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  Business in Brazil  
Forms of Association - Incorporation


Notwithstanding the large number of types of companies in the Brazilian legal system, the most used forms of enterprises are Corporations “Sociedades Anônimas” (S/A) - and the Limited Liability Companies “Sociedade por Quotas de Responsabilidade LTDA” (LTDA). This is due to the fact that in both cases all the participants have limited liability. The other company forms are rarely used.

Sociedade Anônima
A Corporation (S/A), governed by Law no. 6.404 of December 15, 1976, is basically a commercial legal entity, with its capital stock represented by shares. It could therefore be defined as a business corporation having as its objective the earning of profits to be distributed to the shareholders.

There are two kinds of Corporations: (a) those capitalized by public offer and subscription, which are denominated “open capital S/A”; subject to Brazilian Securities and Exchange Commission (CVM) regulations and inspection, and (b) those obtaining their resources without any public offer, denominated “closed capital S/A”.

The Corporation may also be an authorised capital S/A, being incorporated with a subscribed capital of less than the authorized share capital established by its By-laws. Despite the founders’ establishing a determined authorized capital level (authorized capital), the company may operate with a capital lower than that authorized, which may then be gradually reached via issue of shares without the need of further approval by a Shareholders General Meeting or a change in the By-laws.

The requirements to establish a Sociedade Anônima are the following:
· subscription by at least 2 (two) persons of the entire allotted share capital;
· payment in cash of at least 10% (ten per cent) of the value of the subscribed capital;
· filing its By-laws with the local Board of Trade.

The capital of a joint stock company is divided into shares representing part or fractions of such capital stock. The shares may be common or preferred shares, depending on the rights they confer to holders thereof. ----Common shares entitle the holder to the common or essential shareholders rights, such as voting rights while preferred shares do not, except if established contrarily in the By-laws. Special rights are reserved for holders of some kinds of shares, such as preferred shares (with or without right to vote). These consist of priority for capital return, with premium or without it, or even both the above advantages.

Shares can be either with par value or without par value. Shares with a par value always have a predetermined value expressed in money. In spite of their name, the shares without par value do have a price, their issue price. However, this price does not appear on the certificates. The issue price of the shares without par value is set by the founders, at the time company is formed, by a Shareholders General Meeting or by the Board of Directors at the time of a capital increase.

Each shareholder owns one or more shares in the capital stock. The minimum number of shareholders necessary to incorporate an S/A is two. The shareholders are guaranteed to be entitled to certain essential rights such as, but not limited to:
· profit sharing;
· in the event of liquidation, the right to participate in company business;
· priority in the subscription of shares, warrants convertibles into shares, convertible debentures and subscription warrants;
· withdrawal from the company in cases foreseen in the Law.

An Ordinary General Meeting of Shareholders must be held in the first 4 (four) months after the end of the fiscal year, according to the Law and company’s By-laws.

The Corporation may be managed only by the Executive Officers or by the Board of Directors jointly with the Executive Officers, depending on company’s By-laws. The Board of Directors (“Conselho de Administração”) is a body for collective decision-making, and is mandatory in public open-capital and authorised capital S/As, and optional in closed S/As. Its members must be shareholders, residing in the country. It must be composed of at least 3 (three) members, who shall be elected and removed by the Ordinary General Meeting of Shareholders.

The Executive Board (“Diretoria”) is the executive body of the S/A. It is in charge of representing the company and practising all necessary acts related to its day-by-day operations.

The “Diretoria” is composed of, at least, 2 (two) members – Executive Officers (“Diretores”), who may be shareholders or not, and must be individuals residing in the country, being elected and removed, at any time, by the Board of Directors, or, in the absence of such body, by the Ordinary General Meeting of Shareholders. “Diretores” may be elected for a tenure of 3 (three) years at most.

The financial statements of a Corporation show its financial position and changes occurred during the most recent period. In open capital S/As, the financial statements must be audited by independent audit firms or by independent auditors, duly registered with the Brazilian Securities and Exchange Commission. With respect to a closed capital S/A, the audit of its financial statements is optional.

Dissolution of a Corporation may be ordered by Court or occur by administrative decision. Prior to its dissolution, the company’s liquidation, which may be amicable or judicial, must take place to appraise its assets, pay its debts and distribute the balance, if any, among the shareholders, according to their respective participation in the capital stock.

Limited Liability Company By Quotas (Ltda)
A Limited Liability Company (LTDA) is governed by Decree no. 3.708 of January 10, 1919. LTDA is a middle term between a company composed of individuals and one formed by capital contributions. As it can unite aspects and conditions from both types of companies, it is frequently chosen by those who intend to establish a company.

The LTDA can be organised as a civil or commercial company, depending on the definition of its objectives set forth in the Articles of Incorporation.

A LTDA’s capital is divided into quotas. A quota represents the amount in currency, credits, rights or assets with which the quotaholder contributes to incorporation of the company. The quotas are necessarily registered and are not represented by securities or certificates.

Among its characteristics it is relevant mentioning:
1. simplicity of its formation;
2. quotaholders liabilities are limited to the total amount of company capital;
3. it is not subject to the considerable costs publishing balance sheets and other relevant corporate acts incurred by joint stock companies;

The LTDA is incorporated by its Articles of Incorporation and possesses only one class of partners, the limited liability quotaholders, which can be an individual or a legal entity. Each quotaholder is liable for the total amount of the capital and not only for its quotas, until the capital is fully paid-up. From there on, quotaholders will have no further liability with the company or third parties.

In principle, the managing quotaholder, or the delegate-manager, is not responsible for liabilities contracted in the company's name. Nevertheless, the manager will be held liable with the company and to third parties for acts which exceed the limits established by the Articles of Incorporation and for acts which infringe the Law. Such irregularities can evidently provide grounds for the dismissal of the manager by the majority of quotaholders.

Brazilian Decree no. 3.708 establishes that the quotas of a LTDA are of one form and class. A LTDA may not issue common or preferred shares.

  Exchange Controls  

Purchase and sale of foreign currency in Brazil is subject to governmental control. There are two exchange markets in Brazil that are subject to Central Bank regulations, both of which operate at floating rates. They are the following:

(A) Commercial/financial free exchange rate market. This market is reserved basically for (i) trade-related transactions, such as import and export transactions; (ii) foreign currency investments in Brazil; (iii) foreign currency loans to residents in Brazil; and (iv) certain other transactions, involving remittances abroad, which are subject to prior approval by the Brazilian monetary authorities; and(B) Tourism floating exchange rate market. This market was developed initially for the tourism industry, and was later expanded to allow certain other transactions, such as the purchase abroad of software. The applicable regulations indicate the types of transactions whose payments in foreign currency, to and from Brazil, qualify for foreign exchange in this market.The key distinction between these two markets is that, while both operate at floating rates freely negotiated between the parties, (i) the commercial/financial exchange market is restricted to transactions which require prior approval of the Brazilian monetary authorities; and (ii) the tourism foreign exchange market is open to transactions defined in the current legislation but which do not require any kind of prior approval by the Brazilian monetary authorities. This market is the first step towards creation of a free exchange market in Brazil.Under the Brazilian exchange control system, Brazilian residents and companies are required to sell and are entitled to buy foreign currencies for certain purposes as discussed above at the rate prevailing on the commercial /financial exchange market (the “Commercial Market”). Such purchases may only be carried out through a Brazilian bank authorised to buy and sell currency on the Commercial Market (an “Authorised Bank”). The Commercial Market rate is freely negotiated among the Authorised Banks but issubject to influence by the Central Bank, which often intervenes in the Commercial Market for control of extreme exchange rate fluctuations.The purchase of currency for repatriation of capital invested in the country and for payment of principal and interest on loans, notes, bonds and other debt instruments issued abroad by Brazilian obligors is also made on the commercial/financial exchange market. The obligors of such obligations may freely purchase necessary currency to make the required payments abroad by presenting to a bank authorised to deal in exchange the registration certificate issued by Central Bank in connection with such obligations prior to such obligations being incurred.No stamp, transfer or other similar tax in Brazil with respect to transfer, assignment or sale of any debt instrument outside Brazil including the Notes) is required .Aside from those two foreign exchange markets, there is a third way of performing transfers from or to Brazil, which is the international transfer of Reais. This type of international transfer, does not require an exchange transaction. Non-resident accounts in Reais are used to perform such transfers. Non-residents maintain these accounts at Brazilian financial institutions (formerly CC5 accounts”) and each debit or credit to such accounts is considered entry of funds into the country or its remittance abroad. The exchange rate representing price of the foreign currency is determined by the supply and demand of such currency, whose agents are importers and exporters, foreign tourists, cross-border investors, foreign currency debtors and others, including the intervening government, which constantly operates on the market to avoid abnormal exchange rate fluctuations.

Recently, the National Monetary Council (“Conselho Monetário Nacional - CMN”) has manoeuvred in the way of balancing the rates practised on the Commercial and Tourism currency exchange markets, avoiding distortions on currency values due to demand pressure from specific operations, such as foreign short term investments liquidation. The CMN Resolution 2.588 of January 22, 1999 unifies currency exchange market trading positions from both the Commercial and Tourism exchange markets. Note that the Resolution does not extinguish the two different currency markets, but allows a dealer to buy foreign currency from a Tourism Market seller to fulfil an order from a Commercial Market buyer, thus balancing practised rates.

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  Internacional Relationships  

Before an international-level ratification, these treaties and conventions negotiated and signed by the President of the Republic, should be submitted to the National Congress: at first to the House of Representatives, and subsequently to the Senate, whose President enacts a formal Legislative Decree.

The Brazilian Law considers that international treaties and conventions are superior in relation to the ordinary laws, thus the abrogation or revocation thereof takes place only by means of constitutional rules. As a matter of fact, the Federal Supreme Court (STF), guardian of the Constitution and its major interpreter, has the competence to judge, at the appellate level (extraordinary appeal), causes which decision was awarded at a single or last level. Likewise, the Superior Court of Law, the highest body of the Federal Justice, has the competence to judge at a special appellate level, such causes decided at a single or last level by the Federal Regional Courts or the State Courts, the Federal District and Territories. Therefore, in Brazil, the international treaties and conventions, once they are incorporated in the Brazilian legal system, may only be deemed incompatible with the Federal Constitution (and not with the ordinary laws) and solely through an express decision of the STF, through their own appeal: the extraordinary appeal.

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  Branches Business  

Brazilian law recognises the legal personality of a foreign company, which is permitted to exercise and defend its rights in Brazilian territory. However, to open a branch in Brazil and do business, the enterprise must obtain authorisation from the President of Brazil, through Executive Decree. The proceeding usually takes about three months from request date. Note that branches are not submitted to special exchange regulations.

When authorisation is requested, the foreign investor must deposit an amount of the capital destined for the operations in Brazil and determined by the governmental body, which issues the authorisation.

A branch must adopt the name of the enterprise as a whole, followed by the expression "do Brasil" or "para o Brasil".

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  Representatives (Agents and Distribuitors)  

Commercial Representation - Agency
Commercial Representation in Brazil is governed by Law nr. 4.886, of December 9, 1965, amended by Law nr. 8.420, of May 8, 1992. According to these laws, Commercial Representation is defined as the intermediation activity performed on a permanent basis by any person or company committed to achieve the market of products or services on behalf of a company or of several companies.

In this sense, the commercial representatives perform their duties by gathering sales proposals from potential customers and sending them for approval of the represented company. In case of acceptance, the commercial representative will be entitled to claim for a previous and contractually agreed percentage of the transaction proceeds(“commission”), conditioned to effective payment performed by the customer, unless the agreement sets out the rights of commission regardless of buyer’s payment.

Commercial representation agreements, as well known as Agency Agreements, shall be in duly executed as written documents. As per article 27 of Law nr. 8.420/92, besides the specific provisions agreed by the parties, same shall regulate the following subjects: (i) general conditions of the representations; (ii) indications and features of the products; (iii) duration of the commercial representation relationship; (iv) indication of representation area, along with permission (or not) for the representation company to perform direct sales of its own in the indicated areas; (v) granting (or not) of exclusivity in indicated area; (vi) commission’s value and stipulation if its payment will be conditioned (or not) to the effective collection of buyers’ payment; (vii) exclusivity (or not) on behalf of the represented company’s products; and (viii) indemnity to be paid to commercial representative, in case of non justified termination of the contract, which shall not be less than 1/12 of the total remuneration paid to the agent during the agreement.

-Law nr. 4.886/65, as altered by Law nr. 8.420/92, establishes expressly the events, which may lead to termination for cause by the represented company and also by the commercial representative.

Distribution Agreement can be defined as an agreement, in which a person undertakes the obligation to purchase the merchandise of a certain manufacturer to resell, with or without exclusivity, and for his own account, in a certain territory, and in which the manufacturer undertakes the obligation to sell its products on a continuous basis, to a distributor for resale in the territory. Such agreements are not subject to specific legislation in Brazil, although many authors consider distribution agreements to be commercial concession agreements latu sensu.

It is recommended that all distribution agreements should be in writing and must specify the following conditions:

(a) Parties shall keep a continuous buyer/seller relationship during the term of the agreement;
(b) Supplier shall always provide special advantages to distributor;
(c) Product to be traded shall necessarily be resold by distributor;
(d) Territory or territories where distribution shall be exercised must be expressly indicated;
(e) Contract must determine whether there is exclusivity in distributorship within the territory;
(f) There is to be no other relationship between the parties other than the one settled in the contract (there is no labor relation between them).

-----Supplier is entitled to comply with the following obligations:

(a) Any orders received by supplier from customers in the territory shall be passed on to distributor for fulfillment.
(b) Supplier shall promote publicity towards the products and services related to these rendered by distributor.

Obligations of distributor are as follows: (a) To maintain a suitable number of complete sets of samples of products for marketing purposes;
(b) to promote the supplier's products.

Distribution agreement shall remain in force for a definite or indefinite period, as provided therein.

Labor Effects
Neither commercial representatives nor distributors acquire rights as an employee. Notwithstanding, as Brazilian Labor law is very strict, it is recommendable, to avoid labor claims and heavier economic burdens, that represented company makes the following restrictions for its commercial representation contracts in Brazil: (i) commercial representative should be established as a company; (ii) represented company must restrict the orders granted to representative company to the performance of representative’s obligations.

Regulatory Bodies
Every commercial representative must be registered before “Conselho de Representantes Comerciais” (Commercial Representative Council) of the state where the respective activities take place. Such Councils have regulation power regarding the exercise of the profession. There is no regulatory body for distributors.

Commission Rates
Commission rates shall be set forth in agency agreements. The commercial representative is entitled to receive the commission only after the order is paid and until the 15th day of the subsequent month of payment. Distributors do not receive commissions since they buy to resell and the remuneration is by means of a margin resulting from the resale price.

Anti-trust Regulation
Both commercial representation and distribution agreements are submitted to Anti-Trust Law (Law nr. 8.884/94) provisions. Accordingly, such agreements must not produce any of the following effects, or, otherwise, it may be considered infringement of economic order: (i) limitation, fake or in any other manner damage of free competition or free initiative; (ii) domination of relevant market of goods or services; (iii) unjustifiable rise of profits; and, (iv) unfair exercise of dominant position (Anti-trust Law, art. 20).

Termination Rights
In regards to Commercial Representation, in case of non-justified termination of the agreement by the represented company, executed for an undetermined term, which remained in force for more than six (6) months, shall be subject to previous notice of thirty 30 days, or an indemnification equivalent to the average remuneration of the last three months is applicable in case of non concession of the prior notice.

Despite the prior notice, the termination without cause of the agreement for an undetermined period of time also gives raise to the obligation for the represented company to pay an indemnification, which shall be, at least equal to 1/12 of the total amount paid as commissions during the contractual term.

With relation to agreements with determined term, such indemnity shall correspond to monthly average of the income paid to representative until contractual rescission, multiplied by the number of month left for contractual term end.

Unlike commercial representation agreements, there is no specific provisions that regulate indemnification upon termination of distribution agreements in Brazil. However, Brazilian Courts in case of abrupt and abusive termination have already condemned manufacturers to pay an indemnification to distributors other than the one established in the agreement. In the absence of specific statutes, principles of contract, civil and commercial law and analogy to other typical contracts are also applicable.

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  Environmental Law  

Environmental protection, in Brazil, is foreseen by Federal Constitution in Article 225. According to same, every person has the right to an ecologically well-balanced environment. Its preservation and protection is a responsibility of the Public Power, as well as of the entire community.

The main law regulating this subject is Law 6.938, of August 31, 1981, as amended, establishes the National Environment Policy.

The competence to legislate on the environment in Brazil is established by Article 24, Clauses VI and VIII of the Federal Constitution. It foresees legislative concurrent competence between Union, States and Federal District.

In the hypothesis of non-existence of a federal law, all States have full legislative competence. The existence of a general federal law suspends effects of the state law in case of discrepancy. However, it does not mean that States are not allowed to introduce new forms of environmental protection, they can also create more severe laws than those established by the Union. Concerning Municipalities, same cannot legislate on environmental protection, but are entitled to protect same, being capable to edit laws establishing penalties to polluters.

Although legislative competence on the environment is only attributed to Union and States, the Federal Constitution, in Article 23, Clauses VI and VII, establishes that the three administrative levels -Union, States and Municipalities - have administrative competence to protect the environment and oppose pollution.

The main aspects that must be taken into consideration when examining Brazilian environmental legislation are: (i) licensing of effective or potentially polluting activities; (ii) administrative and criminal penalties; and (iii) civil liability for ecological damages.

I - Licensing of effective or potentially polluting activities:

Construction, installation, expansion and functioning of any establishment that uses environmental resources, or considered to be effective or potentially polluting, according to Law 6.938/81, Article 10, depends on previous licensing with the state environmental agency.

For projects or activities considered to be potentially or effectively polluting, the development of the Study of Environmental Impact (EIA), to be completed by its respective report (RIMA) is required. This study is part of the licensing process and the concession of referred license depends on its approval.

The activities that ought to be licensed or even submitted to the environmental impact study are listed by federal or state environmental bodies. It is possible that an activity must obtain a license to operate without having to proceed an environmental impact study.

To install and develop such projects, the entrepreneur shall obtain the following licenses:

1) Previous License - LP, containing prescriptions to be followed during localization, installation and operational phases, according to federal, state and municipal standards;

2)Installation License - LI, authorization of beginning of implantation, according to the previous license;

3) Operational License - LO, authorising, after due inspections, beginning of activities and its pollution control equipment, according to previous and installation licenses.

Licensing process of some specific activities will have to be analysed by the federal environmental body (IBAMA - Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis). For example, the required participation of IBAMA in licensing processes occurs when a project is going to be located at, or crosses an Environmental Protection Area (APA), an Indian Reservation or any other protected area, called “Conservation Units”.
Concerning this subject, CONAMA, the federal normative body, established a measure, Resolution nr. 237/97, setting rules to uniform many aspects of environmental licensing. It adopted a sole level licensing criteria, where activities are licensed only by the federal, state or municipal body, depending on the ground of interest, eliminating the necessity of more than one license for the same project. This Resolution also establishes a six-month limit for the environmental body to grant the license. In case of existence of EIA/RIMA and/or public hearing, this period is extend to one year.

II - Administrative and criminal penalties:

The second aspect to be mentioned concerns penalties that may be imposed by Brazilian authorities. These penalties consist of fines, interdiction of rights, suspension of activities, among others, imposed by the federal, state or municipal environmental agencies. For some conducts, however, considered as ecological crimes, prison is foreseen.

While administrative liability arises from the infringement of legal or administrative rules, the offender being subject to administrative penalties, such as interdiction of activities, warning, fine, suspension of benefits, the criminal liability results from the practice of a fact foreseen as crime or contravention, imposing fines, confinement or restriction of rights to the offender. Brazilian law defines ecological damages as a crime.

Recent Law 9.605/98 defined a series of crime and administrative faults against the environment as well as established corresponding penalties and introduced other means to guarantee environmental protection, such as, the possibility to impose criminal for legal entities.

III- Civil liability for ecological damages:

Apart from administrative and criminal sanctions, the polluting party is also liable for damages caused to the environment.

Brazil adopts the objective liability system for environmental damages. Although Federal Constitution foresees civil liability, its regime is established by Law 6.938/81. Accordingly, obligation to compensate depends only on attributing a damage to someone, with no the need to prove any intention or guilt. The lawsuit for this indemnity is a class action foreseen by Law 7.347/85, called Public Civil Action. Also important considering that, in the terms of Law 9.605/98, for this kind of damage, legal entity personality must be disregarded in case of impossibility to repair it.

Therefore, taking the above into consideration, in case of merger and acquisition, a previous evaluation of the enterprise environmental situation is recommended, since liability follows the company regardless of whoever the controller is.

For all these reasons, the environmental issue has become a new opportunity for business development. It does not matter whether it is about marketing or a way to avoid government penalties or lawsuits. The environmental question must be considered in any new investment or strategy planning of a company.

  Foreign Capital - Direct Investment  

Although there are several company forms in Brazil, only two of them are really worth considering for investment purpose in a Brazilian subsidiary. These are (i) the “LTDA” (or limited liability quota company) - a hybrid between a corporation and a partnership -; and (ii) the “Sociedade Anônima” or “S.A.”, which is the basic corporation form in Brazil.

In relation to the limited liability quota company, a foreign investor could essentially be the sole quotaholder, but at least one additional quotaholder (preferably two, if natural persons) would have to hold a nominal participation in the equity. Each quotaholder is liable for the payment in full of his quota of the capital. As the same time, in the event the company goes bankrupt, each quotaholder is liable, jointly and severally with the others, for payment in full of company’s capital to the extent it may not already have been fully paid up, regardless of whether that particular quotaholder’s own quotas were fully paid or not.

As far as Brazilian law is concerned, there is no requirement that the capital must be paid upon formation of the LTDA. The Articles of Incorporation may provide that the capital be paid in over the time or as requested by management. (However, to obtain a permanent visa for expatriate managers, should such be the case, currently, a minimum amount of capital equivalent to US$ 200,000.00 would have to be paid in at outset.) The quotas of LTDA - referred to as shares of corporation - are of one form and class, although the Articles of Incorporation may attribute a percentage of participation in the profits to a quotaholder, which is not the same as his percentage of the quota-holdings.

Law Nr. 6.404 of December 15, 1976 governs Sociedades Anônimas, which are similar to a corporation. Such law is far more detailed than LTDA’s Decree No. 3.708. As a result, statutory law in practice, determines management structure, operations and corporate acts of a Sociedade Anônima more frequently than they are in the case of a LTDA. Sociedade Anônima is formed with at least two shareholders by adoption of by-laws, which are filed with the Commercial Registry. Shareholder’s liability is limited to payment in full of his own shares. Unlike a LTDA, Sociedade Anônima requires that at least 10% of the amount of the initial subscription to shares be paid in at the company’s formation.

In general terms, a LTDA is a more flexible company form than a Sociedade Anônima. Therefore, if there is no minority shareholder or joint venture partner involved (who could have conflicting interests), there will be no compelling reason to form a Sociedade Anônima. By using the LTDA form, the investor could avoid (to the extent it desires) the management structure of a corporation, the formalities associated with the operation of a Sociedade Anônima (calling shareholders’ meetings, maintaining minute books) and the disclosure rules applicable to same (publication of financial statements and minutes of shareholders’ meetings). Under these circumstances, we usually recommend that the more appropriate company form for the Brazilian Subsidiary would be a LTDA. (Please note that it would always be possible to change the form at any time.)

Contribution to the capital of the Brazilian Subsidiary should be in foreign hard currency, through official exchange market, or in Brazilian currency, through certain legitimate funding mechanisms. However, only capital contributions in foreign hard currency are eligible for registration with Central Bank of Brazil. Such foreign capital registration would allow the Brazilian Subsidiary to remit dividends to foreign company and repatriate the registered capital base, at least up to the then current net worth of the Brazilian Subsidiary, through the official exchange market. At any given time, a foreign investor’s registered capital base is the amount of capital it has paid in together with the amount of any increases in capital resulting from capitalised retained earnings.

Foreign capital in Brazil is governed by Laws nr. 4.131 (the “Foreign Capital Law”) and 4.390, dated September 3, 1962 and August 29, 1965, respectively. Both laws are regulated by Decree nr. 55.762, of February 17, 1965, and have been amended.

As set forth in Law nr. 4.131/62, “foreign capital is considered to be any goods, machinery and equipment that enter into Brazil with no initial disbursement of foreign exchange, and are intended for production of goods and services, as well as any funds brought into the country to be used in economic activities, provided they belong to individuals or companies resident or headquartered abroad”.

Foreign capital shall be registered with Central Bank of Brazil (Central Bank), which will issue a Certificate of Registration reflecting the amount invested in foreign currency and corresponding amount in Brazilian currency. Such certificate allows remittance of profits abroad, repatriation of capital and registration of reinvested profits.

Investor who does not request the register of invested capital within legal term is subject to the penalties imposed by Central Bank, which, at present, represents a fine equal to US$ 50,000.00.

No preliminary official authorisation is required for investment in currency. The investment to subscribe capital or acquire equity stock in a Brazilian company may be remitted to this country through any banking establishment authorised to deal with foreign exchange.

There is usually no restriction on distribution and remittance of profits abroad. Since January 1st, 1996, profits are exempt from income tax withholding.

Should a foreign investor decide to reinvest profits in the company that produced them or in another sector of domestic economy, same are eligible for registration as foreign capital along with the original investment thereby increasing the basis of calculation for future remittances.

Foreign capital registered with Central Bank may be repatriated to its country of origin, at any time, without authorisation. Only returns in excess of the registered amount will be considered capital gains, being subject to 15% withholding income tax.

Central Bank will examine the net worth of the company involved, as shown in its balance sheet. In case net worth is negative, Central Bank may conclude dilution of investment existed, and may thus deny authorisation for repatriation of part of the investment in proportion to such negative result.

Remittance of funds, not corresponding to registered investment, is forbidden.

The equity stock owned in a Brazilian company by a foreign investor may be sold, assigned or otherwise transferred abroad, with no tax implications in Brazil, regardless of price paid. Foreign purchaser will be entitled to register capital in the same amount as the registration previously held by seller, once again regardless of the price paid for the investment abroad. Application must be presented to Central Bank for issuance of new Certificate of Registration reflecting the change in foreign investor’s identity, which is essential to allow the new investor to remit/reinvest profits and to repatriate capital.

Certificate of Registration will allow remittance of the principal, interest and any other expenses and/or burdens related to the external indebtedness. Any alteration to terms of the agreement shall be recognised by Central Bank of Brazil and reflected in respective Certificate of Registration. Whilst transfer of amount related to the principal are income tax free, remittance of interests or any other kind of income is submitted to such tax assessment, at the rate of 15%.

Remittances of currency as royalties and/or expenses for technical/scientific assistance are only authorised after the register of corresponding agreements with Central Bank of Brazil. Such remittances are also submitted to a withholding income tax at a rate of 15%.

  Tax Law  

General Features

Brazilian tax system encompasses the following tax categories:

1. Federal taxes
2. State taxes
3. Municipal taxes

Brazilian Federal Constitution establishes tax competence of each federative entity (municipalities, states and federation). It also establishes tax principles.
Within its competence, each entity may create its own taxes. However, the Constitution imposes that general rules of taxation - including definition of all taxes and relevant taxable events, tax basis and taxpayers - must be established by a federal law.

Federal Taxes
Rate: 15%, plus a 10% surtax on annual taxable income exceeding R$ 240,000.00 (approximately US$ 123,077.00 at US$1/R$1,95 exchange rate).
Payment: Monthly on an estimated basis, or quarterly, on an actual basis.

Estimated basis: Levied at a 15% rate, on a percentage of gross revenue ranging from 8% to 32%.
10% surtax is due whenever tax basis exceeds R$ 20.000,00 (approx. US$ 10,256.00 at US$1/R$1,95 exchange rate). Income tax returns are due by March of the following year.
Actual basis: Income tax is paid quarterly at a 15% rate on the actual taxable income (calculated in accordance with the additions and exclusions established by the income tax legislation), plus a 10% surtax, levied on the amount exceeding R$ 60.000,00 (approx. US$ 30,769.00 at US$1/R$1,95 exchange rate).

2. PERSONAL INCOME TAX - Levied at progressive rates, according to the brackets shown below:

Monthly Income Applicable Rate Deduction Allowed
Up to R$ 900.00 exempt
From R$ 900.00 to 1,800.00 15% R$ 135.00 (deductible)
In excess R$ 1,800.00 25% R$ 315.00 (deductible)

For adjustment purposes, tax return is due at the end of the fiscal year.

3. WITHHOLDING TAX - Levied on payment, credit or remittance of interest or capital gains, to a person/legal entity domiciled abroad. The general rate applicable is 15%.-----Royalties: 15%
Interest: 15%
Dividends: 0%-----4. SOCIAL CONTRIBUTION

Rate: 12%for all legal entities.

Payments: When the income tax is paid monthly on an estimated basis, the social contribution should be calculated at 12% on an estimated tax basis of 12% of company’s gross revenue.-----When the income tax is paid quarterly on a actual basis, the social contribution should be calculated at 12% of the actual profits.

5. PIS/COFINS - The Turnover Tax (PIS) is levied at a 0.65% rate on company’s total monthly invoicing. The Social Security Financing Contribution (COFINS) is levied at a 3% rate on company’s total monthly invoicing. Neither PIS nor COFINS are due on export of goods and services.

6. ITR - Tax on Property of Rural Real Estate (ITR) levied annually at variable rates on the value of the rural real estate. Rates vary according to the degree of utilisation of the land.

7. COMPULSORY “LOAN” - The compulsory loan may be levied by the federal government whenever there is a need to cover extraordinary expenses deriving from public calamity, external war or its imminence, or in the case of public investment of urgent nature and of relevant national interest.

8. PAYROLL TAXES - Payroll taxes are calculated on employees’ monthly salary at varying rates, depending on the company’s activity:

Social Security tax: 20%
Other Fees: 2.0% to 6.0%
Insurance against labor accidents: 1.0% to 3.0%

Severance Pay Indemnity Fund (FGTS): 8% (deposited monthly to employee’s blocked account).

9. IPI (FEDERAL VAT) - The IPI is levied by the federal government on the sale of industrialised products by a domestic manufacturer or on import of such products by an importer, at rates varying according to classification of the product.

Taxpayers are the importer, the manufacturer (or qualified as such by the law), the dealer of products subject to taxation, when purchased by the previous taxpayers, and the buyer at auction of seized or abandoned products. For IPI tax purposes, industrialisation (or manufacturing) is the process whereby a product is subject to any procedure that modifies its nature or purpose, or improves it for marketing.

As a VAT, IPI is recoverable to the extent that tax paid upon import or acquisition of products can be offset against tax due upon subsequent transactions.

IPI tax rates vary according to the degree of essentiality of the product, from 0% to 30%. Non-essential/hazardous products (e.g. cigarettes) can be taxed at the highest rate.

10. Import duty - The import duty is levied by the federal government, on import of products, at rates varying according to classification of the product in the Mercosul External Tariff Code - TEC, which is based on the Harmonized Tariff System. The tax basis for import duty is the CIF value of the equipment.

Mercosul External Tariff Code (TEC) is adopted by all Mercosul countries, each of them having a list of exceptions (for each country’s local industry protection purposes, these are items that do not observe the TEC, and accordingly bear higher or lower rates that will gradually conform to the TEC rates until year 2006).

Because import duty may be a useful Governmental tool to balance trade debts, as a rule its rates may be raised at any time through an act of the Executive Power. Notwithstanding this possibility foreseen in the Brazilian legislation, a rate increase exceeding the TEC rate will only be allowed with the approval of the other Mercosul members.

11. IOF - IOF (tax on financial transactions) may be levied, as foreseen by the corresponding legislation, on transactions of: (i) credit, (ii) currency exchange, (iii) insurance and (iii) securities negotiation. As a regulatory tax, IOF rates may be raised and lowered by the Executive Power at any moment, with immediate enforceability.-

12. CPMF - CPMF is denominated a provisional tax, because such tax is to be basically collected on debits to bank accounts only until June 17, 1999. Taxpayers are the holders of bank accounts, and the tax rate is 0,38%, on the 12 (twelve) first months, and 0,30% on the following 24 (twenty-four) months. As a rule, the taxpayer is the person/legal entity from whose account the amounts are withdrawn.

State Taxes

1. ICMS (STATE VAT) - ICMS is levied by the States on circulation of merchandise and on rendition of interstate and inter-municipal transportation and communication services, as well as on import of such goods and services. Rates may vary from 7% to 25%. As a VAT, the ICMS is recoverable to the extent that tax paid upon import or acquisition of products can be offset against tax due upon subsequent transactions.

2. IPVA- The tax on property of automotive vehicles (IPVA) is levied annually on the possession of such vehicles.

3. TAX ON TRANSMISSION OF PROPERTY OWING TO DEATH OR DONATION - This tax is levied on the transmission of real estate or movable property upon death or through a donation. Rates are progressive and vary from state to state according to the value of the property that is being transmitted, but can not exceed 8%.

Municipal Taxes

1. ITBI - The tax on transmission of property inter vivos (ITBI) is levied on the onerous transmission of real estate. Rates are progressive and vary from municipality to municipality according to the value of the real estate that isbeing transmitted.

2. IPTU - The tax on property of urban real estate (IPTU) is levied on the possession of urban real estate. It is levied annually on the value of the urban real estate. Rates vary from municipality to municipality.

3. ISS - The municipal tax on services (ISS) is levied on the rendition of services, at rates ranging from 0,5% to 10%, depending on the kind of service, and varying from municipality to municipality.

  Labor Law  

General Labor and Employment Aspects

The 1988 Brazilian Federal Constitution, the Consolidation of Labor Laws (CLT) and other supplementary laws regulate questions involving Labor and Employment under the Brazilian System. However, the labor contract and the collective bargaining agreement applicable to a certain category of workers can also provide for other benefits which must also be considered

It is important to emphasise that the labor union organisation is active and rather strong in Brazil and responsible for a series of benefits and rights which are guaranteed by the collective bargaining agreement. Note that in Brazil every worker must pay a compulsory annual contribution to the Labor Union equivalent to one day of salary, regardless of the membership. The payment is withheld by the employer directly from the employees' salary.

The Labor Contract

Workers have a professional card in which terms of their employment contract must be entered. Employers must keep files containing information on each employee and submit this information annually to the labor law authorities

According to the Brazilian Law, labor contracts are generally recorded in writing for a fixed or undetermined period of time. There is also the hypothesis of celebrating an experience labor contract, which must not exceed to 90 days.

Basic Rights Guaranteed to Workers

Brazilian Labor and Employment Laws are very protective and there are a series of other rights not mentioned below, which may be guaranteed to workers depending on their activity

a) Wages: The Brazilian Constitution guarantees a minimum monthly salary, which is currently of R$ 136,00 (approximately US$ 80.00).
b) 13th Salary: The 13th salary corresponds to an additional month’s salary paid annually or according to the proportional number of months worked in the year.
c) Vacation: Employees are entitled to thirty(30) days of vacation after working one year for the same employer if not absent from work for more than five unjustified times during this same period.
d) Working Terms and Overtime Pay: Brazilian legislation establishes that the maximum working week is of 44 hours, distributed over five or six working days. Overtime work shall be compensated with a premium rate of at least 50% over normal working hour.
e) Prior notice in case of dismissal: In case the employer wishes to dismiss an employee, he is obliged to give a prior notice of at least thirty days to the worker.
f) Incentives: Employers give incentives such as transportation and meal subsidies, with companies receiving tax deductions or other beneficial tax treatment for the resulting expenses. These benefits are not included in the taxable income of employees.
g) Profit Sharing: The 1988 Constitution expressly grants workers the right to profit-sharing, which does not integrate the salary, by means of annual negotiation between employers and employees.
h) Guarantee Fund for Time of Service (FGTS): The government severance employment Fund (FGTS) is the equivalent to 8% of the employee’s salary, deposited every month by the employer in a blocked FGTS bank account in the name of the employee. In case of dismissal without cause the employer has to pay a 40% penalty of the FGTS over the entire amount deposited in the FGTS bank account.

Withdrawals, are however, authorised in only a few circumstances established by law.Termination of Employment

Under the Brazilian Labor and Employment Law the labor contract may terminate either by a decision of the employee or by employer. Considering the termination promoted by the employer it can be an dismissal with or without cause.

Social Security

Every worker in Brazil is necessarily covered by a social security insurance which is supported by employers, employees and the Government.

Contributions by employees range from 7.82% to 11%, depending on remuneration, according to the Social Security Law.

Contribution for companies is 20%, calculated on each employee's monthly salary.

Self-employed individual contributes with 10% or 20% of the base salary. This base salary is fixed monthly by the government. The amount of the contribution depends on when the self -employed individual joined the social security system.

The National Social Security Institute (INSS) is therefore the most common pension in Brazil but it provides very low benefits.

Old age pension or retirement pension schemes are available to men aged 65 years and women aged 60. Men who have worked for at least 35 years and women who have worked for at least 30 years are entitled to these pensions. Workers in certain industries with jobs of an especially dangerous or unwholesome nature are entitled to retire at an earlier age. However, it must be mentioned that the Social Security System is undergoing a remodeling and modernization process and recent changes have been approved by the Government while others are still subject of discussion.

Foreign Work In Brazil
According to the Labor and employment legislation, 2/3 (two-thirds) of the employees in any Brazilian company must be Brazilian citizens, and 2/3 (two-thirds) of the total compensation must be received by Brazilian. However, exceptions exist for skilled workers and specialized technicians.
b) Immigration control and visas

The legal dispositions on the matter established the following types of visas which may be granted to a foreigner seeking entrance to Brazil:
a - in transit
b - tourist
c - temporary
d - permanent
e - courtesy
f - official
g - diplomatic

Under no circumstances shall a visa be granted, in the following cases:
a - not having yet reached the age of 18, not accompanied by a person legally responsible for him or without this person's express, written consent;
b - a person considered pernicious to public order or to national interests;
c - a person formerly expelled from the country, except in case expulsion has been revoked;
d - a person sentenced or sued for felony, susceptible to extradiction according to Brazilian legislation.
e - a person not considered healthy according to conditions established by the Health Department.

A temporary visa may be granted to a foreigner intending to come to Brazil:
a - on a cultural trip or studies;
b - on business trip;
c - as an artist or sportsman;
d - as a student;
e - as a scientist, teacher, technician, or professional of another category, on a contract regimen or for service to the Brazilian government;
f - as a newspaper, magazine, radio, television or foreign agency correspondent;
g - as a religious Minister, or member of an institute of consecrated life, or of a congregation or religious order.


The information contained in this publication is given by way of general reference only and is not to be relied upon. No responsibility will be accepted by authors or publishers for any inaccuracy or omission or statement which might prove to be misleading. You are advised to seek your own professional advice before proceeding to invest or do business in Brazil.