Download Doing Business in Brazil.

Business Law Review
Business Law Review, Londres, nov.1981
international trade and investment
Doing Business in Brazil
Denis Borges Barbosa LLB LLM 1
Brazil is the largest Latin country in the world. Its size and population represent roughly one half
of South America, and its GNP has had for some years one of the ten highest rates in the Western
world. A more liberal approach recently to Brazil's social and political problems has coincided
with a less favourable economic situation. Following the growth of external debt (mostly due to
petroleum imports), a new export effort, a severe cut in governmental expending and the imposition of monetary controls on the inflation rate have been the remedies prescribed to handle the
situation. Given Brazil's enormous mineral sources (including almost everything except
petroleum), relatively high industrialisation and expanding markets, added to which an
impressive agricultural output (only second to the USA's in exports), the country can be
considered as thoroughly viable.
Foreign Capital and Exchange Controls
Full repatriation of direct capital investment, tax free, is assured under Law 4131/62. Upon
registration in the Central Bank (no previous authorisation is needed except in certain areas such
as banking and insurance), which is required after the remittance to Brazil, both repatriation and
remittance of profits are guaranteed; no limitation exists for profit remittances but, in practice,
the high level of taxation of remittances exceeding 12 per cent of profits has resulted in the
average registered foreign capital continuing to increase in recent years. Re-investments are
repatriable or may be used as profit-remittances.
Exchange is available through the banking system for payment of interest, royalties, services,
etc, but prior authorisation from the authorities is required. It must be stressed that the exchange
rate is not determined by the free market, being the result of several periodic small alterations
established by the Central Bank; in December 1979, a
large devaluation, the first since 1967, cut 30 per cent of the then rate, but since that time the
periodic minidevaluation policy continues to be the practice.
No licence to import is formally needed. However, in recent years the agency in charge of
foreign trade (CACEX) has been slowing down the release of documents, and import quotas are
allocated to importers on a yearly basis. The earnings from exports are also converted in local
currency through the banking system.
1 D B Barbosa is an attorney practising in Rio de Janeiro, Brazil.
Direct investment may include: (a) monies; (b) tangibles; and (c) the conversion of remittable
credits: interests, royalties, technical fees, etc due from Brazil (see "Business Organisations"
below). Investments in the Stock Exchange can only be made indirectly through investment
companies duly authorised. Investment in real property must be effected through a Brazilian
subsidiary; in rural areas the previous approval of a number of authorities is required for a
definite agricultural or industrial project.
There are other limitations on the use of foreign capital:
(a) Mineral resources in general can only be exploited by a Brazilian subsidiary (branches of
foreign firms excluded).
(b) Firms exploiting iron resources, which require railway transportation and the construction of
railway or maritime terminals must have 40 per cent of their capital in Brazilian hands. If the
firm has more than 50 per cent of its capital in foreign hands, a series of financial restrictions and
special rules apply regarding re-investment.
(c) Atomic minerals are the property of the state.
(d) Firms engaged in the exploitation of the minerals Cu, Zi, Ni, S, Ph, K and Na, as well as coal,
can only obtain special financing in cases where the majority of its capital is in Brazilian hands.
(e) The prospecting and exploitation of petroleum resources are a state monopoly. The refining
of petroleum, the maritime transportation of petroleum or petroleum products produced in Brazil
and pipeline transportation of same and also gas are similarly state monopolies.
(f) Coastal cargo shipping is reserved to Brazilian ships.
(g) TV, radio and newspapers cannot be owned by foreign legal or natural persons.
(h) In the borderline (150 km from the border) there are some restrictions on foreign landowners
and foreignowned business.
(i) Engineering corporations which are majority-owned by foreigners cannot render consultancy
and other services to Government and Governmentowned corporations, unless Brazilianowned
counterparts are unable to do the same thing.
(j) Banking is subject to the rule of reciprocity and not more than 30 per cent of the voting
capital of a Brazilian bank can be owned by a foreign bank in cases where the country of the
latter imposes restrictions on the operation of Brazilian banks.
(k) Insurance is also subject to the rule of reciprocity.
(1) Fishing in territorial seas can only be carried out by foreign flag ships under special
authorisation (unless an international agreement waives this requirement).
(m) The production of military equipment is subject to the authorisation of the National Security
Council and to some special rules.
Business Organisations
It is possible for a foreign investor to enter the Brazilian market either by buying shares or quotas
of an existing company, by forming a new company (whether or not including the purchase of
asseis of existing businesses) or by establishing a branch of a foreign one. The last method, quite
common in the past, is no longer used very often as in practical and tax terms this is an expensive
and slow-moving way of carrying on business except in a few areas (like banking).
Forming a new organisation is thus the preferred system. Many different types of business
organisations exist, but the most common ones are the —limitada" and —sociedade anonima",
besides the "sociedade civil". The "limitada" is a corporation, in which a number of associates,
fixed in the contract, each have liability for the full amount of the stated capital. The "sociedade
anonima" is an Americantype corporation, issuing shares to an unfixed number of investors. The
"sociedade civil" is a partnership, or a corporation in the form of a "limitada", but whose
purposes are not of a commercial nature (as, for instance, lawyers' firms).
The structure of a "sociedade anonima" is mostly prescribed by statute and, in the case of open
market transactions (when shares are sold on the Stock Exchange or on the spot market) the
Brazilian securities exchange commission may intervene. In certain areas (eg banking) the only
authorised form is the "sociedade anonima". The "limitada" is more flexible in its structure, less
overburdened with financial statements and formalities, being frequently chosen to be the
holding company of a Brazilian constellation of subsidiaries.
The shareholders' agreement, which can turn the problems of the sociedade anonima to
advantage, is formally provided for in the statute. Only a Brazilian company may have a whollyowned subsidiary, and in practice these are common, under the form of a "limitada" or
"sociedade anonima" of two associates, one of which has only a token number of shares or
quotas.
The controlling owner has under the statute special liabilities as regards minority shareholders
and community and when domiciled abroad must maintain a special attorney in the country upon
whom all court summonses may be served.
The management of a "sociedade anonima" must be exercised through a board of at least two
directors who must be Brazilian residents. The "limitada" arrangement can be vested in nonresidents, but a resident must act as a delegate of the manager domiciled abroad.
oint ventures are permitted both in corporate and non-corporate form. The latter (consorcio) is a
working agreement among independent parties to carry out a given business and must be
registered with the Board of Trade. The union of foreign and national capital in one corporation
is in practice almost compulsory in some fields, namely:
(a) petrochemicals. The foreign investor must share with the Government and a private Brazilian
partner most new projects.
(b) telecommunications. The Government shows some preference to buy from Brazilian
majority-owned companies.
(c) banking and finance. An upper level of 40 per cent is maintained for foreign participators.
(d) capital goods. In general, new manufacturers only enjoy preferred financing in cases where
the major capital contribution is Brazilian. _
Patents, Trademarks and Licensing
Brazil has, from the beginning, been a member of the Paris Union (The Hague Revision is in
force). The Patent Cooperation Treaty is also applicable, both parts. The Brazilian Industrial
Property Code (enacted in 1971) provides for patents for invention, utility models and industrial
designs (two and three dimensional types); trade, industry and service marks; and advertising.
Worldwide novelty is required and 15 years from the application date (ten for utility models and
designs) is the patent term. Trademarks must be renewed every ten years.
Patents are not granted, inter alia, for pharmaceuticals, chemical products (but are granted for
chemical processes), foods, software and discoveries. Royalties are not paid for foreign patents
unless they can show priority, and subsidiaries or branches cannot send royalties to the parent
company. As regards trademarks, no royalties can be paid after the first ten years, and the same
prohibitions which exist for patents also apply.
In cases where royalties are paid, 5 per cent over net revenue of output (one per cent for
trademarks) is the maximum limit, and in many areas an even lower limit is applicable. Knowhow contracts have a five year payment limit, with a further five year period of absolute
confidentiality; the same limitations on the amount of royalties of patents are extended to knowhow contracts. Technical services (engineering projects, supervision, etc) are subject to a local
production rule, under which if there is a Brazilian competitor held to be able to render the
service then no foreign competitor can take the job.
All contracts (licences, know-how or service contracts) are screened by the Patent and
Trademark Office (INPI) which will also check out every restrictive clause, like export
prohibitions, tie-ins, or grant-backs. Almost all remittances for royalties or services are subject to
a 25 per cent withholding tax on payments effected or credited, plus a 25 per cent exchange tax
on the actual amount remitted (see "Incentives" below). Know-how royalties sent by the
subsidiary or branch to its foreign parent company are not deductible, being considered plain
profits distribu
tions and taxed as such; in practice, a subsidiary (more than 50 per cent of voting capital) or
branch cannot pay royalties to its parent company either for patents, trademarks or know-how.
Software is normally treated as know-how, but in some very isolated cases, an independent party
has been able to pay a little more for computer programmes than for know-how to a foreign
seller; absolute prohibition is liable to continue for intragroup payments. Computer and related
technology is under the general supervision of a special agency (SEI) of the National Security
Council.
_
Capitalisation of intangibles follows the usual rules: know-how and services are not capitalisable
directly, but the results of the authorised payments are.
Taxation of Corporations
The income tax on corporation profits is 35 per cent to 40 per cent, with lesser rates for farming,
forestry and animal husbandry (6 per cent), and public utilities. A branch of a foreign company is
also taxed automatically with a further 25 per cent withholding tax on the profits, as they are
considered as paid to the main branch.
Withholding tax is also levied at a 25 per cent rate over any payments abroad for capital gains,
profits and dividends, interests, royalties and technical fees. A 15 per cent rate is due (a) on
profits of branches of foreign corporations when the profits are reinvested in the expansion of its
activities in Brazil; (b) on dividends and gains attributable to investors abroad by investment
companies earning them on stock market operations (from two to six years, after which the rate
declines down to 8 per cent); and (c) on capital gains on the sales of shares of such investment
companies. Internal payments of profits between corporations, which were nontaxable until
1979, are now subject to a withholding tax of 15 per cent, to be compensated by the further
profits payments the receiving company makes to its shareholders. There are tax treaties with
Austria, Belgium, Denmark, Finland, France, Italy, Japan, Luxembourg, Norway, Portugal,
Spain,. Sweden and West Germany.
As already mentioned, payments of " profits exceeding 12 per cent of registered foreign capital
and reinvestments are heavily taxed (up to 60 per cent of what is effectively remitted); the same
happens with investments made through investment companies up to the eighth year from the
initial registration. Individuals are also subject to income tax at a progressive rate; capital gains,
donations and inheritances are not taxable, but on all such gains exceeding about £20,000 there is
a compulsory withholding tax.
Further taxes include VAT on sales and on other industrialised products, import and export
duties (the last mainly on certain raw materials and unprocessed agricultural or animal products),
rural and urban real taxes, tax on the transfer of real estate, on financial exchange and security
transactions, on transportation services, lubricants and fuels, electricity, minerals, and some local
taxes.
Import duties are usually very high, in order to create a protective barrier in favour of local industries.
Funding and Financing
The Brazilian banking system comprises the Central Bank, a series of publicly-owned
commercial banks among which the Banco do Brasil SA is the most influential, official development banks, saving and housing banks, private commercial and industrial banks, housing and
consumer credit finance institutions. At the top of the system, there is a National Monetary
Council. Foreign and foreign-owned banks are in a minority, and a strict reciprocity rule applies.
Foreign loans can take two main legal forms. The borrower can take either the 4131 type loan
(directly from the lender abroad) or the Resolution 63 loan through an authorised Brazilian bank
or a branch of a foreign bank operating in Brazil. Both loans must be registered with the Central
Bank and, in the last case, the intermediate borrower (the bank) supports the exchange risk. The
Central Bank checks the interest rates, in order to keep them at market level; a minimum term to
remit full payment abroad is applicable, but partial pre-payments are allowed.
The financing of imported goods is subject to registration at the Central Bank if the term of
contract is longer than 360 days. Imported goods under such financing are submitted to a local
production similarity test.
In addition to the regular 25 per cent income withholding tax, a financial tax is levied on
Resolution 63 transactions, and also on all internal transactions. In some cases, a tax credit of 45
per cent of the tax on interest paid on loans is granted to borrowers.
Export financing at low rates is provided by Government agencies.
Incentives
Among the many incentives provided for industrialisation, the most important are the following:
Special Export Programme (BEFIEX)
The programme includes a partial exemption (70 to 90 per cent) of import taxes on capital goods
and a 50 per cent exemption on components, intermediate products and raw materials, without
submitting the same to the general local-production similarity test; in some special cases there is
full exemption.
A company benefitting from the programme must guarantee an export schedule for a given
number of years under a three to one rate (for each dollar imported, three to be exported). Capital
goods imports are not included in the calculations of the rate. The programme is meant to be
carried out in a group-wide perspective and not from the standpoint of a single company. The
other linked companies participate to some extent in the benefits. The exports themselves have
benefits equivalent to those regularly granted to exports; furthermore, the supplementary tax on
profit remittances, corresponding to BEFIEX export revenues, can be used to pay other taxes. A
small version of this programme called CIEX covers only the partial exemption on the
importation of capital goods.
Local sales of capital goods
When there is a tender to buy capital goods (machines and equipment) supported by foreign or
official financing as the investor's own resources, some of the incentives granted to exports are
extended to such local sales. The same is applicable when the tender is substituted for an
agreement among the buyers and the local capital goods manufacturer's associations, assuring
that a given level of local buying will be effected and approved by the Government's Foreign
Trade Agency (CACEX). The purpose is to grant local producers the same tax exemptions and
conditions which foreign exporters have in such tenders, provided there is a sufficient protective
benefit to compensate for the limitation of market size, etc.
Special tax incentives are also given to domestic sales of some capital goods and, in particular,
to certain large projects (like the ITAIPU bi-national dam, nuclear and oil drilling projects).
Import of services
Some special projects of outstanding interest also enjoy exemption from the withholding tax due
on payment of services rendered exclusively abroad, eg when their prices are fixed or in a cost
plus basis (running royalties excluded).
Industrialisation of the Northeast
The Brazilian North East is a particularly undeveloped area and local industries are given
significant tax and financial incentives. The agency in charge is the SUDENE administration.
The incentives are:
(i) reduction of 50 per cent on income tax, or full exemption for 10 to 15 years in the case of new
enterprises or in some modernised ones;
(íi) refund of 50 per cent on income tax due for reinvestment purposes in cases where the
incentive above does not apply;
(iii) reduction in special cases, or exemption of import duties and excise and sales taxes on
imported goods for firms located in the region;
(iv) reduction of up to 50 per cent of income tax due on corporations for investment in the
FINOR fund administered by SUDENE.
(v) other, incentives granted to individuals and corporations investing in the area are also
applicable.
Amazonian Region
The same set of incentives is granted to companies located in the Amazonian region. The agency
in charge is the SUDAM administration.
Manaus Free Zone
In the core of the Amazonian region, there is a Free Zone around the capital of Amazonas State,
Manaus, where exemption from import duties and internal taxes are granted. Sale outside the free
zone of products manufactured therein are also tax exempt.
Industrial Development Council (CDI)
Preferential financial support from Government agencies, accelerated depreciation and, in some
cases, tax incentives, are granted to projects approved by the CDI. This agency is in charge of
selecting the industrial sectors which should receive preferred conditions from the Government.
Other Incentives
There are various incentives for scientific research, doing business in the state of Espirito Santo,
fisheries, mining, tourism projects, afforestation and the big iron ore mining project of Carajas.
Imports and Exports
Brazil is presently engaged in an all out export drive. With the current balance of payments
problem, the way to keep the economy going is to export as much as possible, import as little as
possible, and maintain a steady inflow of capital. Therefore it is not surprising that strong
barriers against imports are being built progressively from year to year and, at the same time, all
sorts of incentives are provided to increase exports.
The Foreign Trade Agency (CACEX) controls both the inflow and outflow of goods imported
and exported, acting in coordination with the other authorities involved. CACEX manages the
system of general informal import licensing (guias de importação), the specific formal import
licensing areas (computers, steel products, coal, financed capital goods) and also the informal
quota system for regular importers. Taxation is also used as an import deterrent: tariffs
rise to 205 per cent. There is an additional 25 per cent tax on exchange and the general exemptions granted until 1979
are now more difficult to get.
Federal VAT (IPI) is levied on imports of industrialised products and state VAT (ICM) on merchandise; these taxes
are added to the value already submitted to the import tariff.
CACEX also controls transferpricing, through price-lists and authenticated pro-forma invoices; some tax
compensation schemes are related to dumping: the tariff is charged over the normal price in the country of origin and
there is a "reference price", the difference from it in a specific case being levied as tax.
The local production similarity test is applicable everywhere: if goods are produced internally, at
the same price (plus taxes), within the same time and with the same specifications, no exemption
of taxes is granted. Also submitted to the test are the importation of goods as foreign capital
investment, imports which are financed for payments in over 360 days and imports of used
goods.
Inflation
Wages are indexed (half-yearly up to certain maximum limits), as well as debts, treasury
bonds, taxes, retirement payments, saving deposits, etc. The economy is geared to inflation in
such a way that a foreigner sometimes becomes baffled with the Brazilian way of doing
business. There are traps: for instance, assets and debts are indexed in the accounts, but
inflationary gains are taxed.
Many large corporations have indexation specialists, in order to protect the profit margin against
the ascending rates. In a long term contract, the artistry of indexation is a major requirement, as
some new foreign-owned Brazilian corporations have learnt only too quickly. Prices, as a rule,
are not as important as indexation, which is paramount. This situation, however, is liable to
change as soon as the new measures are felt and inflation becomes more modest.
Conclusion
Brazil needs a flow of capital to continue its development. A particular area where new
opportunities can be exploited is leasing of capital goods, including sale and leaseback. New
legislation is being proposed by the Government to Congress to encourage international leasing
as a form of controlling the balance of payments.