estate.

Employees that are dismissed unfairly (without just cause) have the following rights in Brazil:

At least 30 days’ notice, with the salary paid in cash
A 13th monthly salary prorated to the time worked in that year
Balance of salary until that month
Prorated vacation salary
Additional penalty calculated as a percentage (currently 50%) of the total amount deposited into the Severance Fund called "Fundo de Garantia de Tempo de Serviço", FGTS.

Brazilian Federal constitution stipulates a minimum salary. Currently, the minimum monthly salary is R$300, equivalent to approximately US$ 150. In cities as São Paulo or Rio de Janeiro, a worker may be paid from 2 to 5 minimum salaries, depending on its qualifications.

8. Public-Private Partnerships*

* Source: Ministry of External Relations, Trade Promotion Department (BrazilTradeNet)

A Public-Private Partnership implies a medium or long-term (5 to 35 year) contract for the provision of services, signed by the Public Administration, involving sums of not less than twenty million reais. PPP contracts shall not be authorized if their sole objective is provision of labor, equipment, or execution of public works. Under a PPP, installation of the infrastructure necessary to provide the service, contracted by the Administration, depends upon private-sector funding, and remuneration of the private-sector partner is conditioned to performance standards, and is due only once the service is being provided to the State and to consumers.

The law provides for the possibility of a combination of tariff remuneration and payment of public counterpart funding, and defines PPPs as administrative concession contracts, under either sponsorship or administrative modalities. Under a sponsorship concession, remuneration of the private partner, aside from tariffs charged from users of the service, will also involve payment of a counterpart by the public-sector partner. Under an administrative concession, on the other hand, which applies in cases where there is no option of recovering costs by charging consumers, the public-sector partner disburses payments only when the service is made available.

Among the advantages of PPPs is the possibility they provide for inverting the phases of prequalification and assessment in the tender process, and sharing of risks posed by force majeur, acts of God, acts of princes, and extraordinary economic risks of the contract. The Law also authorizes arbitration for the settlement of disputes, the establishment of funds and the contracting of insurance guarantees for payment owed by the Public Authorities to the private partner.

In the case of the Federal Government, the PPP Law establishes that calls to tender issued by the competent authorities shall be subject to prior approval by the PPP Management Committee - CGP, comprised of the Ministries of Planning, Budget and Management, (the coordinator), of Finance, and of the Presidential Staff (Casa Civil). This is the body responsible for issuing guidelines for the contracting of PPPs at the federal level, and for setting criteria for the selection of projects to be implemented under the PPP system.

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