Establishing a business in Brazil

A Q&A guide to establishing a business in Brazil.

This Q&A gives an overview of the key issues in establishing a business in Brazil, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.

To compare answers across multiple jurisdictions, visit the Establishing a business in... Country Q&A Tool.

This article is part of the global guide to establishing a business worldwide. For a full list of contents, please visit www.practicallaw.com/ebi-guide.

Carlos Frederico Bingemer and Filipe Thompson, BMA – Barbosa Müssnich Aragão
Contents

Legal system

1. What is the legal system in your jurisdiction based on (for example, civil law, common law or a mixture of both)?

Brazil is a civil law country. The Brazilian legal system is based on codes and legislation enacted by the federal, state and municipal legislatures.

 

Business vehicles

2. What are the main forms of business vehicle used in your jurisdiction? What are the advantages and disadvantages of each vehicle?

Brazilian law provides for several types of companies and legal entities, but the most common forms are limited liability companies (sociedade limitada) (LLCs) and corporations (sociedade anônima). The following forms of companies are rarer and are most often used for specific purposes:

  • Single member limited liability company (empresa individual de responsabilidade limitada).

  • Undeclared partnership (sociedade em conta de participação).

  • Simple company (sociedade simples).

  • Partnership (sociedade em nome coletivo).

  • Limited partnership (sociedade em comandita simples).

  • Limited partnership with share capital (sociedade em comandita por ações).

  • Cooperative (cooperativa).

The introduction of the LLC in Brazil was intended to address the needs of small and medium-sized businesses, with a relatively small capital and a simple or family management structure. LLCs are therefore more flexible. Quotaholders have more room to determine the rules governing the company and the rights and obligations of quotaholders in the articles of association (AoA). In contrast, corporations' bye-laws tend to be more rigid. Therefore, shareholders usually regulate their relations with their partners and the company through shareholders' agreements, which are considerably more beneficial to them (for example, in terms of enforceability) and more comprehensive.

Corporations were originally intended to be used by large companies, especially because corporations have access to a variety of mechanisms to raise funds from the public. However, contrary to the legislator's expectations, there are many small, closely-held businesses that are organised as corporations, and many large businesses incorporated as LLCs.

In LLCs, the liability of each quotaholder is restricted to the value of their quota, but all quotaholders are jointly liable for paying the corporate capital. In corporations, the shareholders' liability is limited to the issue price of the subscribed and paid shares (Law No 6,404/1976). These limitations of liability are not absolute, and the quotaholders/shareholders may be exposed to liability for the company's obligations in exceptional circumstances.

Both LLCs and corporations have a separate legal personality, and can hold assets in their own name.

 

Establishing a presence from abroad

3. What are the most common options for foreign companies establishing a business presence in your jurisdiction?

Foreign companies usually opt for limited liability companies, as these are more flexible to operate than corporations.

In addition to incorporating an investment vehicle (that is, a subsidiary), an overseas company can contract with local representatives through:

  • Agency or distribution agreements.

  • Franchise structures.

  • The acquisition of quotas in an investment fund incorporated in Brazil.

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4. How can an overseas company trade directly in your jurisdiction?

The vast majority of foreign companies do business in Brazil through subsidiaries or affiliates (limited liability companies and corporations). When an overseas company chooses to establish a branch, that branch will be governed by, and subject to Brazilian law. The creation of a branch requires authorisation granted by ministerial ordinance, which is a lengthy and bureaucratic process.

Registration with the Federal Revenue is simultaneous with the incorporation process. The company must then register with the state and/or with the municipality, depending on the nature of its activity. As a general rule, after these registration procedures are completed, the company can start doing business (including issuing invoices for the supply of services, goods and so on).

 
5. What are the formalities for setting up a partnership?

The incorporation requirements and formalities applicable to general partnerships (sociedades em nome coletivo) and limited partnerships (sociedades em comandita simples) are similar to those that apply to limited liability companies, as they are all mainly governed by Law No 10,406/2002. Documents relating to limited partnerships must be filed with the competent Public Registry of Legal Entities.

Like corporations, limited partnerships with share capital (sociedades em comandita por ações) are also governed by Law No 6,404/1976. They are therefore subject to the same incorporation requirements and formalities (and both are registered with the competent Commercial Registry).

Currently, these forms of partnerships are extremely rare in Brazil.

 
6. What are the formalities for setting up a joint venture?

A joint venture (JV) is usually structured as a legal entity (limited liability company or corporation), but can also be structured as a contractual JV. Although not legally required, the execution of JV agreements is quite common and strongly recommended in both cases.

 
7. Are trusts available in your jurisdiction?

Trusts cannot be set up under Brazilian law.

The answers to the following questions relate to private limited liability companies (or their equivalent).

 

Forming a private company

8. How is a private limited liability company or equivalent corporate vehicle most commonly used by foreign companies to establish a business in your jurisdiction formed?

Regulatory framework

Limited liability companies (LLCs) are governed by Articles 1,052 to 1,087 of the Civil Code. Corporations are governed mainly by Law No 6,404/1976 (Corporate Law) and by certain provisions of the Civil Code.

The main regulatory bodies and authorities involved in the establishment of a business are the:

  • Commercial Registry (of the state or territory in which the company is incorporated).

  • Federal Revenue.

  • Municipal Secretariat of Finance.

  • State Secretariat of Finance, in certain cases.

For more information on these authorities see box, The regulatory authorities.

Tailor-made or shelf companies

In addition to incorporating a legal entity, overseas companies can acquire shelf companies already incorporated in Brazil.

Formation process

LLCs are incorporated through articles of incorporation, which are referred to as articles of association (AoA) (Contrato Social) after the incorporation is complete. The articles of incorporation and the subsequent amendments to the AoA must be executed by at least two persons, who can be either natural or legal persons, and need not be Brazilian residents. The incorporation documents and the AoA are registered with the Commercial Registry of the state or territory in which the company is incorporated.

Corporations are incorporated through either private or public subscription, by at least two persons (natural or legal, domestic or foreign residents), of all the shares that compose the share capital of the corporation, as established in the corporation's bye-laws (Estatuto Social). In addition, shareholders must approve the bye-laws at a special shareholders' meeting. At least 10% of the issue price of the subscribed shares must be paid immediately, in cash.

All the filings with the competent Commercial Registry are public. The filing procedures must be made electronically, but amendments to the AoA and quotaholders' meeting minutes (for LLCs) or shareholders' meeting minutes (for corporations) must be filed in person at the competent Commercial Registry's office. Usually, specialised service providers assist companies with their filings.

Registration fees and the average timelines for the completion of the filing process vary depending on the state of filing and on the nature of the document to be filed. For example, in the Commercial Registry of the state of São Paulo, a regular corporate act of a limited liability company can currently be filed for about BRL158, while a regular corporate act of a corporation can be filed for about BRL347. If all the documents are in good order and fully comply with the applicable legislation, the filing process may be completed within a week in São Paulo.

Company constitution

The articles of incorporation (at the time of incorporation) and AoA are the LLC's main constitutional documents.

The bye-laws are the corporation's main constitutional document, and must be approved by a special shareholders' meeting. The minutes of this shareholders' meeting must be filed with the competent Commercial Registry

The execution of separate quotaholders' (LLC) or shareholders' (corporation) agreements is very common. As a general rule, these agreements need not be filed with any governmental body (their terms and conditions are therefore not public), but must be deposited at the company's headquarters.

 

Financial reporting

9. What financial reports must the company submit each year?

As a general rule, limited liability companies are not required to publish their financial statements, which reduces costs and ensures greater confidentiality of companies' financial information.

The publication of a corporation's financial statements and of minutes of shareholders' meetings is mandatory. However, a closely held corporation with less than 20 shareholders and a net equity not greater than BRL1 million can:

  • Call a shareholders' meeting by sending a notice to each shareholder (that is, publication of the notice is not required).

  • Choose not to publish its financial information and the documents related to the annual shareholders' meeting referred to in Article 133 of Law no. 6,404/1976, if that information is filed with the Commercial Registry (Junta Comercial).

Publicly held companies have additional disclosure obligations (see Question 25 ( www.practicallaw.com/7-570-8027) ).

A foreign company with a branch in Brazil must publish its balance sheet, financial statements and the acts of its management bodies if it is required to do so those under its laws of incorporation. These documents must be published in:

  • The Federal Official Gazette, the State Official Gazette or the Federal District Official Gazette, depending on the place where the branch is located.

  • A newspaper of wide circulation regularly published in the same locality.

Additionally, branches of foreign companies must publish their balance sheet and financial statements.

 

Trading disclosure

10. What are the statutory trading disclosure and publication requirements for private companies?

There are no statutory trading disclosure and publication requirements for private companies, subject to certain exceptions (for example, in the context of e-commerce transactions).

 
11. How do companies execute contracts or deeds?

As a general rule, there are no specific formalities for the execution of contracts and deeds by legal entities. The general provisions of the Civil Code apply.

In the case of limited liability companies and corporations, contracts and deeds must be executed by duly empowered officers or appointed representatives, in accordance with the specific provisions of the articles of associations or bye-laws (as the case may be). In some cases, these may require prior approval by the quotaholders/shareholders and set out special approval quorums.

 

Membership

12. Are there any restrictions on the minimum and maximum number of members?

Limited liability companies (LLCs) and corporations must have at least two quotaholders or shareholders, who can be either natural or legal persons, and need not be Brazilian residents.

Single member companies (empresa individual de responsabilidade limitada) (EIRELI) were established by Law no. 12,441/2011, which amended the Civil Code to allow the incorporation of EIRELIs. As a general rule, EIRELIs are subject to the same rules as LLCs.

 

Minimum capital requirements

13. Is there a minimum investment amount or minimum share capital requirement for company formation?

No minimum share capital is required for the incorporation of a limited liability company (LLC), and the share capital does not have to be fully paid at the time of incorporation.

No minimum share capital is required for the incorporation of a corporation. The Civil Code does not state the percentage that must be paid up at the time of incorporation, but Law No 6,404/1976 provides that at least 10% of the issue price of the subscribed shares must be paid in cash on incorporation.

 
14. Are there restrictions on the transfer of shares in private companies?

It is common for quotaholders to establish rules governing the sale and transfer of quotas in the company's articles of association (AoA) (or in a quotaholders' agreement). If the AoA and/or the quotaholders' agreement do not contain provisions on the sale and transfer of quotas, a quotaholder can assign its quotas, in whole or in part, to (Civil Code):

  • Any quotaholder, without consulting the other quotaholders.

  • A third party, if the assignment is not opposed by the holders of at least one-quarter of the company's share capital.

The assignment and transfer of quotas of an LLC is carried out through the execution of an amendment to the AoA, duly filed with the competent Commercial Registry.

The general rule is that shares issued by a corporation are freely transferable (through the execution of the relevant transfer form in the proper corporate book). However, it is not uncommon to find restrictions on the sale and transfer of shares in a corporation's by-laws or in shareholders' agreements.

Both quotaholders of LLCs and shareholders of corporations have pre-emptive rights for the subscription of newly issued quotas/shares. Pre-emptive rights for the acquisition of existing shares are usually set out in separate quotaholders'/shareholders' agreements.

 

Shareholders and voting rights

15. What protections are there for minority shareholders under local law? Can additional protections be given?

Minority shareholders of corporations benefit from various protections under Law No 6,404/1976 (Corporate Law). The company's bye-laws may also set out additional protections. Protections include the following (subject to certain requirements and conditions set out in the applicable legislation):

  • Shareholders holding at least 10% of the total share capital can:

    • elect a member and their substitute to the board of directors;

    • elect one member of the fiscal council (that is, a corporate body independent from the company's management and independent auditors, which is entitled to oversee the management's activities, analyse the company's financial statements and report its findings to the shareholders) and their substitute in a separate election;

    • request the creation of a fiscal council; and

    • request a cumulative voting procedure for the election of the board of directors.

  • Shareholders holding at least 5% of the total share capital can:

    • request, before a court, a complete inspection of the company's books, when acts that are contrary to the law or to the company's bye-laws are committed, or when there are grounds to suspect that serious irregularities have been committed by the company (subject to certain requirements set out in the Corporate Law and in the regulations of the Securities and Exchange Commission);

    • call a shareholders' meeting when the company's managers do not comply within eight days with their justifiable request to call a meeting, indicating the matters to be discussed; and

    • bring an action for civil liability against a manager for losses caused to the company's property (where a shareholders' meeting decide not to start proceedings).

  • The bye-laws or a shareholders' meeting resolution cannot deprive individual shareholders of the following rights:

    • to participate in the corporate profits;

    • to participate in the assets of the company in the case of liquidation;

    • to supervise the management of the corporate business, as set out in the Corporate Law;

    • statutory pre-emptive rights; and

    • to withdraw from the company in the cases set out in the Corporate Law.

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16. Are there any statutory restrictions on quorum or voting requirements at shareholder meetings? Must quorum or voting rights be proportionate to shareholdings?

In limited liability companies, each quota is assigned one vote. In corporations, each share is assigned one vote. However, preferred shares may have no voting rights or may contain limitations to the exercise of voting rights.

In limited liability companies, except as otherwise provided in the articles of association, quotaholders' meetings are quorate if quotaholders representing at least three quarters of the voting quotas are present on a first call, and if any number of quotaholders are present on a second call.

In corporations, except as otherwise provided in the applicable legislation or in the bye-laws, shareholders' meetings are quorate if shareholders representing at least one fourth of the voting shares are present on a first call, if any number of shareholders are present on a second call. Shareholders' meetings that are called to amend the bye-laws require the presence of shareholders representing at least two thirds of the voting shares on a first call, and any number of shareholders on a second call. However, some decisions involving changes to the bye-laws require the affirmative vote of shareholders representing at least 50% plus one share of the corporation's share capital.

See Question 17 ( www.practicallaw.com/7-570-8027) for further information on voting requirements.

 
17. Are specific voting majorities required by law for any corporate actions (for example, increasing share capital, changing the company's constitution, appointing and removing directors, and so on)?

Limited liability companies (LLCs)

The Civil Code sets out various majority requirements for the approval of certain resolutions, for example:

  • The following actions require a simple majority vote:

    • electing and removing managers;

    • fixing managers' compensation; and

    • filing for bankruptcy and appointing a liquidator.

  • A two-thirds majority vote is required (unless otherwise provided by the articles of association (AoA)) for the election and removal of managers that are not quotaholders, but only when the quota capital is fully paid.

  • The following actions require a three-quarters majority vote:

    • amending the AoA;

    • approving a corporate restructuring (for example, merging or splitting the LLC); and

    • liquidating and winding up the LLC.

    • The following actions require a unanimous vote of shareholders:

    • changing the corporate form; and

    • electing managers that are also quotaholders (only when the quota capital is not fully paid).

Corporations

As a general rule, in corporations whose shares are not admitted to trading on the stock exchange or on the over-the-counter market, the approval of shareholders representing at least one half of the voting shares is necessary for the following actions (unless a larger voting majority is required by the bye-laws) (Law No 6,404/1976 (Corporate Law)):

  • Issuing preferred shares or increasing an existing class of preferred shares without maintaining the existing ratio with the remaining classes of preferred shares, unless already set out in, or authorised by, the bye-laws.

  • Altering a preference, a privilege or a condition of redemption or amortisation conferred on one or more classes of preferred shares, or creating a new, more favoured, class.

  • Reducing the compulsory dividend.

  • Merging the corporation with another corporation, or consolidating it.

  • Participating in a group of corporations (as defined in the Corporate Law).

  • Changing the corporate purpose.

  • Ceasing the state of liquidation of the corporation.

  • Issuing participation certificates.

  • Splitting the corporation.

  • Dissolving the corporation.

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18. Can voting majorities required by law be disapplied to protect a minority shareholder (for example, through class rights or weighted voting)?

Voting majorities required by law cannot be disapplied, unless permitted under the applicable legislation. See Question 15 ( www.practicallaw.com/7-570-8027) for more information on minority shareholders' rights.

 

Sectoral restrictions

19. What are the conditions or restrictions on establishing a business in specific industry sectors? Are there industry sectors in which it is not permitted to establish a business?

There are requirements on establishing a business in the following regulated sectors (among others):

  • Telecommunications.

  • Broadcasting.

  • Media.

  • Aviation.

  • Journalistic activities.

  • Oil and gas.

  • Mining.

  • Healthcare.

  • Private security.

  • Insurance.

  • Production and commercialisation of food, beverages and medicines.

Applying for licences, authorisations and registrations in these sectors requires the establishment of a company in Brazil, with local management. Other requirements, conditions and restrictions may apply, depending on each market and the activity to be performed.

 

Foreign investment restrictions

20. Are there any restrictions on foreign shareholders?

There are restrictions on foreign ownership in specific regulated markets, including the following:

  • Public broadcasting services.

  • Certain types of pay TV services.

  • Goods for the oil and gas industry.

  • Aviation.

  • Private security.

  • National defence.

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21. Are there any exchange control or currency regulations?

The general rule is that obligations to be executed in Brazil must be paid in the national currency (reais), or will be deemed null (Decree-Law No 857/1969).

Obligations between entities or natural persons domiciled in Brazil and entities or natural persons domiciled abroad must be paid exclusively through institutions authorised to operate in the foreign exchange market (Law No 9,069/1995). Authorisation to operate in the foreign exchange market is granted by the Central Bank, which has control over the foreign exchange market. However, in specific cases, the approval of the Securities and Exchange Commission is also required.

Therefore, the Brazilian person or entity receiving or remitting the funds must execute a foreign exchange transaction with an authorised Brazilian financial institution for the purchase and sale of foreign currency.

Under the Central Bank Rules, the authorised financial institution executing the foreign exchange transaction must verify the legality, legitimacy and economic grounds of the underlying transaction. For that purpose, it can request from the Brazilian person or entity any document or information that it believes necessary to verify compliance with the applicable requirements. Financial institutions set internal rules and compliance policies for foreign exchange transactions and related supporting documents.

As a general rule and subject to specific exceptions, the transfer of funds to or from abroad is not subject to:

  • Any kind of limitation with respect to the amount involved.

  • Prior authorisation of the Brazilian authorities.

In addition, foreign investment in Brazil requires registration with the Central Bank. Registration must be duly updated to effect remittances abroad of amounts related to foreign investment.

 
22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

The main restrictions concern the lease and acquisition of rural properties by foreign nationals, which are set out in Article 190 of the Brazilian Constitution, Law No 5,709/1971, Law No 8,629/1993 and Decree No 74,965/1974.

Brazilian legal entities that are controlled by foreign nationals (that is, where the majority of the share capital is held by foreign legal entities or individuals) are treated in the same way as foreign legal entities for the purchase or lease of rural properties. For foreign individuals, the applicable legislation requires proof of residency in Brazil. Additionally, the laws mentioned above provide that foreign nationals can only purchase properties located in areas considered indispensable to national security after obtaining the approval of the National Security Council (Conselho de Segurança Nacional). There are also restrictions, requiring authorisation by the federal government, on the purchase by, transfer or concession to foreign nationals of properties located along the coast, near the Brazilian frontier and near military bases or forts, except in the case of acquisition of autonomous units in condominiums.

There are also restrictions and requirements applicable to the performance of certain activities in the frontier zone, such as (Law No 6,634/1979):

  • Use of public land.

  • Installation and operation of communications equipment.

  • Construction of logistic facilities (including roads, bridges and airports).

  • Mining.

  • Activities that concern national security.

  • Use of rural land.

The performance of these activities requires prior and formal approval from the National Security Council, and evidence that the following conditions are met:

  • At least 51% of the operator's capital is owned by Brazilian citizens.

  • At least two-thirds of the operator's workforce is made of Brazilian citizens.

  • The administration and management of the business is carried out by a majority of Brazilian citizens, who must hold the main powers.

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Directors

23. Are there any general restrictions or requirements on the appointment of directors?

The following persons cannot be elected to management positions in corporations (such as the board of directors):

  • Persons disqualified under a special law.

  • Persons sentenced for a bankruptcy offence, fraud, bribery or corruption, misappropriation of public funds or embezzlement, or crimes against the national economy or public property.

  • Persons subject to any criminal sanction that precludes, even temporarily, access to public office.

A person who has been declared incapable by the Securities and Exchange Commission (Comissão de Valores Mobiliários) is also ineligible for management positions in publicly held corporations.

Directors must have a good reputation. A candidate cannot be elected as a director if he or she either (unless a waiver is granted by the shareholders' meeting):

  • Holds a position in a competitor company, especially in a consultative or management body or in a fiscal council.

  • Has conflicting interests with the corporation.

Only natural persons can be appointed to a board of directors. As a general rule, directors are not required to be Brazilian citizens or Brazilian residents, but they must appoint a representative residing in Brazil. The representative must have powers to receive service of process in legal actions, under a power of attorney with a validity extending to at least three years after the end of the director's term of office.

 

Board composition

24. What are the legal requirements for the composition of a company's board of directors?

Structure

Although the Civil Code does not provide for the establishments of boards of directors (BoD) in limited liability companies (LLCs), a significant number of businesses have adopted articles of associations that establish a working BoD.

A corporation can be managed by either:

  • Officers, who form a board of officers (Diretoria).

  • Officers and a BoD (Conselho de Administração).

In publicly held corporations and closely held corporations that have an authorised capital, the corporation's bye-laws must establish a BoD. In other corporations, the creation of a BoD is optional.

As a general rule, the members of the BoD can be removed at any time by the shareholders. A director's term of office must not exceed three years, but can be renewed.

Number of directors or members

The BoD of an LLC or of a corporation (if any) must be composed of a minimum of three directors. There is no legal provision setting a maximum number of directors, but the articles of associations or the bye-laws can provide for a maximum number.

Employees' representation

A corporation's bye-laws can provide for the participation of an employees' representative to the BoD. The representative is chosen directly by the employees through an election organised jointly by the corporation and the relevant unions.

 

Reregistering as a public company

25. What are the requirements for a business to reregister as a public company?

Membership

To register as a publicly held company, a company must be a corporation and file a registration request (Pedido de Registro de Companhia Aberta) with the Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM), which is the regulatory and supervisory body of the capital markets. Once the registration is complete, the corporation is bound by the provisions of Law No 6,385/1976 (Capital Markets Law) and by the regulations issued by the CVM. To trade securities on the stock exchange, a corporation must also file a registration request with the São Paulo Stock Exchange (BM&FBOVESPA) (the sole stock exchange operating in Brazil).

Only corporations duly registered as publicly held companies with the CVM and with BM&FBOVESPA can register and conduct their initial public offerings, and trade their securities, on BM&FBOVESPA.

Share capital and other requirements

Specific requirements for publicly held companies vary depending on the share listing segment chosen by the corporation. BM&FBOVESPA established four listing segments, in addition to the traditional one, with increasing corporate governance requirements.

The BM&FBOVESPA's Regulation for Registration of Issuers and Securities requires corporations conducting their initial public offering (IPO) and listing their securities with the stock exchange to meet at least the first level (Nível 1) of corporate governance rules (see below).

The main requirements for the various listing segments are as follows:

  • Traditional segment:

    • no specific free float requirements;

    • common and preferred shares can be issued;

    • the board of directors (BoD) must be composed of at least three members;

    • shareholders are granted a tag-along right for a price equal to 80% of that paid to the selling controlling shareholder;

    • optional adoption of arbitration under the Rules of the Market Arbitration Chamber.

  • First level (Nível 1):

    • at least 25% of shares must be in public free float;

    • common and preferred shares can be issued;

    • the board of directors (BoD) must be composed of at least three members;

    • shareholders are granted a tag-along right for a price equal to 80% of that paid to the selling controlling shareholder; and

    • optional adoption of arbitration under the Rules of the Market Arbitration Chamber.

  • Second level (Nível 2):

    • at least 25% of shares must be in public free float;

    • common and preferred shares can be issued;

    • the board of directors (BoD) must be composed of at least five members, and 20% of them must be independent directors (as defined in the applicable regulations);

    • shareholders are granted a tag-along right for a price equal to that paid to the selling controlling shareholder for common shares and to 80% for preferred shares; and

    • mandatory adoption of arbitration under the Rules of the Market Arbitration Chamber.

  • New Market (Novo Mercado):

  • at least 25% of shares must be in public free float;

  • only common shares can be issued;

  • the board of directors (BoD) must be composed of at least five members, and 20% of them must be independent directors (as defined in the applicable regulations);

  • shareholders are granted a tag-along right for a price equal to that paid to the selling controlling shareholder; and

  • mandatory adoption of arbitration under the Rules of the Market Arbitration Chamber.

  • Alternative investment market (BOVESPA Mais):

    • at least 25% of shares must be in public free float by the seventh year of listing, or the corporation must comply with minimum liquidity requirements;

    • only common shares can be issued;

    • shareholders are granted a tag-along right for a price equal to that paid to the selling controlling shareholder; and

    • mandatory adoption of arbitration under the Rules of the Market Arbitration Chamber.

CVM Ruling No 480 requires corporations in the process of going public to prepare a Reference Form (Formulário de Referência) with required information. After the registration and the IPO are complete, the corporation must continue to file the Reference Form annually, or whenever any information on the form needs to be updated (under the applicable regulations).

In addition to the information made available on the Reference Form, a corporation in the process of going public must file a wide variety of documents containing important financial data and analyses supported by the management, such as:

  • Audited financial statements for the previous three fiscal years or audited financial statements of the corporation since it was formed, if it has been in existence for less than three years (standardised financial statements).

  • In certain cases, audited financial statements prepared especially for the purpose of registration with the CVM.

  • Interim financial statements following the end of the previous fiscal year, preferably filed by the end of the most recent quarter of the current fiscal year, and not more than 120 days before the registration request date (quarterly information form).

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Tax

26. What main taxes are businesses subject to in your jurisdiction?

The main taxes that companies are subject to in Brazil are outlined below.

Federal taxes

Corporate income taxes (Imposto de Renda da Pessoa Juridical and Contribuição Social sobre o Lucro Liquid) (IRPJ and CSLL). Brazilian tax resident companies are subject to IRPJ and CSLL on their worldwide income. IRPJ is levied at a 15% rate, plus a 10% surcharge on taxable profits above BRL240,000 per year. The CSLL rate in most cases is 9%. The IRPJ-CSLL combined rate is 34%. There are two available methods for calculating IRPJ and CSLL:

  • Actual profit method. Taxable income is calculated on the entity's book income, adjusted by non-taxable revenues, non-deductible expenses and deductions or additions provided by law. Tax losses incurred in a given year can be carried forward indefinitely. Any tax losses carried forward can offset up to 30% of the taxable profits in a given year.

  • Presumed profit method. Taxable income is based on the application of a presumed profit margin (from 1.6% to 32%) on the entity's operating gross revenue plus other types of income. All financial income and other qualified income must be entirely added to the taxable income. No deductions, loss carry-forward or carry-back are allowed.

Entities with gross revenues exceeding BRL78 million per year or BRL6.5 million per month in the previous fiscal year cannot elect the presumed profit method. Changing method is not allowed during a given fiscal year.

Social contributions on gross revenues (Contribuição ao Programa de Integração Social and Contribuição para o Financiamento da Seguridade Social) (PIS and COFINS). PIS is a social security tax that applies to company revenue. COFINS is also a social security tax, and arises on the importation of goods and services. The rates vary depending on the method adopted by the company, as follows:

  • Cumulative method. PIS and COFINS are levied on gross revenues at a combined rate of 3.65%. Entities subject to the presumed profit method for IRPJ and CSLL purposes (see above) must use the cumulative method.

  • Non-cumulative method. PIS and COFINS are levied on total revenues at a combined rate of 9.25% (except for financial income, which is subject to a 4.65% rate). Taxpayers can use credits based on the input of certain items.

Tax on financial transactions (Imposto sobre Operações Financeiras) (IOF). IOF is levied on five types of financial transactions:

  • Credit transactions.

  • Securities transactions.

  • Insurance transactions.

  • Exchange transactions.

  • Gold transactions.

The IOF rate can be changed at any time, but cannot exceed 25%.

IOF/Exchange is due on the execution of foreign exchange agreements relating to inflow and outflow of funds to and from Brazil, at a general 0.38% rate.

Excise tax (Imposto Sobre Produtos Industrializados) (IPI). IPI is levied on domestic and imported manufactured products. The taxable basis is the transaction value and, on import, the cost, insurance and freight value of the product.

The IPI rates usually range from 10% to 20% and vary according to the Harmonised System's classification code (luxury products can be subject to rates of up to 330%).

State tax

State value added tax (Imposto Sobre Operações Relativas à Circulação de Mercadorias e Serviços de Transporte Interestadual de Intermunicipal e de Comunicações) is levied on the physical circulation of goods and certain services. It is subject to the non-cumulative principle (that is, the tax paid on previous transactions can be offset against the tax due on subsequent transactions).

The taxable basis is the value of the transaction. The tax rates vary depending on the state and the actual transaction (for example, 17% to 19% for intra-state transactions, and 4%, 7% or 12% for inter-state transactions).

Municipal tax

The municipal services tax (Imposto sobre Serviços) (ISS) is levied on certain services listed in federal legislation that meet any of the following criteria:

  • Rendered within Brazil.

  • Imported by Brazilian residents.

  • Exported by Brazilian service providers, if the exported services produce effects in Brazil.

Generally, ISS is due to the municipality where the service provider is located. The rates can vary from 2% to 5%.

27. What are the circumstances under which a business becomes liable to pay tax in your jurisdiction?

As a rule, the following types of income are subject to taxation in Brazil:

  • Income of companies resident in Brazil.

  • Brazilian source income paid to non-Brazilian residents.

Tax resident

A company is considered a Brazilian tax resident if it is incorporated in Brazil under the applicable legislation.

A foreign entity can be deemed a taxpayer in Brazil if it either:

  • Makes direct sales from abroad.

  • Qualifies as a permanent establishment.

Sales made in Brazil through agents of parties located abroad, which are invoiced directly to buyers, qualify as direct sales. The party residing abroad can be considered a taxpayer in Brazil, as a legal entity established in Brazil, if the agent in Brazil has authority to contractually bind the principal to contracts with buyers.

Although there is no definition of permanent establishment in the legislation, it is reasonable to conclude that a permanent establishment is a separate unit of an enterprise for the continuous performance of trading and service activities. Some elements that can be taken into account include facilities, personnel, logistics, continuity and autonomy.

Non-tax resident

Income paid by Brazilian sources to non-Brazilian residents is subject to withholding income tax (WHT). As a rule, WHT is due at a 15% rate on amounts paid to beneficiaries that are not located in favourable tax jurisdictions (as defined in the applicable legislation).

28. What is the tax position when profits are remitted abroad?

Profits can be remitted abroad as dividends or interest on net equity (juros sobre o capital próprio) (JCP).

Dividends

Dividends are exempt from tax even if their beneficiaries are located in favourable tax jurisdictions. Payment of dividends may generate a tax sparing or matching credit in the beneficiary's country of residence, if the beneficiary is located in a country with which Brazil has entered into a double taxation treaty.

JCP

JCP is a remuneration paid to investors that is calculated based on the long-term interest rate (usually 6% per year) multiplied by the Brazilian company's equity accounts.

Payments of JCP to foreign investors are subject to withholding tax at a 15% rate, if the foreign investor is not located in a favourable tax jurisdiction, and at a 25% rate otherwise.

JCP is deductible from the corporate income taxes taxable basis (see Question 26, Federal taxes) up to either:

  • 50% of the company's annual profits.

  • 50% of the company's accumulated profits or profits reserve.

The correct classification of the JCP under double taxation treaties (that is, as dividends or interest) must be analysed on a case-by-case basis.

 
29. What thin-capitalisation rules and transfer pricing rules apply?

Thin-capitalisation rules

These rules provide for maximum debt-to-equity ratios. When these ratios are exceeded, the excess interest is not deductible from the company's taxable basis for corporate income taxes (IRPJ/CSLL) purposes (see Question 26, Federal taxes).

Interest paid to foreign related parties is deductible for IRPJ/CSLL purposes when the following conditions are met:

  • The amount of debt owed to the foreign related party is not higher than double the amount of the equity interest held by that party in the Brazilian company.

  • If the foreign related lender does not hold an equity interest in the Brazilian borrower, the amount of the debt owed to the foreign related party is not higher than double the amount of the Brazilian company's total net equity.

  • The total amount of debt owed to foreign related parties is not higher than double the amount of the equity interests held by all foreign related parties in the Brazilian company.

Interest paid to individuals or legal entities that are resident or domiciled in jurisdictions considered as tax favourable jurisdictions, or benefiting from privileged tax regimes, will only be deductible if the overall amount of indebtedness to those lenders is not more than 30% of the Brazilian borrower's total net equity.

Transfer pricing rules

Transfer pricing rules apply to transactions involving goods, services or rights and to financial transactions with:

  • Related parties.

  • Parties located or domiciled in low or nil tax jurisdictions.

  • Parties benefiting from a foreign privileged tax regime.

  • Interest on loan transactions. If the actual interest rate is higher than the maximum permitted interest rate under Brazilian transfer pricing rules, the excess interest is not deductible for IRPJ/CSLL purposes.

The following rates are used for the calculation of the deductible amount of interest paid or credited to related parties:

  • The market rate for sovereign debt securities issued by Brazil in the international market in US dollars, in the case of transactions with a fixed rate.

  • The market rate for sovereign debt securities issued by Brazil in the international market in reais, in the case of transactions with a fixed rate.

  • The six-month London Interbank Offered Rate (LIBOR), in all other cases.

Additionally, a rate determined by the government applies, which is currently set at 3.5%.

Import transactions. Brazilian transfer pricing legislation provides for three methods to determine the parameter price on import transactions:

  • Comparable uncontrolled price. This method uses the weighted average price in sales made by the taxpayer or by third parties on similar payment terms.

  • Resale price less mark-up. The parameter price is calculated by reference either to the resale price or the sale price of the goods, services or rights manufactured in Brazil that use the imported goods, services or rights.

  • Production cost plus mark-up. This compares the amounts charged in related-party transactions with the average production cost of similar goods, services or rights in the country of origin, increased by the taxes and duties imposed by that country on exports, and by a statutory profit margin of 20%.

If more than one method applies, the company can use the method resulting in the highest import price.

Export transactions. There are four methods for export transactions:

  • Acquisition/production cost plus taxes and mark-up. This consists of the weighted average production or acquisition cost, plus underlying taxes charged in Brazil and a mark-up of 15%.

  • Wholesale price less margin. This consists of the weighted average sale price of identical or similar goods in the wholesale market of the country of export, reduced by the taxes in that country and a margin of 15% on the wholesale price.

  • Retail price less margin. This corresponds to the weighted average sale price of identical or similar goods in the retail market of the country of export, reduced by the taxes charged in that country and a margin of 30% on the retail price.

  • Compared uncontrolled prices. This method compares the export price and the weighted average sale price charged by:

    • the Brazilian exporter in identical or similar transactions with non-related parties; or

    • other Brazilian exporters with non-related parties in identical or similar transactions, during the same period and under the same payment conditions.

For more information on tax on corporate transactions see: Tax on Corporate Transactions global guide.

 

Grants and tax incentives

30. Are grants or tax incentives available for companies establishing a business in your jurisdiction?

Tax incentives are available in Brazil, depending on the company's business activity. The main tax incentives are as follows:

  • Manaus free trade zone (Zona Franca de Manaus) (ZFM). The ZFM offers special tax benefits for the development of industrial projects in this area. These incentives are valid until 2073.

  • Regional incentives. Companies located in the North and Northeast regions are entitled to a reduction of up to 75% of corporate income tax (Imposto de Renda da Pessoa Juridical).

  • Sector-specific tax benefits. Specific incentives aim to attract and promote (among other things):

    • investments in the infrastructure sector (REIDI);

    • the importation/exportation of goods for use in activities of research and production in the oil and gas sector (REPETRO);

    • investments in the oil infrastructure sector in the North, Northeast and Midwest regions of Brazil (REPENEC);

    • the modernisation and extension of port structures (REPORTO).

  • Special customs regimes. These are aimed at increasing exports and imports of goods (such as the drawback, temporary import, bonded warehouse and temporary export regimes).

.

 

Employment

31. What are the main laws regulating employment relationships?

Employment relationships in Brazil are governed by the Consolidation of Labour Laws (Consolidação das Leis do Trabalho) and other specific laws (such as Law No 8,036/1990, which sets out regulations concerning the Unemployment Guarantee Fund (Fundo de Garantia por Tempo de Serviço)). These laws apply to all employees in Brazil, regardless of their nationality. Choice of law clauses in employment contracts are not recognised in Brazil.

Additionally, labour unions usually negotiate collective bargaining agreements or conventions to guarantee additional rights for both unionised and non-unionised employees.

Brazilian labour law also applies to Brazilian employees who are transferred to work abroad, if the foreign legislation is less beneficial to these employees than Brazilian law.

 
32. What prior approvals (for example, work permits, visas, and/or residency permits) do foreign nationals require to work in your jurisdiction?

A foreign national who intends to work in Brazil must obtain a temporary visa, together with a work permit issued by the National Immigration Council (Conselho Nacional de Imigração) (CNIg). Work visas must be requested by local entities, which means that foreign individuals are not allowed to apply without a prior employment offer made in Brazil. Several documents are required for the issue of a work visa, such as evidence of the applicant's education and previous experience in the position to be occupied. All these requirements are listed in Normative Ruling No 99/2012 issued by the CNIg. Since the granting of visas and work permits is an act of sovereignty, Brazilian authorities can reject an application even when the requirements are met (although this is unlikely).

A foreign investor who wants to appoint a foreign national as a manager can apply for a management visa. This is a permanent visa granted to officers, executives and other employees with management powers, and requires a minimum investment, in foreign currency, of an amount equivalent to either:

  • BRL600,000 per manager.

  • BRL150,000, with a commitment to create at least ten jobs within the next two years.

These investments must be added to the company's share capital as capital increases, and duly registered with the Central Bank.

 

Proposals for reform

33. Are there any impending developments or proposals for reform?

The Congress has been discussing a new Commercial Code containing new provisions on legal entities, but the proposal is controversial.

The Federal Government has been considering lifting or removing barriers to the:

  • Acquisition of rural land by foreign nationals.

  • Acquisition of equity interests in Brazilian commercial airline companies by foreign nationals (increasing the current 20% limit on foreign ownership to 100%).

 

The regulatory authorities

Department of Business Registration and Integration

Main activities. Commercial registry.

W http://drei.smpe.gov.br

Securities and Exchange Commission

Main activities. Regulation and oversight of the securities market.

W www.cvm.gov.br

Federal Revenue

Main activities. Federal revenue agency.

W www.receita.fazenda.gov.br

Central Bank

Main activities. Principal monetary authority of Brazil.

W www.bcb.gov.br

 

Online resources

Legislation Portal (Portal da Legislação)

W www4.planalto.gov.br/legislacao

Description. The Legislation Portal contains all federal legislation and amendments to the Brazilian Constitution published in the Official Gazette.

Securities and Exchange Commission

W www.cvm.gov.br/subportal_ingles/menu/investors/regulation.html

Description. This website provides access to free translations of laws and regulations related to the securities market.

 

Contributor profiles

Carlos Frederico Bingemer, Partner

BMA – Barbosa Müssnich Aragão

T +55 (21) 3824 5866
F +55 (21) 2262 5536
E carlosbingemer@bmalaw.com.br
W www.bmalaw.com.br

Professional qualifications. Brazil, Lawyer

Areas of practice. Corporate; infrastructure; mergers and acquisitions; energy sector.

Recent transactions/experience

  • Advising publicly held companies.

  • General cross-border deals.

  • Advising Kore Wireless on the acquisition of Wyless Group Holdings.

  • Advising Saint Gobain on the sale of Verallia to funds managed by Apollo Global Management LLC.

  • Advising TPG on its investment in M&G Chemicals.

  • Advising PetroRio on the sale of "Campo de Solimões" to Rosneft.

  • Advising Petrobras on its merger with Petroquisa, a Brazilian oil and gas publicly held company.

  • Advising Brasil Telecom on the sale of Brasil Telecom.

  • Advising Santos Brasil on the acquisition of pension funds and on its initial public offering.

Languages. Portuguese, English, French, Spanish

Filipe Thompson

BMA – Barbosa Müssnich Aragão

T +55 (21) 3824 1070
F +55 (21) 2262 5536
E filipe.thompson@bmalaw.com.br
W www.bmalaw.com.br

Professional qualifications. Brazil, Attorney-at-Law

Areas of practice. Corporate; mergers and acquisitions; corporate restructurings.

Recent transactions/Experience

  • Advising publicly held companies.

  • General cross-border deals.

  • Advising Ultrapar on the formation of a joint venture between Ipiranga (a subsidiary of Ultrapar, a Brazilian publicly held company) and Chevron to create a new company in the lubricants business.

  • Advising Kore Wireless on the acquisition of Wyless Group Holdings.

  • Advising Bradesco Seguros on the investment of Advent in Fleury, a Brazilian publicly held medical diagnostics company.

  • Advising Saint Gobain on the sale of Verallia to funds managed by Apollo Global Management LLC.

  • Advising TPG on its investment in M&G Chemicals.

Languages. Portuguese, English

Also contributed to the Q&A: Eduardo Hayden Carvalhaes Neto, Gabriel Carvalho, Jana Fraccaroli, José Eduardo Pieri, Luiz Marcelo Góis, Maria Eduarda Bérgamo, Marina Pettinelli, Pedro Henrique Silveira and Thais de Barros Meira.

 
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