Doing Business in Brazil 2012

August 2012DOING BUSINESS IN BRAZIL

MAZARS IS AN INTERNATIONAL, INTEGRATED AND INDEPENDENT ORGANIZATION SPECIALIZED IN AUDIT, CONSULTING, ACCOUNTANCY, TAX, LEGAL AND ADVISORY SERVICES.MAZARS CAN RELY ON THE SKILLS OF 13,000 PROFESSIONALS IN THE 69 COUNTRIES WHICH MAKE UP ITS INTEGRATED PARTNERSHIP ACROSS THE CONTINENTS. MAZARS ALSO HAS CORRESPONDENTS AND JOINT VENTURES IN 15 ADDITIONAL COUNTRIES.

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Audit> Independent Audit of Financial Statements> Audit for Consolidation Purposes of Multinational Groups> Limited Review of Financial Statements> Agreed Upon Procedures > Assurance Services

Tax> Transfer Pricing Services> Tax Planning> Accessory Obligation Review > Tax & Labor Due Diligence> Tax Advisory for Expatriates> Tax Review for Direct & Indirect Taxes> Succession & Corporate Planning for Owner Managed Business

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MAZARS IN BRAZIL

Present in Brazil since 1995, Mazars counts almost 500 employees in 4 oces: So Paulo,

Rio de Janeiro, Campinas and Ribeiro Preto. Our services include:

Niteri Contemporary Art Museum (Museu de Arte Contempornea de Niteri MAC).

DOING BUSINESS IN BRAZIL 2012 1

CONTENTSWhy invest in Brazil? 2Key facts and figures 3How to invest? 14Accounting and Audit Standards 20Tax Environment 24Labor Environment 44Appendices 52

This guide has been prepared for the assistance of those interested in doing business in Brazil. It does not cover exhaustively the subjects it treats, but it is intended to answer some of the important broad questions that may arise. When specic issues arise in practice, it will often be necessary to consider the relevant laws and regulations and to obtain appropriate professional advice.

DOING BUSINESS IN BRAZIL 20122

WHY INVEST IN BRAZIL?At the end of December 2011, it was ofcially announced that Brazil had overtaken United Kingdom as the 6th largest economy in the world. As Douglas McWilliams1 then said, Brazil had already beaten European countries at soccer for a long time, but the new phenomenon is that the South-American giant is now going to outperform them economically.

Since 1994, Brazil succeeded in reducing ination and progressively initiated a steady growth that had been expected for many years but always postponed due to a lack of economic and political stability. After the effects of the 1997/1998 Asian crisis disap-peared, Brazil entered a new era of economic development and multiplied its Gross Domestic Product (GDP) by ve since 2002.

Economy is now largely based on services (67%) and industry (27%) while agriculture remains one of the most productive in the world. The country is a top producer, manufacturer and/or exporter of aircrafts, automobiles, electronics, textiles, footwear, ethanol, steel, sugar, coffee, orange juice, soybeans and corned beef among others.

Abundant natural resources are also a key to its economic success. Brazils area ranks 5th in the world and its soil is rich in bauxite, iron ore, timber, tin, manganese, natural gas, aluminum, nickel, gold and petroleum. In addition, more than 85% of its electricity production comes from renewable sources (hydropower, biomass, wind, solar).

To assume this growth, Brazil benets from a large and young population (5th in the world with 192.4 million individuals2, 26% are under 15 years old) and a fast growing middle-class.

Despite all these positive aspects, Brazil also faces challenges in its development momentum. Informal activities are still apparent, bureaucracy slows down administrative processes and the tax environment is unstable and complex (federal, state and municipal levels for instance). There is a large social gap between the rich and the poor and the geographical imbalance between the North and South has not disappeared. Indeed, Southern states of So Paulo, Rio de Janeiro and Minas Gerais represent more than 50% of Brazilian GDP.

Nonetheless, South-Americas greatest economy presents far more opportunities than threats. Incoming events (World Cup 2014, Olympic Games 2016), good macro-economic conditions and forecasts, strong domestic market and the need for invest-ments in infrastructure and skilled people as well as the political stability shall be sources of condence and interest for potential investors.

Sejam bem vindos!Eduardo Cabrera, Managing Partner of Mazars in Brazil

1. CEO of CEBR: Center for Economics and Business Research British independent commercial economics consultancy2. Source: Brazilian Geography and Statistics Institute (IBGE), 2011


WHY INVEST IN BRAZIL?

KEY FACTS AND FIGURESBahias Wish Ribbons.


INSTITUTIONAL

KEY FACTS AND FIGURES

After a XXth century marked by a military domination over Brazilian politics and periods

of dictatorship, the return of the civilians to power in the mid-1980s paved the road to

political stability and economic success with the implementation of the Plano Real in

1994, a set of measures controlling inflation and equilibrating the balance of payments.

Brazil is a federal republic whose political system is based on the union of three

independent political entities (the Federation, the States and the Municipalities) and

three government branches (executive, legislative and judicial). The President, elected

for 4 years, is both the head of state and head of government. Following the 2 periods

of the popular President Luiz Incio Lula da Silva (also known as Lula), Dilma Rousse

was elected at the end of 2010.

Constitutional Form Federal Republic

Area 8,515,692 km - 5th in the world

Population 192.4 million - 5th in the world

GDP (US$) 2,493 billion - 6th in the world

Capital Braslia (2.6 million people)

Other main cities (million people)

So Paulo (11.3), Rio de Janeiro (6.3), Salvador (2.7), Fortaleza (2.5), Belo Horizonte (2.4), Manaus (1.8), Curitiba (1.8), Recife (1.5), Porto Alegre (1.4), Belm (1.4)

Ocial language Brazilian Portuguese

National currency Real (BRL)

President Dilma Rousse

Main International Organizations

UN, WTO, Mercosul, FAO, UNESCO, IBRD, IMF, G15, G20, CPLP

ReligionsRoman Catholics (73.6%), Protestants (15.4%), Spiritualists (1.3%), Others (9.7%)

Ethnic groupsWhite (53.7%), Mulatto (38.5%), Black (6.2%), Japanese/Arab/Amerindian (1.6%)

Source: IBGE, CIA, IMF

Brazils population is a mosaic built over the centuries by various waves of voluntary or

forced immigration (mainly Portuguese but also Italian, Spaniards, German, Japanese,

Middle-Eastern and African slaves), who intermixed with indigenous populations.


Key facts and gures

Brazilian life expectancy is the highest among the BRICS (Brazil, Russia, India, China

and South Africa). It still currently remains behind Western standards but the evolution

of its Human Development Index shows that the country benefits from one of the

highest development trends. The country counts on a young and relatively employed

population ready to take on the future challenges that a fast developing country such

as Brazil inevitably faces.

Brazil Russia India China South Africa USA

Life expectancy 73.5 68.8 65.4 73.5 52.8 78.5

Literacy rate (15 years old and above) 90% 99% 63% 94% 86% 99%

Median age 29.3 38.7 26.2 35.5 25.0 36.9

Urban population 84% 73% 30% 47% 62% 82%

Human Development Index (HDI) 0.718 0.755 0.547 0.687 0.619 0.91

HDI evolution since 1995 (%) 13% 12% 25% 27% -4% 3%

Unemployment rate (%) 6,0% 6,5% n/a 4,0% 23,9% 9,0%

Age structure

0-14 years old 26% 15% 31% 19% 29% 20%

15-64 67% 72% 64% 72% 66% 67%

65- 7% 13% 5% 8% 6% 13%

Source: UNDP, CIA, IMF, World Bank, CCFB

Brazilian social classes 2003 - 2014 (% of the population)Brazilian society is moving fast. Indeed, from 2010 to 2020, 8.8 million people are expected

to migrate from the low income brackets, classes E and D, to the middle class (class C).

Classes and Monthly revenues 2003 2009 2014

Class A & B (> R$ 4,635) 8% 11% 16%

Class C (R$ 1,159 to 4,635) 37% 50% 56%

Class D (R$ 701 to 1,159) 27% 24% 20%

Class E (< R$ 701) 28% 15% 8%

Source: FGV, IBGE, LCA, Bradesco

POPULATION & EMPLOYMENT INDICATORS


Key facts and gures


Gross Domestic Product - current US$ billion

ECONOMIC AND FINANCIAL INDICATORS

0

1000

2000

3000

4000

5000

6000

7000

8000

201120052000

9000

14000

USA Japan France UK IndiaChina Germany Brazil Russia South Africa

Source: IMF

Key facts and gures


While the USA, China and Japan continue to dominate GDP ranking, Brazil became the

6th largest economy in 2011, ahead of UK.

The 4 emerging giants (Brazil, China, Russia and India) proved their economic miracle

is based on long term sound foundations: since the BRIC concept was created in

2001 by Jim ONeill3, China is almost on the same path as the USA and Brazil, Russia

and India are expected to overtake European powers by 2020.

2020 GDP Projections in US$ billion Position Change from 2011

#1 USA 21278 -

#2 China 17888 -

#3 Japan 7630 -

#4 Russia 4584 +5

#5 India 4501 +5

#6 Brazil 4262 -

#7 Germany 4187 -3

#8 UK 3975 -1

#9 France 3689 -4

#28 South Africa 648 +1

Source: CEBR

Although GDP growth slowed down to 2.7% in 2011, compared to 7.5% in 2010, the world

continued to put its confidence in the Brazilian economy since the country remained as

one of the most successful places to invest in, behind China, but ahead of Russia and

India. Indeed, inbound investments have almost doubled since 2007.

Brazil Russia India ChinaSouth Africa USA

GDP Growth rate 2011 2,7% 4,3% 7,8% 9,2% 3,4% 1,5%

Per Capita GDP 2011 (US$) 12789 12993 1389 5414 8066 48387

Inflation (Consumer Prices - 2011) 6,6% 8,4% 8,6% 5,4% 5,0% 3,1%

FDI Net Inflows 2011 (US$ billion) 66,7 50,8 34,0 124,0 4,5 210,7

Stock of FDI 2011 - At Home (US$ billion)

426 343 225 776 125 2874

World rank for FDI stock #13 #16 #20 #7 #29 #1

Source: World Bank, CIA, CEBR, IMF, UNCTAD

3. Chairman of Goldman Sachs Asset Management. South Africa, whose economy still remains smaller than the others, is included in the group since 2010 to form the BRICS.


Key facts and gures

Gross Domestic Product by state and sectorGeographical disparities are still strong among the 26 states and the Federal district;

Southern states remain the most populated and the drivers of an economy now led by

services. States of So Paulo, Rio de Janeiro and Minas Gerais represent more than

40% of the population and 50% of the GDP.

Other 19 states 22%

FederalDistrict 4%

Bahia 4%

Santa Catarina 4%

Rio de Janeiro 11%Paran 6%

Rio Grande do Sul 7% Minas Gerais 9%

So Paulo 33%

Industry 27%

Services 67% Agriculture 6%

Source: CIA, CCFB, IBGE


Key facts and gures

NOMINAL INTEREST RATES Source: Bradesco, CCFB, BCB

6

8

10

12

14

16

18

20

may/12apr/12jan/12jan/11jan/10jan/09jan/08jan/07jan/00

0

5

10

15

20

25

2011200520001995

Nominal interest rates (SELIC) evolution (%)Brazilian inflation 1995-2011 (%)

Brazilian Central Bank has been taking measures to reduce interest rates and lowered

them several times in 2011 and 2012. Indeed high rates attracted substantial foreign

capital flows leading to an overvalued currency unfavorable to exportations. It also

generated a higher risk of non-payment from borrowers to banks and limited the level

of lending to customers.

6

8

10

12

14

16

18

20

may/12apr/12jan/12jan/11jan/10jan/09jan/08jan/07jan/00

0

5

10

15

20

25

2011200520001995

BRAZILIAN INFLATION Source: BCB


Key facts and gures


INDUSTRYThanks to recently discovered oshore black gold, Brazil became an important oil

producer. The country is also a leader in renewable energy, as hydropower and

biomass account for more than 85% of total electricity output.

Brazil Russia India China USA

Proven crude oil reserves (million of barrels)

14288 79432 5820 18000 19121

Oil production - in barrels per day (million) 2,7 10,3 1,0 4,1 9,7

Production world rank #13 #2 #24 #5 #3

Proven natural gas reserves (billion of cubic meters)

434 46000 1085 2751 7075

Natural gas production - in cubic meters (million)

24,1 588,9 52,8 102,5 611,0


Production of energy (Mtoe) 230 1182 502 2085 1741

Energetic dependance (% of imports in energy used) 4% 0% 26% 8% 22%

Electricity production - in kilowatt-hours (billion) 509,2 925,9 835,3 4604,0 3953,0


Part of electricity production from renewable sources (%)

85% 15% 15% 19% 11%

Motor vehicle production (million) 3,4 2,0 3,9 18,4 8,7


Source: CIA, IMF, EDF, World Bank, OECD, OPEC, ANP

Brazilian structure of electricity production

Hydraulic

Biomass

Fossil

Nuclear

80%

5%3%

12%

Source: CCFB, EDF

Key facts and gures


Brazilian Export: main partners

Argentina 9%

Netherlands 5%

Others 44%USA 10%

Japan 4%

Germany 3%

UK 2%

China 17%

South Korea 2%Chile 2%

Italy 2%

Brazilian Import: main partners

Argentina 7%

Germany 7%

Others 37% China 15%

South Korea 4%

Japan 4%

France 3%

USA 15%

India 2%

Italy 3%

Nigeria 3%

INTERNATIONAL TRADE

Source: Ministrio das Relaes Exteriores (MRE)


Key facts and gures


Debt and credit ratingsBrazilian public gross debt only represents 54.3% of GDP in 2011 (compared to more

than 100% in many developed countries) with a projection of 40.4% by 2016. This

improvement is supported by the continuous increase in the countrys international

credit ratings.

Sovereign Credit Ratings apr/10 sept/11 dec/11 mar/12 Outlook

Moodys Baa3 Baa2 Baa2 Baa2 Positive

Fitch BBB- BBB BBB BBB Stable

S&P BBB- BBB- BBB BBB Stable

Source: The Guardian

Exchange ratesExchange rate fluctuation is still a major issue for both local companies in their import

and export operations and for foreign investors in their long term cash management

strategies.

1,4

1,8

2,2

2,6

3,0

3,4

May-1

2Jan

-12Se

pt-11

May-1

1Jan

-11Se

pt-10

May-1

0Jan

-10Se

pt-09

May-0

9Jan

-09Se

pt-08

May-0

8Jan

-08

BRL per 1 EURBRL per 1 USD

Source: Natixis, BCB

Key facts and gures


Transportation infrastructure is still in its early development stage compared to mature

economies. Access to new technologies is widespread but still at a prohibitive cost.

Brazil USA France

Roadways (km) 1751868 6506204 1050117

paved (%) 13% 67% n/a

unpaved (%) 87% 33% n/a

Airports (number) 4072 15079 475

paved (%) 18% 34% 63%

unpaved (%) 82% 66% 37%

Nb of mobile phones lines (million) 251 328 64

Cellphones per habitant ( > 15 years old) 1,8 1,3 1,2

% of population using the Internet 39% 78% 69%

Source: CIA, CCFB, ANATEL

Number of operating vehicles (million)More than 70 million vehicles operate in Brazil. Local production amounted to 3.4

million units in 2011 (+0.7% compared to 2010) whereas imports represented c. 20.0%

of total licensing in the last 2 years.

0

10

20

30

40

50

60

70

80

2000 2005 2010 2011

Brazil

State of So Paulo

MISCELLANEOUS INDICATORS

Source: DENATRAN

14 DOING BUSINESS IN BRAZIL 2012

HOW TO INVEST?Night view of Copacabana beach in Rio de Janeiro.


Legal EntitiesThe incorporation of a subsidiary is the most common way for foreign investors to enter the

market. Registration with the Social Security System and the Federal, State and Municipal

Tax authorities is compulsory and all types of legal entities may be adopted.

In particular, the two most common legal structures used in Brazil are the LLC (Limitada) and

Corporation (Sociedade Annima), whose main characteristics are briefly presented below:

Limitadas (Ltda) Limited Liability Companies

Sociedades Annimas (SA) Corporations

Corporate Capital

No minimum capital requirement *Original full subscription and paying-up of 10% or more in cash

Full paying-up within 5 years or sooner in case of capital increase

Divided into quotas with fixed price or dierent unit prices

Divided into negotiable shares

Partners

At least 2 original quota/share-holders (resident or non-resident individual or entity), but the second can hold a minimal interest

Liability limited to contributions after full paying-up of the capital

Liability limited to contributions

Management

Investors must empower a resident legal representative and get a taxpayer registration number (CPF for individuals and CNPJ for entities)

Supervisory Board (Conselho Fiscal) is optional

Board of Directors (Conselho de Administrao) is optional

Board of Directors (Conselho de Administrao 3 members at least, resident individuals and shareholders) is mandatory for publicly held

corporations only

Management Board (Diretoria) with 2 members at least (resident individuals, not necessary

shareholders)

Dividends

Under the Brazilian Civil Code, non proportional distribution of profits is authorized

According to specific disclosure in the bylaws, shareholders have the right to receive a

compulsory minimum amount of dividends

Others

Common choice for firms with few owners and

no intention to raise public fundsMay be privately or publicly held

Fewer administrative processes are required than for a corporation

Supervised by the CVM (Securities and Exchange Commission) in case of a SA publicly held

SA is necessary for financial institutions

* Except for specific sectors (financial sector) or situations (obtaining a permanent visa for an entity managed by a non resident person)

Source: CCBF

ENTERING THE MARKET


How to invest?

These legal structures give the foreign investor the opportunity to keep more control

on its activities in comparison to commercial agreements (see hereafter) and to limit

shareholders responsibility for Brazilian operations (which is not the case for a branch

establishment, considered as a dependent entity from the foreign parent company).

Furthermore, special authorization from the Ministry of Development, Industry and

Commerce (MDIC) is necessary in order for a foreign firm to establish a branch in

Brazil. As it involves many administrative processes, few companies opt for this direct

but time-consuming solution.

Commercial agreementsOut of legal structures, commercial agreement options such as distribution or sales

representation present the advantage of time saving and reducing initial investments,

in comparison to creating or acquiring a legal structure.

For legal purposes, distribution agreements, in which the distributor takes possession

of the products, should disclose: a precise definition of the products, the delimitated

area and exclusivity conditions, the duration of the commercial relationship and the

advertising and trademark licenses issues. According to the Brazilian Civil Code, if

no term has been agreed and disclosed initially, the agreement will be considered as

having an indefinite duration and could only be terminated with a 90-days prior notice

period.

In sales representation agreements (without transfer of ownership), foreign companies

should protect any know-how, patent or trademark at the National Institute of Industrial

Property (INPI).

In both situations, these agreements may present legal risks, which shall be addressed

at the beginning of the commercial relationship by both parties, as well as operational

issues as the foreign entity may not have ecient control on the distribution policies

locally applied by its distributor.


How to invest?

No nationality or minimum capital investments are required in order to start a

business in Brazil. However, there are some exceptions, such as respecting some

liquidity and solvency ratios for public tender or when a foreign individual is appointed

as a Brazilian entitys manager, administrator or executive director.

In this latter case, a minimum capital investment will be required (for both SAs and

Limitadas), following the Normative Resolution n95 released on August 10th 2011:

investment in foreign currency of an amount equal or higher than R$ 600,000 per

foreign worker, or R$ 150,000 per foreign worker along with the commitment of

creating at least 10 new jobs (per foreign worker) over the following 2 years.

Foreign investments are authorized in many activities: mining, oil & gas, agriculture

& forestry, light manufacturing, telecommunications, electricity, banking & financial

institutions (with prior authorization from the Brazilian government), insurance (limited),

tourism or retail. Foreign equity ownership is limited to 20% in air transportation and

30% in media industries (TV broadcasting & newspapers).

Some sectors are also prohibited: nuclear energy, mail & telegraph services, public

health services, aerospace industry and sanitation. However, such sectors may remain

accessible in some cases through local investment vehicles.

FIP AND FMIEEBoth regulated by the Securities and Exchange Commission (CVM), the Fundo de Investimento em Participaes (Private Equity Fund or FIP) and the Fundo Mtuo de Investimento em Empresas Emergentes (Emerging Companies Investment Fund or FMIEE) are not legal entities but funds held by financial investors. They have rapidly become attractive venture capital and private equity investment vehicles, as they are not subject to corporate and gross revenue taxes (IRPJ, CSLL, PIS/COFINS).Some terms and conditions are to be respected. Any participant cannot hold 40% or more of the funds quotas and income. Furthermore, the portfolio must not be composed with debt securities exceeding 5% of the funds net equity, and if a foreign investor resides in a low tax jurisdiction, he will not benefit from any exemption.

FOREIGN DIRECT INVESTMENT


How to invest?

If any participant of a M&A contract presents an annual gross revenue higher than R$

750 million in Brazil and another participant an annual gross revenue above R$ 75

million in Brazil, then the whole case must be presented for approval or rejection to

the Federal Antitrust Agency (Conselho Administrativo de Defesa Econmica or CADE),

which will investigate for a maximum of 240 days. This period may be extended to 300

days upon request of the participants or to 330 days by the CADE.

THE SUPER CADEUntil the end of 2011, contracts could be presented within 15 days after completion, but after the law change in 2012, all projects signed after May 31st, 2012 must now be submitted prior to their execution (Lei n 12.529/11). This Super CADE law brings about some uncertainties to the business community regarding the potential delays that it will bring and the operational implication of this on-hold period (communication of the transaction, management during the interim period, business implications). However, non-complex operations are expected to be cleared within 60 days maximum, according to the CADE. Furthermore, authorities diminished the constraints on M&A deals by raising the thresholds for prior analysis, which were increased from R$ 400 million and R$ 30 million initially to R$ 750 million and R$ 75 million respectively (Interministerial Ordinance n994 of May 30th, 2012). This will reduce the number of cases to be studied and should hopefully accelerate processes.

ANTI-TRUST AUTHORITIES


How to invest?

In order to control potential transfer of public entities to the private sector, and to keep

regulating and supervising economy, the Brazilian State created various regulatory

agencies for each branch.

Banking and insurance sectors are respectively regulated by the Brazilian Central

Bank (BACEN - Banco Central do Brasil) and the SUSEP (Superintedncia de Seguros

Privados), while Brazilian Stock Exchange is under the authority of the CVM (Securities

and Exchange Commission - Comisso de Valores Mobilirios).

The IBAMA was created to deal with environmental issues, such as elaborating

standards to limit pollution, making decisions on the localization of industries and

authorizing various types of projects (hydroelectric dams for instance).

ANEEL (Electricity), ANATEL (Telecommunications), ANP (Oil and Natural Gas), ANTT

(Transport), ANAC (Civil Aviation), ANVISA (Sanitation), ANS (Health), ANA (Water

resources) and ANCINE (Cinema industry) are the other main Brazilian agencies.

CONTROL OF INTERNATIONAL FINANCIAL OPERATIONS The Brazilian Central Bank (BACEN) is responsible for controlling financial relations with other countries. Any inbound or outbound financial operation must be registered in the dedicated Electronic Declaratory Registry (Registro Declaratrio Eletrnico or RDE): Foreign Direct Investments in the RDE-IED (Investimentos Estrangeiros Diretos), foreign investments on capital and financial markets in the RDE-Portflio and debtor financial operations towards other countries in the RDE-ROF (Operaes Financeiras). Debtor financial operations include financial loans, rent of equipment, chartering of vessels, etc.Individuals and legal entities intending to perform such operations must be registered at the Brazilian Central Bank (BACEN) themselves, in the Cademp (Cadastro de Pessoa Fsica/Jurdica, Residente/no Residente no Pas).

REGULATORY AGENCIES

CHAPTER HEADLINE ON ONE OR TWO LINES MAXIMUM


ACCOUNTING AND AUDIT STANDARDS

City of So Paulo, economic heart of Brazil.



Brazilian accounting and audit standards have progressively been converging with the

International Financial Reporting Standards (IAS/IFRS) for the last half decade, even if a

few dierences remain (disclosure required, options allowed).

The Brazilian Committee of Accounting Pronouncements (CPC), in charge of the conversion

plan, translated almost integrally the international standards to create the new Brazilian

standards (Brazilian GAAP or CPCs).

In order to get legal eects, these standards are presented for approval or rejection to the

Federal Board of Accountancy (CFC) and the regulation main agencies (CVM, SUSEP, ANEEL).

Depending on the decision of these entities, rules shall apply to a sector or not. Furthermore,

standards cannot be in contradiction with the Corporate Law.

For example, in order to converge respectively with IAS 16 and 38, CPC 27 and 4 allowed the

revaluation of fixed assets to fair value to the extent permitted by law, whereas the Brazilian

Corporate Law no. 6.404, amended by Law no.11.638, excluded the revaluation from its context,

thereby leaving room for interpretation and consideration of the accounting principles.

Note that the conversion plan is still in progress and that further evolutions should occur.

For instance CPC 19 recently changed in order to adapt to IAS 31, by allowing both the

proportionate consolidation and the equity method in Joint Ventures consolidation. Before

that, only the proportionate option was permitted in Brazil. However IFRS 11 intends to

replace IAS 31 from January 2013 and would only recognize the equity method. As a

consequence, Brazilian standards could also evolve.

THE EQUITY METHODEquity method should be used in individual financial statements as well, and not only as a consolidation method, when the investor has a significant influence on investee s management and the investment is relevant.

All Brazilian financial statements must be prepared in compliance with Brazilian GAAP

whatever the companys size, which shall give a true image of the companies.

More specifically, listed companies, financial institutions and insurance companies

must prepare their consolidated financial statements in full compliance with IFRS and

their statutory reports in accordance with Brazilian GAAP.

BRAZILIAN GAAP VS. IFRS


Accounting and Audit Standards

Small and medium-sized enterprises (SMEs) financial statements are not required to be

audited by an independent auditor whenever the SME is not a listed company, insurance

company, investment fund or financial institution over the jurisdiction of the Central

Bank. A SME is a legal entity or a group of entities under common control whose total

assets are below R$ 240 million or presenting an annual revenue below R$ 300 million.

Annual financial statements of large companies must be audited by an independent

auditor. Publication is only mandatory for corporations (SA), not limitadas (Ltda). A large

company is a legal entity or a group of entities under common control whose total assets

are over R$ 240 million or presenting an annual gross revenue over R$ 300 million.

Audit and publication requirements are compulsory for all listed companies, insurance

companies, investment funds and financial institutions over the jurisdiction of the

Central Bank. Quarterly financial reports are required for listed companies, financial

institutions and insurance companies and biannual audit reports are compulsory for

financial institutions and insurance companies.

Furthermore, SMEs whose annual revenue is below R$ 48 million can opt for a simplified

corporate income tax regime, the Presumed Profit Regime. Under this regime, the

income tax is calculated on the basis of the gross revenue. To this extent, the quality and

update of the profit and loss below gross revenue is not a major stake for the income

tax declaration.

It is important to note that tax authorities do not require audited financial statements,

but some fiscal obligations must of course be respected, as detailed below.

BUSINESS VS. CONTROLLING CULTUREThe culture of financial control is usually very limited in SMEs which are generally business focused family companies. Ocial financial statements are often prepared for tax purposes only and should be considered with caution in a transaction context. It is not unusual to find management information which diers from the ocial one, and the risk of unrecorded transactions does exist.

AUDIT REQUIREMENTS


Accounting and Audit Standards

Brazilian companies are subject to multiple electronic and paper filings:

SPED: public system of digital bookkeeping, which aims at replacing paper copies of invoices and tax records for electronic files. SPED can be defined as an instrument that unifies reception, validation, storage and legalization of records and documents that are part of the accounting and tax bookkeeping of companies, through a single computerized flow of data. Such documentation is comprised of several accounting and tax books, such as the general ledger, the general journal, balances and trial balances, inflow and outflow books, inventory book, ICMS and IPI calculation registers, DIPJ, DACON, GIA, etc. The general ledger, the general journal, balances and trial balances referred to above must be annually transmitted by taxpayers to the SPED system by means of Digital

Bookkeeping (ECD). Brazilian legal entities must file an annual corporate income tax return (DIPJ) generally by June 30th of the following calendar year (which includes information about the IRPJ, CSLL and IPI). In case the IRPJ and the CSLL are calculated monthly, prepayments must be paid by the last working day of the following month. Any amounts of IRPJ and CSLL due for the year (exceeding the prepayments performed)

must be paid by the last working day of January of the following year. GIA (ICMS Calculation Information Form) and SINTEGRA (Integrated Goods and Services Interstate Operations Information System) must be filed monthly by the taxpayer. In the State of So Paulo, the GIA is due from the 16th up to the 19th day of the following month, depending on the final number of state registration (inscrio estadual). The SINTEGRA must be remitted to the State tax authorities up to the 15th

day of the following month. DACON (Demonstrative of Calculation of Social Contributions PIS/COFINS) must be filed monthly or twice a year by the taxpayer. The monthly DACON is due by the fifth day of the second month following the month of reference. The DACON must be delivered twice a year; once in October (in relation to the first semester), and once in

April of the following year (in relation to the second semester). The taxpayer must also annually file the DIRF (Declaration of Withholding Income Tax - Declarao do Imposto de Renda Retido na Fonte). For the 2011 calendar-year, the DIRF had until February 29th, 2012 to be delivered.

Penalties will apply in the failure to comply with these obligations.

FISCAL OBLIGATIONS



TAX ENVIRONMENTRio Negro bridge at night.



The Federal Tax Code of 1966 and the Federal Constitution of 1988 define the main

principles of the Brazilian tax system, which is composed of 3 levels of jurisdiction:

federal, state and municipal.

The Brazilian Federal Revenue Bureau (RFB) is an entity of the Ministry of Economy

(Ministrio da Fazenda) and supervises the federal tax system. Smaller, similar

agencies monitor the tax system in all states and main municipalities.

Brazilian legislation is quite complex regarding various collection levels, many rules

frequently changing and a relatively high taxation. Accurate information, advisory and

planning are essential in order to benefit from investment opportunities.

The fiscal year always corresponds to the calendar year (1st of January until 31st of

December). It is enforced by tax law regardless of the corporate year chosen by the

company for reporting purposes.

Apart from the case of fraud where it does not apply, the statute of limitation for

most taxes and social charges in Brazil is 5 years. Federal, state and municipal tax

authorities may perform inspections regardless of whether certain taxes or periods

were already inspected.

Tax legislation and jurisprudence give the owner of the operating assets responsibility

to pay current and previous taxes, as long as he retains the capacity to generate

earnings from these assets. Thus, entities resulting from transformation, merger

and spin-o or exploiting a continuing business (although under a dierent name or

proprietorship) shall be liable for past tax obligations of the original entity or business.

5 YEARS, NO LESS, NO WAY OUTThe tax clearance concept does not exist and the risk is only extinguished at the end of the statute of the 5-year limitation period. Responsibility is generally transferred with the transfer of activity, irrespective of the legal form of an investment (asset deal vs. share deal).

GENERAL PRINCIPLES


Tax Environment

Unpaid tax liabilities are subject to interest generally based on the SELIC rate (Special

System for Settlement and Custody) defined by the Central Bank of Brazil (c. 8.5%

annually in May 2012), especially for Federal Taxes. For State and Municipal tax liabilities,

interest is usually based on the IPCA rate (Amplified Consumer Price Index) defined by

the IBGE (Instituto Brasileiro de Geografia e Estatstica c. 5% annually in May 2012).

They are also subject to penalties between 20% (voluntary payment before tax inspection)

up to 150% (in fraud cases), with an intermediary rate of 75% in case of an assessment in

the absence of fraud. The 75% and 150% rates can be halved if the taxpayer pays without

any challenge and within a 30 days period following the assessment notification.

Corporate Income TaxesThe Brazilian legal entities operating for profit are subject to corporate income taxes that

include the corporate income tax IRPJ, and the social contribution on net profit - CSLL,

at following rates:

Income tax rates IRPJ CSLL Total

Applicable on the whole taxable income 15% 9% 24%

Applicable on taxable income above KR$ 240 10% 10%

Total 25% 9% 34%

There are four taxation systems of net income:

Actual Profit tax regime (annually or quarterly based);

Presumed Profit tax regime (quarterly based);

Arbitrated Profit tax regime (quarterly based);

SIMPLES Simplified tax regime (monthly based).

MAIN REGIMES & TAXES


Tax Environment

Actual Profit tax regimeThe Actual Profit system is the general rule of profit taxation. It corresponds to the

taxation of the accounting net profit after adjustments defined by the tax legislation

(elimination of non-taxable revenues and reintegration of non-deductible expenses).

For Brazilian corporate regulation, expenses must necessarily be related to the

companys operations in order to be subject to deductibility. Most of provisions for

expenses or losses are not deductible upon booking, with the exception of provisions

for vacation pay or 13th salary.

All accounting records and details of the tax calculation must be kept in the Taxable

Income Control Register (LALUR). Payments in the annual regime shall be done on

monthly basis (estimate), except if accumulated payments until the prior month exceed

the amount due in the current year.

UNLIMITED CARRY FORWARDThe Actual Profit tax regime allows the compensation of tax losses carry forward, which have no time restrictions, but a limit of 30% of the taxable income of the year. Carrybacks are not permitted in Brazilian tax legislation.

Presumed Profit tax regimeCompanies with annual gross revenues below R$ 48 million (among other terms and

conditions) can opt to tax a presumed net profit determined as a percentage of the

gross revenue earned, such percentage being dependent on the nature of the activity

performed by the company, independently if the company has registered a net profit

or net loss in the financial statements.

Presumed Profit as a percentage of revenues

Revenues Presumed Profit for IRPJ Presumed Profit for CSLL

Sales of goods 8% 12%

Services rendered 32% 32%

Others revenues 100% 100%


Tax Environment

After application of the above percentages on revenues, the corporate income tax

rates are applied to the presumed profit amount (25% for IRPJ and 9% for CSLL).

Arbitrated Profit tax regimeIf the accounting registers are not reliable, the tax authorities may arbitrate the taxable

income applying the revenue percentages similarly to the Presumed Profit method

increased by 20% for IRPJ, resulting in the following percentages:

Arbitrated Profit as a percentage of revenues

Revenues Arbitrated profit for IRPJ Arbitrated profit for CSLL

Sales of goods 9,6% 12%

Services rendered 38,4% 32%

Others revenues 100% 100%

After application of the above percentages on revenues, the corporate income tax

rates are applied to the arbitrated profit amount (25% for IRPJ and 9% for CSLL).

SIMPLES (simplified tax regime)The SIMPLES is a unified regime for the payment of Federal, State and Municipal tax and

labor taxes, which replaces all other payment regimes, except taxes on imports and

financial operations. It varies from 4.0% to 22.9% depending on activity and revenues.

Only companies with annual gross revenues below R$ 3.6 million and operating in

specific industry sectors, such as small businesses, small service providers, small

industries and family companies may opt for this simplified tax system.

Export companies that opt for SIMPLES may have up to R$ 7.2 million of gross

revenues, as long as the domestic revenues fall under the R$ 3.6 million limit.

GOODWILL AMORTIZATIONFor Corporate Income Tax purposes, under certain terms and conditions, goodwill generated by an acquisition and related to expected future profitability can be amortized over 5 years (or more) after the merger or reverse merger between the acquirer and acquired company. Before the merger, the goodwill is non-deductible. Intangible assets are not subject to amortization for tax purposes and are only tax deductible on sale of the respective asset or return to the shareholder.


Tax Environment

Social Contributions on revenues (PIS /COFINS)The PIS and COFINS are federal social contributions due on the monthly gross

revenues, except export revenues (among other benefits provided for by law). Rates

and systems of PIS/COFINS determination vary in accordance with:

The regime of the corporate income taxes which the company is subject to (Actual Profit

/ Presumed / Arbitrated / SIMPLES);

The nature of good, trading operation or business performed by the company.

The PIS/COFINS system can be cumulative or non-cumulative:

The cumulative system, generally applicable to companies that opted for the Presumed/

Arbitrated profit, is based on a default tax rate of 3.65% (0.65% for PIS and 3.00% for

COFINS) without the possibility of credits on purchases.

The non-cumulative system, generally applicable to companies that adopt the Actual

Profit regime, is based on a default tax rate of 9.25% (1.65% for PIS and 7.60% for COFINS),

with the possibility of credits at the same rate on purchases, services acquired and some

expenses defined by legislation.

Moreover, there are some increased tax rates for some industry sectors and reduced

tax rates to incentivize other sectors defined by the government. PIS/COFINS are also

due on import of goods and services with a tax rate of 9.25% independent of the regime

of taxation of income adopted by the company.

Except in sectors with specific treatment, the application of PIS/COFINS to gross

revenues by Corporate Income Tax option can be summarized as follows:

Regime of taxation of income

Actual Profit (PIS/COFINS non-cumulative)

Presumed/Arbitrated Profit (PIS/COFINS cumulative)

Domestic gross revenues 9,25% 3,65%

Export gross revenues 0% 0%

Financial revenues 0% 0%

Interests on net equity 9,25% 0%

Other revenues (non-operational revenues)

9,25% 0%

Sale of fixed assets 0% 0%

Calculation of credits on acquisition of goods for resale or inputs

Allowed Forbidden


Tax Environment

Illustrative impact of the tax regime on IRPJ/CSLL & PIS/COFINS

P&L (services company)

KR$ Actual Profit Presumed Profit

Gross Sales (A) 1000 1000

Rates 9,25% 3,65%

PIS/COFINS (93) (37)

Operating Costs (700) (700)

PIS/COFINS credits 42 Forbidden

EBIT 250 264

Financial Income 20 20

Income Tax 270 284

Rates 34,00% 34% x 32% x (A)

IRPJ/CSLL (92) (109)

Net income 178 175

Tax Charge 142 145

Regardless of gross sales thresholds or tax exemptions, the choice of the optimized

tax regime can only be made while considering both PIS/COFINS and IRPJ/CSLL

dierentiated rates in each scenario.

Indeed, higher PIS/COFINS rates in the Actual Profit tax regime may be counterbalanced

by tax credits and a more beneficial income tax exposure depending on profitability

perspectives. Such option can be updated in the beginning of each fiscal year based on

an assessment of the sales and profitability levels depending on the companys activity.

Tax on Industrialized Products (IPI)The Federal tax on industrialized products (IPI) is levied on sales of industrialized

products in the country, or on the importation of raw material, semi-finished or

finished goods for production or resale.

All types of products are classified in the TIPI (IPI tax rates Table). Rates applied on

IPI tax base go from 0 to 300% (tobacco for example). Considering that this tax has

a regulatory characteristic, the rates can be reduced by the government with more

flexibility (by Decree) to incentive determined industries.


Tax Environment

The IPI tax payer usually can calculate IPI credits on expenses related to the production

costs (raw material, intermediate material and packaging material).

Contribution for Intervening in the Economic Domain (CIDE)The CIDE is a Federal contribution levied on the importation of services with technology

transfer or specialized technical or administrative services. Usually CIDE is due by Brazilian

entities that hold license of use or are acquirer of technological knowledge (including

agreements related to exploitation of patents, brands use and technology supplying and

technical assistance services). The regular CIDE tax rate is 10% on the amounts paid or

credited to beneficiaries abroad and tax charge is due by the Brazilian entity.

Tax on Financial Operations (IOF)This Federal tax applies to credit & securities transactions (0 to 1.5% a day), exchange

& insurance transactions (0 to 25% but 7.38% in most of insurance operations) and

gold transactions (1%) performed trough financial institutions. Intercompany loans are

subject to IOF as well (up to 1.5 % of the nominal amount).

State Tax on Circulation of Goods (ICMS)The ICMS is a State tax levied on imports of products and circulation of goods,

interstate and inter-municipal transportation and communication services. As a State

tax, the rates and its rules may vary in each State of the Federation (26 States and the

Federal District of Brasilia).

ICMS internal tax rates range from 7 to 19%, and can be increased to 25% in certain

situations (communication services for instance), depending, among other aspects,

on the type of good, its origin and destination, and on regional tax incentives (see

ICMS map below). Almost every situation is specific and has to be checked before

importation and/or circulation of goods and services in Brazil.

Note that ICMS applies to internal state as well as interstate operations (imported and

non-imported) and that ICMS credits may be obtained by the company on raw materials

and goods acquired for resale. It is possible to oset this credit against future amounts

of ICMS to be paid. In the case that a company purchased goods including ICMS without

being an ICMS taxpayer, it will not be eligible for corresponding tax credits.


Tax Environment

17%

18%

19%

17%

18%18%

Inter-state rates on importations

4%

Inter-state rates

ICMSMainly applied internal and inter-state rates

12%

12%

7%


Tax Environment

THE WAR OF HARBORSThe Brazilian government recently unified Brazils taxes on interstate trade of imported goods. The Senates Committee for Economic Aairs (Comisso de Assuntos Econmicos - CAE) approved on April 17th, 2012 the unification proposal (Resolution 72), and the Senate agreed on April 24th. The government aims at applying a unified 4% interstate ICMS to imports (internal state rates remain unchanged and the law does not concern non-imported products) with an objective of reaching 2% by 2015.Indeed, because of high ICMS rates, several states created local benefits to grant tax reductions and boost imports performed through their airports and harbors. It led to the so-called War of Harbors. By imposing a unified interstate rate, the governments goal is to avoid such local incentives.

Import Tax (II)The Import Tax is due by the importer and calculated on the Cost, Insurance and

Freight (CIF) value of the goods. The amount of Import Tax paid is non-reimbursable

and represents a cost to the importer.

The tax rate applicable to imported goods ranges in accordance to the Common

External Tari (Tarifa Externa Comum or TEC) defined by the Harmonized Tari

Schedule (HTS / NCM: Nomenclatura Comum do Mercosul). There are more than

10,000 dierent items and II rates vary from 0% up to 35%; the average is 10%.

Besides the Import Tax, the importation of goods is also subject to the other Federal

(IPI and PIS/COFINS) and State taxes (ICMS).

Municipal Service Tax (ISS)The tax on services of any nature (services tax ISS) is a Municipal and cumulative

non-deductible tax levied on gross revenues of services rendered (except for

communication services and inter-municipal transportation).

The tax rate ranges from 2% to 5%, depending on the Municipality in which the company

is established and on the type of services rendered. Under certain conditions, ISS

may be due to the municipality where the service is eectively performed (on site

works, for instance). Cities decide to apply a rate or another depending on services, but

always from 2% to 5%. In municipalities of So Paulo and Rio de Janeiro, for example,

ISS is calculated at a standard rate of 5% for most of the services.


Tax Environment

Revenues obtained from exported services usually are exempt from ISS, since the

economic outcome or the benefit of the services rendered should be observed abroad.

Imported services are subject to the taxation of ISS with a tax rate that ranges from

2% to 5% in accordance to the Municipality in which the company is established.

The gross-up taxation systemMost taxes are computed on a tax base including the tax itself (the gross value

including taxes). Therefore, as illustrated below, the eective tax rates if computed on

the net value are higher than the ocially announced rates. Moreover, the tax base of

ICMS may be dependent on the identity of the purchaser as the rate is applied on the

value including IPI in case of sale to a final user.

Sale to an intermediary user Sale to final user / consumer

Rate Value

Total for the client 110

IPI 10% 10

Product value (invoice) 100

ICMS 18% 18

PIS 1,65% 1,65

COFINS 7,60% 7,6

Net value 72,75

ICMS rate compared to Net Value 24,7%

PIS rate compared to Net value 2,3%

COFINS rate compared to Net value 10,4%

Rate Value

Total for the client 110

IPI 10% 10

Product value (invoice) 100

ICMS 18% 19,8

PIS 1,65% 1,65

COFINS 7,60% 7,6

Net value 70,95

ICMS rate compared to Net Value 27,9%

PIS rate compared to Net value 2,3%

COFINS rate compared to Net value 10,7%


Tax Environment

Transfer pricingBrazilian tax legislation related to transfer pricing (TP) requires demonstrating the

adequacy of the prices with foreign related parties for the following operations:

Import of goods, services and rights;

Export of goods, services and rights;

Payment of interests on loan agreements not registered with the Brazilian Central Bank.

TP rules are applicable to international transactions with related parties and to

transactions with entities established in privileged tax jurisdictions (see list in

appendix). A privileged tax jurisdiction is defined (i) by not taxing income and earnings

from abroad (or taxing them at 20%), (ii) by not permitting access and limiting

transparency on transactions, structure, ownership, and (iii) by oering tax privileges

to nonresident individuals or entities without any economic activity.

The Brazilian TP rules show substantial dierences compared to the OECD transfer pricing

standards: instead of the arms length principle which is not provided for, fixed profit margins

should be used to determine the transfer price. Main methods used to demonstrate that the

price is appropriated (or to calculate the amount of the adjustment fixed by law) are:

Importation: Compare with the acquisition price practiced with independent parties (PIC);

Demonstrate that in the resale operation there is a minimum profit of 20% (resale of goods) to 60% (sales

of manufactured goods made in Brazil with imported inputs) (PRL);

Demonstrate that the profit obtained by the related company in the country of the origin of the good does

not exceed 20%.

Exportation: Demonstrate that the export price is equivalent to 90% or more of the price practiced in the internal market;

Compare with exportation prices in operations with independent parties (PVEx);

Demonstrate that the price practiced in the wholesale market in the country of destination of the goods

includes a maximum profit of 15% (PVA);

Demonstrate that the price practiced in the retail market in the country of destination of the goods

includes a maximum profit of 30% (PVV);

Demonstrate that, in Brazil, a markup of at least 15% is applied on the cost of production or acquisition.

Payment of interests: a maximum interest rate equivalent to Libor (6 months) plus a spread of 3% per year is allowed.

TRANSACTIONS WITH RELATED PARTIES


Tax Environment

Tax treatiesBrazil agreed on Double Taxation Treaties (DTT) with the following countries. Most of

these agreements contain tax sparing clauses.

Argentina, Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Ecuador,

Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands,

Norway, Peru, Philippines, Portugal, Slovakia, South Africa, South Korea, Spain,

Sweden, Ukraine.

Consolidation or group taxationThere are no rules about tax consolidation. Federal, State and Municipal authorities

apply separate taxations to each company and branch/establishment of the same

company.

Dividends & InterestsDividends are currently not subject to withholding taxation, while interests paid to

non-residents are generally subject to a 15% withholding tax or 25% if they are based

in a tax haven jurisdiction.

Thin capitalizationOn December 16th, 2009, the Government published Provisional Measure (PM) 472

which, among other provisions, includes new thin capitalization rules that can be

summarized as follows:

Interest paid or credited by a Brazilian entity to a related party (individual or legal entity),

not resident or domiciled in a tax haven jurisdiction, may only be deducted for income

tax purposes if (i) the interest expense is viewed as necessary for the activities of the lo-

cal entity and (ii) the amount of debt granted by the related party does not exceed twice

the amount of its participation in the net equity of the Brazilian entity. A second test also

needs to be performed including the total amount of debts with any foreign related party.

If under either debt/equity test a 2:1 ratio is exceeded, the portion of interest related to

the excess debt amount will not be deductible for Brazilian income tax purposes.

Similar provisions are also applicable to interest paid or credited by a Brazilian entity to

an individual or legal entity (whether or not a related party) resident or domiciled in a tax


Tax Environment

haven or favorable tax regime jurisdiction. In these cases, the interest expense will only

be deductible for Brazilian income tax purposes if (i) the expense is viewed as necessary

and (ii) the amount of the debt does not exceed 30% of the Brazilian entitys net equity.

A second test also needs to be performed including the total amount of debts with any

foreign party resident or domiciled in a tax haven jurisdiction. If under either debt/equity

test the 30% of net equity threshold is exceeded, the excess interest will not be deductible for

Brazilian income tax purposes. All provisions apply to debt financing transactions, whether

or not registered by the BACEN.

Interests on net equityThe Brazilian tax legislation allows the calculation of interests on net equity to be paid

to shareholders, instead of dividends. These interests are determined based on the

Long Term Interest Rate (TJLP, issued by the Brazilian tax authorities, 6% annually in

May 2012) applied to the net equity of the Brazilian entity.

Moreover, interests on net equity are deductible expenses for IRPJ and CSLL

purposes, reducing the income tax burden and consequently, the eective tax rate.

The deductibility of the amount of these interests is limited to 50% of the net income

of the period or 50% of the accumulated profits plus the reserves (the larger sum out

of the two). Unlike the treatment of dividends, the Brazilian entity is obliged to collect

15% withholding tax at the time of payment of interest on capital abroad.


Tax Environment

Foreign investors may benefit from all tax incentives, and there is no nationality

restriction to benefit from these incentives. Tax benefits may be granted by the States

(a total number of 26 + Federal District of Braslia), the Municipalities or by the Federal

organizations, for each specific sector.

Note that it is mandatory to be established as a registered company in order to benefit

from any kind of tax benefit. Tax Authorities usually grant the tax benefit to the main

Federal Tax Number (CNPJ), i.e. the parent company.

Special ZonesInvestments may be performed in Free-Trade Zones (Manaus FTZ, North and

Northeast regions among others) in order to benefit from exemption or reduction of

corporate income tax (IRPJ), import duties, excise tax (IPI), sales tax (ICMS) and taxes

on gross revenues (PIS/COFINS) depending on certain conditions (local components/

production/consumption).

Many governmental incentive programs also provide low cost financing, which has

been very important regarding Brazils chronic inflation and high bank interest

rates. The main governmental financing entity is the BNDES (Banco Nacional de

Desenvolvimento Econmico e Social).

Manaus Free-Trade Zone (MFTZ): 75% of reduction of IRPJ for 10 years (currently limited

until 2023), reduction up to 88% of Import Tax (II), exemption of IPI if locally consumed

and/or produced, reduced ICMS tax rate, exemption of PIS/COFINS when importing in

MFTZ, no PIS/COFINS on raw, intermediate and packing materials when buyer and sup-

plier are located in MFTZ and acquired materials are used in a local manufacturing pro-

cess, limited PIS/COFINS (mostly 3.65%) on sales of locally produced goods.

Superintendence for the Development of Amaznia (SUDAM) & Northeast (SUDENE):

Independent agencies aliated to the Federal government and providing reduction or

exemption of income taxes depending on their appreciation of projects in the North and

Northeast regions.

TAX INCENTIVES


Tax Environment

Special Customs RegimesA few examples of special customs regimes in Brazil:

Temporary Admission program allows some imported goods to stay for a determined

time and purpose on the territory without paying import taxes (mostly useful for exhibi-

tions, commercial, cultural and sports events, rental transactions).

Drawback regime involves various benefits. For instance, payment of import taxes such

as II, IPI, ICMS, and AFRMM (Merchant Marine Renewal Tax) can be partially or totally sus-

pended on goods which will be re-exported after being transformed, repaired or manu-

factured locally. The amount of exemption depends on the level of local manufacturing.

Instead of being suspended, taxes may alternatively be paid first and then restituted

after re-exportation. Imported items must be limited to 40% of exported goods.

Raw materials and components mainly parts for aircrafts, vehicles and electronics

importation may also be exempt from federal (II, IPI and PIS/COFINS) and state taxes

(ICMS) thanks to the RECOF program, if products are to be exported or sold on the do-

mestic market. More specifically for vehicles, RECOM regime allows importation without

IPI and foreign exchange coverage of materials and components destined for custom in-

dustrialization of products ranked from 8701 to 8705 in the IPI rates Table (TIPI): chassis,

car body, spare parts and subassemblies such as motors, components and accessories.

REPETRO is a special custom regime dedicated to the import and export of goods in-

volved in the prospection and exploration of oil and natural gas deposits. It allows im-

portation without IPI, PIS and COFINS of raw materials, parts and pieces used in the pro-

duction of such goods which are to be re-exported (drawback) or presumed so. Another

benefit is the exemption from IPI, PIS and COFINS on importation of foreign equipment

for a temporary stay. Companies holding permits and authorization for exploring oil and

natural gas deposits may benefit from REPETRO.

Another regime suspending the payment of taxes is the REPEX, which allows the import

of crude oil and its derivatives when they are exported or re-exported. This program is

dedicated to firms allowed by the National Petroleum Agency (ANP Agncia Nacional

do Petrleo) to import and export oil products.

A last example of special tax regime is the REIDI, related to the Growth Acceleration

Program (PAC Programa de Acelerao do Crescimento) and aiming at fostering


Tax Environment

investment and development of infrastructures by exempting the purchase of goods and

services from PIS and COFINS. Entities involved in such projects must first be legally ap-

proved as part of the PAC (transports, harbors, energy, sanitation and irrigation sectors).

FOSTERING EXPORTSImportation of goods which are not available in the Brazilian market may be subject to a reduction of import duties.Exports are encouraged through the lack of taxation on sales and, upon request and depending on the activity, exemption, deferment or suspension on taxes paid on purchases. The support to export sales can also take the form of specific credit lines at beneficial rates.

R&D and Green TechnologiesActivities related to Research & Development may lead to some incentives such

as IPI reduction, accelerated depreciation for new equipment destined to R&D and

accelerated amortization for capitalized R&D expenses and some intangibles.

Concerning investments in green technologies, companies may benefit from tax

exemptions or reductions (PIS/COFINS, IPI, ICMS) on industries, operations or

processes involving biodiesel, ethanol, solar & wind energy.

Exceptionally, land can be obtained as capital grants from local governments.

A BOOST FOR INFORMATION TECHNOLOGIESAccording to the Laws n 8.248, 10.176 and 11.077 (Lei de Informtica), legal entities involved in production of computer hardware may benefit from a tax incentive reducing IPI of some goods by 80 or 95%, depending on the localization of the company. Indeed, the North, Northeast and Central-West regions oer higher percentage of reduction. To keep this benefit, firms must invest in R&D from 4.00% to 4.35% of the annual revenues generated by the eligible products.


Tax Environment

Asset deal vs. Share deal Main tax aspects of an asset deal:

Income tax and social contribution apply to both operational and non-operational gains resulting from

the sale of assets (usually 34%)

PIS/COFINS may apply depending on the type of asset

ICMS applies to the transfer of inventory and generates tax credits but does not generally apply to fixed

assets

IPI applies to both transfer of inventory and fixed assets in the case of direct importation or manufacturing

by the seller

A real estate tax (ITBI) may also apply for property transfers

Share deals occur more frequently as they require less documents and are less taxed: Income tax and social contribution apply on sales net profits for Brazilian entities

PIS/COFINS, ICMS and IPI do not apply, neither do stamp duties or transfer taxes

A 15% withholding tax applies if the seller is an individual; the rate may increase to 25% in the case of a

nonresident entity

Gains from sale of publicly traded shares get a 20% tax but are exempt to nonresidents, unless they are

listed in a privileged tax jurisdiction.

Royalties & CopyrightsA 15% withholding tax as well as the 10% CIDE generally apply to royalties and

copyrights paid to non-residents. If the beneficiary resides in a tax haven jurisdiction,

the rate raises to 25%.

Importation of servicesTaxation of services rendered by a foreign company (importation of services) depends

on their nature. Technical services (involving special knowledge and performed by

independent professionals or artists) lead to a withholding 15% tax and a 10% CIDE tax,

whereas non-technical services get a 25% withholding tax. PIS/COFINS at the full rate

(9.25%) and ISS are applied on all types of services.

OTHER TAX ISSUES


Tax Environment

DO YOU REALLY NEED YOUR IMPORTED SERVICE?For a technical service fee invoice of US$ 1,000 issued by a foreign company, under the assumption of a 5% ISS rate, the Brazilian entity will withhold 15% of IRRF (therefore only US$ 850 will be paid to the foreign entity) and will pay US$ 257 of ISS, PIS/COFINS and CIDE.

NB: For both Royalties and Service Fees involving transfer of technology, specific

conditions of remittance and deductibility may be respected.

CFC RulesControlled Foreign Company (CFC) rules dier from those applicable in other countries

as they are relatively new in Brazil.

Financial statements of the foreign entity must be translated into Brazilian currency

and profits generated must be included in the December 31st financial statement of the

Brazilian firm; they may be subject to taxation in certain circumstances liquidation

for instance.

Consolidation of profits and losses of foreign subsidiaries is generally not permitted

for Brazilian tax purposes.

Capital gains taxationFollowing the sale of an asset located in Brazil, capital gains of residents get the usual

corporate income tax rate of 34%, while capital gains of non-residents are subject to a

15% withholding tax (25% if a tax haven resident).

Nonresidents investing in financial & capital marketsNonresidents face various withholding income tax rates on their revenues coming

from Investments in Financial and Capital Markets:

10% when investing in swap operations, stock funds and future market operations

carried out apart from stock or mercantile exchange markets;

15% in other cases including fixed income investments;

0% in case of capital gains (earnings linked to stock, commodities and other similar

transactions) or gold traded apart from commodity exchange markets and gained and

distributed by foreign investment funds;


Tax Environment

0% as well for income obtained through Brazilian government bonds since February

2006 and for mutual funds whose portfolio is constituted with 98% or more of these

bonds;

0% for investment in FIPs (Fundos de Investimento em Participao) and FMIEEs (Fundos

Mtuos de Investimento em Empresas Emergentes) or funds investing in these funds

quotas.

Declaration of Brazilian Capital Abroad for residents (DCBE)All individuals and entities based, domiciled or resident in Brazil must declare at the

Brazilian Central Bank all values (currency assets, investments, property, rights)

equal or greater than US$ 100K owned out of the national territory. This obligation is

fulfilled by filling out the Declaration of Brazilian Capital Abroad form (DCBE) on an

annual basis.



LABOR ENVIRONMENTSamba drums.



In 1943, Brazil initiated a general consolidation of labor laws that led to the CLT decree

(Consolidao das Leis do Trabalho). This system has governed most labor relationships

until now, despite some specific regulations applying to some workers categories.

In Brazil, the trial period cannot exceed 90 days. Contracts are based on 44 hours a week.

In case of dismissal, the employer must respect a prior notice of 30 days. If not, he faces

a one month salary penalty, which corresponds to the minimum amount an employee can

receive. This indemnity may go up to 3 months if the employee has worked in the company

for 20 years or more. The employer must also pay the eventual holiday and 13th salary to

the employee.

As explained below, the employee gets the totality of his Severance Indemnity Fund

account (FGTS account) plus an additional 40% if he gets dismissed without any good

reason (justa causa). In case of justified dismissal or resignation, the employee does not

receive this amount.

Note that in any case, there is no obligation for the employer to reclassify dismissed

employees.

In order to hire a foreign employee as a manager or director, a permanent visa will

be required, in addition to capital investment requirements. For a foreign employee,

a renewable work visa of 2 years must be obtained. Foreign workers may be hired as

expatriates or with local contracts.

In case of illness, salary is paid by the company for up to 15 days. The payment is then made

by social security.

There are two systems of Health Insurance: public and private. The public one is

HIRING, DISMISSAL AND LITIGATION

HEALTH INSURANCE


Labor Environment

mandatory and financed by employees and employers and every employee has access

to it. Employers have to pay up to 28.8% on payroll to social security authorities and

withhold from 8% to 11% of gross wages from the employees (limited to R$ 430.78 per

month in 2012).

In the private system, usually established by collective labor agreements or granted

by the employers, the payment is made by the company and may be partially financed

by the employees, depending on the policy adopted by the employer.

In 2012, minimum wage was increased from R$ 545 to R$ 622 (+15%).

Each year, every employee has to receive one additional salary (13th salary or Christmas

bonus) at the end of the civil year (half before the end of November and half before

Christmas day).

Overtime hours are paid 50% to 100% more than normal hours and dangerous or night

shift work gets 20% to 40% more.

In terms of profit sharing, a law does exist but no precise instruction is given. As a

consequence, not all companies distribute this kind of advantage, but they may be

forced to do so if profit sharing agreements were negotiated by branch.

Every employee has a vacation period of 30 calendar days per year; during holiday,

salary is increased by 1/3.

The mandatory defined public pension contribution system is valid for all employees

and there is a voluntary supplementary scheme oered by employers. The contribution

is included in the INSS tax payments.

REMUNERATION AND BONUSES

PENSION AND VACATION


Labor Environment

Collective Labor Agreements generally exist for each branch and category of employee.

Labor Unions are more important and powerful in industries (transport, automobile,

steel). The main entities are CGT (Central Geral dos Trabalhadores), CUT (Central

nica dos Trabalhadores) and Fora Sindical.

Employees are free to choose whether to join a union or not, but in any case must

pay an annual contribution which is directly withheld by the company once a year

(equivalent to one days salary).

To finance the Brazilian Social Security system (INSS), companies pay a monthly fee

equivalent to 20% of employees gross salaries. This percentage may be increased

by other rates: 1 to 3% of insurance for work accidents (RAT), and up to 5.8% for

other entities and funds (Education allowance, INCRA, SENAI, SESI, etc.). Employees

contribution (8% to 11% of the gross salary) is directly withheld by the employer.

Furthermore, employers have to make a monthly deposit equivalent to 8% of the

employees gross salaries in order to finance the Government Severance Indemnity

Fund for Employees (FGTS). The money is blocked on a personal account at the Caixa

Econmica Federal but the employee may withdraw it if he retires, intends to buy a

real estate property or suers from a serious disease. He also gains access to it in the

case of any lawful unjustified dismissal made by the company. In this last case, the

employer will also pay the employee an additional 40% penalty (of the correspondents

FGTS account) and an additional 10% penalty to the government.

LABOR AND SOCIAL SECURITY CONTRIBUTION

LABOR UNIONS & COLLECTIVE AGREEMENTS


Labor Environment

Main charges and taxes on payroll are:

Description Rate (%)

INSS 20,0

SESI 1,5

SENAI 1,0

INCRA 0,2

RAT 1.0 to 3.0

Education allowance 2,5

SEBRAE 0,6

FGTS 8,0

Depending on the sector and activity, some taxes may not apply except for the

compulsory INSS and FGTS.

Alternatively, if the employee is a director or manager who receives a pr-labore

and not a standard salary, the company has to only pay INSS (20%).


Labor Environment

The monthly withholding income tax is based on salary and advances paid over the

month. It is calculated on the gross salary minus INSS with some deductions fixed by

law (see example below).

Note once again that dividends are not subject to withholding taxation.

Withholding Tax (IRRF) 2012

Salary Base (R$) Rate (%) Deduction (RS$)

Up to 1,637.11 - -

1,637.12 to 2,453.50 7,5 122,78

2,453.51 to 3,271.38 15,0 306,80

3,271.39 to 4,087.65 22,5 552,15

from 4,087.65 27,5 756,53

INSS 2012 - Employees Contribution

Salary Base (R$) Rate (%)

Up to 1,174.86 8,0

1,174.87 to 1,958.10 9,0

1,958.11 to 3,916.20 11,0

INSS maximum base: R$ 3,916.20

Source: Ministrios da Fazenda e da Previdncia Social

LABOR COST OPTIMIZATION, AN UNFORTUNATE DRIFTPayment of salaries and bonuses out of payroll and use of full time service providers (PJ: Pessoa Jurdica) with employment characteristics are examples of existing practices. In case of tax or labor inspection, these operations may be reclassified as labor contracts (CLT) and authorities may request the payment of unpaid charges (up to the last 5 years) and interests in addition to penalties up to 150%.In the case of labor claims brought by the employee, the latter may request the payment of employment benefits (extra hours, holidays, Christmas bonus) in the 2 years following the occurrence of the employment relationship.

WITHHOLDING TAXES


Labor Environment

In case of a classic employee remuneration (CLT contract)

(R$)

(a) Monthly gross salary 13055,56

Base INSS 3916,20

(b) INSS Employee (11% on base INSS) 430,78

INSS Company (20% on gross salary) 2611,11

SESI (1.5%) 195,83

SENAI (1.0%) 130,56

INCRA (0.2%) 26,11

RAT (3.0%) 391,67

Education allowance (2.5%) 326,39

SEBRAE (0.6%) 78,33

FGTS (8%) 1044,44

(c) Total payroll charges (36.8% on gross salary) 4804,45

Number of dependents 2

Deduction per dependent 164,56

(d) Total dependents deduction 329,12

(e) Base IRRF (a - b - d) 12295,66

(f) IRRF (e * 27.5% - 756.53) 2624,78

Net Salary (a - b - f) 10000,00

(g) Christmas bonus cost (8.33%) 1087,53

(h) Holiday additional cost (2.77%) 361,64

Total cost for the company (a + c + g + h) 19309,17

ILLUSTRATIVE LABOR COST CALCULATION


Labor Environment

In case of a Pr-labore remuneration (Managerial functions)

(R$)

(a) Monthly gross salary 13055,56

Base INSS 3916,20

(b) INSS Manager (11% on base INSS) 430,78

(c) INSS Company (20% on gross salary) 2611,11

Number of dependents 2

Deduction per dependent 164,56

(d) Total dependents deduction 329,12

(e) Base IRRF (a - b - d) 12295,66

(f) IRRF (e * 27.5% - 756.53) 2624,78

Net Salary/Pr-labore (a - b - f) 10000,00

Total cost for the company (a + c) 15666,67



APPENDICESNight view of Rio de Janeiro from Sugarloaf Mountain.



Denmark Holding companies without economic activity

Hungary Oshore KFT companies

Iceland International Trading Companies (ITC)

Malta International Trading Companies (ITC) and International Holding Companies (IHC)

Uruguay Sociedad Anonima Financiera de Inversin (SAFI) incorporated until December 31st, 2010

USA Limited Liability Companies (LLC) with participation of non-resident investors and not subject to Federal Income Tax in the USA

NB: Holding Companies from Luxembourg and the Netherlands were removed from the list, as well as the Entidad de Tenencia de Valores Estranjeros (ETVE) from Spain.

PRIVILEGED TAX REGIMES


Appendices

Alderney Madeira Islands

American Samoa Maldives

Andorra Marshall Islands

Anguilla Mauritius

Antigua and Barbuda Monaco

Aruba Montserrat

Ascension Island Nauru

Bahamas Netherlands Antilles

Bahrain Niue

Barbados Norfolk Island

Belize Oman

Bermuda Panama

British Virgin Islands Pitcairn Island

Brunei Queshm Island

Campione dItalia Saint Helen Island

Cayman Islands Saint Kitts and Nevis

Cook Island Saint Lucia

Costa Rica Saint Pierre and Miquelon

Cyprus Saint Vincent and The Grenadines

Djibouti San Marino

French Polynesia Sark

Gibraltar Seychelles

Grenada Singapore

Guernsey Solomon Islands

Hong Kong Swaziland

Isle of Man Switzerland

Jersey Tonga

Kiribati Tristan da Cunha

Labuan Turks and Caicos Islands

Lebanon United Arab Emirates

Liberia U.S. Virgin Islands

Lichtenstein Vanuatu

Macau Western Samoa

TAX HAVEN JURISDICTIONS


Appendices

AFRMM Adicional ao Frete para Renovao da Marinha MercanteMerchant Marine Renewal Tax

ANA Agncia Nacional de guas National Water Agency

ANAC Agncia Nacional de Aviao CivilNational Civil Aviation Agency

ANATEL Agncia Nacional de Telecomunicaes National Telecommunication Agency

ANCINE Agncia Nacional do CinemaNational Cinema Agency

ANEEL Agncia Nacional de Energia EltricaNational Electric Power Agency

ANPAgncia Nacional do Petrleo, Gs Natural e Biocombustveis

National Agency of Petroleum, Natural Gas and Biofuels

ANS Agncia Nacional de Sade Suplementar National Supplementary Health Agency

ANTT Agncia Nacional de Transportes TerrestresNational Ground Transportation Agency

ANVISA Agncia Nacional de Vigilncia Sanitria National Health Surveillance Agency

BACEN / BCB Banco Central do Brasil Central Bank of Brazil

BCC Cdigo Civil Brasileiro Brazilian Civil Code

BNDES Banco Nacional de DesenvolvimentoBrazilian Development Bank

Brazilian GAAP

Princpios Contbeis Brasileiros Geralmente AceitosBrazilian Generally Accepted Accounting Principles

CADE Conselho Administrativo de Defesa EconmicaFederal Antitrust Agency

CFC Conselho Federal de ContabilidadeFederal Board of Accountancy

CFC Sociedade Estrangeira Controlada Controlled Foreign Company

CIDE Contribuio de Interveno no Domnio EconmicoContribution for Intervention in the Economy

GLOSSARY


Appendices

CIF Custo, Seguro e Frete Cost, Insurance and Freight

CLT Consolidao das Leis do TrabalhoConsolidation of Labor Laws

CNPJ Cadastro Nacional de Pessoa JurdicaNational Registry of Legal Entities

COFINSContribuio para o Financiamento da Seguridade Social

Social Security Contribution

CPC Comit de Pronunciamentos ContbeisCommittee of Accounting Pronouncements

CPF Cadastro de Pessoa FsicaIndividual Taxpayers Registry

CSLL Contribuio Social sobre o Lucro LquidoSocial Contribution Tax on Profits

CVM Comisso de Valores MobiliriosSecurities Exchange Commission

DACON Demonstrativo de Apurao de Contribuies Sociais PIS and COFINS Return

DCBE Declarao de Capitais Brasileiros no ExteriorBrazilian Capital Abroad Return

DCTF Declarao de Dbitos e Crditos Tributrios Federais Federal Tax Settlement Return

DIPJDeclarao de Informaes Econmico-Fiscais da Pessoa Jurdica

Corporate Income Tax Return

DIRF Declarao do Imposto de Renda Retido na FonteDeclaration of Withholding Income Tax

DTT Acordos de Bitributao Double Taxation Treaties

FDI Investimento Direto EstrangeiroForeign Direct Investment

FGTS Fundo de Garantia por Tempo de ServioGovernment Severance Indemnity Fund

FIP Fundo de Investimento em ParticipaesInvestment Fund in Partnerships

FMIEEFundo Mtuo de Investimento em Empresas Emergentes

Investment Fund in Emerging Entities

GDP Produto Interno BrutoGross Domestic Product

IBGE Instituto Brasileiro de Geografia e Estatstica Brazilian Institute of Geography and Statistics


Appendices

ICMS Imposto sobre Circulao de Mercadorias e ServiosTax on Circulation of Goods and Services

IFRS Normas Internacionais de Informao FinanceiraInternational Financial Reporting Standards

IHC Empresa Controladora InternacionalInternational Holding Company

II Imposto de Importao Import Tax

INCRA Instituto Nacional de Colonizao e Reforma AgrriaNational Institute of Land Colonization and Reform

INPI Instituto Nacional da Propriedade IndustrialNational Institute of Industrial Property

INSS Instituo Nacional do Seguro SocialSocial Security Contributions

IOF Imposto sobre Operaes FinanceirasTax on Financial Operations

IPI Imposto Sobre Produtos Industrializados Excise Tax

IRPJ Imposto de Renda Pessoa Jurdica Corporate Income Tax

IRRF Imposto de Renda Retido na Fonte Withholding Tax

ISS Imposto Sobre Servio Service Tax

IT Tecnologia da Informao Information Technology

ITBI Imposto sobre a Transmisso de Bens Imveis Property Transfer Tax

ITC Empresa Exportadora InternacionalInternational Trading Company

LALUR Livro de Apurao do Lucro RealTaxable Income Control Register

Ltda Sociedade LimitadaLimited Liability Company (LLC)

MDIC Ministrio do Desenvolvimento, Indstria e Comrcio Ministry of Development, Industry and Commerce

MFTZ Zona Franca de ManausManaus Free Trade Zone

OECDOrganizao de Cooperao e de Desenvolvimento Econmico

Or

Documents

Doing Business in Brazil 2012