Legal Aspects of Foreign
Investment in Brazil
Valter Matta
vmatta@tozzinifreire.com.br
Brazil
Federative Republic of Brazil

Dimensions:
Half
of
South
America’s territory. 9 times size of
France

Population: 189 million (5th in the
world) people

Official Language: Portuguese
Federative Republic of Brazil
Federative Republic of Brazil
EXECUTIVE BRANCH
LEGISLATIVE BRANCH
PRESIDENCY OF THE
REPUBLIC
NATIONAL
CONGRESS
(MR. LUIZ INÁCIO
LULA DA SILVA)
MINISTRIES
FEDERAL
SENATE
(81 members)
CHAMBER OF
FEDERAL
DEPUTIES
(513 members)
Federative Republic of Brazil
JUDICIARY BRANCH
FEDERAL SUPREME
COURT
FEDERAL APPEALS
COURT
STATE COURT OF
APPEALS
(2nd Instance)
FEDERAL COURT OF
APPEALS
(2nd Instance)
STATE COURTS
(1st Instance)
FEDERAL COURTS
(1st Instance)
Economic Indicators
GDP
GDP per capita
US$ 1,150,000 million (2006)
US$ 6,085 (2006)
GDP Growth
Inflation
Consumers Priced Index
(12 months)
3.7% (2006)
4.7% (2007 – estimate)
2006: 3.14%
2007: 4%*
(*) official estimate – Central Bank
Economic Activities

Largest producer and exporter of coffee, orange juice, sugar
and ethanol

Largest producer and exporter of iron ore

Largest exporter of soybean, beef and chicken

4th aircraft producer (largest producer of regional aviation jets)

9th car exporter

4th steel exporter

8th software producer

A leader in oil exploitation in deep waters
Exports
Exports in 2006
US$ 137,471 billion *
(*) Ministry of Development, Industry and Commerce
Imports
Imports in 2006 *
US$ 91,394 billion
Major imports *
Machinery and electrical equipment, chemical products, and
oil
(*) Ministry of Development, Industry and Commerce
Foreign Direct Investment
6,384
Foreign Direct Investment
4,644
4,507
4,433
US$ (million)
3,495
3,208
1,974
1,514
1,078
1,661
1,435
1,285
1,22
1,388
0,848
0,782
1,458
0,745
0,779
0,648
0,26
2005
Total: US$ 21,638,000,000
2006
Total: US$ 22,225,000,000
0,117
Foreign Direct Investment
2005
2006
2007 (July)
US$ 21,638,000,000
US$ 22,225,000,000
US$ 24,700,000,000
Foreign Direct Investment
Restrictions for foreign investment:

Nuclear energy

Healthcare services

Mail and telegraph (Federal Law 6538/1978)

Domestic aviation, aerospace and airport infrastructure

Rural property ownership limited to size

Mining: companies (even under foreign control) may apply for a
license to operate in the mining sector

Newspapers and broadcasting companies: foreigners cannot
hold more than 30% of Brazilian press and broadcasting
companies
Business Opportunities
PAC
 The Federal Government has launched a program in 2007
named PAC (Growth Acceleration Program). In general
terms, PAC’s target is the economic growth of Brazil,
through the incentive to credit and financing, and infrastructure projects.
 Amount of investments expected (up to 2010): US$ 251
billion
 Main sectors:
– Energy: US$ 137 billion
– Transportation: US$ 29 billion
– Water Sector: US$ 20 billion
Business Opportunities
TRANSPORTATION
 Forecast of investment in transportation 2007-2010
– Highway: US$ 16.7 billion
– Railway: US$ 4 billion
– Port: US$ 1.35 billion
– Airport: US$ 1.5 billion
– Merchant Navy: US$ 5.3 billion
Business Opportunities
Sectors:
 Forestry, Wood Sourcing, Paper and Pulp
 Ethanol Production
 Mining
 Oil and Gas
 Consumer Products
 Infrastructure
Investment Structures
Investment Structures
Indirect Investment:
 Distribution and sales representation agreements: often
precede the establishment of a direct local presence
Direct Investment:
 Incorporation of a subsidiary: where market conditions
support a local presence and associated investment costs
 Joint Venture
 Acquisition of a local company
Indirect Investment - Distribution

Applicable regulation: distribution agreements are not subject
to specific regulations. The general contractual provisions of the
Civil Code applies

Territory: sale by distributor is subject to defined territory

Termination: the termination is subject to distributor recovering
investments
Indirect Investment - Sales Representation
Sales Representation Agreements:
 Are subject to specific regulations (Law 4886/65, amended
by Law 5420/90 and Civil Code, articles 710 to 721)
Sales Representatives:
 Do not acquire products in their own name, but merely act
as intermediaries in the sale of products
 Entitled to commissions based on sales (direct or indirect)
 Termination:
– Fixed term agreement: average monthly commission
multiplied by ½ of remaining months
– Indeterminate term: 1/12 of commissions paid during
the life of the agreement
Direct Investment - Joint Venture

Memorandum of Understanding: preliminary, binding or nonbinding document

Joint Venture
relationship

By-laws: the company is governed by its articles of association
or by-laws

Shareholders Agreement: governs the relationship between
shareholders, especially in connection with the transfer of
shares and voting rights
Agreement:
broad
rules
of
the
parties’
Direct Investment - Acquisition

Memorandum of Understanding: preliminary, binding or nonbinding document

Due diligence – Sensitive areas: tax, labor and environmental
matters

Share Purchase Agreement
Types of Brazilian entities
Limited Liability Company (Sociedade Limitada):
 Governed by the Civil Code
 At least two partners (quotaholders)
 Articles of Association
 Transfers of quotas and capital increases require
amendment to Articles of Association
 Managers must be domiciled in Brazil
 No Board of Directors
Types of Brazilian entities
Corporation (Sociedade Anônima - S.A.):
 Governed by the Corporations Law
 Must have at least two shareholders (except for whollyowned subsidiaries)
 By-laws
 Transfer of capital does not need to be reflected in an
amendment to the by-laws
 Shares may be traded at stock exchange
 Shares may be voting or non-voting (non-voting up to 50%
of the capital)
 May issue other securities: debentures and warrants
 Shareholders meetings: Annual and Extraordinary
Types of Brazilian entities
Management of the Corporation
 Administrative Council
– similar to U.S. Board of Directors
– certain corporate resolutions and election of Board of
Officers
– board members must be shareholders
 Board of Officers
– representation of the company
– members domiciled in Brazil
Financial Statements must be published yearly
Foreign Entities’ Branches
Yes, it is possible to open a branch of a foreign entity in Brazil,
although …
 Time consuming
 Several requirements, including governmental
authorization
 Some governmental agencies are not familiar with Foreign
Entities’ Branches
 Any changes in the by-laws of the foreign company must
be approved by the Brazilian Government to be effective in
Brazil
Central Bank
Foreign Capital Registration
 Must be registered with the Central Bank:
– Direct investments of Brazilian companies, either made in
cash or in assets
– Cross border loans and financings
 Registration entitles access to foreign exchange market to
repatriate investment, receive dividend, principal and interest
payments
 Foreign exchange transactions require execution of a foreign
exchange contract with commercial bank
Taxation
Tax Treaties for avoidance of double taxation
Argentina
Austria
Canada
Chile
Czech Republic
Slovak Republic
Ecuador
Finland
Hungary
India
Japan
Korea
Netherlands
Norway
Portugal
Spain
Germany (currently not in force)
Belgium
China
Denmark
France
Italy
Luxembourg
Philippines
Sweden
Taxation
TAX
Federal Corporate Income Tax (“IRPJ”)
Federal Social Contribution on Net Profits (“CSLL”)
Withholding Income Tax on Remittances Abroad
Federal Individual Income Tax (“IRPF”)
Distribution of Dividends
RATE
15% + 10% on any amount in excess of
US$ 120,000/year
9%
15% (basic rate)
25% (tax haven jurisdiction)
Progressive rate (15% to 27.5%)
0
Federal Tax on Manufactured Products (“IPI”)
Variable as per product classification
State Tax On Distribution of Goods (“ICMS”)
7% to 25%
Municipal Tax on Services (“ISS”)
2% to 5%
Federal Contribution on Financial Transfer of
Credits (“CPMF”)
0.38%
Import and Export
RADAR – MAIN TYPES
Simplified RADAR:
 Import / export operations up to US$ 150,000.00 in a
period of six months (cap does not apply to fixed assets)
 Less control / less documentation to be provided
 1 to 3 months to be obtained
Ordinary RADAR:
 Higher limits to import / export operations (granted by
IRS)
 Strict control / lots of documentation to be provided (tax
assessment, including financial capacity)
 3 to 6 months to be obtained
RADAR – FINANCIAL CAPACITY
 Subjectivity: IRS sole discretion
 Objectives: Financial capacity to pay for import operations for 6
(six) months term. Prevention of fraud/money laundering
 Assessments: Investments, assets, cash flow, previous
operations
Importation using a third Company
Importation on behalf of a third party
(importação por conta e ordem de terceiros):
 The trading company is a service provider to the final
owner
 Services Agreement submitted to IRS
Importation under order
(importação por encomenda)
 The importation is made by the importer with the final
owners’ own financial resource (no payments in advance
are allowed)
 The trading company sells the imported goods to the final
owner
 Sales Agreement submitted to IRS
Anti-Trust
Merger Notification
Required whenever:
 The companies (buyer and target) have a combined
market share of 20%
 Either party has gross revenues in Brazil higher than
US$ 200 million
Filing within 15 business days of the first binding
document
Environmental Licenses
Environmental License
Environmental Licensing Procedure
 Previous license – relates to feasibility of the project
 Installation license – authorizes construction of the project
 Operating license – authorizes implementation of the project
– Environmental Impacts Studies (EIS) required depending
on environmental impact of the project
– Licensing usually at state level (low impact
activities may be licensed by the Municipalities whenever an
agreement exists between the States and Municipalities)
but cross border projects may require federal licensing
Labor Relations
Labor Relations

Working hours: eight hours per day and forty-four hours per
week

Salary: legal minimum salary (approximately US$ 200)

Vacation: 30 days per year and a vacation bonus equivalent to
one-third of monthly salary

Christmas bonus: “thirteenth salary”
Labor Relations - Cost
E M P LO Y E E
LA B O R
C H A R GES
S O C IA L
S E C UR IT Y
C H A R GES
C OM EN T S/
R IS KS
IN D E P E N D E N T
C ON T R A C T OR P ER SON
Approximately
32% of
monthly
Open for negotiation
salary:
13o.salary,
vacation and
FGTS
28%
20%
Services under
Other benefits subordination and
in the
on habitual basis:
collective
risk of labor claim for
bargainig
recognition of an
agreement
employment
relationship
IN D E P E N D E N T
C ON T R A C T OR
LE G A L E N T IT Y
O UT S O UR C IN G
( C LE A N IN G , G UA R D ,
ET C )
T EM P OR A R Y
WO R KE R
T R A IN E E
_
_
_
Open for
negotiation
-
-
-
-
Risk of labor
claim and
secondary
liability
Maximum term of
The company has
90 days
Activities
secondary liability
extendable for
relating to
for labor obligations.
equal term.
the
The outsourcing is
Workers should
graduation
allowed to non core be employees of
course.
business activities. the employment
agency.
Labor Relations – Cost Simulation (Employee)
LABOR CHARGE CALCULATION
Base Salary
Monthly Christimas Bonus Reserve
Monthly Vacation Reserve + 1/3
Severance Pay Fund "FGTS" (8%)
Social Security "INSS" (28%)
Subtotal
Meal
Transportation (up to 6%)
Health Insurance
Total
US$ 1,000.00
US$ 83.00
US$ 111.00
US$ 95.00
US$ 334.00
US$ 1,623.00
US$ 269.00
US$ 72.00
US$ 150.00
US$ 1.996.43
Labor Relations – Unions and Job Stability

Unions: Employees are legally allowed to be submitted to a
Union

Job Stability

–
Expectant mothers: 5 months after delivery
–
Union directors: 1 year after their term in office
–
Members of the Accident Prevention Committees
(CIPA) –1 year after their term in office
–
Employees injured due to accident at work site or
professional disease: 1 year after returning to work
Other rights: set forth in collective bargaining agreements
Labor Relations – Types of Work Visa

Business: 90 days per year; may be extended for more equal
term

Temporary: applicable to employee (up to 2 years) and
technical assistant (up to 1 year)

Permanent: for officers/managers appointed in the by-laws
– Investment of US$ 200,000 or US$ 50,000 + 10 new job
positions in the company in the next 2 years
– Same term of the appointment, limited to 5 years. May
be extended
Intellectual Property
Intellectual Property
The Brazilian Patent and Trademark Office (“INPI”): granting and
control of industrial property rights
 Applications for trademark registration
 Issuance of letters of patent
 Certification of licensing agreements (registration of
technology transfer, trademark licenses and patent licenses
agreements)
 Both foreign and Brazilian industrial property rights must be
registered in Brazil
 The remittance of royalties must be registered with BACEN
Dos and Don'ts for doing
business in Brazil
Dos and Don´ts
Be patient…
red tape, government, licensing, regulatory instability
Dos and Don´ts
Remember that Brazil is a civil law country
Dos and Don´ts
Don’t even try to understand
the Brazilian tax system
Dos and Don´ts
Register your investment
with the Central Bank
Dos and Don´ts
Be patient!!
Cultural differences, delays
Dos and Don´ts
Do not focus only on numbers