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GUIDE ON HOW TO
DO BUSINESS IN BRAZIL
2
Contents
Investing In Brazil ....................................................................................................................... 8
An overview of Brazil ............................................................................................................... 8
How to establish a company in Brazil ..................................................................................... 11
Steps to get started .................................................................................................................. 11
Steps for growth ...................................................................................................................... 11
Deciding your future in Brazil: what do you need to know before investing? ........................ 11
Which type of entity to choose: branch or subsidiary? ........................................................... 11
Starting from scratch: Incorporate a LTDA. or S.A.? ............................................................. 12
Differences .............................................................................................................................. 12
Requirements for incorporating .............................................................................................. 13
Registration - CNPJ ................................................................................................................. 16
Requirements for acquiring a company in Brazil .................................................................... 18
Operating your capital / Opening a bank account ................................................................... 19
Accounting and auditing ........................................................................................................... 20
BR GAAP & Audits ................................................................................................................ 20
Audit standards ........................................................................................................................ 20
Brazilian GAAP And IFRS ..................................................................................................... 20
Tax environment ....................................................................................................................... 21
Taxes in Brazil ........................................................................................................................ 21
Corporate taxes on profits ....................................................................................................... 21
Taxes on revenue - PIS and COFINS ...................................................................................... 21
Value Added Tax on goods and services – ICMS ................................................................... 22
Tax on manufactured products – IPI ....................................................................................... 22
Tax on Services – ISS ............................................................................................................. 22
Withholding taxes ................................................................................................................... 23
Withholding Income Tax – Over remittances ......................................................................... 23
Intervention in the Economic Domain Tax – CIDE ................................................................ 23
Financial Transaction Tax - IOF ............................................................................................. 23
Hiring people in Brazil .............................................................................................................. 24
Payroll ..................................................................................................................................... 24
Payroll taxes ............................................................................................................................ 24
New labor tax filling - E-Social .............................................................................................. 25
Relocation of foreign citizens to work in Brazil ..................................................................... 26
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Immigration ............................................................................................................................. 26
Labor aspects ........................................................................................................................... 27
Income Tax aspects ................................................................................................................. 27
Cross-border challenges .......................................................................................................... 28
Size of the country............................................................................................................... 28
Cultural aspects ................................................................................................................... 28
Languages differences ......................................................................................................... 28
Financial growth ........................................................................................................................ 29
Financing Brazilian operations and repatriation of profit ....................................................... 29
Funding through equity: Capital contribution ......................................................................... 29
Funding through debt: Cross-border loan ............................................................................... 29
Repatriation of profits ............................................................................................................. 29
Compliance in Brazil ................................................................................................................. 31
Overview ................................................................................................................................. 31
How to import into Brazil ......................................................................................................... 32
Import models ......................................................................................................................... 33
Import on own account ........................................................................................................ 33
Import by order.................................................................................................................... 33
Import on behalf of third parties ......................................................................................... 33
Import taxes and duties ........................................................................................................... 34
Import Tax – II .................................................................................................................... 34
Tax on manufactured products – IPI (imports) ................................................................... 34
Value Added Tax on goods and services – ICMS (imports) ............................................... 34
PIS and COFINS (imports) ................................................................................................. 35
AFRMM .............................................................................................................................. 36
Customs-related litigation and Tax-related litigation associated with the import ................... 36
Fiscal classification ............................................................................................................. 36
Customs valuation ............................................................................................................... 36
Transfer pricing ................................................................................................................... 37
Origin and source ................................................................................................................ 37
Ex-tariff ............................................................................................................................... 38
Inquiries ............................................................................................................................... 38
Brazilian flagged vessel ...................................................................................................... 38
Incentives and financing.......................................................................................................... 38
Special customs schemes ........................................................................................................ 39
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Temporary Admission ......................................................................................................... 39
Drawback (suspension, exemption, return) ......................................................................... 39
Bonded Warehouse ............................................................................................................. 39
Temporary Export ............................................................................................................... 40
Certified Bonded Warehouse (Depósito Alfandegário Certificado – DAC) ....................... 40
Blue Line – Express Customs Clearance ............................................................................ 40
Brazilian Authorized Economic Operator Program ............................................................ 40
Customs forwarding – Process and documents ....................................................................... 41
Commercial Invoice ............................................................................................................ 41
Incoterm .............................................................................................................................. 41
Bill of Lading and Cargo Manifest ..................................................................................... 41
Certificate of Origin ............................................................................................................ 41
Import License (Licença de Importação – LI) .................................................................... 42
Import Declaration (Declaração de Importação – DI) ....................................................... 42
Proof of Import (Comprovante de Importação – CI) .......................................................... 42
Non-taxing rules entailed to the import ................................................................................... 43
Import payment methods ..................................................................................................... 43
Cash in advance ................................................................................................................... 43
Documentary collection in cash or on credit ....................................................................... 43
Documentary Credit or Letter of Credit .............................................................................. 44
Open account in cash or on credit ....................................................................................... 44
Import financing above 360 days ........................................................................................ 45
Import financing .................................................................................................................. 45
FINIMP – Import Financing ............................................................................................... 45
Forfaiting ............................................................................................................................. 45
Logistics .................................................................................................................................. 46
Maritime transport ............................................................................................................... 46
Cabotage (Coasting navigation) .......................................................................................... 47
Air transport ........................................................................................................................ 47
How to do cash management in Brazil .................................................................................... 48
The Central Bank .................................................................................................................... 48
Brazilian payments / Clearing system ..................................................................................... 48
Interbank Payment Clearing House (Câmara Interbancária de Pagamento – CIP) .......... 48
Checks And Other Papers Clearing Service (Centralizadora da Compensação de Cheques
e Outros Papéis – COMPE) ................................................................................................ 48
5
Reserves Transfer System (Sistema de Transferência de Reservas – STR) ........................ 48
TECBAN ............................................................................................................................. 49
Cash management in Brazil..................................................................................................... 49
Liquidity management ......................................................................................................... 49
Cash flow management ....................................................................................................... 50
Working capital management .............................................................................................. 50
Account services ................................................................................................................. 50
Cash management – Collection methods ................................................................................ 51
Collections ........................................................................................................................... 51
Boletos ................................................................................................................................. 51
Other types of receivables ................................................................................................... 52
Cash management – Payment methods ................................................................................... 53
Supplier’s payment .............................................................................................................. 53
Payroll ................................................................................................................................. 53
Tax payments ...................................................................................................................... 54
Import Tax payment through SISCOMEX (Integrated Foreign Trade System) ................. 54
Authorized Direct Debit (DDA) .......................................................................................... 54
Cross-border payments ........................................................................................................ 54
Electronic Banking System ..................................................................................................... 55
How to build a labor force in Brazil ........................................................................................ 56
The Brazilian labor market ...................................................................................................... 56
Hiring professionals in Brazil ................................................................................................. 57
Minimum wage ................................................................................................................... 57
Guarantee Fund for time of service ..................................................................................... 57
Annual Christmas bonus salary – 13th Salary ...................................................................... 57
Profit sharing ....................................................................................................................... 57
Night shift premium ............................................................................................................ 58
Working day ........................................................................................................................ 58
Overtime payment ............................................................................................................... 58
Weekly paid rest period ....................................................................................................... 58
A day off on holidays without deduction from salary ......................................................... 59
Thirty-day yearly paid vacation .......................................................................................... 59
Prior notice of dismissal ...................................................................................................... 59
Extra remuneration for pain, hazardous or dangerous activities ......................................... 60
Additional allowance for employee transfer ....................................................................... 60
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Transportation voucher ....................................................................................................... 60
Means of Hiring .................................................................................................................. 60
Outsourcing ......................................................................................................................... 61
Keeping track of working hours .......................................................................................... 61
Breaks .................................................................................................................................. 61
On-Call Compensation ........................................................................................................ 62
Standby hours ...................................................................................................................... 62
Home office and telework ................................................................................................... 62
Salary and Benefits ................................................................................................................. 63
Salary ................................................................................................................................... 63
Benefits ............................................................................................................................... 64
Occupational safety and harassment ....................................................................................... 64
Occupational safety ............................................................................................................. 64
Moral and sexual harassment .............................................................................................. 65
Quotas ..................................................................................................................................... 65
The disabled ........................................................................................................................ 65
Apprentices ......................................................................................................................... 66
Interns .................................................................................................................................. 66
Trade Union and strikes .......................................................................................................... 66
Trade Union ........................................................................................................................ 66
Strikes .................................................................................................................................. 67
Social security system ............................................................................................................. 67
Hiring and termination of contract .......................................................................................... 69
Hiring .................................................................................................................................. 69
Termination of employment contract .................................................................................. 70
Legal obligations upon contract termination ....................................................................... 72
Employment Guarantees ..................................................................................................... 72
Hiring costs ............................................................................................................................. 73
Companies that have not opted for the Simples regime ...................................................... 73
Companies that have opted for the Simples regime ............................................................ 75
Inspection ................................................................................................................................ 76
Labor Prosecution Office .................................................................................................... 76
Labor claims ........................................................................................................................ 76
How to perform merger and acquisitions ............................................................................... 77
M&A activity overview .......................................................................................................... 77
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Understanding the M&A process ............................................................................................ 77
Market research and screening of potential target companies ............................................. 77
Target analysis and financial modeling ............................................................................... 78
Discounted Cash Flow ........................................................................................................ 78
Relative valuation / Multiples comparison .......................................................................... 80
Asset-based valuation .......................................................................................................... 81
Transaction terms and conditions negotiations ................................................................... 81
Earn Out and alternative pricing / payment structures ........................................................ 81
Legal, financial, tax and operational Due Diligence ........................................................... 82
Protections and guarantees .................................................................................................. 84
Definitive contract ............................................................................................................... 84
Legal and regulatory approvals ........................................................................................... 85
Financing M&A ...................................................................................................................... 85
How to franchise in Brazil ........................................................................................................ 87
The franchising system in Brazil ............................................................................................. 87
Economic data ..................................................................................................................... 88
Franchise formatting ............................................................................................................... 88
Shareholders’ agreements ................................................................................................... 90
Corporate governance and compliance ............................................................................... 90
Tax environment ................................................................................................................. 91
Intellectual Property management ....................................................................................... 91
Copyright ............................................................................................................................. 91
Industrial Property ............................................................................................................... 92
Franchise manuals ............................................................................................................... 93
Common practices in franchising ........................................................................................ 93
8
Investing In Brazil
An overview of Brazil
Brazil, has a nominal GDP of approximately USD 1.8 billion, is one of the 10 largest economies
in the world. Geographically, it is the world’s 5th largest country, with a population of
approximately 207 million inhabitants according to the Brazilian Institute of Geography and
Statistics (Instituto Brasileiro de Geografia e Estatística - IBGE), and it has a predominantly
tropical climate. Brazil covers a total area of approximately 8,515,767 km², which is bigger than
to the area of the USA, excluding the state of Alaska. Brazil is composed of five major regions:
the North, Northeast, Southeast, South and Central-West.
Capital: Brasília
Largest Economic City: São Paulo (represents 10.7% of the GDP)
Currency: Brazilian Real (BRL)
Official Language: Portuguese
Nominal GDP: according to the Brazilian Central Bank, 2015, approximately USD 1.8 trillion*
Inflation rate: according to the general National Consumer Index (Índice de Preços ao
Consumidor - IPCA), and the Brazilian Central Bank, the 2015 avarage was 8.5%.
Political System: Federal Republic
Stock exchange: BM&F Bovespa
Leading share indexes: IBOVESPA & IBrX
Doing Business ranking (World Bank, 2015): 116
GDP per capita (Brazilian Central Bank, 2015): USD 8,650*
*The value in dollars is quoted at an exchange rate of approximately BRL 3.28/1 USD.
Brazil is known for its rich biodiversity, abundant agricultural, mineral and energy potential,
rapidly changing business conditions and innovation and is the leader in the International Direct
Investment ranking in Latin America. It is number eight in the world ranking, and receives USD
64.6 billion in direct investments, according to the UNCTAD (United Nation Conference on
Trade and Development). According to the Central Bank of Brazil, the leading countries in
identifying opportunities and investing directly in the country are: France, The Netherlands,
Japan, Spain, United States, United Kingdom, South Korea, Canada and Switzerland. The cities
of São Paulo and Rio de Janeiro, located in the Southeast region, received the largest share of
investments.
MAIN SECTORS
According to the IBGE, the main sectors contributing to the Brazilian GDP are: the service
sector, which generated BRL 3,642.3 billion in 2015; manufacturing, with BRL 1,149.4 billion
and agriculture and ranching, which reached BRL 263.6 billion. São Paulo, Rio de Janeiro and
Minas Gerais (all in the Southeast region) are the country´s largest GDP contributors, being
responsible for almost 41% of the total amount.
AGRICULTURE PRODUCTION
Brazil is a significant producer of coffee, orange, sugar cane, beef, pork, poultry, corn soy and
cotton.
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SERVICES
The investment opportunities in the services sector are numerous, and foreign companies have
been investing heavily in the following sectors:
•Trade;
•Telecommunications; and
•Financial services.
INFRASTRUCTURE
The reconstruction of the Brazilian economic policy, after recent political changes, encourages
business development in infrastructure and technology. A new round of concessions in
infrastructure in the federal program “Programa de Parcerias para Investimentos”, of more
than BRL 15 billion is expected in ports, airports, roads, railways – together with sales of assets
that will revive the economy and boost the country GDP growth in the next three to four years.
EXPORTS
According to the World Bank data, exports from Brazil amounted to USD 191.1 billion in 2015.
Brazil’s top 10 exports accounted for 60% of the overall value of its global shipments, which
are: oil seed, ores, oil, meat, machines, vehicles, iron, steel, sugar, sea food and coffee.
Source: The World Bank, 2015.
A SHIFTING ECONOMY
Brazil is going through an era of active economic and political restructuring. The current
situation has led to the development of compliance tools and subsequent better practices in
39%
21%
19%
16%
4% 1%
MAIN EXPORT DESTINATIONS
FROM BRAZIL
Asia
Europe
South America
North America
Africa
Others
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corporate governance. The period is followed by an increase in the levels of professionalism and
transparency in companies.
There is still a lot of room for improvement in Brazil both politically and economically, but this
does not take away from the opportunities offered by the country. Another significant factor is
the number of entrepreneurship hubs in the country, which have become relevant as there is an
international growing interest in Brazilian startups. These clusters are especially numerous in
the Southeast region, in the cities of Belo Horizonte-MG, Campinas-SP, Rio de Janeiro-RJ and
São Paulo-SP, as well as in Florianópolis-SC, in the South region, and Recife-PE, in the
Northeast region.
According to UNCTAD the GDI (General Development Index) ranks Brazil as the 13th for its
financing environment (out of 60), which is above developed economies, such as the USA and
United Kingdom.
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How to establish a company in Brazil
Steps to get started
Steps for growth
Deciding your future in Brazil: what do you need to know before investing?
Companies around the globe weigh the merits of establishing a physical presence in the country
and making a definite footprint in Brazil. There are indeed cases of foreign companies hiring a
sales person/representative to work as a contractor to research the market or get that first order
before the physical set up. This comes with some risks, such as creating a potential liability in
the employment relationship, having to wire funds to individuals’ bank accounts, and having no
control or oversight over business matters.
In order to hire employees, open a bank account and carry out a number of other tasks, it is
necessary to establish a corporation. The next step is to decide which type of legal entity it will
be.
Which type of entity to choose: branch or subsidiary?
The first step in moving to Brazil is deciding what type of structure best suits the business.
Incorporating a foreign company’s branch in Brazil is usually a very time-consuming
bureaucratic process: the establishment of a branch requires prior approval from the federal
government by Presidential decree. The federal government must also authorize any
amendments to the branch’s Articles of Incorporation. Unlike subsidiaries, branches are
considered part of the foreign entity in Brazil. In this regard, a branch’s foreign controlling
company may have unlimited responsibility for its debts in the event that the branch is unable to
fulfill such obligations. It is important to keep in mind that branches are subject to Brazilian
laws and courts with respect to acts and transactions that take place in Brazil.
Given this information, the vast majority of investors in Brazil adopt the subsidiary model, since
their shareholders are not responsible for the subsidiary’s debts, except for specific provisions
set forth by specific rules.
Once that is established, the investor will need to decide which format is more appropriate for
the business. The investor could also decide to acquire an existing company or assets, which
would require a due diligence project. One could also form a Joint Venture, which could take
the form of a Limited Liability company or a consortium agreement, which is commonly
adopted for relevant infrastructure projects in Brazil. Therefore, the main decisions will be
around incorporating or acquiring a company.
Deciding your future
in Brazil
Which type of entity to
choose?
Incorporate or acquire?
Bylaws and registration
Ready to start
Accounting and Auditing
Tax environment
Hiring people in Brazil
Financing growth
Compliance in Brazil
12
Starting from scratch: Incorporate a LTDA. or S.A.?
There are other types of legal entities, however, they do not apply to companies with Foreign
Capital. Therefore, the majority of legal entities incorporated in the country are either
“Limitada” or “S.A.”: the Limitada type of business (Sociedade Limitada or Ltda.) is a limited
liability company, and a S.A. (Sociedade Anônima) is similar to a corporation. The Ltda. is
sually the preferred vehicle for a wholly owned subsidiary, as formally the liability of the
shareholders is limited to their capital contribution. A S.A. demands stricter governance rules.
The S.A. is a legal entity under a private law, regardless of its purpose, governed by statute
whose capital is divided into shares. These shareholders have limited liability to the value of
shares acquired by them. They are governed by special legislation: Law 6,404 of May 05, 1976
as amended, mainly by Law 9,457 of May 05, 1997 and 10,303 of October 31, 2001.
The Ltda. is a legal entity under private law and is defined as Limitada, because the
responsibility of each partner is limited to the number of shares he/she owns. The power of each
partner is limited and bound by approvals defined in the Civil Code. Thereby, the autonomy of
each partner is also limited. It is the best option for the small business owner or a startup.
Differences
In a S.A., corporate governance is stronger and it ensures more rights for minority shareholders,
with mandatory distribution of annual profits. In this type of society, the real function of the
partners is to contribute with capital to the company. In a S.A., there are strict rules related to
accounting/auditing as there is a mandatory publication of certain corporate acts and minutes of
general meetings which must be signed.
In a Limited company, the costs for establishment and maintenance are generally lower;
however, minority quota1 holders are equally financially responsible.
Ltda. S.A.
A Ltda. is ruled by Article no. 1,052 to 1,087 of
the Civil Code, and it is organized through the
Articles of Incorporation (bylaws), with limited
liability partners.
A S.A. is established by the Brazilian Civil Code
in Article 1,088, and its latest regulation is Law
No. 1,1941 of May 27, 2009. It is a business
corporation with shares. Dividends are distributed
to the shareholders in the form of interest over
capital (Juros
sobre Capital Próprio).
The management of a Ltda. is carried out by
one or more individuals, shareholders or not, as
indicated in the bylaws (contrato social).
A S.A. may be managed by a Board of Directors
and Executive Board, or solely by a Board of
Directors. The Executive Board must have at least
three members, all of whom must be shareholders
and individuals. If they
do not reside in Brazil, they must appoint
Attorneys in-fact to represent them.
1 Quotas are the partner´s share of contribution in relation to the share capital of the company.
13
The capital is divided into equity units, named
quotas, which are registered. There are
formally no minimum capital requirements.
A S.A. can be classified as: publicly held, where
shares are traded on the Stock Exchange, or
Privately Held (Capital Fechado), meaning shares
are not traded.
The company needs to be constituted by at least
two partners. A partner can be either an
individual or a legal organization, and need
legal representation in Brazil, if the
professionals are not Brazilian resident.
The Board of Directors represents the S.A. and
ensures that everything is in place for its day-to-
day activities. It is composed of at least two
Directors, who may be shareholders and
individuals, and who must be Brazilian residents.
They may be elected for a maximum of 3 years.
There is no obligation to publish annual
financial statements, although banks, lawyers,
and other creditors usually require yearly
approval of Balance Sheets.
An Audit Committee is established to ensure that
the company follows best practices in corporate
governance. The company needs to be audited
yearly and must consistently publish financial
reports in national printed
newspapers or online, as they are normally
required by banks, tender processes and suppliers.
Ltdas. (Sociedades Limitadas) and S.As. (Sociedades Anônimas) need to be registered with the
Board of Trade (Junta Comercial) and with the tax authorities. Nowadays when the registration
with the Board of Trade is executed, the registration is automatically executed by the Federal
Tax Authorities.
S.As. need to be registered with the Securities and Exchange Commission (Comissão de
Valores Mobiliários - CVM). If the S.A. is publicly held, then it can issue depositary receipts
(DRs).
Both entities must hold annual general shareholder’s meetings by April 30th of each year
(considering fiscal year from January 1st to December 31st) in order to approve financial
reports. Minutes are generally drafted by local legal counsel. These must be signed by the
accountant, Legal Acting Director, and in the case of a S.A., by the auditors. All documents
and deliverables must be in Portuguese and all the amounts must be expressed in Brazilian
Reais.
Requirements for incorporating
BYLAWS
After a company decides on the most appropriate legal entity to establish in Brazil, the next step
is to draw up the company’s bylaws. The company will only be able to operate after it has
registered with the Board of Trade and tax authorities, and has been granted a Federal Tax ID
number (Cadatro Nacional de Pessoa Jurídica - CNPJ).
Below are some of the most important topics to be decided before setting up the bylaws, and it
is highly recommended involving an attorney in this stage of the process:
14
•Name of the Brazilian entity: the name should be in Portuguese, describing the purpose of the
legal entity, and one must verify with the Board of Trade whether the name is not currently
being used by other parties; and
• Shareholders: two shareholders are needed for a Ltda. These might be a corporation or an
individual, foreign or Brazilian. If the shareholders are foreigners, a legal representative must be
appointed so that these entities (or individuals) are granted a CNPJ number. This number does
not mean there are obligations related to this entity. The legal representative is a contact person
between the entity and tax authorities (for summons, inspections, dividend distribution, and
others). The shareholders draw up a power of attorney, which needs to be translated into
Portuguese, and registered in Brazil.
The shareholders must therefore appoint an attorney in fact. Articles 1,074, Paragraph 1 of the
Brazilian Civil Code, 119 and Article 126, Paragraph 1 of Law 6,404, dated December 15 ,
1976 of the Brazilian legislation, rules the obligation of a foreign company (quota or
shareholder of a company in Brazil) to have an attorney in-fact in the country in order to
represent it within the national territory, with powers to receive summons referring to legal
actions filed against it.
The legal representative, according to the instructions and authorizations from the foreign
shareholder(s), also:
•Participates in meetings, assemblies and other deliberation sessions;
•Signs, acquires, disposes, cedes or transfers shares or quotas; and
•Carries out all other rights concerning the conditions of a partner, quota or a shareholder of the
Brazilian company in question.
All of these parties, foreign shareholders, and legal representatives need to be registered within
the Brazilian Central Bank’s database (Cadastro de Empresas - CADEMP). This will allow the
company to register the Electronic Registration of Foreign Currency (Registro Declaratório
Eletrônico - RDE), Registration of Financial Transactions (Registro de Operações Financeiras -
ROF), Foreign Direct Investment - FDI (Investimento Externo Direto - IED) and other
investments.
•Purpose of the legal entity (objeto): choosing the purpose of the legal entity determines
towhich tax and labor laws the company is subject to. It also determines, for example, whether
the company needs to be registered with the municipality or state, if it will be subject to the Tax
on Services (Imposto sobre Servicos - ISS) or State Value-Added Tax, or simply State VAT
(Imposto Sobre Mercadorias e Serviços - ICMS) taxes, what type of licenses it will need, and
which classification on the National Registration of Economic Activity (Cadastro Nacional de
Atividade Econômica - CNAE) will be necessary.
•Legal Acting Director: one or more individuals carry out the management of the Ltda. and
this governance is formalized by means of a contract or a separate appointment. The
shareholders may determine the duration of this appointment in the bylaws, and a change is
formalized with the amendment and registration of the same bylaws, to which the professional,
who will no longer fulfill this position, must agree upon.
15
Article 1,011 and its respective paragraphs of the Brazilian Civil Code, Article 35, paragraph II
of the Law 8,934/94, deliberations from the National Department of Business Registration, and
among others, stress the condition that the manager must be domiciled in Brazil; foreigners
must have a permanent visa.
In addition to being responsible for the full legal representation of the company, the Legal
Acting Director appointed by the foreign partners may be held responsible on civil and criminal
grounds if he/she does not comply with the rules established in the contract or legislation,
including the obligation to compensate damages and losses borne by the foreign companies.
The appointment of the manager for this position is terminated by means of dismissal, at any
given time, or when the term stipulated in the company’s Articles of Incorporation has expired.
The Legal Acting Director also represents the legal entity and acts before other parties, some of
which include:
•Banks, as a signatory to bank accounts;
•The Brazilian Central Bank, for registration of capital inflows and outflows, signature on
documents related to foreign exchange transactions, and the filing of obligations;
•Tax authorities;
•Signing of financial statements;
•Labor Department for the signing of professional books;
•Signing of suppliers (rentals, warehouses, cellphones, internet, and others) and client contracts;
and
•Courts.
The limitations of the powers of the Legal Acting Director are reflected in the bylaws. Note that
these limitations might also affect day-to-day banking transactions.
•Address: if the nature of the business is services, i.e. if no goods are traded, the entity may
choose to have a virtual office to which all correspondence will be directed. However, if the
nature of the business is the trading of goods, the entity may employ a warehouse to store goods
and invoice customers from a branch established within the bylaws, and registered with the tax
authorities.
•Capital Requirements: formally, there are no minimum capital requirements. It is important to
review this information if the company plans to hire expatriates to manage the Brazilian
business, as other rules may apply. If the company plans to enter tenders or will need an
import/export license, there also may be additional requirements. All foreign capital inflows
must be registered with the Brazilian Central Bank.
•RADAR-SISCOMEX: a legal entity that needs to import and export products must obtain prior
authorization from Secretariat of Foreign Trade (Secretaria do Comércio Exterior - SECEX),
Integrated System of Statistics on Trade (Sistema Integrado de Comércio Exterior -
SISCOMEX) and from the Brazilian Central Bank. SECEX reviews and compares import prices
16
in order to prevent the dumping of products in the Brazilian market. It is advisable to request a
specialized broker to apply for this license due to its bureaucratic requirements.
Bylaws must be amended when there is a change to any of the items above. Later amendments
must be registered with the Board of Trade, tax authorities (Receita Federal - RF), and other
authorities according to the specific amendment.
Registration - CNPJ
Once the bylaws have been prepared according to the powers of attorney, they should be
translated into Portuguese and registered with the tax authorities in order to obtain a CNPJ for
the foreign shareholders. The bylaws of the Ltda. can then be registered with the Board of Trade
and with the tax authorities, so a CNPJ is granted to the Ltda. The CNPJ number together with
the name and address registered in the bylaws serve as identification of the subsidiary for
statutory purposes.
At the time of registration, an accountant must be appointed. Please note that this professional
must be registered with the Regional Council for Accountancy (Conselho Regional de
Contabilidade - CRC). The Ltda. can then proceed with the first required registrations:
•The registration of foreign exchange is done through the Eletronic Registration (Registro
Declaratório Eletrônico - RDE), which is part of the Central Bank Information System (Sistema
de Informações do Banco Central do Brasil - SISBACEN). Registration is mandatory for
inflows and outflows of foreign capital, and it is relevant at this point because of the inflow of
capital, according to what has been established in the bylaws. The Brazilian Central Bank’s
database registration of foreign shareholders is also required at this point;
•In order to hire professionals, registration with the labor authorities is required: National Social
Security System (Instituto Nacional do Seguro Social - INSS) and Guarantee Fund for Length of
Service (Fundo de Garantia do Tempo de Serviço - FGTS);
•If the company deals with services or starts operations as a cost-plus entity, it must first be
registered with the municipality in which it is located, as it will be subject to ISS and to an
Inspection Fee (Taxa de Fiscalização - TFE);
•If the company trades goods, is a manufacturer or delivers certain services, it must first be
registered with the state in which it is located, as it will be subject to the State Value-Added
Tax;
•All companies need to be registered with a Trade Union, and this registration depends on the
type of activity the company will perform in Brazil. All of the company’s registered employees
will be subject to the rules of the Consolidation of Labor Laws (Consolidação das Leis do
Trabalho - CLT) of that specific Union; and
•In order to suuport users to feel safe about their online actions, two tools were created to assure
the privacy of information and guarantee the authenticity of files sent by e-mail: the e-CNPJ and
e-CPF (Cadrasto de Pessoa Física - e-CPF). These are digital certificates approved by the
Federal Revenue (Secretaria da Receita Federal) and serve to protect personal and corporate
information. Moreover, the Legal Acting Director needs the digital certificate in order to
17
forward and receive information from the tax authorities, while the company’s digital
obligations are filed through its digital certification.
According to the nature of the business, other registrations/authorizations might be required. It
is recommended to check with the regulatory institutions and with the attorneys regarding the
necessary authorizations and licenses.
Please, find ahead some of the licenses and authorizations needed as well as its respective
regulators:
▪Business license;
▪Environmental license (Companhia Ambiental do Estado de São Paulo - CETESB);
▪Telecommunications (Agência Nacional de Telecomunicações - ANATEL);
▪Electricity (Agência Nacional de Energia Elétrica - ANEEL);
▪Movies (Agência Nacional do Cinema -ANCINE);
▪Private Health (Agência Nacional de Saúde Suplementar - ANS);
▪Consumer Goods (health, food and beverage) (Agência Nacional de Vigilância Sanitária -
ANVISA);
▪Chemistry professional (Conselho Regional de Química - CRQ);
▪Trademarks and Patents (Instituto Nacional da Propriedade Industrial - INPI);
▪Authorization for financial company operations with the Brazilian Central Bank (Banco
Central do Brasil - BACEN);
▪Insurance Industry (Superintendência de Seguros Privados - SUSEP);
▪Tourism (Empresa Brasileira de Turismo - Embratur);
▪Engineering and Architecture (Conselho Regional de Engenharia, Arquitetura e Agronomia -
CREA);
▪Real Estate (Conselho Regional de Corretores de Imóveis - CRECI);
▪Business administration (Conselho Regional de Administradores - CRA); and
▪Accountants (Conselho Regional de Contabilidade - CRC) and accountants and auditors
(Comissão de Valores Mobiliários -CVM).
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Requirements for acquiring a company in Brazil
If an investor wants to start a business in Brazil with an already operating company, it is
possible to acquire an existing business.
An acquisition between two companies of the same nationality is a highly complex process and
must be well-planned. Therefore, it is necessary to perform careful due diligence in order to
maximize the possibility of success.
In a transaction between companies of different nationalities (cross-border), the due diligence
process is even more important and major care should be taken in the prior assessment of
corporate cultures. This is mainly regarding the culture of adherence of the key people who will
face new challenges.
Also, tax issues that arise from acquiring legal entities in Brazil depend, to some extent, on the
residency of both the purchaser and the seller. In general terms, capital gains are taxed in Brazil
even in the case of transactions executed entirely abroad, when the assets (or shares) sold are
located in Brazil.
Share deals are generally more common than asset deals in Brazil because even in the case of an
asset purchase, there is a significant risk that the tax liabilities of the previous business will be
attached to the acquired assets. Additionally, share deals generally result in lower levels of
documentation and indirect taxation for acquirers. A case-by-case analysis is always
recommended for the company in order to decide the ideal acquisition structure.
When properly structured, the most significant advantage of a share deal over an asset deal is
that the amount (or part) paid in excess of the target’s net equity may generate an amortizable
premium or a step up (goodwill) in the tax base of depreciable or amortizable assets, and/or a
reduction on the direct taxable income calculation. The possible outcome should be analyzed by
a tax expert.
This potentially amortizable step up is subject to several tax, legal, accounting, business and
substance requirements, and must be very carefully analyzed and supported in order to mitigate
any risks associated with such an acquisition structure.
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Operating your capital / Opening a bank account
As a rule, in order to run a company in Brazil one will need a bank account in Brazilian Reais,
for which the Legal Acting Director will be the master signatory. Payments can be executed
through an online banking system, which requires the reading of a barcode and is operated in
Portuguese. Recently, commercial banks have made available an international system for their
foreign clients. Payments are executed with payment slips (boletos), registered with the bank.
Care must be taken regarding the taxes applicable and amounts to be deducted from each
payment. For accounts receivable, a company must involve its bank for the issuance of
registered slips for the easy identification of inflows of wire transfers. It is highly recommended
that startups outsource this activity due to the difficulty of managing them from outside Brazil.
Due to strict rules, banks require a previous relationship abroad, in order to open an account in
Brazil. There are few international commercial banks in Brazil. Most international banks have a
representation office, or act as wholesale banks. It is advisable to seek advice from the existing
bank relationship.
READY TO START
The company can now work with suppliers, sign agreements for delivery to clients, set up an
office, enter into agreements for internet, phone, cell phone connections, hire professionals,
approve and pay for the reimbursement of expenses, and so on. Furthermore, from the date the
CNPJ is granted, the company will need to comply with Brazilian statutory obligations. In other
words, it will have to comply with Federal, State and Municipal obligations.
One will need to make a strategic decision on hiring qualified, English-speaking personnel
(since English is an universal language, but there are also Turkish speakers, although they might
be rare) for accounting, taxes, payroll and finance. There are some specialized recruitment
agencies that can provide assistance with this. While it is common for Small and Medium
Companies (SMEs) to have in-house accounting, outsourcing this function is a usual alternative
in Brazil. Legal Acting Directors are usually hired from professional firms, so that the country
manager/senior professional can streamline his/her efforts to the commercial function.
Finding accountants and lawyers who speak English (or other language according to the
company’s preference) and can work closely with the entrepreneur ensures compliance and
might be a cost-efficient solution. It is advisable to ask the attorneys, Chambers of Commerce or
other professionals inside the business network for recommendations on a reputable company.
The company is now ready to start operations in Brazil.
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Accounting and auditing
BR GAAP & Audits
Brazilian Corporations with shares in the state exchange (S.As.) are required to publish their
annual audited financials and must have their quarterly financials reviewed by independent
auditors. Privately held entities are also required to have their financial statements audited by an
auditor registered with the Securities and Exchange Commission when they meet the “large
entity” criteria, which means (a) the entity has annual net revenues greater than BRL 300
million or (b) its total assets are greater than BRL 240 million.
Financial institutions or insurance companies (or any other group of entities under the
jurisdiction of the Central Bank) are required to publish their annual and semi-annual audited
financials.
The following groups of entities must have their financials audited by independent auditors
registered with the CVM: listed and large companies (as described above); financial institutions
and those under the jurisdiction of the Central Bank; investment funds; and private pension
funds.
The tax authorities do not require audited financials, though the name of the independent auditor
must be reported in the company’s annual tax form.
Audit standards
In 2010, the Brazilian audit standards were converged with the International Standards on
Auditing (ISAs) issued by the International Federation of Accountants (IFAC) through the
International Auditing and Assurance Standard Board (IAASB).
Brazilian GAAP And IFRS
Law 11,638, enacted in 2007, modified the Brazilian securities market. The accounting standard
administrators and regulators were already committed to seeking alignment with the IFRS, and
in 2010, the convergence process was concluded for consolidated financial statements. Stand-
alone financials are prepared under accounting practices adopted in Brazil through the
application of the standards issued by the Accounting Pronouncements Committee (Comitê de
Pronunciamentos Contábeis - CPC). These practices differ from IFRS for separate financial
statements only in relation to the measurement of investments in subsidiaries, associates and
jointly-controlled entities which are based in equity accounting, while IFRS requires
measurement based on the cost of fair value. Recent changes in IFRS reinstated the equity
method as acceptable. Therefore, this difference will no longer exist.
Small and medium-sized companies (SMEs) may adopt the IFRS specifically for SMEs in
Brazil. Alternatively, they can apply the accounting practices adopted in Brazil, which have now
converged with IFRS.
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Tax environment
Taxes in Brazil
Brazil is generally considered a friendly tax environment, but planning is essential to any
business in the country.
Corporate taxes on profits
There are two corporate taxes on profits in Brazil, and their combined rate is approximately
34%. Generally, the Corporate Income Tax (Imposto de Renda sobre a Pessoa Jurídica - IRPJ)
has a basic rate of 15%, plus 10% surtax on annual taxable income that exceeds BRL 240,000.
The Social Contribution on Net Profit (Contribuição Social sobre Lucro Líquido - CSLL) is
applied at a base rate of 9%. This rate may be different for financial institutions.
There are three major options for Brazilian legal entities to calculate and pay corporate taxes on
profits: the Actual Profit System, the Presumed Profit System and the Simplified Profit System.
The Actual Profit System corresponds to applying the IRPJ and CSLL rates (34%) to the
company’s net book profits under Brazilian GAAP (Generally Accepted Accounting
Principles), adjusted by certain specific add-backs and deductions.
The Presumed Profit System is based on a presumed net profit, which is calculated by applying
a predetermined presumed profit rate on the gross revenues of the company. The profit rates are
determined by the Federal Government and vary according to each company’s activity.
However, this system is not always possible because of several restrictions, including a
maximum turnover of BRL 78 million in the previous year.
The Simplified Profit System (Integrated Payment of Taxes and Contributions from Micro and
Small Companies) is a simplified tax regime applicable to micro and small companies that meet
specific gross revenue thresholds and other legal requirements. The Simples regime allows these
companies to calculate taxes applying reduced rates and calculation bases, and it also provides
them with the possibility of paying several taxes together, including federal (IRPJ, CSLL, PIS,
COFINS, IPI, INSS), state (ICMS) and municipal (ISS) taxes using one single payment slip.
Taxes on revenue - PIS and COFINS
The Contribution to the Employees’ Profit Participation Program (Programa Integração Social
- PIS) and the Contribution to the Financing of the Social Security (Contribuição para o
Financiamento da Seguridade Social - COFINS) are federal taxes charged on gross revenues,
on a monthly basis and under two regimes, cumulative and non-cumulative.
Under the cumulative regime, the combined rate is 3.65% and no credit mechanism is
applicable. In other words, under this regime, the PIS and the COFINS are a cumulative tax, not
VAT. Companies that adopt the presumed profit system for taxes on profits must calculate their
PIS/COFINS under the cumulative regime. Generally, companies under the actual profit system
will apply the non-cumulative regime, which subjects taxpayers to a combined PIS and
COFINS rateof 9.25%. However, under this regime, tax credits for PIS and COFINS levied on
certain inputs are available. Both PIS and COFINS are also due on the import of goods and
services, generally at a combined rate of 9.25%.
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Value Added Tax on goods and services – ICMS
The ICMS is a type of state VAT tax generally levied on imports (customs clearance), sales,
transfers and other transactions involving goods (including electricity), inter-municipal and
interstate transportation services and communication services.
For imports of goods and transactions within the same state, the regular ICMS rates range from
17% to 19%. However, for some specific goods, the applicable rate on import operations and
sales within the state may differ from the regular ones. When transactions involve two different
states, the rates are 7% or 12%, depending on the states involved. The applicable rate is 4% on
interstate transactions with imported goods, regardless of the states involved, with some minor
exceptions.
The ICMS tax is also due either when a product is resold in the domestic market or when it is
physically moved from a manufacturing facility.
Given the fact that it is a VAT, ICMS taxpayers are generally entitled to a tax credit for the
amount of the tax paid in the previous transaction with the same goods (inputs), provided that
the purchaser is an ICMS taxpayer regarding that product. The tax credit may be offset against
future ICMS payables.
Importers are generally entitled to recognize a tax credit at the amount of the tax paid to be used
to offset future ICMS liabilities.
Tax on manufactured products – IPI
The Tax on Manufactured Products (Imposto sobre Produtos Industrializados - IPI) is a federal
tax levied on the Import and manufacture of goods. In many aspects, it operates as a VAT tax
which is charged on the aggregated value of the final product. As a general rule, IPI paid on a
previous transaction can be used to offset the IPI liability arising from subsequent taxed
operations as a tax credit. The applicable rate changes according to the product and its
classification under the Table of Excise Tax Levy (Tabela de Incidência do Imposto sobre
Produtos Industrializados - TIPI) which generally follows the Brussels Harmonized Tax Codes.
These rates may vary considerably, from 0% to more than 300%, according to the products. As
an excise tax, IPI rates can be higher for “non-essential” products such as cigarettes, perfumes
and others.
Since the IPI tax has a regulatory nature, the federal government may increase or decrease its
rates at any time by decree as a way to implement financial and economic policies.
On import transactions, as a general rule, an IPI tax credit for the amount of the tax paid on the
import is granted in cases in which the subsequent transaction involving the same product, or
another product in the manufacturing process of which the imported product was used, is
subject to the IPI.
Tax on Services – ISS
The Services Tax (ISS) is a municipal tax levied on revenues derived from the provision of
services and on the import of services. Although it is a municipal tax, the specific services
subject to the ISS are listed in a federal law.
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The tax base for the ISS is the price or value of the service. The rates vary from 2% to 5%,
generally depending on the municipality where the service provider or importer is located,
where the service is provided and the type of service.
Withholding taxes
The Brazilian tax legislation determines that end clients (corporate clients) shall withhold some
taxes (PIS, COFINS, IRPJ and CSLL) when paying the service provider. These withholding tax
rates are predetermined by the Federal Government and are generally 1.5% (IRPJ/IRRF) and
4.65% (CSLL, PIS and COFINS, all combined).
This is a cash flow issue, since any taxes withheld by the end client could be offset against the
taxes (PIS, COFINS, IRPJ and CSLL) owed by the service provider on its regular activities.
Please note that these withholding taxes are not related to the corporate income tax regime
(actual vs profit) nor with the gross revenue taxes regimes (cumulative vs non-cumulative). The
withholding taxes are only a way for the Tax Authorities to anticipate the payment of taxes –
instead of only charging them at the end of each month, they charge part of these taxes (the
amounts to be withheld) on each payment of service fees.
Withholding Income Tax – Over remittances
The Withholding Income Tax (Imposto de Renda Retido na Fonte - IRRF) applies to certain
domestic transactions such as fee payments to service providers and financial income from
investments.
The IRRF tax is also due on general payments by a Brazilian source to most non-residents (e.g.:
the payment of service fees, license fees, interest, interest on net equity, royalties, cost sharing,
management fees, among others). The rate depends on the nature of the payment, the
beneficiary’s residence and the existence of double tax treaties. Normally, rates range from 15%
to 25%, the tax event is the payment.
Intervention in the Economic Domain Tax – CIDE
In addition to the IRRF, a Contribution for Intervention in the Economic Domain
(Contribuições de Intervenção no Domínio Econômico - CIDE) of 10% is levied on payments to
non-residents and includes certain royalties, technical and administrative services and technical
assistance, among others. The CIDE is imposed on the payment of the fees and cannot be
reduced by double tax treaties.
Financial Transaction Tax - IOF
The Tax on Financial Transactions (Imposto sobre Operações Financeiras - IOF) is a federal
tax levied on credit operations, foreign exchange transactions, insurance and securities
transactions executed through financial institutions and includes intercompany loans and some
operations with gold.
The rates vary according to the nature of the transaction and the maturity term. Since IOF rates
have been constantly changing over the past several years, it is recommended careful and
updated analysis regarding this topic prior to entering any such transactions.
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Hiring people in Brazil
Payroll
Payroll processing in Brazil has specific laws and rules.
Please find ahead the most relevant:
• Employment law is described in the Labor Code, Labor Acts and Collective Labor
Agreements. Every company and employee must belong to a Union, and employers must follow
the Union’s collective labor agreements (and bylaws) related to the activity executed in Brazil;
• The standard work time per week is 44 hours, which represents a working period of 8 hours a
day, including a one-hour lunch break; •There is a statutory minimum wage defined by law but
which may be higher according to the collective labor agreement;
• Holiday entitlement is 30 days per year. In certain cases, the employee has the option of
receiving the payment of 10 days in cash. Before each vacation period, the employee receives a
33% premium for the vacation;
• There is a Guarantee Fund for Length of Service (Fundo de Garantia por Tempo de Serviço -
FGTS), which is equivalent to 8% of the employee’s salary and is deposited every month by the
employer into a blocked FGTS bank account in the name of the employee. In the event of
unjustified dismissal, the employer has to pay a 40% penalty on the FGTS over the amount
deposited in the FGTS bank account. Withdrawals are authorized only under circumstances
established by law;
• Each registered employee is entitled to a 13th salary, which is a mandatory annual bonus
equivalent to one month salary and is usually paid in two installments, typically November and
December of each year; and
• Transport to work and meal vouchers are typical benefits within collective agreements. A
health insurance policy, life insurance policy and profit-sharing scheme are not mandatory, but
market practice.
Payroll taxes
• INSS: 8% to 11% for employees and 20% for employers. This is further increased by
workplace accident insurance and other contributions to governmental institutions such as the
National Service, among others. This could bring, in the total combination of the employer,
contributions to almost 29%. Employee contributions to INSS usually range from 8% to 11%
and must be withheld by the employer.
• IRRF: range from 7.5% to 27.5% for the employees. The Brazilian source payments made to
employees for services must be withheld on a monthly basis. Some other contributions are
described ahead:
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PAYROLL OBLIGATIONS
Monthly filings
Number of admissions and terminations in the
prior month (Cadastro Geral de Empregados e
Desempregados - CAGED);
Form for FGTS payments (Guia de
Recolhimento do FGTS e de Informações à
Previdência Social - GFIP);
Contributions of FGTS and INSS (Sistema
Empresa de Recolhimento do FGTS e
Informações à Previdência Social - SEFIP);
Form for Social Security Payments (Guia de
Previdência Social - GPS); and Form for
Payment of Employee’s Withholding Tax
(Documento de Arrecadação de Receitas
Federais - DARF).
Annual Filings
As part of year end reporting, filings of
ancillary obligations need to be executed,
which also encompasses the abovementioned
monthly filings plus: Income Withholding
Tax (Declaração de Imposto Renda Retido na
Fonte - DIRF); and Annual Report on Social
Information (Relatório Anual de Informações
Sociais - RAIS).
New labor tax filling - E-Social
The Federal Government developed the e-Social with the purpose of simplifying and unifying
the fulfillment of some accessory obligations, considering the complexity to fulfill several
simultaneous requirements by employers, as well as optimizing comparisons and validations of
information provided by the taxpayers.
The objective was to create a system to simplify gathering of information regarding payroll,
completely changing the current way for declaration, such as the submission of GFIP. The
Brazilian Revenue Service included in e-Social the participation of other Government agencies,
such as Ministry of Labour and Employment (Ministério do Trabalho e Emprego - MIT), Social
Security, and Brazilian Federal Bank (Caixa Econômica Federal - CEF), which use the payroll
as the basis for their proceedings. Thus, the intention is to reduce the number of requirements by
the employer.
The greatest goal with the creation of e-Social is to reduce discrepancies in cross-referencing the
information between the payroll and some ancillary obligations, as well as to facilitate the
inspection by such agencies regarding the fulfillment of requirements provided by law.
26
The requirement will begin on January 1, 2018 for employers and taxpayers with revenue above
BRL 78 million in 2016, and on July 1, 2018 for other employers and taxpayers.
Relocation of foreign citizens to work in Brazil
The increase of foreign investments in the Brazilian market over the last few years has
considerably fostered the relocation of members of the workforce into the country.
Foreign investors willing to start a business in Brazil or to relocate professionals to work or
provide services in the country must pay special attention to three main issues:
•Immigration aspects;
•Labor rights and payroll obligation; and
•Individual income tax.
Immigration
In general aspects, foreign nationals (individuals, investors or entrepreneurs) willing to do
business or work in Brazil must apply for a visa in accordance with the activities to be executed,
submitting the request to Immigration Coordination of the Ministry of Labour and Employment
of Brazil. Therefore, identifying and applying for the proper type of visa is the first step to start
a business and perform a remunerated activity in the country.
Permanent Visa for Foreign Investors: Basically, a foreign national willing to obtain a
permanent visa as an investor must invest at least BRL 500,000 in a Brazilian corporation
(capital stock, duly paid in) and file a business plan (amongst other requirements). The business
plan consists of a detailed description of the business activities to be developed, the functions of
the investor, entrepreneurship objectives, the importance of the investment to the economic
sector, business strategy, a hiring plan for the first three years including the number of
employees, job positions and compensation plan, the investment plan, and any additional details
that might be required. Assuming that all of the documents are presented and requirements are
met, this visa will take up to 8 weeks to be issued and is valid for up to 3 years.
Permanent Visa for professionals in management positions with legal powers: This is
applicable to foreigners who come to Brazil as administrators, Directors, legal representatives or
councilmen and have managerial powers over a company, commercial group or economic
conglomerate in Brazil. The main requirement to request this kind of visa is that there must be
an investment (direct or indirect) from a foreign company in a Brazilian company. There are
two possible investment options:
•Equal to or greater than BRL 600,000 duly registered at the Central Bank of Brazil, with a visa
granted for 5 years unconditionally; and
•Equal to or greater than BRL 150,000 duly registered at the Central Bank of Brazil, with the
valid visa initially for 2 years and a requirement of creating 10 new jobs.
Temporary Work Visas: Temporary visas are divided in subcategories and will be granted
according to the activity to be performed in Brazil.
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The immigration condition will determine the point at which the professional becomes
responsible for Brazilian income taxes as well as the labor/payroll obligations.
Labor aspects
Despite the need for qualified labor in Brazil, some legal restrictions are imposed on the hiring
of foreign professionals as regular employees of an entity in Brazil (with a labor contract in
Brazil), with the objective of safeguarding local employment.
The Brazilian labor law imposes a limit based on a two thirds rule in which legal entities are
required to maintain a proportion of two Brazilian employees to every one foreign employee.
This ratio also applies for payroll purposes.
The Brazilian Labor Law also ensures specific rights for regular employees (regardless of
citizenship), such as: 30 days’ vacation for each year of work (or pro-rata), one third of the
monthly salary as additional vacation payment, a 13th month salary, as FGTS: an additional 8%
of the salary paid by the employer and deposited into a specific bank account, which can be
withdrawn only under certain circumstances.
Labor rights do not necessarily apply to statutory professionals (investors, statutory directors,
legal representatives), but can be offered by the company.
In addition to that, social security contributions are due by both parties the employer and
employee. It is important to emphasize that labor rights and social contributions shall levy on
global compensation. Therefore, it is highly recommended that one analyzes the employer costs
on the compensation package to be offered to professionals assigned to Brazil for optimal
budget management.
Income Tax aspects
All individuals considered as residents of Brazil are subject to an income tax on worldwide
income on a cash basis (“pay-as-you-earn” system). The tax year is from January 1st to
December 31st. However, for the year in which a foreign citizen becomes a resident of Brazil,
the tax period will be from the residency date to December 31st.
Foreign citizens arriving in the country and holding a Permanent Visa or Temporary Visa with a
local labor contract are considered as Brazilian residents for tax purposes as from the first date
of entry into the country with such visas.
Exceptions apply to members of the Administrative Board, even if they hold permanent visas,
and also to the holders of temporary work visas without employment contracts in Brazil.
Generally, tax residency will be acquired on the date on which the individual exceeds 183 days
in the Brazilian territory during a rolling 12-month period.
The income tax rate in Brazil ranges from 0% to 27.5%, as based on a progressive tax table. For
2016, payable in 2017, annual income over BRL 55,976.16 is taxable at the maximum rate of
27.5%.
A Brazilian citizen, resident in Brazil will be liable for tax compliance as stated below:
•Monthly income tax return on a worldwide income;
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•Capital gains taxation on the sale of assets and rights;
•Annual income tax return (Declaração do Imposto sobre a Renda da Pessoa - DIRPF), to be
filed from March to April;
•Declaration of Brazilian Capital Abroad (Capitais Brasileiros no Exterior - CBE), applicable to
individuals with more than USD 100,000 of wealth located outside of Brazil; and
•Termination of the fiscal residence when permanently leaving the country.
Cross-border challenges
When doing business abroad, there are always some challenges that executives and investors
encounter, due to being in a different country and business environment. Performing an M&A
deal in Brazil is not different. Therefore, an investor may face some challenges related to
Size of the country
Due to its continental size, Brazil may present some challenges related to logistics when doing
deals depending on the region of the country. Currently, São Paulo is the main financial and
business hub of the country and count with essential business infrastructure as any other global
financial center in the world. Therefore, most of the banks, law firms, advisors and corporate
headquarters are based in São Paulo city.
Nonetheless, the country also presents great opportunities when looking at its different regions.
The country has a number of relevant cities spread all over its territory and several of them have
vibrant economies on each different sector. As an example, there are 14 cities with more than 1
million inhabitants just outside the state of São Paulo.
Cultural aspects
Having such a large territory as Brazil and due to the several external influences over the
colonization process of the country, there are important cultural differences compared to other
nations, and even among the regions of Brazil, each one with its own peculiarities.
Those cultural aspects are also extended to the way of doing business and sometimes it may be
crucial to understand it in order to accomplish a successful deal.
Languages differences
Being a Portuguese speaking country is also another factor that makes Brazil quite different
from all other countries in Latin America. In addition to that, different accents of the language
spoken in each region of the country may be a challenge even for a Portuguese speaking
foreigner. Particularly in larger cities, it is not difficult to find English speakers.
29
Financial growth
Financing Brazilian operations and repatriation of profit
All foreign investments (equity or debt) must be properly registered with the Brazilian Central
Bank (Banco Central do Brasil - BACEN) in order to enable future repatriation of capital and
remittances of dividends, interest, and interest on net equity and inter-company invoices.
Brazilian legal entities can be financed through equity and/or debt.
Funding through equity: Capital contribution
The first foreign exchange inflow of the Brazilian entity is commonly the capital inflow, as set
forth in the bylaws. The main advantage for a Company to be financed through equity is that it
is usually tax neutral, since it does not directly result in recognizing foreign exchange gains or
losses at the Brazilian entity level. However, crossborder capital contributions trigger IOF at a
0.38% rate.
The Articles of Incorporation (bylaws) of the Company reflecting the initial share capital and
subsequent changes must be filed with the Board of Trade within a 30-day period. The
incorporation of a Brazilian entity by a nonresident shall be registered with the BACEN via the
Electronic Declaratory Registration at the BACEN’s system (Registro de Investimento Direto
no Brasil -RDE-IED). Lack of proper registration may jeopardize future remittances in foreign
currencies with respect to capital invested.
Funding through debt: Cross-border loan
The main benefit of funding through debt is that the interest paid would be potentially
deductible for corporate tax purposes. In case the company identifies the interest expenses to be
necessary to perform its economic activities, and that such expenses comply with Brazilian
transfer pricing rules and thin capitalization rules, these expenses shall be deductible for
corporate tax purposes.
From a formal perspective, a loan agreement must also be registered with BACEN. Lack of
registration may jeopardize the payment of principal and interest abroad as well as tax
deductibility of interest.
IOF is currently reduced to 0% on inflows of cash related to loans with maturity date greater
than 180 days otherwise, IOF is triggered at a 6% rate on inflows of cash. As the IOF legislation
is constantly changing, it is important to consult a tax expert before entering into loan
agreements.
Repatriation of profits
The most common type of repatriation of profits is through dividend distribution. Dividends are
paid based on the net accounting income after taxes and are not subject to a withholding tax or
IOF. Payments can only be executed to shareholders.
Any of these payments need to be agreed upon at a shareholders’ meeting, and registered with
the Board of Trade and the BACEN before it can be executed.
Another possibility is the interest on net equity (referred to as INE). INE is a kind of hybrid
compensation with some features comparable to dividends and other characteristics similar to
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interest, which is calculated by applying the long-term interest rate on the adjusted equity,
considering all the equity variations that occurred during the year.
Payment and tax deductibility of INE are limited to whichever is greater: 50% of the net
accounting income or 50% of retained earnings and profit reserves. A 15% withholding tax is
applicable to this payment.
Moreover, as mentioned above, a company could be funded through a cross-border loan. In this
scenario, the company would pay interest to the lender located abroad. Interest payments or
credits are subject to a 15% or 25% IRRF rate in Brazil. In order to allow the tax deductibility
of interest, thin capitalization and transfer pricing rules shall be observed, as aforementioned. In
addition, the loan agreement should be duly registered with the BACEN.
Other forms of capital repatriation can be: Payment of Royalties, Management Fees, Sharing
Expenses, among others. All forms of capital repatriation should be analyzed prior to payments,
to allow tax efficiency for the investor.
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Compliance in Brazil
Overview
Compliance has become increasingly important in Brazil, and for that matter the country has
become a signatory to important international agreements and conventions such as the G20, the
Convention of the Organization of American States - OAS, the Organization for Economic
Cooperation and Development - OECD and the United Nations. As a member of these
international organizations, the country has made global commitments to fight corruption,
money laundering, unfair competition and other practices of crimes against the economy and
social development.
Aiming to implement the commitments made in these international agreements, and as a
response to the society´s demand, the Brazilian government has taken steps to curb these
practices, summarized ahead:
•Law nº 12,846/13: known as Anti-corruption law, which provides for administrative and civil
liability of legal entities for the commission of acts against public, national or foreign
administration, and other measures.
This law calls for leniency if the company complies with an extensive compliance program.
This has led to the increased importance of the Compliance officer within medium to large sized
organizations. The role is mostly fulfilled by lawyers with business background, and is still
being developed.
It is very important to ensure that the newly formed company complies with all rules, also
related to FCPA and UK Bribery Act, and when using third parties as suppliers to include in the
engagement letter that they comply with the law. If the presence in Brazil originates from a
Joint-Venture, Merger & Acquisition, Consortium, among others, one must ensure that lawyers,
accountants and/or consultants review important internal processes and the management of the
company to invest in order to access compliance to this law. Special attention should be given to
interactions with government and relations with stakeholders.
•Law nº 9,613/98: known as Money Laundering Law – deals with money laundering crimes
and created the Council For Financial Activities Control (Conselho de Controle de Atividades
Financeiras - COAF), a regulatory agency which is responsible for regulating and controling
financial activities, preventing illicit activities related to money laundering, and other measures.
The evidence of the applicability of this law is visible in opening a bank account, executing a
foreign exchange transaction, getting a credit card or a cell phone, and in the digital ancillary
obligations a company needs to file.
•Law nº 12,529/11: this law strengthened measures to combat crimes against the economy,
focusing on formation of monopolies and price cartels. It deals with the competition market,
with antitrust, in line with global practices. In this scenario, it is possible to highlight the
Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica
- CADE) as an important player in analyzing and regulating these practices.
Since the subject is still being dealt with at all levels, please enquire with your legal counsel in
relation to updates of your specific business.
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How to import into Brazil Up to 1990 Brazil was a closed market for imports. Since then the import volumes have
increased year after year.
Besides the Brazilian Central Bank (Banco Central do Brasil - Bacen), the Ministry of
Development, Industry and Trade (Ministério da Indústria, Comércio Exterior e Serviços -
MDIC), the Secretariat of Foreign Trade (Secretaria de Comércio Exterior - SECEX), and the
Department of Federal Revenue of Brazil (Secretaria da Receita Federal - RFB), there are other
agencies, such as the Brazilian Health Surveillance Agency (Agência Nacional de Vigilância
Sanitária - ANVISA), the Federal Police Department (Departamento de Polícia Federal - PF),
and the Ministry of Agriculture, Livestock and Supply (Ministério da Agricultura, Pecuária e
Abastecimento - MAPA), which are also involved in the import process, depending on the type
and fiscal classification of the product. Although there is an integrated computerized system
called Siscomex, which manages and registers all information related to foreign trade
operations, the process of importing products into the Brazilian market is still a complex task,
due to the myriad of laws, decrees and regulatory instructions regarding the matter.
Certain procedures should be adopted even before making the purchase, placing the order with
the vendor and shipping the merchandise, since specific goods require licenses even before their
shipment. The importer or the entity ordering the product must register their fiscal and financial
capacity at Siscomex, in a System called System of Registration and Tracking of the Customs
Agents’ Activities (Ambiente de Registro e Rastreamento da Atuação dos Intervenientes
Aduaneiros - RADAR).
The import licenses are obtained from SECEX, which checks the conditions stated in the
Proforma Invoice2. The license issued by SECEX determines the customs tax treatment, as well
as the currency exchange treatment given by Bacen.
At the time of nationalization several documents and actions are required, that is, actions that
befall in the course of the customs clearance process (despacho aduaneiro).
Once a customs clearance declaration has been filed, the goods will proceed through the
customs clearance process. In Brazil, in addition to the registration of this declaration, goods are
subject to the import parameters defined by the fiscal channels (green, yellow, red and gray)3.
The Customs Broker will be notified, through the Siscomex, when the goods have been
released. The proof of release is the Import Certificate (CI), printed through Siscomex by the
importer.
2 Proforma Invoice: Document issued by the exporter to the importer, in order to formalize the international
negotiation process. It can be considered as the first agreement between both parties, while not generating payment
obligations by the buyer.
3 Fiscal Channels:
• Green: Automatic clearance of the imports;
• Yellow: Clearance after the conference of all documents and of the import declaration (DI);
• Red: Clearance after the conference of all documents of the DI and verification of the goods; and
•Gray: Clearance after the conference of the DI, verification of the goods, and the preliminary examination of the
customs value.
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There are three import models, which are:
• Import on Own Account (Importação Própria);
• Import by order (Importação por Encomenda); and
• Import on behalf of Third Parties (Importação por Conta e Ordem de Terceiros).
The importer needs to be cautious with changes to laws and regulations, in view of the great
number of amendments that usually occur in the Brazilian legislation.
An operating error could be quite costly since Brazil is a country with continental dimensions.
Thus, logistic planning is very important for a more effective market distribution.
Import models
Import on own account
The importer looks for suppliers, imports the goods and distributes them throughout the country,
being responsible for all logistics procedures.
Under this model, the importer is the owner of the goods. He/she is responsible for all costs
involved in the transaction, financing the operation with his/her own resources, paying the
applicable taxes and contracting the currency exchange directly. The importer undertakes the
activity risks and enters into commitments with the vendor abroad, sometimes through a
distribution agreement or a purchase agreement, and promotes sales within the domestic market.
Import by order
Similar to the aforementioned model, the importer (trading company) is also the owner of the
imported goods and responsible for funding the operation. However, in this format, there needs
to be a local buyer, to whom the goods are purchased for.
The importer sells the merchandise to the local buyer and has no risk regarding the subsequent
sales and distribution of the imported goods within the domestic market.
Import on behalf of third parties
In this model, a purchaser interested in a particular commodity looks for a trading company –
the importer – to import the goods on behalf of the interested buyer. The bill of lading/airway
bill 4 is consigned to the importer, who holds the imported product possession, while the
ownership belongs to a third party (purchaser/buyer) who funds the operation.
Such party has the option of making advance payments to pay for the taxes on the operation and
other expenses. The purchaser contracts the currency exchange and the importer only provides
services. The purchaser and the importer are jointly responsible for the taxes levied on the
imported goods.
4 Bill of Lading is a contract between a shipper and carrier listing the terms for moving freight between specified
points, used for sea transport. Airway bill is also a contract and has the same conditions, but it is used for air
transport.
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Import taxes and duties
Import Tax – II
Import Tax (Imposto de Importação - II) is a Federal tax payable upon customs clearance of
foreign goods, at the moment the import declaration (Declaração de Importação - DI) is
registered, in respect of the “customs value” of the goods according to the General Agreement
on Tariffs and Trade (GATT). Regardless of the import model, the taxpayer is the importer who
promotes the entry of goods into the Brazilian territory. The II rate varies according the
classification of the imported goods pursuant to the Brazilian External Tariff Code (Tarifa
Externa Comum - TEC), which includes the same classification system as the Harmonized
System (HS) as determined by the World Customs Organization (WCO). II rate is a non-
recoverable tax; therefore, it is a cost to the importer.
Tax on manufactured products – IPI (imports)
The Brazilian Federal Value - Added Tax on Manufactured Products (Impostos sobre Produtos
Industrializados - IPI) levies on “finished products” (whether foreign or domestic), which are
resulting from some sort of industrial process even if this process is incomplete, partial or
intermediary.
In case of importation, the IPI is levied upon customs clearance of the goods. Similar to II, IPI is
payable by the importer at the moment the DI is registered.
The IPI is levied in respect of the price of the import (i.e., the product’s customs value) plus II.
The IPI rates vary according to the IPI Tariff Table (TIPI) that includes the same classification
system as TEC.
The subsequent transactions, after importing, does also trigger IPI, even when it involves a
buy/sell transaction or transference delivery, as the case of import on behalf of third parties
model.
The IPI is a non-cumulative tax and, therefore, the amount charged in each successive taxable
transaction is deducted from the current transaction.
Value Added Tax on goods and services – ICMS (imports)
The Tax on the Distribution of Goods and on Interstate and Intermunicipal Transportation and
Communication Services (Imposto sobre operações relativas à circulação de mercadorias e
sobre prestações de serviços de transporte interestadual, intermunicipal e de comunicação -
ICMS) is levied by the States on the legal, physical or economic circulation of the goods on
imported products. The ICMS taxpayer is the businessman, manufacturer or producer who
undertakes the shipment of the goods, or who imports them from abroad and who provides
services. In other words, imports and local transactions trigger ICMS including the subsequent
transactions of imported product even those imported under the “on behalf of third parties” or
‘‘by order of third parties” models.
In case of importation, the tax basis for calculation of the ICMS is the customs value of the
goods, plus the II, IPI, PIS-Import (see next topic) and COFINS-Import (see next topic), the
ICMS itself and customs expenses. Regardless of the import model the duty taxpayer is the
importer.
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The general ICMS rate imposed by the majority of the Brazilian States on intrastate transactions
is 17%. Interstate transactions are usually subject to 12% (or 7% for taxpayers resident in the
States of the Northern, Northeast and Middle-east regions, and the Espírito Santo State).
As per Resolution 13, dated April 25, 2012 (RSF 13/20125), the Brazilian Federal Senate
reduced to 4% the ICMS interstate rate applicable to imported goods. The reduction came into
effect on January 1st, 2013. The 4% rate applies to imported goods that, after clearance, either:
• Do not undergo any manufacturing process; or
• After processing, assembly, packaging, repackaging, renewal or refurbishment, result in goods
that have an “imported content”4 of more than 40%.
The reduced interstate ICMS rate of 4% does not apply to transactions involving:
• Imported natural gas;
• Goods that do not have domestic equivalents (which will be determined by Camex, the
Foreign Trade Chamber); or
• Goods that are manufactured under basic productive processes dealt with in Decree-Law
288/07 (The Manaus Free Trade Zone), and in Law 8,248/91, Law 8,387/91, Law 10,176/01
and Law 11,484/07.
Similar to IPI, ICMS is also a non-cumulative tax. Therefore, the ICMS paid may be offset
against the ICMS payable on future transactions. Despite the noncumulative system, as a
consequence of RSF 13/2012, the importer may cumulate ICMS credits.
For this reason, among others, current corporate solutions must include customs planning when
importing goods into Brazil comparing direct and indirect import models.
PIS and COFINS (imports)
PIS-Import and COFINS-Import are both federal contributions levied on the entrance of foreign
goods into Brazilian territory.
These taxes are levied on the customs value of the goods. As a general rule, such contributions
are due at PIS-Import’s rate of 2.10% and COFINS-Import’s rate of 9.65%. Under the non-
cumulative system, these contributions are levied, as a general rule, at the combined rate of
11.75%.
Based on Provisory Measure No. 563, dated on April 3, 2012 (MP 563/2012), converted into
Law No. 12,715, dated on September 17, 2012, after August 1, 2012, COFINS-Import’s rate for
certain products was increased resulting in the total rate of 10.65%. Therefore, such
contributions are due at the combined rate of 12.75%.
5 RSF 13/12 defines “imported content” as the ratio between the value of the imported portion of the goods and the
total value of the goods shown on the ICMS invoice issued on exit of the goods from the seller’s establishment. The
rules and procedures to be followed in the Imported Content Certification process will be issued by National Tax
Policy Council (Conselho Nacional de Política Fazendária - CONFAZ).
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PIS/COFINS-Import are charged in line with the noncumulative system, in such a way that, if
the importer is taxed under the non-cumulative system, he/she may be entitled to certain credits
in relation to PIS/COFINS-Import he/she pays upon the importation of goods.
In case of importing goods under the “on behalf of third parties” model, the purchaser of the
imported goods is entitled to register the PIS/COFINS credits. Internal transactions are also
subject to Contribution to PIS on gross revenue and COFINS on gross revenue, which consist of
federal contributions levied on monthly basis, on the company’s revenues.
The applicable tax rates, as well as the possible entitlement to certain credits, will vary
according to whether the taxpayer is subject to either the cumulative or noncumulative system
contributions.
Under the cumulative system, as a general rule, these contributions are levied at the combined
rate of 3.65% on revenues arising from the sale of goods and/or rendering services, without the
right to use any credits.
AFRMM
Freight Surcharge for Renewal of the Brazilian Merchant Marine (Adicional ao Frete para
Renovação da Marinha Mercante - AFRMM) is a due to support the development of merchant
marine and shipping construction. AFRMM is charged at a general rate of 25% over the
international maritime freight and at 10% over the costal navigation freight.
Import transactions in Brazil may face additional costs and fees, such as Siscomex Fee, harbor,
warehousing, foremanship fees, etc.
Before importing goods into Brazil, besides the taxes abovementioned, it is also recommendable
to verify all these costs and fees to better valuate the entire import process.
Customs-related litigation and Tax-related litigation associated with the
import
Fiscal classification
II and IPI rates vary according to the classification of the goods in the TEC or TIPI,
respectively. Correct classification of products is vital in order to certify that the right amount of
duty is paid and to ensure that any special measures which are also linked to the classification
code may be taken. In case the company fails to establish the right classification, it may pay
more than due (obtaining a contingent return is a costly process) or less than due (another costly
process that includes fines, which may give rise to a lawsuit for failure to pay taxes).
Customs valuation
Customs laws require that all imported merchandise be valued. Proper valuation is important for
many reasons. Most types of customs duties are assessed ad valorem – that is, based on the
value of the merchandise.
Even where duties are assessed on a “specific” basis – based on quantity – valuation is still
important. Valuation is often used as the basis for customs fees, excise taxes, and value-added-
taxes. It may be a support base required for the proper use of the customs declaration and import
license. An error in valuation may result in the underpayment or overpayment of duties, or in a
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failure to satisfy import restrictions. Persistent errors may lead to fines and penalties, or
shipment delays resulting from product examinations by customs officials.
All products imported into Brazil and submitted to customs clearance are subject of customs
value control, which consists of checking the compliance of the customs value as declared by
the importer with the rules set forth in the Customs Valuation Agreement (OMC). The transport
cost, expenses related to the loading, unloading and handling, as well as the insurance cost of
the product, shall be added to the customs amount. Some items can be excluded (e.g. purchase
commissions, interest rates, costs of assembly performed subsequently to the import), but others
must be included (e.g. costs of packaging, royalties, and licensing fees the purchaser should
pay) in order to determine the product sum.
There are six methods available to determine the product customs value. Most countries use a
valuation method that adopts – or is based on – the World Trade Organization Customs
Valuation Agreement. The common method is based on the actual sales price between the buyer
and seller, with certain adjustments. Other methods exist.
Some countries use a method based on the prevailing export market price of identical, similar,
or comparable goods. Some countries use a method based on the domestic price of identical,
similar or comparable goods.
Transfer pricing
The effects of the legislation related to the transfer pricing are triggered whenever foreign trade
operations are performed between related parties. The exclusive distributor, even if without a
contract, is equally regarded as entailed. The legislation aims at identifying and levying
assumptions where the profit is made abroad, what occurs in a situation where the importer pays
too “expensive” in the import or sells too “cheap” in the export, and in both instances the
entailed party – abroad – makes a greater profit.
Origin and source
In compliance with the trade agreements for industrialized products, a preferential import tax
rate may be applied in Brazil, particularly for those products originated from Mercosul
(Argentina, Paraguay, Uruguay and Venezuela – Bolivia is still in accession process) and from
ALADI (Argentina, Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay,
Venezuela, Cuba and Panama) member countries. In this case, it is essential to identify the
origin of the goods subjected to preferential treatment.
In order to be benefited with the preferential treatment, a valid Origin Certificate is required.
Any errors and/or non-accuracy of the information in such Certificate, will have the importer
subjected to all taxes due (the preferential treatment does not apply) and probably he/she will
also be subjected to a fine.
Brazil applies non-preferential rules under which establishes that when materials or inputs
originate from other countries are used and the manufacturing process consists only of
assembling, selecting, fractioning, diluting or packing, the product will not be considered as
originated from that country, even if these operations alter the product classification at 4 digits6.
6 The tax classification used in Brazil and Mercosur is Mercosur’s Common Classification (Nomenclatura Comum do
Mercosul - NCM). The NCM consists of eight digits: chapter; position; subposition at 1st level (simple); subposition
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This measure was designed to avoid initiatives to evade antidumping duties. Goods that are
subject to antidumping duties, when imported from non-affected countries, shall be supported
with Non-preferential Origin Certificate.
Ex-tariff
A tax exemption or tax reduction may be obtained in instances when demonstrating that the
imported product has no national similar product. There are currently more than 1,000 (one
thousand) products in the ex-tariff listings, released through Resolutions by the Foreign Trade
Chamber of Brazil (www.mdic.gov.br).
A national product is regarded as similar to a foreign product and is able to replace it if: upon
observing the equivalent quality and proper specifications for the intended purpose, its price is
not higher than the cost of the imported product plus the taxes placed on the import, and has the
regular or current delivery time for the same type of product.
It must be generally demonstrated that the national industry would not be able to manufacture or
offer an equivalent to the imported product and the entities, which represent the economic
activities are called to pronounce on the similar production in the country.
Inquiries
Should the taxpayer be in doubt about the law (tax legislation interpretation) and about the
product correct fiscal classification, he/she may formulate an administrative Ruling before the
competent authorities.
As long as the Ruling is pending a solution, the taxpayer/inquirer that is performing any
operation relating to payment of taxes on the inquired product or the interpretation of the legal
provision under the inquiry cannot be levied.
Brazilian flagged vessel
Goods imported by any organization from the Federal, State, and Local Public Administration,
either directly or indirectly, and any other product to be benefited from federal tax exemption or
reduction has to be transported on a Brazilian flagged vessel. In order to be benefited with any
tax exemption or reduction, in case there is not possible to ship the goods on a Brazilian flagged
vessel, a previous certificate of release of prescribed load shall be required at the Brazilian
National Agency of Waterway Transport (Agência Nacional de Transportes Aquaviários -
ANTAQ).
Incentives and financing
In order to attract investments, some Brazilian States have granted fiscal incentives, which
consist of a full or partial reduction of the ICMS applied on the import, in such a way to
minimize the tax cost of the foreign trade operation.
Some fiscal incentives worth mentioning are the Investment Incentive Program in the State of
Espirito Santo (Programa de Incentivo ao Investimento no Estado do Espírito Santo - INVEST-
ES); Differentiated Tax Treatment from the State of Santa Catarina (Tratamento Tributário
at 2nd level (composite); Item and sub item. Ex: 8708.29.99 – 87 (Chapter) 08 (Position) 2 (Subposition at 1st level)
9 (Subposition at 2nd level) 9 (item) 9 (subitem).
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Diferenciado - TTD); Promotion of Cargo Handling by the Ports and Airports from the State of
Rio de Janeiro (Programa de Fomento à Movimentação de Cargas pelos Portos e Aeroportos
Fluminenses - RIOPORTOS); among dozens of other incentives which were established,
structured on the granting of presumed credit, debit charge back, reduction of per cent rate or
calculation base, payment time extension, or installment payment of the tax.
There are also incentives of a financial nature, where the ICMS is paid in full, but the importer
is entitled to favorable financing conditions from the State Development Bank. One of such
incentives is the financial incentive from the State of Espírito Santo through FUNDAP (Fundo
de Desenvolvimento das Atividades Portuárias).
Special customs schemes
The special customs schemes are intended to boost imports. These tax programs provide
benefits in the form of exemption, suspension and refund of taxes levied on imported products
or on locally purchased products, provided the goods are subsequently exported.
Temporary Admission
The goods temporarily admitted to the country for economic use (providing of services or
production of other goods) are subject to tax payment proportionally to their stay time in the
country. The proportionality is obtained by taking into account the period of time the goods
remain in Brazil. Each month correspond to 1% of taxes that shall be paid under the
proportionality method.
The Temporary Admission foresees the total or partial suspension (case of goods for fairs and
sporting events, for example). The payment shall be proportional to the length of stay, up to the
applicable rate on the permanent importation.
A variant of this regime is the special customs regime of temporary admission for an active
improvement, which allows the entry, for a temporary stay in the country, with tax payment
suspension, of foreign or de-nationalized goods intended for active improvement operations
(industrialization or repair) and further re-export.
Drawback (suspension, exemption, return)
The tax exemption – under the customs special drawback regime – is granted on the import of
goods to be used in the manufacturing, supplementation or packaging of products to be exported
(in a quantity and quality equivalent). It is an export incentive and may be applied on the
following modes: suspension (of the payment of the required taxes in the import of the product
to be exported after the improvement), exemption (of these taxes, in a quantity and quality
equivalent to that used in the improvement, manufacturing, supplementation or packaging of an
already exported product), and return (either in full or in part, of the taxes paid in the import of
an item already exported after improvement).
Bonded Warehouse
This regime allows imported foreign goods (imported with or without currency exchange
coverage) to be stored in a bonded area of public use for a period of up to one year, renewable
for another year, with suspension of the tax payment on the imported goods until
nationalization.
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This regime further allows a foreign product to remain at a trade show, exhibition or a similar
event, held in a private use area previously bonded for such purpose. A product admitted under
this regime can be nationalized and subsequently shipped for consumption, or exported, by the
consignee or purchaser.
A product imported with a currency exchange coverage, which is intended for export, can be
admitted under this regime.
The bonded warehouse special regime at the export allows the storage of a product intended for
export, and comprises the common regime mode (storage of goods at a public use room, with
tax payment suspension), and extraordinary regime mode (storage of goods at a private use
room, with the right to use the fiscal benefits contemplated for export incentive, prior to its
actual shipment abroad). The latter is exclusive for trading companies.
Temporary Export
The temporary export regime allows exit from the country – with suspension of the export duty
payment – of a national or nationalized product, intended for re-importation within a certain
time in the same conditions and state it was exported.
The temporary export regime for passive improvement allows the exit from the country, for a
certain time, of a national or nationalized product to be submitted to the transformation,
preparation, improvement or assembling operation abroad, and the subsequent re-import, in the
form of a resulting product, with payment of taxes on the added value. It also applies to the exit
from the country of a national or nationalized product to be submitted to a fixing, repair or
restoration process.
Certified Bonded Warehouse (Depósito Alfandegário Certificado – DAC)
The certified bonded warehouse regime allows considering as exported, for all fiscal, credit, and
currency exchange purposes, the national product deposited in a bonded area, sold to a person
headquartered abroad against a contract for delivery in the national territory and to the order of
the purchaser. The regime may also be operated at a harbor facility of a mixed private use, upon
complying with the provisions stipulated by the Federal Internal Revenue Service (Secretaria da
Receita Federal).
Blue Line – Express Customs Clearance
This program is also available, and it is based on the international Authorized Economic
Operator (AEO) concept. This program promotes voluntary compliance with customs
obligations by offering preferential treatment in customs clearance procedures for import, export
and transit transactions. The foreign trade operator shall demonstrate compliance with safety
standards applied to the logistics chain or the tax and customs obligations, as well as with
reliability and compliance levels required by the Brazilian Program of the AEO, in order to be
certified. Certificated operators in the Brazilian Program of AEO will be granted with benefits
that relate to the facilitation of customs procedures in Brazil or abroad.
Brazilian Authorized Economic Operator Program
Brazilian AEO Program is the certification of supply chain operators that represent low risk in
their operations, both in terms of physical security of the cargo as in the performance of
fulfilling requirements. The application to the program is voluntary. Until 2019, Brazilian AEO
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Program aims to achieve the target of 50% of export and import declarations registered by AEO
certified companies.
Customs forwarding – Process and documents
Commercial Invoice
The commercial invoice should contain the exporter’s and importer’s full name and address,
goods specification, brand, numbering and, if applicable, volume reference numbers; the
quantity and type of volumes; gross weight and net weight; origin, source and acquisition
countries; unit and total price and, if applicable, the amount and nature of the reductions and
discounts granted to the importer, freight, and other expenses related to the goods specified in
the invoice; payment terms and currency; and selling condition term (Incoterm).
The Federal Internal Revenue Service may formulate other requirements, the use of electronic
process, requirement of a consular visa, instances of non-requirement, instances of waiving its
presentation, number of copies it should be issued in and its destination, among other elements.
Incoterm
The Brazilian import and export process allows any sales condition practiced in the international
trade, although some may have barriers that make their use unfeasible, since they are not
compatible with the Brazilian legal system. The International Commercial Terms (Incoterms),
determined by the International Chamber of Commerce (ICC), were developed to promote
accordance between international businesses and are a condition to be included in the purchase
and sale agreement, and it does not mean that this inclusion will substitute the contract. Usually,
the Incoterms set conditions relating to the place of delivery of the product and can include or
not conditions related to the price negotiated, to the expenditure incurred for the freight (inland
and/or international), expenditures related to foremanship, insurance, among others. In Brazil,
there are restrictions when contracting the freight (even related with flagged vessel nationality)
and insurance. They are defined by the type of the product, the country of origin, as well as by
the eventual tax exemption in the import process.
Bill of Lading and Cargo Manifest
The product from abroad, transported by any mode, is registered in a cargo manifest, presented
by the responsible for the carrier vehicle, with a copy of the corresponding Bills of Lading,
which identify the cargo unit in which the product supported by it is contained. For each
unloading point in the customs territory the vehicle must bring as many manifests as are the
locations – abroad – where it has received cargo.
The original bill of lading, or a document with an equivalent effect, is the proof of the product
possession or ownership. Each bill of lading must correspond to a single import declaration,
safe any exceptions stipulated by the Federal Internal Revenue Service.
Certificate of Origin
Certain goods may be subject to tax exemption or tax reduction as a result of international
treaties entered into Brazil. The customs treatment deriving from an international act firmed
applies exclusively to a product originated from the beneficiary country.
A product’s origin country is where it has been produced or, in case of a product resulting from
a material or manpower from more than one country, where it has undergone a substantial
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transformation, that is, which confers on the product a new individuality. The purpose of the
Origin Certificate, or a similar, is to documentarily attest the origin country of the product,
which is determined according to specific locally added contents.
As previously informed (Origin and Source), goods that are subject to antidumping duties, when
imported from non-affected countries, shall be supported with a Non-preferential Origin
Certificate.
Import License (Licença de Importação – LI)
The import of a product may be subject to licensing, which will take place either on an
automatic (in the great majority) or non-automatic way by means of the Siscomex.
Depending on the product to be imported, it requires the manifestation by other agencies, other
than the customs authority. This is what takes place, for example, with products subject to the
health control authority, when the consent of Brazilian Health Surveillance Agency (ANVISA)
or Ministry of Agriculture, Livestock and Supply (MAPA) is required. Other products may be
subject to the consent of the Army, the Brazilian Institute of Environment and Renewable
Natural Resources (Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis
- IBAMA), Federal Police (PF), among others. Thus it is important to check before sending the
product since some LI requires a previous authorization even before shipping the goods.
Import Declaration (Declaração de Importação – DI)
The import declaration is the base document for the import forwarding process, and should
contain the importer’s identification, as well as the product identification, classification, origin,
and customs value.
The import declaration register consists of its numbering by the Federal Internal Revenue
Service, by means of the Siscomex, when the import forwarding process is considered started.
The Brazilian legislation stipulates time frames to start the forwarding process of up to ninety
days from the unloading, if the goods are in a primary zone bonded area; of up to one hundred
twenty days from the goods entry in a secondary zone bonded area; and up to ninety days,
computed as of the receipt of the postal remittance arrival notice.
The import declaration should be instructed with the original copy of the bill of lading or an
equivalent document. The first original of the commercial invoice, signed by the exporter; the
proof of payment of the taxes, if required; and other required documents as a result of
international agreements or under the law, regulation or a regulatory act.
The customs-related taxes (II, IPI, PIS-Import, and Cofins-Import) should be paid by the time
the import declaration (DI) is registered. Usually, the state tax (ICMS) is also paid before
completing the customs forwarding process.
Proof of Import (Comprovante de Importação – CI)
It is a document evidencing the import, issued after the customs clearance of the product which
declaration has been registered in the Siscomex. Customs clearance in the import is the action
through which the customs checking conclusion is registered. After customs clearance, the
product delivery to the importer will be authorized.
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Non-taxing rules entailed to the import
As a general rule the importers are assigned responsibilities inherent in the:
• Consumer’s Protection Code;
• Environmental Legislation; and
• Goods subject to Health Control, in addition to specific rules in the import of Chemicals,
Drugs, and Explosives.
Import payment methods
The import payments can be made in various ways, all of them following the methods normally
used worldwide, with a contingent financing by the Exporter (Supplier Credit) or by the
Importer, by means of financial institutions in Brazil or Abroad (Buyer Credit).
The simplest and most common used methods are: Advance Payment, Documentary Collection,
Documentary Credit, and Open Account. These methods are shortly described ahead.
Cash in advance
The payment, in this method, is made prior to shipment in instances of goods, which will be
imported directly from abroad on a final basis, including under the ‘drawback’ regime, or when
intended for admission to the Manaus Free-Trade Zone, to Free-Trade Areas, or Industrial
Warehouse, or for the nationalization of goods which have been admitted under other special or
atypical customs regimes.
The currency exchange settlement is allowed as long as the advance payment for the import is
supported on commercial operations actually contracted abroad, and their condition is
contemplated in the trading contract, Proforma Invoice or an equivalent document where the
goods sums and delivery time are expressly contemplated. The maximum advance time is one
hundred eighty (180) days as of the contemplated date for the shipment abroad or for the
product nationalization. Exclusively for machines or equipment with a long production or
manufacturing cycle on request, the advance time should be compatible with the production or
item commercialization cycle, noting that the maximum advance time is one thousand and
eighty (1080) days.
On this transaction method, the importer, in possession of the Proforma Invoice (or an
equivalent document) makes the payment to the exporter (by contracting a currency exchange
operation). Once the receipt is confirmed the exporter performs the shipment and sends the
original documents (via courier service) directly to the importer. In possession of the original
shipping documents the Importer proceeds to the product nationalization.
In the event the product shipment or nationalization does not occur up to the reported date, the
importer should provide the repatriation of the sums corresponding to the payments made,
within thirty days.
Documentary collection in cash or on credit
In this method the exporter ships the goods and hands the documents to a bank so his/her
counterparts abroad provide the collection with the importer. The documents are usually
followed by a draft (bill of exchange), in cash or credit, drawn by the exporter against the
importer. It is a note representative of the debt.
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If the collection is IN CASH, the Importer makes the payment to the Bank (by contracting a
currency operation), and picks up the shipping documents in order to subsequently conduct the
product nationalization.
If the collection is ON CREDIT, the Importer performs the acceptance on the draft (bill of
exchange or cambial), picks up the shipping documents, and proceeds to the product
nationalization. Two business days prior to the draft due date, the Importer makes the payment
to the Bank (by contracting a currency exchange operation).
Documentary Credit or Letter of Credit
Documentary credit is a method used on the high-risk, nonpayment operations (commercial
and/or political), and it constitutes a method through which the bank (issuing bank) – acting on
request and on account of the importer (taker) – undertakes the commitment, in last instance, to
pay to the exporter (beneficiary). Thereby, it allows a bank to take on the role of the operation
payer.
Being a firm commitment by the issuing bank (as it should be irrevocable), it may involve an
additional commitment by another bank (confirming bank), imparting a greater safety to the
operation. Such commitment is obviously conditional: the payment is assured as long as the
beneficiary complies with all terms and conditions stipulated in the “credit”, and presents the
required documents.
If the Letter of credit is IN CASH, the Exporter will present the shipping documents with the
trading Bank, which makes the payment (provided that the documents are in good order),
advises the Issuing Bank on the negotiation, and forwards the shipping documents asking for the
reimbursement. The issuing Bank advises the Importer that makes the payment to the Bank (by
contracting a currency exchange operation). Upon the arrival of the shipping documents, the
Issuing Bank hands the shipping documents to the Importer who conducts the product
nationalization.
If the Letter of Credit is IN TERM, the Exporter will present the shipping documents attached
with a draft to the trading Bank, which makes their remittance (provided that the documents are
in good order) to the Issuing Bank requesting the reimbursement on the liability due date.
The Importer gives his/her acceptance on the draft (bill of exchange or cambial), picks up the
shipping document, and conducts the product nationalization. Two business days prior to the
draft due date the Importer makes the payment to the Bank (by contracting a currency exchange
operation), which, in turn, reimburses the Trading Bank for payment to the exporter.
Open account in cash or on credit
On this payment method the exporter finances the importer directly in Brazil (Supplier Credit)
without the need for a financial institution in between.
It is indicated for operations where the commercial relationships between the parties are already
established, and there are no assurances on the part of the importer. The financial conditions
should be those which better adapt to the commercial operation characteristics, and may be in
cash or supporting a payment time granted by the exporter.
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This payment method implies the shipment and remittance of the relevant documents by the
exporter directly to the importer prior to the payment. This will not even issue or accept any
note, which may legally bind him to make the payment.
If the Open Account is IN CASH, the Importer makes the payment to the Exporter (by
contracting a currency exchange operation), and subsequently conducts the product
nationalization.
If the Open Account is ON CREDIT, the Importer makes the product nationalization and makes
the payment (by contracting a currency exchange operation) two business days prior to the due
date.
It is worth bearing in mind that after the latest changes made to the Brazilian rules for foreign
currency, the currency exchange contracting, with the actual remittance of funds for paying the
obligations to the exporter, can be made ahead of the invoice original due date, and there shall
be no longer an entailment between the currency exchange operations and their respective
import declarations.
Import financing above 360 days
It is important to inform that both operations directly financed by the Exporter and those
financed by the Importer, via financial institutions, and with time frames longer than three
hundred and sixty (360) days, shall be registered with the Central Bank of Brazil (Banco
Central do Brasil - BACEN), through a Financial Operations Record (ROF), before the product
nationalization, against a declaration by the importer and a formal manifestation by the creditor.
Import financing
Financing for the purchase of goods from abroad are usually made by Brazilian financial
institutions, allowing for a better cash flow of the importer.
Local leasing of imported product is long-term funding option in which a financial institution,
usually aided by a Brazilian trading company, imports the good.
It is usually used for machinery and equipment intended for fixed assets of the importer in
Brazil. In this operation may be included all import costs and eventually the assembly and
installation of the equipment.
FINIMP – Import Financing
It finances the partial or total value of the acquisition cost of a product abroad, enabling the
immediate payment to the foreign exporter as agreed in the negotiation (cash or at maturity). It
may be contracted for settlement in the short term (up to 360 days of shipment) or long-term
(over 360 days of shipment), in this case, it requires the issuance of ROF (Financial Operations
registry).
Forfaiting
Forfaiting or Draw Discount is a foreign trade operation in which the exporter provides
financing to his/her buyer through a bank that approves the importer client’s risk. The operation
consists in the purchase of receivables in the long term (Bill of Exchange, for example) by a
Bank, usually situated in Brazil, without prejudice against the exporter, and with cash payment.
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Logistics
The concept of logistics comprises all activities related to the acquisition, transport,
transshipment, and storage of goods. It is generally understood as particularly related to the flow
of materials (raw materials, intermediate and end products), but also involves services and
information provided to companies.
The areas making up a complete logistic strategy should include: transport; outsourcing;
competitors; human resources; supply chain management; information management; optional
analyses; communication; actual location cost; specialized competency centers; network
projects; insurance limits and insurance coverage.
Maritime transport
It is the most economical method of transportation to move great amounts of cargoes through
long distances, in addition to a huge variety of route options. With a coast spanning 8.5
thousand navigable kilometers, Brazilian ports moved, in 2015, 1.007 billion tons of a wide
variety of imported and exported goods.
The most important Brazilian cities and large consumer centers, like São Paulo and Rio de
Janeiro, are located close to the coast. The southeast region corresponded to 52% of the regional
shifting of cargo, in 2015, as per Brazilian National Agency of Waterway Transport –ANTAQ
(Agência Nacional de Transportes Aquaviários), reaching 523.8 million tons of volume, due to
the clearance capacity of the products. The most important ports of the region are listed ahead:
• Port of Santos;
• Port of Vitória; and
• Port of Rio de Janeiro.
The south region is an alternative for maritime routes and as important as the southeast region.
According to ANTAQ data, the south region was responsible for handling 142.6 million tons of
goods shipped in 2015, with the volume concentrated with, besides internal logistics, China,
United States and Argentina. The region has important ports, as listed ahead:
• Port of Paranaguá;
• Portonave;
• Port of Itajaí;
• Port of Rio Grande do Sul; and
• Port of Itapoá.
Although not included among the seven main Brazilian ports, the ports of the Northeast Region
and the Amazon Basin (Bacia Amazônica) are well developed and have received constant
investments in infrastructure; especially the ports of Salvador, Fortaleza/Pecém, and Manaus.
The region, was responsible for shipping 336.6 million tons of goods in 2015, mainly from
United States, Colombia and Argentina. Must be highlighted the Port of Suape, that is
potentially one of the hubs ports for the South America, and the first in the Northeast in terms of
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general cargo volume. Suape has a conception as port and industrial complex offering
exceptional conditions for new industrial enterprises.
The maritime traffic between the Turkey and Brazil is regular and served by first-class
shipowners. The approximate transit time ranges from 27 to 40 days, depending on the port of
origin. Since the schedule can be changed without any prior notice, all schedules must be
checked with the shipowner before performing any operation.
Cabotage (Coasting navigation)
Aimed at optimizing the use of their ships and serving the entire Brazilian coast, shipowners
started using the hub port concept, in which the international transport ships unload the goods at
a main port, transshipping the loads to smaller ships. These, in turn, perform the coastwise trade
transport along the Brazilian coast serving other ports in Brazil.
Despite the recent growth in the number of container carrying cabotage ships, the number of
departures is still very limited. One of the reasons for the low offering of ships for cabotage is
still the difficulty for a balanced trade, since the north-south cargoes flows are way greater than
the south-north flows.
Air transport
Air transport is quite efficient for loads with reduced weight and volume, high added value, and
those which require an optimized delivery. This method of transportation handles less than 5%
of the Brazilian foreign trade.
Brazil is served by main national and international airlines, with major concentration of
international flights in the southeastern region of the country, particularly in São Paulo. Turkish
Airlines operates a weekly 60-ton cargo flights from Istanbul to Sao Paulo (GRU Airport, São
Paulo/Guarulhos) as of July 2017.
Three of the four busiest airports in Brazil, are located in the southeastern region, two are
located in São Paulo (GRU Airport; and VCP Airport, Viracopos/Campinas International
Airport, in Campinas) and one in Rio de Janeiro (GIG Airport, Rio de Janeiro/ Galeão –
Antonio Carlos Jobim International Airport). This explains why the region accounts for nearly
75% of the air shipments.
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How to do cash management in Brazil
The Central Bank
Brazil’s Central Bank plays a leading role in monitoring and regulating banking infrastructure.
All foreign investments transactions are under the direct control of Central Bank – registration
in order to determine the amounts available for dividend remittance, capital repatriation and
withholding taxes calculation.
The domestic transactions (debits & credits) are allowed only in Brazilian Reais (BRL) – to
operate on the foreign exchange, all incoming financial transactions must be converted to
Brazilian Real. This is a country regulation where Central Bank prohibits banks from opening
accounts in other currencies and beyond the country of residence.
Brazilian payments / Clearing system
The local banks in Brazil offer the widest range of payment options and the main payment
mechanisms to fulfill its different payment needs: supplier payment, payroll and taxes services.
The Brazilian Payment System was structured in order to reduce the interbank settlement risk
(credit and liquidity).
The local clearing houses in the Brazilian market are:
Interbank Payment Clearing House (Câmara Interbancária de Pagamento – CIP)
Private clearing house owned by 48 banks, provides real-time clearing and settlement of
interbank payments.
Checks And Other Papers Clearing Service (Centralizadora da Compensação de Cheques e
Outros Papéis – COMPE)
It is regulated by Central Bank and operated by Banco do Brasil. The clearing schedules are
detailed below:
• Checks – if the place is part of the national clearing system, available in 48 hours (BRL 299.99
and below) or 24 hours (BRL 300 and higher); if it is not part of the system, available in 5 to 7
days;
• Low value electronic transfers (DOCs) and collection documents (boleto) – available in the
next working day.
Reserves Transfer System (Sistema de Transferência de Reservas – STR)
It is a real time gross settlement system (RTGS), regulated by the Central Bank.
Critical payments in terms of value or urgency can be fully settled on a real-time gross basis,
reducing systemic risk in the financial sector.
Banks settle payments by making use of their reserves at the Central Bank, while clearinghouses
use special settlement accounts registered at Central Bank.
Settlements can be:
• Payments ordered by banks or banking clients;
• Securities gross settlements; and
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• Net settlements from clearinghouses.
TECBAN
Private clearing and settlement system used for electronic fund transfers (credit and debit
orders) and ATM transactions.
Cash management in Brazil
Cash management services in Brazil
Payments Collection Account Services Liquidity Management
Electronic Funds Transfer
(EFD) Boleto Collection Current Account
ZBA – Zero Balance
Account
Boleto Payment Identified Deposit Reporting (MT 940)
Legal Obligation
Management
Tax and Utilities Payment Checks Custody Electronic Statement
Payment Order Pickup Services
SWIFT (MT 101) Automatic Debit
Authorized Direct Debit
Delivery Services
Transactional Web Site – Local e-Banking
VAN – Value Added Network
Host-to-Host
Cash Management is defined in Brazil as the management of balances and funds flow. In this
context, the Cash Manager aims to manage the cash position, keeping the costs arising from
cash flows as low as possible, while minimizing interest costs and maximizing interest income.
The following sub-tasks are distinguished in this context:
• Liquidity Management: balance management and funds’ investments;
• Cash Flow Management; and
• Working Capital Management.
Liquidity management
Liquidity Management in Brazil is restricted to balance management between local accounts
within the same bank. Balance management refers to the day-to-day management of the current
accounts. Every day the Cash Manager seeks to control the company’s cash balances in such a
manner that the interest result on these balance is optimized.
This solution allows companies to customize the balances between its accounts by defining the
remaining balance and the nature of the transferred balance from each account.
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It is also possible to send account movements from a sub-account to a main account.
Cash flow management
Organization of commercial payments is another important Cash Management task. Cash Flow
Management aims to reduce the number of payments, cutting the transfer costs per payment and
effectively managing the outgoing payments while accelerating the income payments. Another
task for the cash manager is to support payable accounts and receivable accounts administration.
Working capital management
In some companies, Working Capital Management is also one of the cash manager’s tasks.
Working Capital is the difference between current assets (cash and quickly realizable assets,
including investments) and current liabilities (liabilities that are repayable within one year). The
size and composition of Working Capital largely determines the company’s liquidity.
Working Capital Management breaks down into:
• Receivable accounts management;
• Payable accounts management;
• Stock management; and
• Legal obligations management.
Important considerations for the Cash Management are: how quickly do customers pay their
bills? How long do stocks remain on the balance sheet? How long can the company wait before
paying its suppliers? How much Working Capital can be compromised by legal obligations?
Some of these activities can be delegated to other specialists or departments. A separate
department can, for instance, be set up under the direction of a credit manager to manage
payable accounts. Stock management is usually entrusted to the production department.
However, the Cash Manager will always keep close track of all variables that influence cash
flows. This is natural considering the company’s cash positions depends largely on the quality
of its Working Capital Management.
Account services
Current Accounts - The banks in Brazil offer local currency current accounts, and time
deposits, with no minimum balance requirements.
There are some conditions to have a current account:
• The companies need to be legally established in Brazil, with local representation;
• Only allowed in local currency (Brazilian Real, represented by BRL), except for air, cargo,
tourism, insurance, power, oil and gas companies, that under very specific situations may also
open an account in foreign currency;
• It is not allowed to have multi-currency accounts;
• Pre-negotiated overdraft facilities are available; and
• Neither netting nor interest compensation cash pooling are allowed.
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Non-Resident accounts: although regulated by law, banks in Brazil do not usually provide non-
resident accounts.
Statements
• Electronic Statements: Brazilian standard statement sent to the companies through file
exchange for ERP integration;
• MT940 Statements: Some banks are prepared to send the MT940 information to any SWIFT
address on a daily basis;
• Legal Obligation Statements: Sent to the companies through file exchange for ERP
integration, this statement contains information on balances, funds and other investments
affected by legal obligations.
Legal obligations management - This service aims to manage all legal locks, unlocks or
transfers. It allows the companies to manage their cash flow based on information on legal
obligations received by e-mail or file exchange. Another benefit of this service is the assurance
to fulfill any legal orders. Also, companies can access all detailed information through
Electronic Banking.
Cash management – Collection methods
Collections
The Brazilian market offers several products and solutions for the company needs. These
solutions allow companies to provide convenience to its payees, receive payments when the
payee doesn’t have an invoice, adopt identified deposit solutions, claim securities, and receive
overdue payments.
Boletos
The most popular collection method in Brazil is the Boleto. It is a nationwide clearable bar-
encoded deposit slip, usually issued by the bank based on a manual or computer-generated
collections list and delivered physical or electronically by the client. The Boleto is sent to the
payer, who can use it to pay the amount owed through any bank or even by electronic tools,
since clearing is nationwide. It assures that the funds will be credited to the beneficiary’s central
account, same day credit. The information is available in D+1.
Types of boletos:
Registered Collection – for companies that demand strict control over its collections and need
rigorous rules for claiming unpaid securities. According to a collection file sent by client, the
bank is able to register the invoices in its system, print and distribute the boletos (deposit slips)
to the client’s customers. The company can have additional services:
• Up to the due date, the client can pay the boletos at any branch of any bank;
• Overdue boletos must be paid only at the issuing bank;
• On the Internet it is possible to reprint postdated boletos;
• A return file with detailed information will be provided to the client;
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• Clients can also send through the collection file instructions of penalty interest, prompt
payment discount and automatic public notary; and
• All boletos with value equal or greater than BRL 250,000.00 must be registered.
Non Registered Collection – for companies that have a smaller number of receivables and
there is no need for legal claims. It works based on file transfer return which allows the
identifications of the performed payments. In this kind of collection, the Bank manages the
settlements and the company is responsible for managing the process of conciliation.
Other types of receivables
Identified deposits - If the company has a close relationship with its business partners and
performs advanced sales, Identified Deposit is the ideal product. This also applies to branches,
regional units and commercial representatives to perform transfers of large amount.
• The banks can provide client’s customers an extensive branch network where direct deposits
into the client’s collection accounts can be made;
• Specific codes can be created to provide the client the appropriate information;
The information is available via Electronic Banking on D-0, credit on D+1, return file on D+1.
Check custody - The Check Custody service seeks to offer a better security for postdated
checks. Because the checks are guarded in a secure place and deposited on an agreed date, the
company reduces operational costs and can control the collection flow in an efficient way.
Main Characteristics:
• Delivery of checks to the Bank can be done by the company or by an armored car company;
• The company can send instructions (extending the due date or returning the check) up to 72
hours before the deposit date (through the Branch);
• The checks to be kept in custody should have a due date of more than 3 working days;
• The checks can be classified in 2 custody types:
• Simple custody: It means the checks are credited into the current account;
• Linked custody: It means the end of a loan/financing operation after the clearing of the checks.
• The client can electronically capture the checks and send a file before physically sending them
to the Bank. This ensures the clearing of the checks in case of loss; and
• Information about checks in custody and returned can be accessed easily on the Internet
Banking.
Automatic debit - This service allows companies to receive the owed values through automatic
debit from the current account of their clients (previously authorized). The information on the
debit to be made is sent by the company through file transfer. The automatic debit process can
only be started after the client gives the authorization. Main Advantages:
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• Cost reduction: By eliminating manual processes, issue and transit of documents;
• Ease and Speed: All information of authorizations, debits and possible cancellations are sent
by file transfer;
• Coverage: This allows debits to be made in any branch, regardless of the operating area of the
Company;
• Good deadline: Debit information should be sent at least 5 (five) days before due date; and
• Available Information: This generates a return file, identifying if each debit was made or not,
with the refusal reasons, if there is any.
Cash management – Payment methods
Supplier’s payment
A product that provides an automated payment system, making ready payments to suppliers,
reducing the operational load in the accounts payable area and giving better security when
making payments. The use of Internet Banking also allows the management of your future
payment flow (scheduled electronic payments). The types of payments are:
• Book Transfer: only for suppliers who have an account within the same bank in Brazil. Credit
made on-line; and
• Electronic Funds Transfer:
• DOC (ACH): for suppliers who operate with other banks and can receive their credit through
Bank clearing. Used for transfers of values smaller than BRL 5,000.00;
• TED (wire): for suppliers who have accounts with other banks and need to receive their credit
in reserve for values larger than BRL 750,00;
Boleto Payment: through the input of a barcode it is possible to make boleto payments
electronically at any bank;
• Payment Order: payment method that makes the resources available to the beneficiary to
withdraw on a branch chosen by the payer;
• Utilities: water, power, gas, telephone.
The cut-off time varies according with the type of the payment as detailed below:
• TED and Boleto with values larger than BRL 250,000.00: from 6:30 AM to 4:30 PM;
• Other payments: from 7 AM to 8:30 PM.
Payroll
It is an automatic electronic salary payment with file manager. This service allows the company
to make, by debit account, its employees payments. To speed up your payroll processing, the
banks suggest transmission using file transfer, receiving CNAB 240 standard files. The bank
can receive the files directly from its clients or using local VAN. The benefits are:
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• Improve security for employees and for the company;
• Speed up the process and make easier to manage the payroll;
• Implementation support and product training.
Tax payments
Some banks in Brazil are authorized to receive several types of taxes such as DARF [Document
for the Receipt of Collection of Federal Income], DARF Simples, GPS [Social Security Form],
GUIAS DE FGTS [Government Severance Indemnity Fund for Employees Form], GARE,
ICMS, Importação-SP, DARE, DAR, DAE, among others.
These payments can be made in two distinct ways:
• Through the Supplier’s Payment Agreement; and
• Through Internet Banking using single transactions.
In both cases, the receipts are available when the payment is made and they can be printed
through Internet Banking. The payment receipts can be reprinted through Internet Banking up to
90 days after payment and up to 10 years for tax payments.
When paying through Supplier’s Payments product, your company can count on the same
resources of the referred agreement, such as:
• Files returned daily;
• Authorization through Internet Banking;
• Consistency checking; and
• Better statement identification.
Import Tax payment through SISCOMEX (Integrated Foreign Trade System)
It can be made available automated payments of IMPORT TAXES, through SISCOMEX, using
accounts/convention, specifically for this service provision.
In this case, client registers and authorizes their Customs Brokers so they can directly debit the
account to pay the taxes. The bank passes on information to the Federal Revenue Service about
the payment of the referred taxes. This information is then sent to the SISCOMEX system.
Authorized Direct Debit (DDA)
It is an integrated system for electronic delivery and settlement, operated by CIP (clearing
house). It centralizes all the financial information between who wants to receive (for a service
done or for a product sold-payee) and who has to pay (payer). DDA is not an automatic debit. It
is an Electronic Billing Delivery and Payment.
Cross-border payments
In Brazil there is no free flow of hard currencies. All international payments must be previously
registered with the local Central Bank. These transactions have an FX contract and are
supported by specific documentation.
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Electronic Banking System
Internet Banking was specially developed to provide convenience, agility and practicality to the
company. With Internet Banking, clients can access all accounts of their companies; perform
investments, payments, transfers, etc.
User management and control is made through the Internet Banking, making management
simple and flexible and ensuring greater control.
Every transaction made through Internet Banking depends on further authorization, bringing
more security to the companies.
All files exported and imported by Internet Banking are recognized by ERP systems.
Nevertheless, banks offer other peer to peer solutions that are directly integrated to ERP.
The core modules are:
• Current Account: verification of balances, statements, future entries, TEDs statements, etc.
• Payments and Transfers: DOCs, TEDs, book transfer, taxes, utility bills, boletos, etc.
• Investments: investment and withdraw in savings account, funds, CDB/RDB/DRA, besides
balances, statements and consolidated position;
• Automatic Debit: inclusion, exclusion, maintenance of accounts and temporary suspension of
debits; and
• Collection: verification of portfolio and complete maintenance of instruments, besides sending
individual or bulk instructions.
Web platforms consist in systems that work through browser and navigation systems and use
internet as a manner to traffic information online. Every access and data transfer is safely
performed by HTTPS, so data can traffic more safely, making any malicious intervention on
information difficult.
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How to build a labor force in Brazil
The Brazilian labor market
In recent years, due to the entrance of many multinational companies and the opening of
startups specialized in different businesses areas, the Brazilian labor market has become more
dynamic and demanding.
To be competitive, companies in Brazil strive to differentiate themselves through investments in
technology and equipment, improving the production processes and in the recruitment of skilled
and talented professionals.
There are job opportunities not only in the capital cities, but also in the interior throughout the
country, especially in the areas of industry and services. In the state of São Paulo, for example,
there are important centers of attraction for those who want to study at top-end universities and
work in innovative companies in the areas of computing, chemistry and biotechnology (the
main centers are Campinas and Jundiaí).
Around the country, small, medium and large companies actively seek skilled labor, pay good
wages and offer compelling benefits.
In this scenario, Brazil has been attracting skilled professionals from all over the world, and has
been issuing a high number of visas to foreigners. However, several sectors complain about the
shortage of skilled labor.
To assist in the training and qualification of their employees, companies in Brazil have the so-
called “S System”, a term that defines the set of entities maintained by productive sectors of the
economy (trade, industry, agriculture, transport and cooperatives), among them, National
Service for Industrial Training (Serviço Nacional de Aprendizagem Industrial - SENAI),
National Service for Commercial Training (Serviço Nacional de Aprendizagem Comercial -
SENAC), National Service for Rural Training (Serviço Nacional de Aprendizagem Rural -
SENAR), National Service for Transport Training (Serviço Nacional de Aprendizagem do
Transporte - SENAT), Euvaldo Lodi Institute (Instituto Euvaldo Lodi - IEL) and National
Service for Cooperate Learning (Serviço Nacional de Aprendizagem do Cooperativismo -
SESCOOP).
These entities offer free courses or at affordable prices through a network of schools,
laboratories and technology centers scattered throughout the Brazilian territory. The “S System”
also counts on Brazilian Services for Assistance to Micro and Small Companies (Serviço
Brasileiro de Apoio às Micro e Pequenas Empresas - SEBRAE) that provides guidance on how
to open and run a business and hire employees.
The Federal Government, in order to attend the needs of the labor market, develops other
programs for the qualification of the workforce and to incentive professional education.
At the Legislative Power, there are several projects under discussion to update the laws related
to employment contracts, aiming to foster the investments, to create new jobs and to drive
economic growth. Aspects such as outsourcing and incentives to collective negotiation (in other
words, granting greater importance to the collective negotiation of rights through agreements
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between companies and trade unions – the so-called negotiation of sectorial adjustments) are in
the sight of this expected reform in the Brazilian labor legislation.
Hiring professionals in Brazil
Every individual who provides habitual services to an employer, under their orders and upon the
payment of a salary, is considered to be employed. An employer is the one who hires, pays and
runs the provision of services, by assuming the risks of such activity.
The Brazilian Federal Constitution presents a myriad of labor rights, but most of them are
granted by the Consolidation of Labor Laws (Consolidação das Leis do Trabalho - CLT), dated
1943. There are also other secondary laws that address other issues, such as: Prior Notice of
Dismissal, Guarantee Fund for Length of Service, Unemployment Insurance, Transportation
Voucher, among others. Some professions considered to be different follow their own specific
legislation. This is the case for Engineers, Attorneys, Athletes, Medical Doctors, among others.
Overall, the labor laws are stated as follows.
Minimum wage
Employees working 44 hours a week must not receive a salary lower than the minimum stated
by Federal Laws. The minimum wage may be higher depending on the state in which
employees work. Currently, there are minimum regional wages for the states of São Paulo, Rio
de Janeiro, Santa Catarina, Rio Grande do Sul and Paraná, which must be observed. If
employees work less than 44 hours a week, their earnings may be proportionate to the number
of hours worked. There are several professions which minimum wages are higher than the stated
and are guaranteed by a Trade Union.
Guarantee Fund for time of service
The Guarantee Fund for Length of Service (Fundo de Garantia do Tempo de Serviço - FGTS) is
equivalent to 8% of the monthly salary earned by the employee. It is deposited in a special
account and will be made available if the employment contract is terminated by the employer,
upon termination of a specified contract period, or in other situations subject to the law, such as
serious infirmities. If the employment contract is terminated by the employer, the employee is
entitled to an indemnity of 40%, referred to as a fine, the calculation of which is based on the
total amount of FGTS, plus interest rates and inflation adjusts.
Annual Christmas bonus salary – 13th Salary
In December of every year, employees are entitled to an additional salary (called Annual
Christmas Bonus Salary or 13th Salary), which is equivalent to the salary earned in December,
plus the average of other salaries received throughout the year (overwork, additional wages,
among others). If the employee has not worked all year long, they will be entitled to a pro-rata
Annual Christmas Bonus Salary. An advance payment of 50% should be made between the
months of February and November.
Profit sharing
Profit sharing is an instrument of integration between capital and work, as well as an incentive
for productivity. Profit sharing payments will not replace or complement the employee’s
remuneration, nor count towards vacation pay or a third of that amount, the Annual Christmas
Bonus Salary, FGTS, prior notice of dismissal, or a FGTS 40% fee; nor will it count towards
social security purposes or other charges for the employer, provided that all legal requirements
are met. In order to calculate real profits, the company may deduct the employees’ profit-
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sharing payment as an operational expense, within their rights. Profit-sharing plans must be
negotiated with trade unions or a committee made up of employees and a trade union
representative, and must indicate clear payment rules, such as plan of goals, productivity index,
company’s quality or profitability, frequency of distribution (not lower than one half-year),
amount, effective period and period for revision of the agreement.
Night shift premium
Payment for work done between 10 p.m. on one day and 5 a.m. on the following day (Night
shift Premium) will be at least 20% higher than for that done during the day. Hours for night
work are considered to be 52 minutes and 30 seconds long.
Working day
A regular working period cannot exceed 8 hours a day and 44 hours a week, except for
professionals who are entitled to special working hours or entitled to have reduced working
hours by the law or trade union negotiation.
Overtime payment
A regular working day can have up to two overtime hours, subject to an agreement signed
between the employer and the employee. Employees are entitled to an additional 50% fee on the
regular hourly amount when they work more than 8 hours a day or 44 hours a week.
Furthermore, Brazilian law allows for the implementation of an “overtime bank”, as those
overtime hours worked can be used as a day off or shorter working day on another day, within
no more than a year, observing a working day of a maximum of 10 hours.
However, this system can only be adopted upon negotiation with the trade union that represents
the workers. Employees who work outside the company without being able to keep track of
their working hours and those who hold positions of trust, such as directors and managers who
have powers to hire, terminate and reprimand employees, and also those who earn higher
salaries, are not entitled to overtime.
Weekly paid rest period
Every employee is entitled to a Weekly Paid Rest Period consisting of 24 consecutive hours,
preferably on Sundays. Employees are forbidden to work on Sundays, except when the
execution of work is imposed for technical requirements. The list of activities permissible on
Sundays is subject to the law. Likewise, the Ministry of Labour and Employment may authorize
Sunday work as long as the company proves the technical need for uninterrupted work.
When employees are not able to have their Weekly Paid Rest Period on Sundays, employers
should assign another day off for them, at the risk of paying double or being subject to other
sanctions from the Ministry of Labour and Employment. The weekly paid rest should preferably
coincide with the Sunday so that in relation to workers who provide services in trade, the
observance of a day of rest on Sundays should be every three weeks, and for women it should
be fortnightly.
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A day off on holidays without deduction from salary
Work on civil and religious holidays is forbidden, unless authorized by law or the Ministry of
Labour and Employment. When it is not possible to have a day off on civil and religious
holidays, employees will be entitled to double pay, unless employers assign another day off in
the same week. Bellow, the list of main holidays recognized in Brazil:
• January 01 (New Year’s Day);
• April 21 (Tiradentes);
• May 01 (Labor Day);
• September 07 (Independence of Brazil);
• October 12 (Nossa Senhora Aparecida);
• November 02 (All Souls’ Day);
• November 15 (Proclamation of the Republic in Brazil); and
• December 25 (Christmas).
In addition to these dates, some holidays fall on different days every year, such as: Carnival,
Good Friday and Corpus Christi. Furthermore, there are state and municipal holidays.
Thirty-day yearly paid vacation
For every year of work, employees are entitled to an annual 30-day paid vacation including a
minimum of a third of the regular salary as an extra. The number of vacation days may be
reduced or shortened by virtue of unexcused absences, extended leave due to illnesses or work-
related accidents. Employees may opt out of one third of their vacation time, i.e. they will have
20 days of vacation and the remainder will be paid in cash. If vacation time is not granted within
one year after the employees are granted their right, employers must pay double.
Five-day paternity leave
Paternity leave, consisting of five days, is granted to employees starting from the date their child
is born. For the employees of companies registered in the Programa Empresa Cidadã7, it is
granted 20 days of paternity leave.
Prior notice of dismissal
Prior Notice of Dismissal is the form of communication in which one of the parties of the
employment contract communicates to the other, with a minimum advance of 30 days, of their
decision to terminate the unspecified contract period (the employment contract parties are: the
employer and the employee).
In the case of dismissal without cause by initiative of the employer, the prior notice of 30 days
should be increased by 3 days for every complete year, up to the limit of 60 days, totaling a
maximum period of 90 days (Brazil has still not adhered to the ILO [International Labor
7 The program known as Programa Empresa Cidadã gives to the employees of adhered companies an extended
maternity and paternty leave (also available in case of adoption). In this program, the company is responsible for
paying the salary during the additional leave period, though companies operating in the Lucro Real tax regime may
deduct the total value paid from its Corporate Income Tax (Imposto de Renda da Pessoa Jurídica - IRPJ).
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Organization] 158 Convention, which addresses termination of employment). During the notice
period, the employee should continue working, unless the employer decides to give them an
indemnity for this period. If the employee resigns, they should notify the employer of their
notice within a minimum advance of 30 days, at the risk of having the corresponding amount of
termination fees deducted from them.
Extra remuneration for pain, hazardous or dangerous activities
Painful, hazardous or dangerous work must be compensated with an additional amount (known
as supplementation) on the regular hourly rate. Hazardous (which can be chemical, biological or
physical) and dangerous (inflammable materials, explosives or electricity) materials are subject
to the law.
If employees are exposed to hazardous materials, they are entitled to an extra hazardous pay
which can vary from 10%, 20% or 40% of the national minimum wage, depending on how
hazardous their work is, according to the directives of the Ministry of Labour and Employment.
On the other hand, employees exposed to dangerous materials are entitled to a premium for this
dangerous work, which is equivalent to 30% of their salary. There is also additional pay due to
workers who are exposed to risks of theft or violence (e.g.: transport of valuables), or who use a
motorcycle in the execution of their work. Likewise, the Federal Constitution states that an
allowance for heavy work can be paid; however, as of yet there are no regulations on this point.
Workers under the age of 18 cannot perform dangerous or hazardous jobs or work at night.
Additional allowance for employee transfer
Employees who need to be temporarily transferred to a location (city and/or state) other than the
one in which they were hired, and consequently are required to move house, will be entitled to
an additional allowance equivalent to 25% of their salary for as long as they work at the site to
which they were transferred. When employees are transferred permanently, employers will not
be required to pay the additional allowance. If employees are transferred temporarily but do not
need to move houses, they will not be entitled to the additional allowance (e.g.: transfer within
the same city).
Transportation voucher
Transportation vouchers are provided to all employees who need to commute using the public
transportation system within the city, or to and from nearby cities or states. The employees’
share of the transportation voucher is equivalent to 6% of their basic salary, with employers
responsible for paying the exceeding fees.
Means of Hiring
The common practice in Brazil is to hire employees for an unspecified time. However, there are
cases in which employees can be hired for a specific period of time; consequently, employers do
not need to pay them any indemnities, i.e. the 40% FGTS fee or grant a notice of dismissal.
These cases are listed as follows:
• A probationary employment contract is one that precedes the contract for an unspecified time
and serves for both parties to evaluate one another mutually. This contract has a maximum
length of 90 days. It may be reduced to a period lower than 90 days (for instance, 45 days) and
be extended only once (for 45 additional days). If employees are found unsatisfactory during the
probationary contract, employment ends on the specified date and employers do not need to
grant a notice of dismissal or pay the 40% FGTS fee;
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• Services whose nature and temporary character justify the need for a contract with a
predetermined time period, such as increased production during holiday seasons;
• Temporary business services, i.e. those that are not required to run permanently, such as
Christmas sales; and
• In addition, there is a temporary labor contract, in which an employee may be hired for up to
three months through a Temporary Work Company, without the need for a formal contract
between the parties (the company in need and the temporary employee), it may be extended for
a further three months provided there is reason to justify the extension of the temporary
employment contract.
This type of contract can only be used when there is an extraordinary amount of work to be
done, or in substitution of regular and permanent employees (in case of vacations, illnesses,
maternity leave, among others). When dealing with the replacement of regular and permanent
employees, the contract may be firmed for more than three months if the circumstances that
justify the hiring of temporary workers for a period of more than three months are already
known on the date the contract is signed, which may not exceed a total period of nine months,
including any extensions.
Outsourcing
Brazil has no laws concerning outsourcing. However, in view of the current worldwide
scenario, the Superior Labor Court (Tribunal Superior do Trabalho - TST) has decided to
regulate the sector. Therefore, the current regulations derive from case laws.
According to the TST understanding of the current scenario, an outsourced workforce is not
allowed to perform the company’s core activities. Only ancillary activities, such as cleaning and
surveillance, can be outsourced. Even in these cases, the contractor may be liable, if the
outsourced company fail to comply with any labor obligations.
However, the limitation of outsourcing (restricted to ancillary activities of the company)
imposed by the TST is sub judice in the Supreme Court (Supremo Tribunal Federal - STF) and
may be revised soon. In addition, there is a specific bill to regulate this topic and, if approved, it
will bring new rules (with a broader range) to outsourcing possibilities and its legal effects.
Thus, this issue is still in progress and may be updated in short term.
Keeping track of working hours
Every company consisting of more than 10 employees must keep track of their working hours,
recording both start and end time of regular and overtime work, as well as meal breaks and rest
granted during the working day. These hours can be recorded manually, mechanically or
electronically.
Breaks
Brazilian law requires that employers grant employees breaks (during the working day):
Rest and meal periods during the working day - If an employee works less than 4 hours a
day, he/she does not need to be granted a period for meals or rest. If employees work from four
but not more than six hours a day, they must be granted a 15-minute break. However, when
employees work more than 6 hours a day, they are granted a mandatory break of at least one
hour, but no more than two hours. Employees may be allowed a longer period for meals and
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rest, provided this has been agreed with the employer or their affiliated trade union. A rest and
meal period may be shorter than an hour, as long as it has been authorized by the Ministry of
Labour and Employment, under the conditions subject to the law. This period does not count
towards the duration of the working day, nor will it be paid.
Break between working days - There must be a minimum of eleven unpaid resting hours
between two working days. Employers must grant a minimum interval of 35 consecutive hours
for their employees’ paid weekly rest; this figure is the sum of the eleven hours between two
working days plus twenty-four weekly paid rest hours.
Special breaks - Some jobs, by virtue of their nature, require paid breaks for rest, such as work
conducted in slaughterhouses, telemarketing, among others.
Breastfeeding breaks - Employees are entitled to two paid breaks during the working day, each
consisting of a half hour, in order to breastfeed their babies until they are six months old.
On-Call Compensation
Employees who have limited individual freedom due to their need to be available to employers
to provide help in emergency situations or immediate services during their rest break are entitled
to on-call compensation plus one third of their regular hourly rates. Once they are called to
work, the length of service will be considered overtime. Employees cannot be on call for more
than 24 hours.
Standby hours
Employees working on a standby system, i.e. one in which they are required to stay within the
premises of the company awaiting orders, are entitled to two thirds of the regular hourly rates.
Employees cannot be on a standby for more than 12 hours.
Home office and telework
New information and communication technologies and economic growth have given rise to new
forms of work, such as telework and home office. In Brazil, telematics and computer-based
means have enabled employees to work anywhere, in centers outside company premises or even
at the employee’s home.
Brazilian law makes no distinction between employees who work within the company premises
and those who work outside of it relying on information technology and communication tools
(teleworker); both are protected by labor laws.
When it is possible for employers to keep track of the actual execution time of employee tasks,
the latter will be entitled to overtime payment when they work more than eight hours. If
employees carry out their duties offline, they are not entitled to overtime.
Depending on how the services are provided, i.e. without obligations to the company, the
teleworker may be considered a freelance employee without labor rights.
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Salary and Benefits
Salary
Salary is the compensation paid directly by employers to employees in return for the services
provided, which cannot be lower than the minimum salary in effect (either national or regional),
or the price floor according to law or agreed by the trade union. In addition to the salary due and
paid by employers, the tips that employees receive are also part of their remuneration. However,
tips paid by clients cannot be considered as compensation for the services provided alone.
Employee salaries can be fixed, mixed or variable, depending on the agreements between them
and the employer.A fixed salary is the amount of money given to employees based on their
availability to the employer, regardless of the job that is carried out.
A fixed salary can be calculated on the hours, days, quarters or months worked. A variable
salary is awarded according to production, depending on how much employees produce.
For example:
• Sales commission;
• A percentage on the employee’s work; and
• Compensation per part manufactured.
A mixed salary is partly fixed and partly variable.
The payment of a salary cannot be stipulated for a period longer than one month, except in
situations concerning commissions, percentages and bonuses. Salaries must be paid up to the
5th business day (not including Sundays and holidays) of the following month.
Salaries must be paid in the national currency of Brazil (Brazilian Real). In addition to money (a
minimum of 30% of the salary), the compensation can be paid as utilities, i.e. goods or services
that are habitually provided to employees, such as: housing rentals, use of the company car for
leisure purposes, vacation travel overseas (extendable to family), which can be regarded as a
salary. Utilities that cannot be regarded as a salary, such as those deemed necessary for the
execution of services hired, cannot be considered as part of the employee’s basic salary (e.g.:
car provided for occupational purposes, uniform, cell phone, laptop, among others).
Employees are granted a salary rise every year, based on a collective negotiation between the
trade union representing them (patrons) and the trade union representing the profession.
Employers cannot reduce an employee’s salary. The Federal Constitution forbids the
enforcement of different salaries because of gender, age, color, marital status or physical
condition. Employers cannot deduct amounts from an employee’s salary, except in the
following cases: salary advance, damages caused by the employee due to fraud or negligence (in
this case, this must be stated in the employment contract), trade union contribution, loan granted
by a financial institution, contributions authorized by the employee for the payment of dental,
health and life insurance, social security plans or cooperative, cultural or recreational
associations.
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Benefits
Benefits are granted spontaneously by employers. Not only are such benefits intended to attract
new and better employees, but also to keep the current ones. In order to encourage the offer of
such benefits, Brazilian legislation does not consider the following (goods or services) as part of
the salary:
• Social security plans;
• Life and personal accident insurance;
• Educational services for employees and their children, either at the company or outside of it,
including registration fees, tuition, yearly fees, books and other educational materials;
• Medical, hospital and dental assistance to employees and their family, provided directly by the
employer or through a medical plan from other companies;
• Culture bonus to employees, consisting of a payment of BRL 50.00 to be used on cultural
products and services, such as movies, plays, among others; and
• Food.
Brazilian legislation grants tax benefits to companies that provide meals for their employees,
provided they are registered in the Programa de Alimentação do Trabalhador. Employers may
provide employees with meals and/ or other foods or reach an agreement with commercial
establishments where employees can have their meals or purchase food using a meal card.
Such benefits will not be considered part of the employee’s remuneration concerning vacation
pay, their one third bonus, Annual Christmas Bonus Salary, FGTS, prior notice of dismissal and
the 40% FGTS fine. Such benefits are also not subject to taxation from the Social Security
Institute or other charges. Meal and food expenses may be deducted from income tax up to the
limit of 5% of the tax owed by the company in every fiscal year.
Occupational safety and harassment
Occupational safety
Every employee is entitled to a safe and healthy workplace. When it comes to the workplace,
Brazil is in accordance with the regulations established by the ILO, which stipulates rules for
the adoption of measures that protect the health, physical and psychological integrity of
employees.
Safety, hygiene and occupational medicine issues are regulated by Ordinance 3,214/78 of the
Ministry of Labour and Employment, through regulation norms, that govern several employer
obligations, such as: the provision of information on occupational risks the employees are
exposed to, providing proper training on occupational safety and hygiene, the provision of
adequate tools and furnishings for the execution of work as well as individual and collective
protective equipment, the establishment of an Environmental Risks Prevention Program
(Programa de Prevenção de Riscos Ambientais - PPRA), a Medical Control Program on
Occupational Health (Programa de Controle Médico de Saúde Ocupacional - PCMSO), an
Internal Commission for Accident Prevention (Comissão Interna de Prevenção de Acidentes -
CIPA), among others.
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Employers must comply with and have employees complying with safety and occupational
medicine norms. The Ministry of Labour and Employment has the duty of inspecting the
employer’s compliance with the abovementioned items.
The main purpose of Brazilian regulatory norms is to prevent work-related accidents and
professional illnesses, thus providing workers with good health conditions and occupational
safety. In the event of a work-related accident, employers are required to issue a Work Accident
Notification (Comunicação de Acidente de Trabalho), within 24 hours.
Moral and sexual harassment
Both moral and sexual harassment should be actively combated in the workplace. The Federal
Constitution grants everyone the right to a private life and intimacy. Brazilian law states that
employers are responsible for civil compensations when their employees commit actions that
result in the injury of other employees.
Furthermore, criminal legislation considers sexual harassment to be a crime whenever a
subordinate is involved. In the eventual suspicion of collective moral harassment, i.e.
harassment against groups of workers, the Labor Prosecutor will conduct investigations and,
when necessary, will file Public Civil Actions, with the intent of having the company pay
indemnities, which may be more than a million Brazilian Reais, according to the size of the
company.
Moral harassment is characterized by abusive behavior, such as gestures, words, written
materials, attitudes, among others, that are intended to affect the employee’s dignity or even
degrade the workplace.
The following are considered as forms of moral harassment:
• Derogatory nicknames;
• Racist and prejudiced comments; and
• Swearing; among others.
Quotas
As a means of incorporating minorities into the job market, Brazil has adopted the quota system
for:
The disabled
Every company that has more than 100 employees must hire rehabilitated or disabled
employees, in the following proportion:
Up to 200 employees – 2%
From 201 to 500 – 3%
From 501 to 1,000 – 4%
1,001 and more – 5%
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The failure to comply with this rule will lead to payment of fines to the agency responsible for
inspecting labor rights. Thus, a company may only dismiss a rehabilitated or disabled employee
once they already have contracted someone in similar conditions or if they already have the
appropriate number of employees established by the law.
Apprentices
Likewise, Brazilian legislation adopts a quota system for apprentices.
The learning contract aims to provide technical development to apprentices aged from 14 to 24
years old, for up to two years, as well as theoretical (at school) and practical classes (in the
workplace). There is no age limit or two year period if an apprentice is disabled. Every company
(with 7 or more employees and in which the work demands professional knowledge) must have
at least 5% and a maximum of 15% of apprentices on its staff8.
For apprentices attending Elementary and Middle School, there is a maximum of 6 working
hours a day; this cannot be extended or compensated. For apprentices who have completed
Elementary and Middle School, the limit can be extended to 8 working hours a day, including
those hours intended for theoretical instruction. Apprentices are granted the same rights as other
employees, except for the FGTS rate which is limited to 2%.
Interns
Although there are no employment quotas, companies may hire students in college, vocational,
high school, special education or professional education as interns. The internship is intended to
teach interns skills that are inherent to the profession.
The internship contract can be extended for up to two years, except in the case of an internship
for the disabled. Special education and adult students who are about to complete primary
education can work up to 4 hours a day and 20 hours a week. For college, vocational and high
school students, the maximum number of working hours is 6 a day and 30 per week. Companies
are only exempt from paying a stipend or any other form of compensation that may be agreed
upon, including transportation vouchers, if the internship is compulsory.
Additionally, interns are granted a break (yearly) of 30 days for internships lasting for one or
more year. If the internship is shorter than one year, the break will be proportionate. A company
hiring an intern must contract an insurance plan for personal accidents on their behalf, which
must be compatible with market figures.
Trade Union and strikes
Trade Union
In Brazil, workers can join any trade union as this right is guaranteed by the Federal
Constitution. No one is obliged to join or stay in a trade union. Thus, whether a worker joins a
trade union or not is not an impediment to getting a job.
Additionally, there should be only one trade union per profession and region, which cannot be
smaller than a city. Trade unions are sponsored by contributions from both employees and
8 For calculation of the number of apprentices purposes, the company should consider all work positions except:
positions that require technical or superior qualification, directors, managers and employees holding positions of
trust, temporary jobs and already hired apprentices.
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companies. Brazilian Labor Regulations states that the organization of a trade union depends on
the profession or work carried out under the same conditions. Such a thing is called
occupational category.
Collective rights are granted by the Collective Labor Conventions, which are agreements made
between company and employee unions. A Collective Agreement may also be signed between a
company and the trade union representing their employees, which will only be valid between
the parties.
Rights arising from the collective negotiation are applicable to all employees, whether affiliated
to a trade union or not.When parties do not reach an agreement, a “Collective Labor Dispute” is
established, and a Labor Judge shall settle the issue.
Strikes
The Federal Constitution grants all workers the right to go on strike. However, they must
communicate this to their employer 48 hours in advance. When it comes to essential services or
activities, the employer must be given 72 hours of prior notice. The following are considered
essential services: medical and hospital assistance, public transportation, bank services, among
others.
If the strike is not enough for employee and employer trade unions (or employers) to carry out a
collective bargaining, it is possible to turn to the Brazilian Labor Court to settle the issue
through a lawsuit challenging the strike.
The Labor Court may deem the strike to be wrongful and have the workers resume work at the
risk of a daily fine; if not deemed to be wrongful, the court may rule on employee claims to
bring the strike to an end.
Social security system
Brazil has a contributive social security system, with fees paid by both the employer and the
employee, as well as freelancers and self-employed individuals, among others. The Federal
Government is responsible for covering any financial gaps in the Social Security System arising
from the payment of continuous benefits.
Employees contribute to Social Security with a percentage of their salaries. The contribution
salary is the amount paid by employers in return for the work provided. The rate is progressive
and varies from 8% to 11% depending on how high the salary is; the higher the salary, the
higher the rate. There is a wage ceiling for this contribution, which is revised every year.
Employee contributions are deducted from their salaries and sent to Social Security through
employers every month.
A company’s monthly contribution to Social Security is 20% of the total salary paid to
employees and is not subject to the contribution wage ceiling. This contribution is intended to
provide Social Security with funds for sick pay, pension payment due to death, family
allowance, Reclusion-Aid, working time retirement, retirement by age, permanent disability
retirement, maternity leave, among others. An additional fee of 1% to 3% in order to fund
insurance for Work-Related Accidents will be applied on the salary of employees; currently
called the Level of Incidence of Disability Arising from Environmental Labor Risks
(Contribuição do Grau de Incidência de Incapacidade Laborativa decorrente dos Riscos
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Ambientais do Trabalho - GILRAT). This additional fee may be reduced by 50% or increased by
100% according to the company’s investments in occupational safety, which is calculated
through the number of work-related accidents at the company compared to the standard rates of
its economic activity. These resources are intended for the payment of sick leave, accident
assistance payment and permanent disability of injured employees or those who suffer from any
work-related accidents.
An additional contribution of 6%, 9% or 12% on the salary of employees who work under
harmful conditions to their health or physical integrity is paid by the company; this contribution
is intended to fund the special retirement of individuals after working for 25, 20 or 15 years,
respectively.
Brazilian Social Security grants insured employees the following benefits:
• Retirement: the general rule states that male employees contribute for 35 years, and female
employees for 30 years, on a contribution-based pension system. Employees who work in
harmful conditions to their health or physical integrity will be entitled to a special retirement
after 15, 20 or 25 years, depending on the harmful materials they were exposed to during their
working life. Employees unable to work will be entitled to permanent disability paid by Social
Security. Retirement on account of age will be granted to male employees who turn 65 years old
and female employees who turn 60, as long as they complete 180 monthly contributions to
Social Security;
• Sick pay: this is covered by Social Security starting from the 16th day of suspension from
work due to a non work-related disease while employees are not able to go back to work. The
salary referent to the first 15 days of suspension must be paid by the employer. Employees must
be subject to a medical inspection by Social Security in order to be entitled to the benefit;
• Work-related sick pay: granted to employees who cannot work due to a work-related
accident or work-related illness starting from the 16th day of suspension from work. The benefit
is granted by Social Security while the employee is not able to go back to work. The salary
referent to the first 15 days of suspension must be paid by the employer. Employees must be
submitted to a medical examination by Social Security in order to be entitled to the benefit.
Employers must continue collecting FGTS during the period in which the employee receives the
work-related sick pay;
• Accident assistance payment: granted as an indemnity to employees who have permanent
sequelae after an accident of any type. The following are some conditions for the payment of
this benefit:
▪ Sequelae that result in reduced ability to carry out a task an employee usually
performed;
▪ Sequelae that reduce the ability to perform a task, where it requires more effort to
execute than before the accident; or
▪ Sequelae that result in the inability to perform the same tasks performed prior to the
accident while allowing the performance of others tasks after professional rehabilitation.
The accident assistance payment is equivalent 50% of the employee’s salary.
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• Family allowance: family allowance is a benefit paid to low income employees in order to
help raise their children of up to 14 years old or disabled dependents of any age; the benefit is
paid by Social Security. The amount paid depends on the salary earned by the employee;
• Maternity leave: maternity leave (which does not compromise employment nor salary),
consists of 120 days and may start up to 28 days prior to the child’s birth. In case of death of the
mother, spouse or partner, the employee will have the right to leave for the remaining period of
right of the mother, except in case of death or abandonment of a child. In case of death of the
child during the birth or a stillborn child, the maternity leave will be of 120 days. The maternity
leave is also due to the employee, who adopts or has legal guardianship for purposes of
adoption. In case of non-criminal abortion, the leave will be of two weeks. Payment of
maternity leave is made from resources collected by Social Security. Employers will pay the
pregnant employee the maternity leave benefit and request a refund from the Social Security
Institute using a specific form. For adopting mothers, maternity leave is paid directly by the
Social Security Institute. In 2009, the federal program Programa da Empresa Cidadã was
established, through which employers grant an additional 60 days maternity leave and are
responsible for paying the salary within this period. However, these numbers may be deducted
from the employer’s Income Tax due;
• Pension payment upon death: this benefit is paid to dependents (spouse, partners and
children up to eighteen years old) of workers who have died;
• Reclusion-Aid: it is paid to low income workers imprisoned in the “Semi-opened” or “closed”
regime and who are unable to earn a salary from a company; and
• Unemployment insurance: unemployment insurance is a benefit granted by the Social
Security Institute, paid with resources arising from the Workers Aid Fund (Fundo de Amparo ao
Trabalhador - FAT), which aims to provide temporary financial assistance to unemployed
workers who have been dismissed without just cause, who are not receiving any Social Security
benefits (except for accident assistance payment or pension payment due to death), and do not
have their own income to help them provide for themselves and their family while they look for
a job. The financial assistance is granted in three, four or five installments, continuously or
alternately, depending on the duration of the employment relationship and whether or not there
have been previous requests. The amount of unemployment insurance paid depends on th
average salary earned by the employee over the Last three months prior to their dismissal and is
subject to a maximum limit. The Government may modify the amount granted subject to
participation in professional training courses.
In addition to these benefits, the Social Security Institute offers services to insured workers such
as health and professional rehabilitation. Such services are intended to enable workers, who are
fully or partially disabled, to obtain a new job which makes their return to the labor market
possible.
Hiring and termination of contract
Hiring
As soon as the employee is hired, they should present their Labor and Social Security ID Card
to the employer, which is mandatory for any job. This document should contain details
regarding employment contract conditions, such as start date, salary raises, salary changes,
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vacation, trade union contribution collection, employer’s name and address, termination date
and other special conditions, if applicable (e.g.: probationary employment contract), among
others.
As soon as they are hired, every employee must have a medical check-up attesting to their
aptitude for the activities they will perform. This usually consists of both clinical and
complementary tests, according to the risks the employee will be exposed to. For example: in
the case of exposure to noise, the employee must undergo an audiometric test.
This admission exam is intended to monitor the health of the employee throughout the contract,
thus preventing work-related problems. Warning: pregnancy exams for admission are unlawful
and regarded as a crime. Discrimination based on gender, origin, race, color, marital status,
religion, age, and others, is also unlawful.
Termination of employment contract
The main means of termination of an employment contract are listed as follows:
• Normal termination of contract at a scheduled date agreed by both parties (specified
time contract): in this case, employees are entitled to a salary for the days they have worked,
vacation pay (consisting of 30 days and pro-rata), prorate Annual Christmas Bonus Salary;
additionally, they can withdraw the money deposited into their FGTS special account. There is
no need for prior notice of dismissal, since both the employee and the employer have agreed on
contract termination beforehand. There is no unemployment insurance;
• Contract termination by the employer without due cause (unfair dismissal): in Brazil, an
employer may terminate an unspecified time contract at any time, without the employee’s
consent, provided that employees do not have an Employment Guarantee. Employers need to
communicate this fact to employees with a minimum advance notice of 30 days, or refund them
(an employee may either work or be paid during the notice period) for the services. Employers
also need to pay the FGTS fine (40% on the FGTS payments in the employee’s special
account), a pro-rata Annual Christmas Bonus Salary and an indemnity on the full or prorate
vacation pay with an additional one third bonus. Employees are entitled to unemployment
insurance;
• Termination by the employee (resignation): employees who do not intend to continue
working at the company must advise their employer of their intention to quit (prior notice) with
a minimum advance notice of 30 days prior to the date they intend to leave. Employees must
work during the 30-day notice period (the time employers are granted in order to find a
substitute); otherwise, employers must deduct the amount referent to the salary that would be
due during the notice period from the termination fees. The following are the rights that are
granted to employees who resign: a salary for the effective days of work, vacation pay plus an
additional of one third and a pro-rata Annual Christmas Bonus Salary. Employees are not
granted the right to withdraw the FGTS money deposited nor unemployment insurance;
• Termination of contract by virtue of the employee’s compliance: with Voluntary
Resignation Plans established by the company, with the purpose of downsizing upon the
payment of an additional pecuniary relief to encourage employees to cease their employment
contract;
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• Termination of contract with due cause (fair dismissal) by virtue of gross misconduct:
employees who are dismissed with due cause will lose the rights for pro-rata vacation pay, prior
notice of dismissal, pro-rata Annual Christmas Bonus Salary; additionally, they will not be able
to withdraw the FGTS money deposited and will not be entitled to the FGTS fine or
unemployment insurance. Employers cannot record the reason for termination in the Labor and
Social Security ID Card. Gross misconduct leading to fair dismissal is subject to the Labor
Laws, the most important of which are as follows:
▪ Corruption;
▪ Misconduct or misbehavior;
▪ Habitual work for their own benefit or somebody else’s without the employer’s consent, and
when considered to be in competition with the company the employee works at or to
compromise their work;
▪ Criminal conviction becoming final and unappeasable when not suspended;
▪ Negligence in the carrying out of their responsibilities;
▪ Habitual drunkenness or drunkenness at work;
▪ Breaching the company’s confidentiality;
▪ Lack of discipline or failure to comply with their superior’s orders;
▪ Abandonment of employment;
▪ An act of violence against the honor or good reputation of anyone at work, or physical
assaults, under the same conditions, except in their own or someone else’s legitimate defense;
▪ An act of violence against the honor or good reputation of the employer or superiors or
physical assaults, except in their own or someone else’s legitimate defense;
▪ Habitual gambling; and
▪ Refusal to wear safety materials provided by the employer.
• Indirect termination of employment contract: if employers fail to comply with the
obligations stated in the employment contract, employees should stop working (except in two
situations in which it is possible to continue working), consider the contract terminated by the
employer’s fault and request the relevant termination fees. If employers fail to acknowledge the
serious infringement of which they are being accused, the employee should file a labor lawsuit
at the Labor Court in order to request the payment of the prior notice of dismissal, pro-rata
Annual Christmas Bonus Salary, overdue full and/or pro-rata vacation pay plus the additional
one third and a FGTS 40% fine from the employer. Employees will be entitled to withdraw the
FGTS fees deposited and to unemployment insurance. Employees may consider the contract
terminated by virtue of the employer’s fault in the following conditions:
▪ When they are required to perform tasks that are beyond their competence, subject to the law,
opposed to proper practice and beyond the rules of the contract;
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▪ When they are subjected to overly rigorous treatment by their superiors;
▪ When they are clearly in risk of danger;
▪ When the contract obligations are not fulfilled;
▪ When employers commit an act of wrongdoing against the employee’s or their family
member’s honor and good reputation;
▪ When they are physically assaulted by their superiors, except in their own or someone else’s
legitimate defense; and
▪ When employers reduce their salary, either by number of parts or tasks, in a way that affects
the importance of their earnings.
• Death of an employee: dependents of deceased workers (spouse and children under 18 years
ld) or, in their absence, the heirs, are entitled to the following: a salary for the effective days of
work, vacation pay plus an additional one third, a pro-rata Annual Christmas Bonus Salary and
the FGTS fees; and
• Company extinction or bankruptcy: employees are entitled to all labor rights as if they had
been dismissed without due cause.
Legal obligations upon contract termination
Employers must record the employee’s termination date in their Labor and Social Security ID
Card within 48 hours, regardless of who requested the termination. It is essential for employees
to undergo a medical checkup at the time of termination; this is intended to certify that
employees are able to return to the labor market.
If the employment contract was longer than one year, the company must be assisted (monitored)
by the Trade Union representing the professionals, in order to pay the termination fees; in the
absence thereof, it should be assisted by the agency of the Ministry of Labour and Employment
for their city.
The deadline for the payment of termination fees depends on how the contract was terminated.
For specified time contracts and dismissals without due cause in which the employee worked
during the prior notice period, termination fees must be paid on the first business day following
termination. On the other hand, for resignations, dismissals with due cause and dismissals
without due cause in which the prior notice period was paid, employers should pay the
termination fees within ten days of termination.
Employment Guarantees
An employment guarantee is the right granted to employees to stay in their job even against the
employer’s will. In this case, termination of the contract by the employer is only possible when
employees commit a serious infringement. The main guarantees are:
• Work-related accidents: if the accident results in a suspension of more than 15 days with the
support of sick pay for accidents, employees will have a guarantee of keeping their job for one
year after their return;
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• Union leader: for 1 year after the end of the mandate and starting from the moment they
register their candidacy;
• A member elected by the employees to be part of the Internal Commission for Accident
Prevention: for 1 year after the end of the mandate and starting from the moment they
registered their candidacy, if elected; and
• Pregnant women: from pregnancy up until 5 months after the child’s birth; in case of death of
the pregnant employee, stability will be ensured to the guardian of the child. However, the
abovementioned periods of time may be extended by means of a collective bargaining;
additionally, this extension may apply to other situations, e.g.: employees who are about to
retire. In this case, the laws regulating the profession should be checked.
Hiring costs
Costs of hiring workforce in Brazil are related to the impact of the social charges on the payroll.
Companies that have not opted for the Simples regime
It will be used the methodology of calculation of the burden of charges developed by
researchers of the State University of Campinas (Universidade Estadual de Campinas -
Unicamp) in Preliminary Report of the Sub-Project “Emprego, Salário, Rotatividade e Relações
de Trabalho em São Paulo”9.
According to this study, the average monthly salaries employees earn is divided into two parts:
the first is the average monthly salary employees earn every year, which is calculated by adding
the percentage figures of the monthly pro-rata Annual Christmas Bonus Salary (8.33%) and the
pro-rata one third of vacation pay (2.78%) to the salary registered in the Labor and Social
Security ID Card; the second part is made up of the percentage figures for the FGTS fees
collected (8% on the monthly salary, on the Annual Christmas Bonus Salary and on the
additional one third of the vacation pay bonus) and for the monthly proportion of the impact of
termination fees (as terminations without due cause) on the contract salary, as shown in table 1,
ahead.
Composition of the total monthly average earnings of the worker
Items of direct earnings of the worker Percentage on the contract salary
Monthly salary as per contract (index 100.00) 100.00
Proportional 13th salary (100.00 divided into
12 months) 8.33
Additional pay of one third vacation
proportional pay (one third of 100.00 divided
into 12 months)
2.78
Average monthly payroll (calculation base
for social charges) 111.11
9 The study was developed in December 1994, by FECAMP/SEADE agreement, coordinated by Carlos Alonso
Barbosa de Oliveira and Paulo Eduardo de Andrade Baltar. This methodology was adopted by DIEESE in the Report
Encargos Sociais no Brasil: Conceito, Magnitude e Reflexos no Emprego, of
April 2006, Agreement SE/TEM No. 04/2003.
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Items of worker’s direct remuneration Percentage on the contract salary
Monthly collection of FGTS 8.00
FGTS on 13th salary (8% of 100.00) 0.67
FGTS on additional monthly vacation pays
(8% of 2.78%) 0.22
Termination of contract as a proportional of
earnings 2.49
Total monthly average earnings of worker
(as a percentage of the monthly contract
salary)
122.49
Out of the total received by employees (122.49), only 111.11 is part of the company’s monthly
average payroll (which is the basis for social charges). FGTS deposits will not be subject to
those figures, nor will the termination fees earned by workers who are dismissed without due
cause (prior notice and a 40% fine on the FGTS balance).
The difference between the figures paid by the company and the worker’s total earnings are the
social charges on the payroll.
Social charges are contributions made by companies every month in order to fund public
policies and educational, health, social assistance, leisure, social security, and work-related
insurances services, such as social security contributions on behalf of the National Social
Security System (Instituto Nacional do Seguro Social - INSS), the Work Related Insurance
(Seguro Acidente do Trabalho - SAT), the salary premium for education intended for the
National Fund for Development of Education (Fundo Nacional de Desenvolvimento da
Educação - FNDE), the contributions to the “S System”, which are allocated to fund entities of
interest to both professional and economic categories (Sesc, Senac, Senai, Sesi, Sest, Senat,
Sebrae) that provide social assistance and professional training to employees, land reform
(Instituto Nacional de Colonização e Reforma Agrária - Incra) and incentives to micro and
small companies (Serviço Brasileiro de Apoio às Micro e Pequenas Empresas - Sebrae).
Social charges account for 27.8% of the average monthly payroll (111.11).
Monthly social charges on a company’s payroll
Type of charge Percentage on the monthly average payroll
INSS 20.0%
Insurance against work accidents (average) 2.0%
Education allowance 2.5%
Incra 0.2%
Sesi or Sesc or Sest 1.5%
Senai or Senac or Senat 1.0%
Sebrae 0.6%
Total 27.8%
Based on the data presented in the first two tables, it can be estimated that the final cost of work,
including social charges, is 53.38% higher than the contract salary registered in the Labor and
Social Security ID Card, as verified in third table that uses as example, the hypothetical wage of
BRL 100.00.
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Total disbursement to employ a worker
Expense items Sub-installments Disbursement
1. Contract salary 100.00
2. 13th salary and additional
payment of 1/3 vacation pay
(as a monthly proportion)
11.11
3. Average monthly payroll
(1+2) (calculation base for
social charges)
111.11
4. FGTS and severance pays
(monthly proportion) 11.38
5. Total monthly average
payment of worker (3+4) 122.49
6. Social Charges (due on
111.11) 30.89
6.1 INSS (20%) 22.22
6.2 Insurance against work
accidents (2% average) 2.22
6.3 Education allowance
(2.5%) 2.78
6.4 Incra (0.2%) 0.22
6.5 Sesi or Sesc (1.5%) 1.67
6.6 Senai or Senac (1.0%) 11.11
6.7 Sebrae (0.6%) 0.67
7. Total monthly
disbursement of the
employer (5+6)
153.38
Therefore, social charges in Brazil account for 30.89% of the contract salary, or 27.8% of the
company’s monthly average payroll, or 25.2% of the remuneration earned by workers, or even
20.1% of the total cost of work for the company.
Companies that have opted for the Simples regime
Companies that have opted for Micro-company and Small Company Integrated Taxes and
Contribution Payment System (Simples) make the unified monthly payment subject to the
application of a certain percentage of the following taxes on the monthly gross income: Income
Tax for Legal Entities.
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Inspection
The Ministry of Labor and Employment, by means of auditors, inspects companies concerning
compliance with labor law in regard to labor rights and occupational safety and medicine issues.
In case of any irregularities, a notice of infraction is entered and the company must pay the fines
stipulated or defend itself.
Labor Prosecution Office
It is important to point out the increasing and important role of the Labor Prosecution Office, an
institution aimed at defending the judicial order, the democratic system and social, inalienable
collective and individual interests, especially in the judgment of public civil actions for the
protection of worker’s homogeneous collective and individual rights.
A public civil action is an instrument that is intended to combat irregularities, fraud and illegal
actions committed by companies concerning labor relations.
Labor claims
The limitation period for terminated employees to file a Labor Claim regarding unpaid fees over
the last five years, is two years starting from the termination date. In Brazil, it is very common
for labor conflicts between employers and employees to be settled in Labor Court, not only
because the extrajudicial mechanism available (dispute resolution and extrajudicial agreements
with the assistance of the trade union) will not exempt the company from re-discussing the
addressed issues in Court, but also because the employee will not be required to pay for the
attorney’s fees.
Most claims cease with an agreement between the parties which may be settled at any time
during the process. When there is no agreement between the parties, the lawsuit continues with
the possibility of proof presenting until a sentence is issued. Liability for related expenses is
decided by the judge and falls to the losing party for payment, who may appeal the decision. If
the employee loses, the judge may exempt them from paying the fees provided if they prove a
low income.
The length of a labor proceeding cannot be estimated: it may last from some months to years,
but the Labor Court is becoming increasingly quick and effective in resolving such cases. Law
12,440/11 established the Certificate of Good Standing of Labor Debts (Certidão Negativa de
Débitos Trabalhistas), which certifies that employers do not have any debts with the Labor
Court, and must be presented in bidding procedures sponsored by the Government.
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How to perform merger and acquisitions
M&A activity overview
After the implementation of economic reforms made in the 90’s and the improvement of the
business environment conditions in the last 20 years, Brazil has experienced a significant
increase in Foreign Direct Investment (FDI) inflows to the country, recently reaching the post of
6th most important destination of FDI.
The main drivers of the FDI inflow growth trend are investments on Infrastructure Programs
and investments related to the events hosted by the country such as the World Cup and the
Olympic Games. Another important driver of Foreign Investments to Brazil has been the
increasing number of M&A transactions, especially involving international groups entering the
country. One of the explanations for the growth of cross border deals is the recent devaluation
of the Brazilian Real against international currencies such as the US Dollar and the Euro. This
depreciation makes the valuation of assets in Brazil more attractive to foreign investors,
especially for those that believe in the improvement of the country’s fundamentals in the long
run.
Understanding the M&A process
When deciding for an M&A approach in order to enter the Brazilian market or expand a
Group’s already existing local operations, it is interesting to understand some local peculiarities
before entering the M&A process.
Market research and screening of potential target companies
The first step before actually starting the M&A process would be to analyze the Brazilian
market considering the sector of interest in order to identify some key aspects, such as: the size
and growth trend of the market; regional aspects; growth drivers; business competitors; required
licenses; and local regulatory aspects.
Nonetheless, a common challenge for foreign groups when performing market research is the
availability of information in English, since most of the content is only available in Portuguese.
It is recommended to have a support in the country for necessary researches, as independent
institutions, entities and Chambers of Commerce.
Then, once having a deep knowledge about the market of interest and with the M&A strategy
aligned, the next and very important step would be to look for the right target company that
would be the platform for the market entry.
Screening the market for target companies may present some challenges in terms of logistics,
considering the continental size of Brazil and the different cultural aspects related to it.
Depending on the sector of interest and the size of the target companies, another obstacle can be
the availability of information about these companies. Especially in the middle market, since the
Brazilian companies are not required to publicly release its financial results neither operational
information, with the exception of publicly listed companies or corporations (Sociedade
Anônima - S.A.). Sector and multisector associations could also be interesting sources.
Market research and screening of potential
target companies
Target analysis and financial
modeling
Transaction terms and conditions negotiation
Legal, accounting and operational Due
diligence
Definitive contracts:
closing the deal
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Target analysis and financial modeling
The next step in the M&A process after having selected the target company would be to
approach it and begin the negotiation process by getting the local shareholders attention to
pursue the deal. At this moment, it may be worth having an external M&A advisor with local
experience, in order to avoid exposure and help to set the expectations of the seller right from
the beginning of the negotiation process.
In Brazil, as in most M&A processes throughout the world, it is very common and also
recommended for both parties to execute a Non-Disclosure Agreement (NDA) before
exchanging any information, avoiding exposure and as a protection for sensitive information
that will be exchanged between the parties.
Accordingly, the next action is the target company’s evaluation, which determines:
• The strategic benefits of executing the transaction considering the expected return on the
investment;
• The purchase price as a base to structure the transaction; and
• The deal proposal to be presented to the target company.
Regarding the company valuation exercise, there are various valuation methods available, but
three of them should be highlighted, since they are the most commonly used in the market
considering different cases and specific needs.
Discounted cash
flow
Relative valuation /
Multiples comparison Asset-based valuation
Methodology
Projection of the
financial statements
considering potential
cash flow generation
and its growth
Implicit value of the target
company in comparison to
other transactions
involving peer companies
in the
market
Assessing the
company’s value based
on its assets.
Metrics
Discounted
Cash Flow;
Discount
Rate.
Enterprise
Value/EBITDA;
Enterprise
Value/Sales
Price/Earnings
Book value
(balance sheet)
Replacement
cost.
Discounted Cash Flow
The Discounted Cash Flow (DCF) is the methodology most widely used by institutional
investors when valuing companies in Brazil.
It is based on the Net Present Value of the expected cash flows to be generated by the Company
in the future, discounted at a rate that reflects the Company’s risk and the investor’s cost of
capital.
The DCF is a methodology that requires a deep analysis of the Company’s financials and
growth drivers as well as the several factors that may have influence on the risk of the Company
to perform the expected cash flow generation.
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One of the challenges when running a DCF analysis in Brazil, especially when looking at small
and medium size Companies, privately held, is to understand the company’s financials
considering some local practices frequently observed vis-à-vis the sustainability of the posted
cash flows. For instance, it is very common for Brazilian entrepreneurs, as managing
shareholders at their companies, to receive their entire compensation through dividends, since
dividends are exempt from taxes in the country so far. This practice can artificially inflate the
company’s operating income and may mislead the analysis of unaware investors, resulting in a
quite significant value impact especially on small and medium sized companies.
In this case, the Operating Income of the target company should be adjusted by an estimated
compensation for the managing shareholder based on the market practice for the sector and size
of the target company. The accuracy of the DCF analysis is based on the quality of data and
information available on the target Company.
In Brazil, privately held companies in general are not legally required to have their financials
audited unless they operate in regulated activities, or if they have annual revenues above BRL
300 million or equity above BRL 240 million. Therefore, except on the aforementioned cases, it
is not common for small and medium sized companies to have their financials audited by an
external firm.
However, it is a practice that has been increasing recently due to ascending concerns with
corporate governance and the additional value associated to those practices for the shareholders.
Having said that, especially in the middle market, the careful analysis of the Company’s
financials with a local knowledge of the accepted accounting practices is vital for a good M&A
deal, avoiding issues in the future and possibly jeopardizing the expected returns.
Another important component of the Discounted Cash Flow is the Cost of Capital which is used
as the Discount Rate in the DCF exercise.
The Cost of Capital is calculated as a weighted average of the Cost of Equity of the investor,
considering the risk of the target company or asset, and the Cost of Debt of the referred
company, measured by its cost to raise money with third parties such as banks in Brazil, which
also reflects the company’s risk.
In order to calculate the Cost of Equity from the perspective of a foreign investor valuing a
Company or an Asset in Brazil, the Capital Asset Pricing Model (CAPM) is most commonly
used. It starts by taking into account a risk free rate, normally measured by the US 10 year
Treasury bond. Then, it should be added up a market risk premium, required by this investor
when investing in a variable income asset, adjusted by a coefficient that reflects the risk of the
company’s sector, called Beta.
In addition, investors also would require a risk premium for investing in an emerging market
such as Brazil. Normally, this risk is measured by the Credit Default Swap (CDS) spread
required by investors to invest in Brazilian treasury bonds in comparison to the US Treasury
bond. At the first quarter of 2016, this spread was ranging around 500 bps or, in other words,
5% p.a. This is a result of the recent increase in the investors risk perception for the country.
Until two years ago this figure was ranging around 200 bps (2% spread).
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Depending on the size of the target companies analyzed, especially small and mid-sized
companies, the investors may also require an additional return to compensate for the additional
risk exposure to those companies considering corporate governance, transparency, higher
volatility of cash flows, among others. To sum up, the Cost of Equity (Ke) could be translated
into the following formula:
Ke = Rf + β(Rm - Rf) + Rc + Rs
In which:
Ke = Cost of EquityRf = Expected return of investing in a risk free asset
β = Beta coefficient
(Rm - Rf) = Market risk premium
Rc = Country risk premium
Rs = Size risk premium
Relative valuation / Multiples comparison
One of the most intuitive valuation approaches is the Relative Valuation or the so called
Multiples Comparison, which basically uses the value of transactions of Peer Companies,
publicly traded or private, or assets with similar features in order to assess the value of a certain
Company or asset.
In order to compare the value of the company to its peers, it is normally used some parameters
such as the company’s EBITDA, Net Income, Revenues or other important indicators for the
business area, such as square meters or square feet in the real estate market, number of students
in the education sector, crushing volume capacity for sugar mills, among others.
The most common ratios in the market concerning companies valuation are Enterprise
Value/EBITDA (EV/EBITDA) and Price/Earnings (P/E). The main restriction of such valuation
approach is that it assumes the company analyzed has the same features of the other companies
with which it is being compared, that is not always the case since each company is different
from the other in a certain way, even if they operate in the same sector and market. Another
weak point is that this approach normally uses a performance indicator from the past as a base
for comparison, therefore not fully contemplating future performances of projects under way or
not fully matured. This approach could also be misleading in the case of companies under
financial distress which, for instance, may present negative financial performance in terms of
EBITDA or Net Income leading to the conclusion of a negative value whilst they actually might
have a significant asset or liquidation value. This last point will be better explained in the next
topic, regarding Asset-Based valuation.
Nonetheless, the relative valuation approach is still widely used in the market, since it is very
straightforward. It helps the discussions and negotiations, even when the parties do not have
experience in finance or M&A.
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Asset-based valuation
There are some situations when valuing a company where the Asset-based approach is more
recommended, instead of the approaches previously described, such as:
• Financial distress cases or liquidation processes: in these cases, the companies may not be
generating positive income. However, at the same time, the company may have important assets
that might have more value than the operations related to those assets within the company;
• Non-operating or pre-operational assets: in some cases, a company may have assets that are
not being used in its operations or under a ramp-up phase not yet matured. In both cases, the
potential value of those assets would not be reflected in the Company’s cash flow and should in
a way be added up to the total Enterprise Value.
When resorting to this approach, there are two most commonly used ways of assessing an asset
value:
• Book value: in this case, the asset value is assessed by the amount registered at the Company’s
Balance Sheet, which may be the importance of the investments made to compose that total
asset value of the historical purchase amount, depreciated over time;
• Market value: another way of assessing the value of an asset would be to take into account the
amount of similar assets in the market or its potential replacement cost.
Transaction terms and conditions negotiations
When the evaluation stage ends, the terms and conditions of the transaction must be set.
In most of the cases, it is very common for the parties to have first an indicative agreement
setting the key terms of the transaction before entering into a deeper analysis in the Due
Diligence phase and into the final contracts, which are both money and time consuming.
This indicative agreement is normally in the form of:
• Letter of Intent (LOI);
• Memorandum of Understanding (MOU); or
• Term Sheet.
Earn Out and alternative pricing / payment structures
In order to bridge the gap of value expectations between buyer and seller, it has become
increasingly common in transactions in Brazil to have pricing structures with payment in
variable installments depending on the company’s future performance, the so called Earn Out
payment. In this way, if a seller expects a higher valuation because he/she believes that his/her
company has a strong growth potential, a buyer may accept the valuation proposed by the seller
as long as the company actually achieves some pre-determined performance targets.
Other aspects at an indicative agreement (LOI, MOU and/or Term Sheet)
In addition to defining the Purchase Price, there are also some other important elements to
address at an Indicative Agreement, such as:
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• The key parameters that are the base to establish the proposed Purchase Price. These
parameters should be verified in the Due Diligence phase and may be subject to adjustments in
case of divergence from the initial information received;
• Payment structure;
• Shareholding stake to be acquired for the purchase price offered;
• Scope of the Due Diligence to be conducted next (Accounting/Financial, Tax, Legal,
Environmental, Operational, among others);
• Confidentiality of the transaction terms and information exchanged;
• Exclusivity period in which the parties must not negotiate with a third party for a pre-
determined period;
• Binding or Non-Binding nature of certain or all terms of the Agreement;
• Key shareholding rights for a future partnership (in case of partial shareholding acquisition),
such as key controlling/veto rights, Tag Along/Drag Along rights, among others; and
• Dispute resolution.
Legal, financial, tax and operational Due Diligence
The Due Diligence phase consists in the process of confirming the main assumptions for the
Indicative Term Sheet, based on the preliminary information received on the Target Company,
as well as assessing the potential risks related to the Company’s activities and past practices that
may result in potential claims and liabilities in the future.
For a successful due diligence process, it is paramount to have access to detailed information on
the Company. It is also vital to the Company’s key management.
This process should comprise several different areas of Diligence, such as:
Operational/Business
• Confirmation of operational and business assumptions as well as potential risks associated to
the company’s business and operations;
• Validation of the investment thesis;
• Meeting and evaluating the key management, analyzing strengths and potential weaknesses
that would need to be reinforced;
• Analysis and confirmation of potential synergies;
• Analysis and confirmation of controlling systems in place and potential weaknesses associated
to it; and
• Identification of potential unnecessary costs and expenses that could be optimized.
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Accounting/Financial
• Examination of the Company’s financial statements, crosschecking them with the generally
accepted accounting practices and with the initial information assumptions for the company’s
valuation; and
• Examination of financial liabilities and potential risks associated with it.
Tax/Labor
• Review if all the tax obligations of the Company have been duly fulfilled, including labor
related obligations and social charges;
• Analysis of current tax and labor liabilities that the Company may have; and
• Analysis of potential risks related to an eventual misconduct of the Company in relation to its
tax and labor obligations, which could result in a potential liability in the future, affecting the
new shareholders and potentially compromising the initially expected return on investment.
Legal
• Evaluation of the company’s registrations, licenses, permits and authorizations;
• Verification of Certificates issued in the name of the company attesting that it is in compliance
to all the obligations required by the public authorities;
• Evaluation of contracts with clients, suppliers, creditors and others related to commitments
assumed by the company;
• Evaluation of intellectual property items;
• Evaluation of the real estate used by the company, verifying existing licenses or any sort of
encumbrances imposed on the company’s properties;
• Analysis of the corporate documents evaluating potential limitations or encumbrances
associated to the company’s shares;
• Evaluation of lawsuits and claims against and in favor of the Company;
• Analysis of Environmental issues related to the company’s activities and required
environmental procedures; and
• Analysis of regulatory aspects associated to the company’s operations. For instance, in Brazil,
as in several countries, some activities are overseen by government regulatory agencies which
require the companies in those sectors to follow a set of rules and mandatory requirements, such
as healthcare (Agência Nacional de Vigilância Sanitária - Anvisa), telecom (Agência Nacional
de Telecomunicações - Anatel), aviation (Agência Nacional de Aviação Civil - Anac), education
(Ministério da Educação - MEC), among others.
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Protections and guarantees
The main goals of the Due Diligence process are to identify potential risks associated to the
company’s operations and practices as well as to quantify the potential impact in terms of value
of contingencies and, equally important, to assess the probability of those risks to materialize in
the future.
With the Due Diligence phase concluded and the potential risks and contingencies assessed, it is
possible to discuss and negotiate ways to protect the buyer from the risks associated to the
company’s past practices.
Thus, it is normal for the buyer to seek for guarantees in case of contingencies materializing in
the future. Those guarantees could be in the form of:
• An escrow account, setting aside a portion of the purchase price as a form of guarantee;
• Real Estate; and
• Shares. In this case, the buyer should consider the fact that, despite having an intrinsic value
for the shares given as a guarantee there is also the risk that in case the buyer needs to assume
those shares he/she would also be assuming the issues associated to those shares.
In spite of the aforementioned points, there are also cases in which buyer and seller negotiate a
purchase price assuming that the buyer would bear any potential liabilities of the company at its
own risk.
Other important aspect in Brazilian legislation, which should be considered, is regarding taxes.
There is an expiry period that the government can claim taxes not paid by the company. For
most of the taxes is five years, except for Income Taxes that could go up to six years from the
moment of the tax event. This is a general rule and should be analyzed case by case by local tax
experts during the due diligence process. For instance, when discussing labor taxes and social
charges the debate could be more complex than that.
Definitive contract
Once the Due Diligence phase is completed and the identified issues have been discussed, the
next step is to address the final agreement in the form of the Shares Purchase and Sale
Agreement (SPA).
Generally, the main clauses and conditions of the SPA could be described as follows:
• Price and payment structure and schedule, also describing the shareholding to be transferred
between the parties;
• Additional investment through capital increase and issuance of new shares, when applicable;
• Guarantees from the buyer concerning the purchase price payment;
• Representations and warranties from the seller attesting the company’s current situation
considering all aspects related to its operations and ability to continue with it;
• Representations and warranties from the buyer attesting its capabilities of executing the deal;
• Indemnifications and penalties for breach of the contract;
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• Pre-closing and Post-closing required actions;
• Shareholders Agreement to regulate the relationship among the shareholders with the
transaction going forward (if applicable), considering several aspects such as:
• Corporate governance;
• Ruling and veto rights;
• Preemptive rights;
• Tag and drag along rights;
• Dissolution and succession;
• Profits and dividends distribution;
• Non-competition of shareholders;
• Non-solicitation of key management and employees.
• Binding effects on successors and assigns;
• Confidentiality; and
• Conflict resolution method and venue.
Legal and regulatory approvals
In several cases it is very common to have third parties approvals required for the transaction to
be completed such as:
Creditors (banks, bondholders, among others) with approval clauses in case of change of
control;
• Regulatory agencies, if applicable; and
• Antitrust authorities:
• In Brazil the anti-trust authority is called Administrative Council for Economic Defense
(Conselho Administrativo de Defesa Econômica - CADE). Its preapproval is required for
transactions in which both of the parties involved presented Gross Revenues in the calendar
year precedent to the transaction above BRL 75 million, in the case of the seller, and above
BRL 750 million, in the case of the buyer. The aforementioned revenue threshold should
consider the entire group of companies associated to each party involved.
Financing M&A
An important decision in every M&A process is how the buyer is going to finance the deal. This
can occur either through its own funds or through third-parties. By leveraging the transaction
using third party funding, the buyer can increase its expected return on investment.
Therefore the preferred structure will always try to involve at least some sort of leverage. With
regards to leveraging, it is relevant to point out some differences between Brazil and more
mature markets. While in the United States is very common to come across Leveraged
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Buyouts 10 , in Brazil these structures face some challenges due to the smaller size of the
monetary market and to the higher costs of raising money locally, as previously described in
this guide.
Accordingly, it is relevant to say that a transaction to be leveraged locally would require the
target company to have high margins and a significant growth rate in order to bear the high
interest rates charged by the banks and also would probably require good guarantees.
Another way of a foreign investor to finance the deal is to raise money abroad using its own
credit facilities available. However, it is important to keep in mind the risk of the exchange rate
volatility throughout the time of the loan maturity. However, the significant lower interest rates
abroad could compensate a potential risk of local currency devaluation.
The most preferred way of financing a transaction with third parties in Brazil is with the target
company’s sellers. In many times, the purchase price payment can be structured in installments
upon a compensation for the sellers which can be much lower than the interest rate spread
charged by local banks. Obviously, this sort of structure depends on each case, considering the
financial situation of the seller and also on a certain degree of negotiation.
Other sources of third party financing may be:
• Debentures and other sorts of bonds: Brazil has a quite developed and organized bond
market. For instance, according to Brazilian Capital Market Entities Association (Associação
Brasileira das Entidades dos Mercados Financeiro e de Capitais - ANBIMA), in 2014, the
volume of new bond issuances considering debentures, promissory notes and other private
bonds amounted to approximately BRL 115 billion (roughly USD 49 billion);
• Private equity funds and family offices as coinvestors: in 2014 there were approximately
USD 50 billion in private equity funds available with a focus in Brazil;
• Multilateral development banks (e.g.: IFC, KFW, BNDES11);
• Real estate funds: in some cases the transaction may also require the acquisition of real estate
which calls for a great portion of the total transaction amount. In many of those cases, there are
in Brazil several funds willing to invest in the real estate as a joint effort to the deal financing.
The analysis of all these aspects and details is crucial for a successful deal.
10 Leveraged Buyout - a buyout using borrowed money, the target company's assets are usually security for the loan. 11 Brazilian Development Bank. It is relevant to report that BNDES provides a range of programs for financing this
type of acquisition, it is important to be well informed before any decision.
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How to franchise in Brazil
The franchising system in Brazil
The Franchising consists of a system whereby a franchisor concedes to a franchisee, through a
franchise agreement:
• The right of use of a trademark or a patent;
• The right of exclusive or semi-exclusive distribution of products or services; and
• Eventually, the right of use of deployment technology and business administration or
operating system developed or held by the franchisor.
This concession occurs through direct or indirect remuneration, without, however, being
characterized employment relationship between franchisor and franchisee.
Franchising is one of the business formats adopted for the expansion of the activities of a
company.
For those who want to expand their businesses, franchising carries some important advantages
as the possibility of an available third party capital for the business expansion and the
knowledge on a given territorial area that is unknown or little explored by the franchisor
company.
Before approaching the process of franchising, which is the subject of this guide, it is important
to mention some of the frequently asked questions about Company Owned Stores and
Franchises.
Company Owned Stores (or subsidiaries) are the way of expansion of a retail self-controlled
private capital company. Typically, these stores are branches, subsidiaries or independent
companies belonging to the same business groups of the main company.
Franchises, on the other hand, are independent legal entities, controlled by the franchisee
approved in the selective process conducted by the Franchisor. Franchises are standardized
under the same brand, architectural layout and visual merchandising, as determined by the
Franchisor. Franchisees must comply with all the provisions of the Brazilian Franchise Offering
Circular (Circular de Oferta de Franquia - COF) – similar to the Franchise Disclosure
Document (FDD) in the United States – and the franchise agreement. Both capital for opening
the franchise and responsibility for its obligations belong to the franchisee.
The Franchise market in Brazil began to be organized in the 80’s. The most important
milestones were the creation of the Brazilian Franchising Association (Associação Brasileira de
Franchising - ABF) and later on the enactment of a specific law (Law No. 8,955/94), which is
still the basis of the relationship between Franchisors and Franchisees.
As a core message, it is important to note the enormous difference between:
• Deciding to build and structure an international franchise network in Brazil; and
• Deciding to export an international franchise system to Brazil.
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The majority of operations that neglected an initial analysis of the Brazilian market, and simply
chose to export a foreign franchise system to Brazil, faced an enormous rate of business failure.
Economic data
On a consolidated basis, the Franchising industry in Brazil has grown considerably more than
the retail industry and even more than the Gross Domestic Product (GDP), according to data
from the last decade. Even in the current scenario of instability, the trend of continuous growth
in the franchise industry in relation to the country’s economy has been confirmed with the
increase in the number of franchise networks and the consequent rise of income for the
franchisors.
Evolution of Retail, Franchising and the GDP in Brazil (2004-2014) (Nominal values)
Franchise formatting
Three corporate formats deserve greater emphasis for those who want to implement a
franchising business in Brazil:
• Stock Corporation (Sociedade Anônima - S.A.);
• Limited Liability Company (Sociedade Limitada - Ltda.); and
• The Single Holder Limited Liability Company (Empresas Individuais de Responsabilidade
Limitada - EIRELIs).
The Stock Corporations are classified as business corporations with shares and may take the
form of publicly or privately held companies. It is a corporate type commonly used by medium
and large size companies. The expenses for their constitution and maintenance are higher and
they are subject to greater bureaucracy and legal complexity than the Limited Liability
Companies.
5,7
3,14
65
-0,2
7,6
3,9
1,82,7
0,1
9,2
4,86,2
9,7 9,1
5,9
10,9
6,7
8,4
4,3
2,2
9,1
13,2
11,1
15,6
19,5
14,7
20,4
16,9
20,8
10,2
7,7
-5
0
5
10
15
20
25
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
GDP (%) Retail (%) Franchising (%)
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Limited Liability Companies are classified as limited liability partnerships and have been the
most common choice among Brazilian entrepreneurs. It is a corporate format that is normally
used by small and medium size businesses. The expenses for its constitution and maintenance
are lower, and they are subject to less bureaucracy and legal complexity than the Stock
Corporations.
The Single Holder Limited Liability Companies (EIRELIs) are one-person companies,
consisting of a sole shareholder for the entire share capital. It is a format that is commonly used
by small businesses. The expenses for their constitution and maintenance are even lower, and
they are subject to smaller bureaucracy and legal complexity than the Stock Corporations and
the Limited Liability Companies.
Once the type of corporation that best suits the business’ purposes is defined, it is necessary to
establish the Company’s Bylaws containing all the features and mandatory provisions required
by law. Among some of the formal requirements of the Company’s Bylaws, one should pay
special attention to the corporate’s name and object as they have to be in accordance with the
activities that the company intends to develop. The Bylaws must be duly filed at the Board of
Trade (Junta Comercial) of the state where the company will establish its main office. The
company is only considered formally constituted after its file at the Board of Trade.
There is no restriction for the constitution of a franchisor company owned by foreign holders.
However, it is required to have:
• A Brazilian manager; or
• A foreign manager with a permanent visa in Brazil.
Franchisor companies must take the following points into consideration:
• Corporate name must contain the terms “franchisor”, “franchise”, “franchising” or similar;
• Corporate object must contain not only the activity “granting of franchising identified by NNN
brand”, but also other activities such as:
• The coordination of the activities of the franchisees or other companies that may use the
brand;
• The definition of administrative, operational and market rules for these franchisees and other
companies;
• The management of intangible assets (trademarks, patents, among others.);
• The management of advertising and marketing budget of the franchisee’s network; and
• The pilot unit’s main activity. Therefore, if the franchisor company owns branches, it is also
recommended to include in the corporate object a specific provision for each branch, containing
their specific activities.
• The implementation of a pilot unit is very important. Through it, the franchisor is able to
develop operational standards that in the future will be transferred to the franchisees and also be
written in manuals and used in training programs. In many cases, the pilot unit is constituted as
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a branch of the franchisor company and its corporate object should be its specific activity. The
headquarters will have a corporate object related to the compliance with the administrative and
financial functions of the franchisor.
Shareholders’ agreements
The bylaws of the company is a public document, which means it is available for public
consultation through a simple certificate or copy request at the Board of Trade of each state.
Due a lack of confidentiality, it is advisable that partners’ special interest issues be regulated
through partners’ or shareholders’ agreements.
The partners’ or shareholders’ agreement is regulated by the Law No. 6,404/76, better known as
Lei das Sociedades por Ações and the Civil Code. The partners’ or shareholders’ agreement
binds the signatories and it should:
• Be in written form;
• Respect the general rules of Law; and
• Be properly filed at the company’s headquarter.
The Lei das Sociedades por Ações lists some of the topics that may be object of a partners’ or
shareholders’ agreement, such as:
• The purchase and sale of shares;
• The right to first acquire them;
• The right to vote; and
• The Company’s Controlling.
Franchisor companies must take the following points into consideration:
• The partners’ or shareholders’ agreement should rule over the ascertainment of assets and the
situation of the company’s intellectual property in cases of voluntary or litigious corporate
dissolution;
• In Brazil, the corporate disputes are not usually solved in a short period of time and generally
there are no confidentiality guarantees. Thus, it is strongly advised that the partners’ or
shareholders’ agreement provides the arbitration as a mean of solving corporate disputes. In
Brazil, the arbitral decision has the same effects as a judicial decision. In addition, arbitration
has the benefits of confidentiality, celerity and arbitrator’s expertise. However, the arbitration in
Brazil usually implies higher expenses than a judicial dispute, because it is a much more
specialized procedure. On the other hand, considering the referred benefits of arbitration,
especially celerity and confidentiality, most times arbitration is a more advantageous procedure
for companies and its costs are worth if considered from the business point of view.
Corporate governance and compliance
Corporate governance covers all procedures for regulating the relationship between
shareholders, partners, managers and control agencies of a company. Corporate governance’s
main objectives are to ensure that decisions are made in the companies’ best interest. In Brazil,
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corporate governance is based on the fundamental principles of transparency, equity,
accountability and corporate responsibility.
Corporate governance has been brought to the fore even more after the enactment of the
Brazilian Anti-Corruption Law, which sets administrative and civil liability of companies
involved in corruption, as well as other misconduct against the Public Administration.
Therefore, the implementation of internal control procedures and whistle blowing policies are
recommended. Besides that, a Code of Ethics complied by employees and franchisees prevents
damages that a possible misconduct can cause to the franchisor’s and the franchise network’s
reputation.
Tax environment
Franchisor companies must take the following points into consideration:
• It is important to decide in which municipality the registered office of the franchisor will be
established. The franchisor activity is treated as services provider, activity to which municipal
taxes are imposed. Municipalities are free to set the tax rate (currently it can differ between 2%
and 5% over gross revenues);
• It is important to understand the tax aspects of the supply chain, including the franchisor’s
suppliers and the network of franchisees’ suppliers. In the case of state taxes, the difference in
rates charged by each state often carries the collection of border taxes (known as tributary
substitution). It can cause relevant impact over the cash flow/profitability of products.
Intellectual Property management
Intellectual Property protects and regulates the rights resulting from any production of the
intellect, whether in the industrial, scientific, literary or artistic domains. The management and
protection of intellectual property is one of the main functions of a franchisor. In Brazil, the
Intellectual Property includes:
• Copyright; and
• Industrial Property.
Copyright
Copyright is a set of prerogatives conferred by law to the physical or legal person creator of
intellectual work, so they can enjoy the moral and economic benefits resulting from the
exploitation of their creations. In Brazil, copyright is regulated by the Copyright Law (Lei dos
Direitos Autorais), which protects the relationship between the creator and those who use
his/her artistic, literary or scientific creations, such as texts, books, paintings, sculptures, music,
photographs, projects, computer software, among others. The intellectual work protected by
copyright does not require registration. Registering is useful only as means of authorship proof.
For legal purposes, the copyrights are divided into the author’s moral rights and the patrimonial
rights. Patrimonial rights may be entirely or partially transferred to others through licensing,
concession, assignment or other legal means.
Copyright is fundamental for franchisors, especially regarding the protection of engineering and
architecture projects (architectural layout). The protection of computer software used by the
franchisor and/or the franchisee is also extremely important. Therefore, it is advisable for the
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franchisor to guarantee the registration and the proper protection, by written contracts, of the
sale and exploitation of rights related to engineering and architecture (layout) and the computer
software used.
Industrial Property
Industrial property is a set of prerogatives and rights conferred by law on patents on inventions
and utility models, industrial designs, trademarks and geographical indications, as well as
cultivars, domain names and other elements of industrial innovation. In Brazil, industrial
property is regulated by the Industrial Property Law (Lei de Propriedade Industrial), Law No.
9,279/96, which protects and provides for the rights to patents and utility models, industrial
designs, trademarks and unfair competition. Industrial Property rights are only acquired through
proper registration with the National Institute of Industrial Property (Instituto Nacional de
Propriedade Industrial - INPI), the national institute for industrial property.
Among the elements of Industrial Property, the brand is the main element of the franchisor’s
business. According to Brazilian law, the brand is a distinctive sign, visually perceptible,
designed to identify and distinguish goods and services of a company. According to their visual
presentation, brands are classified as nominative, figurative, mixed or three-dimensional.
Brazilian law also provides for two special categories of marks, namely the highly reputed
brands and notorious brands.
The INPI adopts the Nice Classification (Classificação Internacional de Produtos e Serviços de
Nice - NCL), which is an international classification of goods and services with 45 classes, with
information about the various types of products and services and what belongs to each class.
The classification system is divided between products and services. Upon registration, it is
compulsory to indicate the class (field of activity) connected with the brand.
Franchisor companies must take the following points into consideration:
• Any person or entity, domestic or foreign, exercising legal activity may require the trademark
registration in Brazil, but it is required to prove the activity in the field of the products and
services connected with the brand;
• It is extremely important that the franchisor promotes the registration of the brands and their
corresponding classes connected to the services provided to the franchise network and the
products or services classes offered to the consumers through the franchise network. Currently,
Class 35 is the one correspondent to the franchising services (including advertising services,
business management, business administration, office functions, and others), in which the
franchisor brand should be registered;
• It is recommended that the franchisor perform researches along with INPI to verify if no
previous registering requests of identical or similar brands exist, because the brands right of use
is one of the most relevant elements of franchise agreements;
• The franchisor should also register with INPI any contracts involving technology transfer,
franchise agreements and similar for purposes of foreign royalties payment, if there are any.
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Franchise manuals
The Franchise Law does not establish how many manuals a franchisor should provide. It is
advisable that the franchisor provide at least three (3) manuals to the franchisees, such as:
• Implementation manual, regarding the franchise pre-operation;
• Point of sale manual, for the franchisee’s sales team, focusing on operation routines and sales;
and
• Franchise relationship manual, for the franchisee, focusing on operational rules for a better
relationship with the franchisor.
Considering Brazil’s extension and the importance of the appropriate use of the franchise brand
(and all other intellectual property elements) by franchisees, many franchisors have been using a
manual exclusively for branding, besides the other manuals already mentioned.
Franchise manuals are not documents attached to the Franchise Offering Circular (COF). The
law does not determine the exact moment when the franchisor must provide the manuals to the
franchisee. It is a franchisor decision, however the manuals are usually delivered with the
signing of the preliminary contract. The manuals must be constantly updated. Most franchisors
provide around three (3) and five (5) manuals.
Common practices in franchising
Franchisors usually create a group communication channel for the network of franchisees in
order to stimulate discussion, criticism and suggestions and, most importantly, spread the
network’s best practices. The two main formats used for this communication channel are:
• The Board of Franchisees; or
• The Association of Franchisees.
The Board of Franchisees is a consultative body with no defined structure or legal personality.
The Franchisees Association is a non-profit organization of deliberative nature, which has own
legal personality and constituted according to law. Both formats are structured by the franchisor
and are composed of representatives of the franchisor and franchisees.
It is recommended to franchisors, in either case, to define rules regarding purpose, corporate
structure, eligibility requirements, the election of franchise network representatives, rules of
vacancy, operational budget, accountability, voting quorums, representation and franchisor’s
veto privilege in deliberations. All these rules should be written in the Board Regulation or in
the Association Bylaws.
The Board of Franchisees or the Franchisee Association are usually responsible for monitoring
and advising the franchisor in the management of group marketing funds collected by the
franchisee network, commonly referred to as ‘Advertising Funds’.
When choosing whether to establish a Board or Association of Franchisees, the maturity level of
the franchise network must be considered. It is recommended that franchise networks with
lower maturity level or in their early stages choose to establish a Board of Franchisees, and that
franchise networks of intermediate or higher maturity level choose to establish an Association
of Franchisees.
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Consulate General of the Republic of Turkey in São Paulo
Office of the Commercial Attaché
Address: Rua Gomes de Carvalho, 1581, Cj. 810, Itaim Office Tower,
Vila Olímpia, São Paulo – SP, CEP 04547-006 BRAZIL
Tel: +55 11 3045 1733
Fax: +55 11 3045 1899
E-mail: [email protected]
