Tax Guide - Brazil

1 Brazil Business and Taxation Guide

Business and Taxation

Guide to

Brazil


Preface This guide was prepared in 2012 by Mazars in Brazil. Present in Brazil since 1995, Mazars has almost 500 employees in four offices:

So Paulo Rio de Janeiro Campinas Ribeiro Preto.

The firm offers a broad range of valued-added services to clients, including:

Accounting & Outsourcing Services o Accounting & Financial Outsourcing o Direct & Indirect Tax Outsourcing o HR Outsourcing o Secretarial Services o Accounting Tax Reconciliation

Consulting o Strategy o Benchmarking o Marketing & Sales o Operational Excellence o Information Technology o Sustainability & Human Rights o Asset Management o Conduct & Human Resources o Risk Management

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

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

Financial Advisory Services o Transaction Services (Acquisition & Vendor Due Diligence) o Valuation o Litigation & Arbitration o Project Finance & Modelling.

Mazars is an international, integrated and independent organisation specialising on Audit, Consulting, Accountancy, Tax, Legal and Advisory Services. The firm has 13,000 skilled professionals


working in 69 countries, making up an integrated partnership across all continents. Mazars also has correspondents and joint ventures in 15 additional countries. This guide has been prepared to assist people interested in doing business in Brazil. It is intended to answer some of the important broad questions that may arise, but does not cover exhaustively each subject. Seeking appropriate professional advice about the relevant laws and regulations is advisable.

The key contacts in Mazars in Brazil are:

Eduardo Cabrera Managing Partner Email: [email protected] Tel: +55 11 3524 4577 Eder Mutinelli Consulting Email: [email protected] Tel: +55 19 3368 7811 Dominique Nezan Audit Email: [email protected] Tel: +55 11 3524 4582 Firas Abou Merhi Financial Advisory Services Email: [email protected] Tel: +55 11 3524 4577 Uipiquer Dos Santos Tax Email: [email protected] Tel: +55 11 3524 4539 Ricardo Aquino Accounting and Outsourcing Services Email: [email protected] Tel: +55 11 3524 4578

Praxity 2011 This guide is intended as a general guide and should not be acted upon without further advice.

mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


Contents Page 1. General information 6

1.1 Opportunities and possible obstacles for foreign investors 1.2 Area and population 1.3 Government and law 1.4 Currency 1.5 Economy 1.5.1 Industry 1.6 Financial stability

1.6.1 Interest rates 1.6.2 Debt and credit ratings 1.6.3 Exchange rates 1.6.4 Miscellaneous indicators

2. Regulation of foreign investment 10 2.1 Investment requirements and sectors 2.2 FIP and FMIEE 2.3 Anti-trust authorities 2.4 Super CADE 2.5 Regulatory agencies 2.6 Control of international financial operations

3. Government incentives 13 3.1 Tax incentives 3.2 Special Economic Zones

3.2.1 Free-Trade Zones (FTZ) 3.3 Special customs regimes 3.4 Fostering exports 3.4 R&D and green technologies

3.4.1 Information technology 4. Business organisations available to foreigners 16

4.1 Legal entities 4.2 Commercial agreements

5. Setting up and running business organisations 18 5.1 Accounting and audit standards

5.1.1 Brazilian GAAP and IFRS 5.1.2 The Equity method

5.2 Audit requirements 5.3 Fiscal reporting obligations

6. Corporate taxes and social charges 21 6.1 General principles

6.2 Corporate income tax 6.2.1 Actual Profit tax regime 6.2.2 Presumed Profit tax regime 6.2.3 Arbitrated Profit tax regime 6.2.4 SIMPLES (simplified tax regime)

6.3 Federal Social Contributions on gross revenues (PIS /COFINS) 6.4 Other Federal, State and Municipal taxes and contributions

6.4.1 Tax on Industrialized Products (IPI)


6.4.2 Contribution for Intervening in the Economic Domain (CIDE) 6.4.3 Tax on Financial Operations (IOF) 6.4.4 State Tax on Circulation of Goods (ICMS) 6.4.5 Municipal Service Tax (ISS) 6.4.6 The gross-up taxation system

6.5 Transfer Pricing 6.6 Consolidation or group taxation 6.7 Dividends and interest 6.8 Thin capitalisation 6.9 Interest on net equity 6.10 Other tax considerations

6.10.1 Asset deal vs. Share deal 6.10.2 Royalties and copyrights 6.10.3 Importation of services 6.10.4 Controlled Foreign Company (CFC) rules 6.10.5 Capital gains tax 6.10.6 Declaration of Brazilian Capital abroad for residents (DCBE)

6.11 Labour laws 6.11.1 Hiring, dismissal and litigation 6.11.2 Health insurance 6.11 3 Remuneration and bonuses 6.11 4 Pensions and vacations

6.12 Labour unions and collective agreements 6.13 Social Security contributions

6.13.1 INSS Employee Contribution (2012) 6.13.2 Illustrative examples of employer labour costs

7. Personal taxation 34 8. Double taxation agreements 35 9. Sales and use taxes 36 9.1 State Tax on Circulation of Goods (ICMS) 10. Portfolio investments for foreigners 39 11. Trusts 40 12. Practical information 41

12.1 Transportation 12.2 Language 12.3 Time relative to Greenwich Mean Time (GMT) 12.4 Business hours 12.5 Public holidays

13 Appendices 43 13.1 Privileged tax regimes 13.2 Tax haven jurisdictions


1. General information 1.1 Opportunities and possible obstacles for foreign investors

At the end of December 2011, Brazil overtook the United Kingdom as the 6th largest economy in the world. Since 1994, Brazil has succeeded in reducing inflation and progressively initiated a steady growth that had been anticipated for many years but always postponed due to a lack of economic and political stability. After the 1997/1998 Asian crisis, Brazil entered a new era of economic development and has multiplied its Gross Domestic Product (GDP) by five since 2002. Brazils economy is now largely based on services (67%) and industry (27%), while agriculture remains one of the most productive in the world. The country is a top producer, manufacturer and exporter of aircrafts, automobiles, electronics, textiles, footwear, ethanol, steel, sugar, coffee, orange juice, soybeans and corned beef, among others. Abundant natural resources are also a key to Brazils economic success. Brazils land area ranks 5th in the world and its soil is rich in bauxite, iron ore, timber, tin, manganese, natural gas, aluminium, nickel, gold and petroleum. In addition, more than 85% of its electricity production comes from renewable sources (hydropower, biomass, wind, solar). Brazil has a large and young population (5th largest in the world with 192.4 million individuals1, 26% are under 15 years old) and a fast growing middle-class. Despite all these positive aspects, Brazil also faces challenges in its development momentum. Informal activities are still apparent, bureaucracy slows down administrative processes and the tax environment is unstable and complex (for example, federal, state and municipal levels). There is a large social gap between the affluent and the poor and the geographical imbalance between the North and South still exists. Indeed, Southern states of So Paulo, Rio de Janeiro and Minas Gerais represent more than 50% of Brazilian GDP. Nonetheless, Brazils economy offers far more opportunities than threats. Incoming events (World Cup 2014, Olympic Games 2016), good macro-economic conditions and forecasts, strong domestic market and investments in infrastructure and skilled people, as well as the political stability, should be a source of confidence and interest for potential investors. 1.2 Area and population Brazils population is culturally diverse, built over the centuries through various waves of voluntary or forced immigration (mainly Portuguese, but also Italian, Spaniards, German, Japanese, Middle-Eastern and African slaves), mixing with indigenous populations. Brazilian life expectancy is the highest among the BRICS (Brazil, Russia, India, China and South Africa). It is still currently behind Western standards, although the evolution of its Human Development Index shows that the country benefits from one of the highest development trends.

1 Source: Brazilian Geography and Statistics Institute (IBGE), 2011


The country counts on a young and relatively employable population ready to take on the future challenges that a fast developing country, such as Brazil, inevitably faces. Brazil Life expectancy 73.5 Literacy rate (15 years and above 90% Median age 29.3 Urban population 84% Human Development Index (HDI) 0.718 HDI evolution since 1995 (%) 13% Unemployment rate (%) 6.0% Age structure 0-14 years of age 26% 15-64 67% 65+ 7% 2 Brazilian society is moving fast. From 2010 to 2020, 8.8 million people are expected to migrate from the low-income brackets, classes E and D, to the middle class (class C). Brazils social classes, 2003 to 2014 (% of the population) Classes and monthly revenues 2003 2009 2014 Class A & B (>R$4,635) 8% 11% 16% Class C (R$1,159 to R$4,635 37% 50% 56% Class D (R$701 to R$1,159 27% 24% 20% Class E (


1.5 Economy While the USA, China and Japan continue to dominate GDP ranking, Brazil became the 6th largest economy in 2011, ahead of UK. Brazils GDP growth slowed to 2.7% in 2011, compared to 7.5% in 2010. Behind China, but ahead of Russia and India, Brazil has become one of the most successful places to invest in. Inbound investments have virtually doubled since 2007. Brazil GDP Growth rate 2011 2.7% Per Capita GDP 2011 (US$) 12,789 Inflation (consumer prices 2011) 6.6% FDI Net Inflows 2011 (US$ billion) 66,7 Stock of FDI 2011 At Home (US$ billion) 426 World rank for FDI stock #13 4 Geographical disparities are still strong among the 26 states and the Federal district; Southern states remain the most populated and the drivers of an economy now led by services. States of So Paulo, Rio de Janeiro and Minas Gerais represent more than 40% of the population and 50% of the GDP. 1.5.1 Industry Brazil has recently become an important oil producer, as a result of recent offshore crude oil reserves. The country is also a leader in renewable energy, as hydropower and biomass account for more than 85% of total electricity output. Brazils main export partners are:

China 17% USA 10% Argentina 9% The Netherlands 5% Japan 4% Germany 3% Italy 2% Chile 2% UK 2% South Korea 2%

The countrys main import partners are:

USA 15% China 15% Argentina 7% Germany 7% South Korea 4% Japan 4% Nigeria 3% Italy 3%

4 World Bank, CIA, CEBR, IMF, UNCTAD


France 3% India 2%

5 1.6 Financial stability 1.6.1 Interest rates The Brazilian Central Bank has taken measures to reduce interest rates, lowering them several times in 2011 and 2012. High rates have attracted substantial foreign capital flows leading to an overvalued currency unfavourable to exportations. The interest rates have also generated a higher risk of non-payment from borrowers to banks and limited the level of lending to customers. 1.6.2 Debt and credit ratings Brazilian public gross debt only represented 54.3% of GDP in 2011 (compared to more than 100% in many developed countries). Brazils public gross debt is projected to drop to 40.4% by 2016. This improvement is supported by the continuous increase in the countrys international credit ratings, which is currently positive (Moodys) and stable (Fitch and Standard & Poors). 1.6.3 Exchange rates Exchange rate fluctuation remains a major issue for both local companies in their import and export operations and for foreign investors in their long term cash management strategies. 1.6.4 Miscellaneous indicators Transportation infrastructure is still in its early development stage compared to mature economies. Access to new technologies is widespread but still at a prohibitive cost. There are 251 million mobile phone lines in Brazil. Just over one third of the population (39%) use the Internet. 6 More than 70 million vehicles operate in Brazil. Local production amounted to 3.4 million units in 2011 (+0.7% compared to 2010) whereas imports represented approximately 20.0% of total licensing in the last two years

5 Source: Ministrio das Relaes Exteriores (MRE) 6 Source: CIA, CCFB, ANATEL


2. Regulation of foreign investment 2.1 Investment requirements and sectors No nationality or minimum capital investments are required in order to start a business in Brazil. However, there are some exceptions, such as:

1. Respecting some liquidity and solvency ratios for public tender or 2. Appointing a foreign individual as a Brazilian entitys manager, administrator or executive

director. In case 2, following the Normative Resolution n95 released on 10 August 2011, a minimum capital investment is required, for both Sociedade Annima (SAs) and Limitadas (Limited Liability Companies). The requirements are:

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

R$ 150,000 per foreign worker, along with the commitment that at least 10 new jobs (per foreign worker) will be created in the following two years.

Foreign investments are authorised in many activities. These include:

Mining, oil and gas Agriculture and forestry Light manufacturing Telecommunications Electricity Banking and financial institutions (with prior authorisation from the Brazilian government) Insurance (limited) Tourism Retail.

Foreign equity ownership is limited to 20% in air transportation and 30% in media industries (TV broadcasting and newspapers). Some foreign investment sectors are prohibited. These include:

Nuclear energy Mail and telegraph services Public health services Aerospace industry Sanitation.

However, such sectors may remain accessible, in some cases, through local investment vehicles. 2.2 FIP AND FMIEE


Both regulated by the Securities and Exchange Commission (CVM), the Fundo de Investimento em Participaes (Private Equity Fund or FIP) and the Fundo Mtuo de Investimento em Empresas Emergentes (Emerging Companies Investment Fund or FMIEE) are not legal entities but funds held by financial investors. They have rapidly become attractive venture capital and private equity investment vehicles, as they are not subject to corporate and gross revenue taxes (IRPJ, CSLL, PIS/COFINS). Some terms and conditions must be respected. Any participant cannot hold 40% or more of the funds quotas and income. Furthermore, the portfolio must not comprise debt securities exceeding 5% of the funds net equity. If a foreign investor resides in a low tax jurisdiction, he or she will not benefit from any exemption. 2.3 Anti-trust authorities If any participant of a M&A contract presents an annual gross revenue higher than R$ 750 million in Brazil, and another participant an annual gross revenue above R$ 75 million in Brazil, then the whole case must be presented for approval or rejection to the Federal Antitrust Agency (Conselho Administrativo de Defesa Econmica or CADE). This authoritys investigation can take a maximum of 240 days. On request of the participants, the duration of the investigation can be extended to 300 days, or up to 330 days by the CADE. 2.4 Super CADE Up until the end of 2011, contracts could be presented within 15 days after completion. However, after the law change in 2012, all projects signed after 31 May 2012 must now be submitted prior to their execution (Lei no 12.529/11). This Super CADE law presents some uncertainties to the business community regarding potential delays and the operational implication of this on-hold period. For example, communication of the transaction, management during the interim period, business implications. However, according to the CADE, non-complex operations are expected to be cleared within 60 days maximum. Furthermore, authorities diminished the constraints on M&A deals by raising the thresholds for prior analysis. These were increased from R$ 400 million and R$ 30 million initially, to R$ 750 million and R$ 75 million respectively (Interministerial Ordinance n994 of 30 May 2012). This is anticipated to reduce the number of cases to be studied and should hopefully accelerate processes. 2.5 Regulatory agencies In order to control the potential transfer of public entities to the private sector, and to keep regulating and supervising the economy, the Brazilian State created various regulatory agencies for each branch.

Banking and insurance sectors are regulated by the Brazilian Central Bank (BACEN - Banco Central do Brasil) and the SUSEP (Superintedncia de Seguros Privados) respectively, while Brazilian Stock Exchange is under the authority of the CVM (Securities and Exchange Commission - Comisso de Valores Mobilirios).

The IBAMA was created to deal with environmental issues, such as elaborating standards to limit pollution, making decisions on the localisation of industries and authorising various types of projects (hydroelectric dams for instance).

The other main agencies in Brazil are: o ANEEL (Electricity)


o ANATEL (telecommunications) o ANP (oil and natural gas) o ANTT (transport) o ANAC (civil aviation) o ANVISA (sanitation) o ANS (health) o ANA (water resources) o ANCINE (cinema industry).

2.6 Control of international financial operations The Brazilian Central Bank (BACEN) is responsible for controlling financial relations with other countries. Any inbound or outbound financial operation must be registered in the dedicated Electronic Declaratory Registry (Registro Declaratrio Eletrnico or RDE):

Foreign Direct Investments in the RDE-IED (Investimentos Estrangeiros Diretos) Foreign investments in capital and financial markets in the RDE-Portfolio Debtor financial operations towards other countries in the RDE-ROF (Operaes Financeiras).

Debtor financial operations include financial loans, rent of equipment, chartering of vessels, etc.

Individuals and legal entities intending to perform such operations must be personally registered at the Brazilian Central Bank (BACEN), in the Cademp (Cadastro de Pessoa Fsica/Jurdica, Residente/no Residente no Pas).


3. Government incentives 3.1 Tax incentives Foreign investors may benefit from all tax incentives in Brazil, as there is no nationality restriction. Tax benefits may be granted by the States (a total of 26 plus the Federal District of Braslia), the Municipalities or by Federal organisations specific to each specific sector. It is important to note that it is mandatory to be established as a registered company in order to benefit from any kind of tax benefit. Tax Authorities usually grant the tax benefit to the main Federal Tax Number (CNPJ), i.e. the parent company. 3.2 Special Economic Zones 3.2.1 Free-Trade Zones (FTZ) Investments may be performed in Free-Trade Zones, for example Manaus FTZ, North and Northeast regions, among others. Dependent on fulfilling certain conditions in relation to localised economic activities, production and/or consumption, foreign and residential investors may benefit from exemption or reduction of:

Corporate income tax (IRPJ) Import duties Excise tax (IPI) Sales tax (ICMS) and Taxes on gross revenues (PIS/COFINS).

Many government incentive programmes also offer low cost financing, which has been very important in relation to Brazils high inflation and high bank interest rates. The main government financing entity is the BNDES (Banco Nacional de Desenvolvimento Econmico e Social).

Manaus Free-Trade Zone (MFTZ) o 75% of reduction of IRPJ for 10 years (currently limited until 2023) o reduction of up to 88% of Import Tax (II) o exemption of IPI if locally consumed and/or produced o reduced ICMS tax rate o exemption of PIS/COFINS when importing in MFTZ o no PIS/COFINS on raw, intermediate and packing materials when buyer and supplier

are located in MFTZ and acquired materials are used in a local manufacturing process

o limited PIS/COFINS (mostly 3.65%) on sales of locally produced goods. Superintendence for the Development of Amaznia (SUDAM) & Northeast (SUDENE)

o Independent agencies affiliated to the Federal government and providing reduction or exemption of income taxes, depending on their appreciation of projects in the North and Northeast regions.

3.2. Special customs regimes A few examples of special customs regimes in Brazil include:


Temporary Admission programme allows some imported goods to stay for a determined time and purpose in the territory without paying import taxes (mainly beneficial for exhibitions, commercial, cultural and sports events and rental transactions).

Drawback regime involves various benefits. For instance, payment of import taxes such as II, IPI, ICMS, and AFRMM (Merchant Marine Renewal Tax) can be partially or totally suspended on goods which will be re-exported after being transformed, repaired or manufactured locally. The amount of exemption depends on the level of local manufacturing. Instead of being suspended, taxes may alternatively be paid first and then restituted after re-exportation. Imported items must be limited to 40% of exported goods.

Raw materials and components (mainly parts for aircrafts, vehicles and electronics),. If products are to be exported or sold to the domestic market, importation may be exempt from Federal (II, IPI and PIS/COFINS) and State taxes (ICMS) through the RECOF programme. Specifically for vehicles, the RECOM regime allows importation without IPI and foreign exchange. This covers materials and components destined for custom industrialisation of products ranked from 8701 to 8705 in the IPI rating Table (TIPI), for instance chassis, car body, spare parts and sub-assemblies, such as motors, components and accessories.

Exploration of oil and natural gas - REPETRO is a special custom regime dedicated to the import and export of goods involved in the prospection and exploration of oil and natural gas deposits. It allows importation without incurring IPI, PIS and COFINS on raw materials, parts and pieces used in the production of such goods which are to be re-exported (drawback),or presumed so. Another benefit is exemption from IPI, PIS and COFINS on importation of foreign equipment for a temporary stay. Companies holding permits and authorisation for exploring oil and natural gas deposits may benefit from REPETRO.

REPEX is another regime suspending the payment of taxes, allowing the import of crude oil and its derivatives when they are exported or re-exported. This programme is solely available to firms authorised by the National Petroleum Agency (ANP Agncia Nacional do Petrleo) to import and export oil products.

REIDI is a special tax regime relating to the Growth Acceleration Programme (PAC Programa de Acelerao do Crescimento). It is aimed at fostering Tax Environment investments and developing infrastructures by exempting the purchase of goods and services from PIS and COFINS. Entities involved in such projects must first be legally approved as part of the PAC (transports, harbours, energy, sanitation and irrigation sectors).

3.3 Fostering exports The import of goods that are not available in the Brazilian market may be subject to reduced import duties. Exports are encouraged through limited taxation on sales and, upon request and depending on the activity, exemption, deferment or suspension of taxes paid on purchases. Export sales may be further supported by utilising specific credit lines at beneficial rates. 3.4 R&D and green technologies Activities relating to Research & Development (R&D) may lead to several incentives, such as:

Reduced IPI Accelerated depreciation for new equipment destined to R&D Accelerated amortization for capitalised R&D expenses and some intangibles.


Companies investing in green technologies may benefit from tax exemptions or reductions (PIS/COFINS, IPI, ICMS) on industries, operations or processes involving biodiesel, ethanol, solar and wind energy. Land can be obtained as capital grants from local governments. 3.4.1 Information technology According to the Laws n 8.248, 10.176 and 11.077 (Lei de Informtica), legal entities involved in the production of computer hardware may benefit from a tax incentive reducing IPI on some goods by 80% or 95%, depending on where the company is located. The North, Northeast and Central-West regions typically offer higher reductions. To retain this benefit, firms must invest between 4.00% and 4.35% of annual revenues generated by the eligible products in R&D.


4. Business organisations available to foreigners

4.1 Legal entities The incorporation of a subsidiary is the most common way for foreign investors to enter the Brazilian market. Registration with the Social Security System and the Federal, State and Municipal Tax authorities is compulsory and all types of legal entities may be adopted. The two most common legal structures used in Brazil are the LLC (Limitada) and Corporation (Sociedade Annima). The main characteristics are briefly presented below: Limitadas (Ltda)

Limited Liability Company Sociedades Annimas (SA) Corporation

Corporate capital

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

Full paying-up within 5 years or sooner in case of capital increase. Divided into quotas with fixed price or different unit prices.

Divided into negotiable shares.

Partners

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

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

Liability limited to contributions.

Management

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

entities). Supervisory Board (Conselho Fiscal) is optional.

Board of Directors (Conselho de Administrao) is optional.

Board of Directors (Conselho de Administrao, three members at least, resident individuals and shareholders) is mandatory for publicly held corporations only. Management Board (Diretoria) with two members at least (resident individuals, not necessarily shareholders).

Dividends

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

According to specific disclosure in the bylaws, shareholders have the right to receive a compulsory minimum amount of dividends.

Common choice for firms with May be privately or publicly


Others

few owners and no intention to raise public funds. Fewer administrative processes are required than for a corporation.

held. Supervised by the CVM (Securities and Exchange Commission) in case of a SA publicly held. SA is necessary for financial institutions.

* Except for specific sectors (financial sector) or situations (obtaining a permanent visa for an entity managed by a non-resident person). These legal structures give a foreign investor the opportunity to maintain more control on its activities in comparison to commercial agreements (see section 4.2). They also assist in limiting shareholders responsibilities for Brazilian operations (which is not the case for a branch establishment, considered as a dependent entity from the foreign parent company). Furthermore, to establish a branch of a foreign entity in Brazil requires special authorisation from the Ministry of Development, Industry and Commerce (MDIC). As a result of the many administrative processes, few companies select this route. 4.2 Commercial agreements Aside from legal structures, commercial agreement options, such as distribution or sales representation, offer many benefits. These include saving time and reducing initial investments, especially when compared to creating or acquiring a legal structure. For legal purposes, distribution agreements, in which the distributor takes possession of the products, should disclose:

A precise definition of the products The delimitated area and exclusivity conditions The duration of the commercial relationship and Any advertising and trademark license issues.

According to the Brazilian Civil Code, if no term has been agreed and disclosed at the outset, the agreement is considered to have an indefinite duration and can only be terminated by giving 90-days prior notice. In sales representation agreements (without transfer of ownership), foreign companies should protect any know-how, patent or trademark at the National Institute of Industrial Property (INPI). In both situations, these agreements may present legal risks. Both parties should address these at the beginning of the commercial relationship. This is equally true for operational issues, as the foreign entity may not have efficient control on the distribution policies locally applied by its distributor.


5. Setting up and running business organisations

Foreign investors must comply with the same tax, legal, labour, environmental and other regulations set for companies or individuals conducting business in Brazil. See the table in section 4.1, which outlines the legal formalities for establishing a Limited Liability Company and a Corporation. 5.1 Accounting and audit standards 5.1.1 Brazilian GAAP and IFRS Brazilian accounting and audit standards have progressively been converging with the International Financial Reporting Standards (IAS/IFRS) for the last half-decade, although a few differences remain, including disclosure requirements and options allowed. The Brazilian Committee of Accounting Pronouncements (CPC), in charge of the conversion plan, translated almost integrally the international standards to create the new Brazilian standards (Brazilian GAAP or CPCs). To be granted legal effects, these standards are presented for approval or rejection to the Federal Board of Accountancy (CFC) and the regulation main agencies (CVM, SUSEP, ANEEL). Depending on the decision of these entities, rules are applied by each sector accordingly. In addition, standards cannot be contradict the Corporate Law. For example, in order to converge respectively with IAS 16 and 38, CPC 27 and CPC4 allowed the revaluation of fixed assets to fair value to the extent permitted by law, whereas the Brazilian Corporate Law no. 6.404, amended by Law no.11.638, excluded the revaluation from its context, thereby leaving room for interpretation and consideration of the accounting principles. Its essential to note that the conversion plan is still in progress and that further evolutions will occur. For instance CPC 19 recently changed in order to adapt to IAS 31, by allowing both the proportionate consolidation and the equity method in Joint Ventures consolidation. Before that, only the proportionate option was permitted in Brazil. However IFRS 11 intends to replace IAS 31 from January 2013 and would only recognise the equity method. As a result, Brazilian standards will also evolve. All Brazilian financial statements must be prepared in compliance with Brazilian GAAP whatever the companys size, providing a true representation of the Companys performance. More specifically, listed companies, financial institutions and insurance companies must prepare their consolidated financial statements in full compliance with IFRS and their statutory reports in accordance with Brazilian GAAP. 5.1.2 The Equity method


Equity method should be used in individual financial statements, and not only as a consolidation method, when the investor has a significant influence on the management of the investment and the investment is relevant. 5.2 Audit requirements Financial statements for small and medium-sized enterprises (SMEs) are not required to be audited by an independent auditor, providing the SME is not a listed company, insurance company, investment fund or financial institution over the jurisdiction of the Central Bank. A SME is a legal entity or a group of entities under common control, whose total assets are below R$ 240 million or presenting an annual revenue below R$ 300 million. Annual financial statements of large companies must be audited by an independent auditor. A large company is a legal entity or a group of entities under common control, whose total assets are over R$ 240 million or presenting an annual gross revenue over R$ 300 million. Publication is only mandatory for corporations (SA), not limitadas (Ltda). Audit and publication requirements are compulsory for all listed companies, insurance companies, investment funds and financial institutions over the jurisdiction of the Central Bank. Quarterly financial reports are required for listed companies, financial institutions and insurance companies, and biannual audit reports are compulsory for financial institutions and insurance companies. SMEs whose annual revenue is below R$ 48 million can opt for a simplified corporate income tax regime, the Presumed Profit Regime. Under this regime, income tax is calculated on the basis of the gross revenue. To this extent, the quality and updating of the profit and loss below gross revenue is not a major stake for the income tax declaration. It is important to note that Brazilian tax authorities do not require audited financial statements, but some fiscal obligations must of course be respected, as covered in section 5.3. 5.3 Fiscal reporting obligations Brazilian companies are subject to multiple electronic and paper filings:

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

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


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

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

The DIRF (Declaration of Withholding Income Tax - Declarao do Imposto de Renda Retido na Fonte) must be filed by the taxpayer annually. For the 2011 calendar year, the DIRF had to be submitted by the 29 February 2012.

Failure to comply with these fiscal reporting obligations could incur financial penalties.


6. Corporate taxes and social charges The Federal Tax Code of 1966 and the Federal Constitution of 1988 define the main principles of the Brazilian tax system, whereby taxes are levied on taxpayers at federal, state and municipal level. The Brazilian Federal Revenue Bureau (RFB) is an entity of the Ministry of Economy (Ministrio da Fazenda) and supervises the federal tax system. Smaller, similar agencies monitor the tax system in all of the states and main municipalities. Brazilian tax legislation can be viewed as quite complex. In addition to various collection levels, the many rules change frequently and taxation is relatively high. Accurate information, advisory and planning are essential in order to benefit from investment opportunities. 6.1 General principles The fiscal year always corresponds to the calendar year (1 January to 31 December). It is enforced by Brazilian tax law, regardless of the corporate year chosen by the company for reporting purposes. Apart from instances of fraud, where it does not apply, the statute of limitation for most taxes and social charges in Brazil is five years. Federal, state and municipal tax authorities may perform inspections, regardless of whether certain taxes or periods were already inspected. Tax legislation and jurisprudence gives the owner of the operating assets responsibility to pay current and previous taxes, as long as he/she retains the capacity to generate earnings from these assets. This means that entities resulting from transformation, merger and spin-off or exploiting a continuing business (despite being under a different name or proprietorship) will be liable for past tax obligations of the original entity or business. The tax clearance concept does not exist in Brazil. This means that the risk only ends when the statute of the 5-year limitation period has passed. Responsibility is generally transferred with the transfer of activity, irrespective of the legal form of an investment (asset deal vs. share deal). Unpaid tax liabilities, especially for Federal taxes are subject to interest generally based on the SELIC rate (Special System for Settlement and Custody) defined by the Central Bank of Brazil (as of May 2012 this was approximately 8.5% annually in May 2012). For State and Municipal tax liabilities, interest is usually based on the IPCA rate (Amplified Consumer Price Index) defined by the IBGE (Instituto Brasileiro de Geografia e Estatstica). In May 2012, this was approximately 5% annually. Legal entities are also subject to penalties, which can range from between 20% (voluntary payment before tax inspection) up to 150% (in fraud cases), with an intermediary rate of 75% in cases of an assessment in the absence of fraud. The 75% and 150% rates can be halved if the taxpayer pays without any challenge and within a 30 days period following the assessment notification. 6.2 Corporate income tax Brazilian legal entities operating for profit are subject to corporate income taxes. These are divided into corporate income tax (IRPJ), and the social contribution on net profit (CSLL), at following rates:


Income tax rates IRPJ CSLL Total Applies to the whole taxable income

15% 9% 24%

Applies to taxable income above KR$ 240

10% / 10%

Total 25% 9% 34% There are four taxation systems that can be applied to net income:

6.2.1 Actual Profit tax regime (annually or quarterly based) 6.2.2 Presumed Profit tax regime (quarterly based) 6.2.3 Arbitrated Profit tax regime (quarterly based) 6.2.4 SIMPLES Simplified tax regime (monthly based).

6.2.1 Actual Profit tax regime The Actual Profit system is the general rule of profit taxation. It corresponds to the taxation of the accounting net profit after adjustments defined by the tax legislation (elimination of non-taxable revenues and reintegration of non-deductible expenses). In corporate regulation in Brazil, expenses must be necessary and relate to the companys operations in order to be deductible expenses. Most provisions for expenses or losses are not deductible upon booking, with the exception of provisions for vacation pay or 13th salary. All accounting records and details of the tax calculation must be kept in the Taxable Income Control Register (LALUR). Estimate payments to the annual regime should be made on a monthly basis (estimate), except if accumulated payments until the month previous exceeds the amount due in the current year. The Actual Profit tax regime allows tax losses to be carried forward. There are no time restrictions, but a carry forward is limited to 30% of the taxable income in that year. Carry backs are not permitted by Brazilian tax legislation. 6.2.2 Presumed Profit tax regime Companies with annual gross revenues below R$ 48 million (among other terms and conditions) can opt to tax a presumed net profit. This is determined as a percentage of the gross revenue earned. The actual percentage applied depends on the nature of the activity performed by the company, independent of whether the company has registered a net profit or net loss in the financial statements. Presumed Profit as a percentage of revenues

Revenues Presumed profit for IRPJ Presumed profit for CSLL Sales of goods 8% 12% Services rendered 32% 32% Other revenues 100% 100% After application of the above percentages on revenues, the corporate income tax rates are applied to the presumed profit amount (25% for IRPJ and 9% for CSLL). 6.2.3 Arbitrated Profit tax regime


If the accounting registers are not reliable, the tax authorities may arbitrate the taxable income applying the revenue percentages. These are similar to the Presumed Profit method, increased by 20% for IRPJ, resulting in: Arbitrated Profit as a percentage of revenues

Revenues Arbitrated profit for IRPJ Arbitrated profit for CSLL Sales of goods 9.6% 12% Services rendered 38.4% 32% Other revenues 100% 100% After application of the above percentages on revenues, the corporate income tax rates are applied to the arbitrated profit amount (25% for IRPJ and 9% for CSLL). 6.2.4 SIMPLES (simplified tax regime) The SIMPLES is a unified regime for the payment of Federal, State and Municipal tax and labour taxes. When utilised, this regime replaces all other payment regimes, except taxes on imports and financial operations. The tax rate applied varies from 4.0% to 22.9%, depending on the entitys activity and revenues. Only companies with annual gross revenues below R$ 3.6 million and operating in specific industry sectors, such as small businesses, small service providers, small industries and family companies may opt for this simplified tax system. Export companies that opt for SIMPLES may report up to R$ 7.2 million of gross revenues, providing the domestic revenues fall under the R$ 3.6 million limit. 6.2.5 Goodwill Amortization For Corporate Income Tax purposes, under certain terms and conditions, goodwill generated by an acquisition and relating to expected future profitability can be amortized over five years (or more) after the merger or reverse merger between the acquirer and acquired company. Before the merger, the goodwill is non-deductible. Intangible assets are not subject to amortization for tax purposes and are only tax deductible upon the sale of the respective asset or return to the shareholder. 6.3 Federal Social Contributions on gross revenues (PIS /COFINS) The PIS and COFINS are federal social contributions due on the monthly gross revenues, except export revenues, and are among other benefits provided for by Brazilian Corporate Income Tax law). Determining the rates and systems of PIS/COFINS varies according to:

The regime adopted by the company for corporate income taxes, including Actual Profit, Presumed Profit, Arbitrated Profit and SIMPLES

The nature of goods, trading operation or business performed by the company - the PIS/COFINS system can be cumulative or non-cumulative

The cumulative system, generally applicable to companies that opted for the Presumed/ Arbitrated Profit, is based on a default tax rate of 3.65% (0.65% for PIS and 3.00% for COFINS), without the possibility of credits on purchases.

The non-cumulative system, generally applicable to companies that adopt the Actual Profit regime, is based on a default tax rate of 9.25% (1.65% for PIS and 7.60% for COFINS), with


the possibility of credits at the same rate on purchases, services acquired and some expenses, as defined by legislation. In addition, there are some increased tax rates for certain industry sectors and reduced tax rates to incentivise other sectors defined by the Brazilian government. PIS/COFINS are also due on the import of goods and services, applying a tax rate of 9.25%, which is independent of the regime of taxation of income adopted by the company.

With the exception of sectors granted specific treatment, the application of PIS/COFINS to gross revenues by the Corporate Income Tax option can be summarised as: Regime of taxation on income Actual Profit (PIS/COFINS non-

cumulative Presumed/Arbitrated Profit

(PIS/COFINS cumulative) Domestic gross revenues 9.25% 3.65% Export gross revenues 0% 0% Financial revenues 0% 0% Interests on net equity 9.25% 0% Other revenues (non-operational revenues)

9.25% 0%

Sale of fixed assets 0% 0% Calculation of credits on acquisition of goods for resale or inputs

Allowed Forbidden

Illustrative impact of the tax regime on IRPJ/CSLL & PIS/COFINS P&L (services company)

KR$ Actual Profit Presumed Profit

Gross Sales (A) 1,000 1,000 Rates 9.25% 3.65% 3.65% (93) (37) Operating costs (700) (700) PIS/COFINS credits 42 Forbidden EBIT 250 264 Financial Income 20 20 Income Tax 270 284 Rates 34.00% 24%x32%x(A) IRPJ/CSLL (92) (109) Net Income 178 175 Tax Charge 142 145 Regardless of gross sales thresholds or tax exemptions, the choice of the optimised tax regime should only be made while considering both PIS/COFINS and IRPJ/CSLL differentiated rates in each scenario. Indeed, higher PIS/COFINS rates in the Actual Profit tax regime may be counterbalanced by tax credits and a more beneficial income tax exposure, depending on profitability perspectives. Such an option can be updated in the beginning of each fiscal year, basing decisions on assessing the sales and profitability levels and depending on the companys activity. 6.4 Other Federal, State and Municipal taxes and contributions 6.4.1 Tax on Industrialized Products (IPI)


The Federal tax on industrialized products (IPI) is levied on the sales of industrial products in the country, or on the importation of raw material, semi-finished or finished goods for production or resale. All types of products are classified in the IPI tax rates table (TIPI). Rates applied on the IPI tax base range from 0 to 300% (tobacco for example). Considering that this tax has a regulatory characteristic, the rates can be reduced by the government (by Decree) offering greater flexibility to incentivise determined industries. The IPI taxpayer can usually calculate IPI credits on expenses relating to production costs (for example, raw material, intermediate material and packaging material). 6.4.2 Contribution for Intervening in the Economic Domain (CIDE) The CIDE is a Federal contribution levied on the importation of services in relation to technology transfers or specialist technical or administrative services. Usually, CIDE is due by Brazilian entities that hold a license of use or entities that have acquired technological knowledge (including agreements relating to exploitation of patents, brands use and technology supply and technical assistance services). The regular CIDE tax rate is 10% on the amounts paid or credited to beneficiaries abroad and the tax liability is due by the Brazilian entity. 6.4.3 Tax on Financial Operations (IOF) This Federal tax applies to:

Credit and securities transactions (0 to 1.5% a day) Exchange and insurance transactions (0 to 25%, but 7.38% for the majority of insurance

operations) Gold transactions (1%) performed trough financial institutions.

Intercompany loans are subject to IOF as well (up to 1.5 % of the nominal amount). 6.4.4 State Tax on Circulation of Goods (ICMS) The ICMS is a State tax levied on the importation of products and circulation of goods, interstate and inter-municipal transportation and communication services. As a State tax, the rates and its rules may vary in each State of the Federation (26 States and the Federal District of Brasilia). See section 9 for details). 6.4.5 Municipal Service Tax (ISS) The tax on services of any nature (services tax ISS) is a Municipal and cumulative non-deductible tax which is levied on gross revenues of services rendered (except for communication services and inter-municipal transportation). The tax rates range from 2% to 5%, depending on the Municipality in which the company is established and on the type of services rendered. Under certain conditions, ISS may be due to the Municipality where the service is effectively performed (for example, on site works). Cities decide to apply a rate depending on services, but the rate is always between 2% and 5%. In the Municipalities of So Paulo and Rio de Janeiro, for example, ISS is calculated at a standard rate of 5% for the majority of services subject to ISS.


Revenues obtained from exported services usually are exempt from ISS, since the economic outcome or the benefit of the services rendered should be observed abroad. Imported services are subject to the taxation of ISS with a tax rate that ranges from 2% to 5% in accordance to the Municipality in which the company is established. 6.4.6 The gross-up taxation system Most taxes are calculated on a tax base including the tax itself (the gross value including taxes). Therefore, as illustrated below, the effective tax rates if computed on the net value are higher than the officially announced rates. Moreover, the tax base of ICMS may be dependent on the identity of the purchaser, as the rate is applied on the value including IPI in cases of a sale to a final user. Sale to an intermediary user Sale to final user/consumer

Rate Value Rate Value Total for client 110 Total for client 110 IPI 10% 10 IPI 10% 10 Product value (invoice)

100 Product value (invoice)

100

ICMS 18% 18 18% 19.8 PIS 1.65% 1.65 1.65% 1.65 COFINS 7.60% 7.6 7.60% 7.6 Net value 72.75 70.95 ICMS rate compared to net value

24.7% ICMS rate compared to net value

27.9%

PIS rate compared to net value 2.3% PIS rate compared to net value 2.3% COFINS rate compared to net value

10.4% COFINS rate compared to net value

10.7%

6.5 Transfer Pricing Brazilian tax legislation relating to transfer pricing (TP) requires demonstrating the adequacy of the prices with foreign related parties for the following operations:

Import of goods, services and rights Export of goods, services and rights Interest payments on loan agreements not registered with the Brazilian Central Bank.

TP rules apply to international transactions with related parties and to transactions with entities established in privileged tax jurisdictions (see list in appendix). A privileged tax jurisdiction is defined as:

i. not taxing income and earnings from abroad (or taxing them at less than 20%) ii. not permitting access and limiting transparency on transactions, structure, ownership, and

iii. by offering tax privileges to non-resident individuals or entities without any economic activity.

The Brazilian TP rules reveal substantial differences when compared to the OECD transfer pricing standards, notably that instead of the arms length principle, which is not provided for, fixed profit margins should be used to determine the transfer price. The main methods used to demonstrate that the price is appropriated (or to calculate the amount of the adjustment fixed by law) are:


Importation: o compare with the acquisition price practiced with independent parties(PIC); o demonstrate that in the resale operation there is a minimum profit of 20% (resale of

goods) to 60% (sales of manufactured goods made in Brazil with imported inputs) (PRL)

o demonstrate that the profit obtained by the related company in the country of the origin of the goods does not exceed 0%.

Exportation: o demonstrate that the export price is equivalent to 90% or more of the price

practiced in the internal market o compare with exportation prices in operations with independent parties (PVEx) o demonstrate that the price practiced in the wholesale market in the country of

destination of the goods includes a maximum profit of 15% (PVA) o demonstrate that the price practiced in the retail market in the country of

destination of the goods includes a maximum profit of 30% (PVV) o demonstrate that, in Brazil, a mark up of at least 15% is applied on the cost of

production or acquisition. Payment of interests:

o a maximum interest rate equivalent to Libor (six months) plus a spread of 3% per year is allowed.

6.6 Consolidation or group taxation There are no rules specific to tax consolidation. Federal, State and Municipal authorities in Brazil will apply separate taxations to each company and branch/establishment of the same company. 6.7 Dividends and interest

Dividends are not currently subject to withholding taxation. Interest paid to non-residents are generally subject to a 15% withholding tax, or 25% if they are based in a tax haven jurisdiction (see appendix for list). 6.8 Thin capitalisation On 16 December 2009, the Brazilian Government published Provisional Measure (PM) 472, which, among other provisions, includes new thin capitalisation rules. These can be summarised as:

Interest paid or credited by a Brazilian entity to a related party (individual or legal entity), not residing or domiciled in a tax haven jurisdiction, may only be deducted for income tax purposes if:

i. the interest expense is viewed as necessary for the activities of the local entity and

ii. the amount of debt granted by the related party does not exceed twice the amount of its participation in the net equity of the Brazilian entity.

A second test also needs to be performed, comprising the total amount of debts with any foreign related party. If, under either debt/equity test, a 2:1 ratio is exceeded, the portion of interest relating to the excess debt amount cannot be deducted for Brazilian income tax purposes.

Similar provisions also apply to interest paid or credited by a Brazilian entity to an individual or legal entity (it doesnt need to be a related party) resident or domiciled in a tax haven or


favourable tax regime jurisdiction. In these cases, the interest expense will only be deductible for Brazilian income tax purposes if:

i. the expense is viewed as necessary and ii. the amount of the debt does not exceed 30% of the Brazilian entitys net

equity. A second test also needs to be performed, comprising the total amount of debts with any foreign party resident or domiciled in a tax haven jurisdiction. If, under either debt/equity test, the 30% of net equity threshold is exceeded, the excess interest cannot be deducted for Brazilian income tax purposes. All provisions apply to debt financing transactions, regardless of whether it is registered by the BACEN.

6.9 Interest on net equity Brazilian tax legislation allows the calculation of interests on net equity to be paid to shareholders, instead of dividends. These interests are determined based on the Long Term Interest Rate (TJLP), applied to the net equity of the Brazilian entity. Brazilian tax authorities issue the TJLP. In May 2012, the annual rate was 6%. In addition, interest earned on net equity is a deductible expense for IRPJ and CSLL purposes, reducing the income tax burden and consequently the effective tax rate. The total interest that can be deducted is limited to 50% of the net income of the period, or 50% of the accumulated profits plus the reserves (the larger sum out of the two). Unlike the treatment of dividends, the Brazilian entity is obliged to collect 15% withholding tax at the time the interest is paid on capital abroad. 6.10 Other tax considerations 6.10.1 Asset deal vs. Share deal

Main tax aspects of an asset deal: o Income tax and social contributions apply to both operational and non-operational

gains resulting from the sale of assets (usually 34%) o PIS/COFINS may apply, depending on the asset type o ICMS applies to the transfer of inventory and generates tax credits, but does not

generally apply to fixed assets o IPI applies to both the transfer of inventory and fixed assets in the case of direct

importation or manufacturing by the seller o A real estate tax (ITBI) may also apply to property transfers.

Share deals occur more frequently, as they require fewer documents and are taxed less: o Income tax and social contributions apply to net profit sales by Brazilian entities o PIS/COFINS, ICMS and IPI do not apply, neither do stamp duties or transfer taxes o A 15% withholding tax applies if the seller is an individual; the rate may increase to

25% in the case of a non-resident entity o Gains from the sale of publicly traded shares incur a 20% tax, but are exempt to non-

residents, unless they are listed in a privileged tax jurisdiction (see appendix for list).

6.10.2 Royalties and copyrights A 15% withholding tax, plus the 10% CIDE generally apply to royalties and copyrights paid to non-residents. If the beneficiary resides in a tax haven jurisdiction (see appendix for list), the rate increases to 25%.


6.10.3 Importation of services The taxation of services rendered by a foreign company (importation of services) depends on their nature. Technical services (involving specialist knowledge and performed by independent professionals or artists) incur a withholding 15% tax and a 10% CIDE tax, whereas non-technical services incur a 25% withholding tax. PIS/COFINS at the full rate (9.25%) and ISS are applied on all types of services. In these instances, it is important for the entity to question whether the imported service is required. For example, a technical service fee invoice of US$ 1,000 issued by a foreign company, under the assumption of a 5% ISS rate, the Brazilian entity will withhold 15% of IRRF (therefore only US$ 850 will be paid to the foreign entity) and will pay ISS, PIS/COFINS and CIDE to the value of US$ 257. Its equally important to note that for both Royalties and Service Fees involving the transfer of technology, specific conditions of remittance and deductibility must be respected. 6.10.4 Controlled Foreign Company (CFC) rules Controlled Foreign Company (CFC) rules differ to those applied in other countries, as they are relatively new to Brazil. Financial statements of the foreign entity must be translated into Brazilian currency and profits generated must be included in the 31 December financial statement prepared by the Brazilian firm. In certain circumstances, such as liquidation, they may be subject to taxation. Consolidation of profits and losses of foreign subsidiaries is generally not permitted for Brazilian tax purposes. 6.10.5 Capital gains tax Following the sale of an asset located in Brazil, capital gains of residents incur the usual corporate income tax rate of 34%, while capital gains of non-residents are subject to a 15% withholding tax (25% if a tax haven resident). 6.10.6 Declaration of Brazilian Capital abroad for residents (DCBE) All individuals and entities based, domiciled or residing in Brazil must declare to the Brazilian Central Bank all values (currency assets, investments, property, rights, etc.) equal to or greater than US$ 100,000 owned out of the national territory. This obligation is fulfilled by completing and submitting the Declaration of Brazilian Capital Abroad form (DCBE) on an annual basis. 6.11 Labour laws In 1943, Brazil initiated a general consolidation of labour laws that led to the CLT decree (Consolidao das Leis do Trabalho). This system has governed most labour relationships until now, although some specific regulations have since been adopted that apply to certain worker categories. 6.11.1 Hiring, dismissal and litigation


In Brazil, an employment trial period cannot exceed 90 days. Contracts are based on 44 hours a week. In cases of dismissal, an employer must respect a prior notice of 30 days. If not, the employer faces a one-month salary penalty, which corresponds to the minimum amount an employee can receive. This indemnity may increase to three months if the employee has worked in the company for 20 years or more. An employer must also pay the eventual holiday and 13th salary to the employee. If dismissed without good reason (justa causa), the employee is entitled to receive the total sum of his or her Severance Indemnity Fund account (FGTS account) plus an additional 40% (see section 6.12). In cases of justified dismissal or resignation, the employee does not receive this amount. Its important to note that the employer is not obliged to reclassify dismissed employees. In order to hire a foreign employee as a manager or director, a permanent visa is required, in addition to minimum capital investment requirements. For a foreign employee, a renewable work visa of two years must be obtained. Foreign workers may be hired as expatriates or with local contracts. 6.11.2 Health insurance In cases of employee illness, the company must pay the employees salary for up to 15 days. After this time period, the payment is then made by Brazilian social security. Brazil operates two systems of Health Insurance: public and private. The public one is mandatory and financed by employees and employers and every employee has access to it. Employers have to pay up to 28.8% of the payroll to social security authorities and withhold between 8% and 11% of gross wages from the employees (limited to R$ 430.78 per month in 2012). In the private system, usually established by collective labour agreements or granted by the employers, the payment is made by the company and may be partially financed by the employees, depending on the policy adopted by the employer. 6.11 3 Remuneration and bonuses In 2012, the minimum wage in Brazil was increased from R$ 545 to R$ 622, an increase of over 15%. Each year, every employee is entitled to receive one additional salary (13th salary or Christmas bonus) at the end of the civil year (half before the end of November and the remaining half before Christmas Day). Overtime hours are paid at between 50% and 100% more than normal hours. Dangerous or night shift workers receive between 20% and 40% more. In terms of profit sharing, a Brazilian law does exist, so no precise instruction is given. As a consequence, not all companies distribute this kind of benefit, but they may be encouraged to do so if the company's branches have negotiated profit sharing agreements.


6.11.4 Pensions and vacations Every employee receives a vacation period of 30 calendar days per year. During the holiday, an employees salary is increased by one-third. The mandatory defined public pension contribution system is valid for all employees and there is a voluntary supplementary scheme offered by employers. The contribution is included in the INSS tax payments (see table in section 6.12). 6.12 Labour unions and collective agreements Collective labour agreements generally exist for each branch and employee category. Labour Unions are generally regarded as more important and powerful in industries like transport, automobile and steel. The main entities are CGT (Central Geral dos Trabalhadores), CUT (Central nica dos Trabalhadores) and Fora Sindical. Employees are free to choose whether or not to join a union. Those that do must pay an annual contribution to the union, which is directly withheld by the company once a year (equivalent to one days salary). 6.13 Social Security contributions To finance the Brazilian Social Security system (INSS), companies pay a monthly fee equivalent to 20% of each employees gross salary. This percentage may be increased by other rates, for example:

1% to 3% insurance for work accidents (RAT) Up to 5.8% for other entities and funds (Education allowance, INCRA, SENAI, SESI, etc.)

Employees contribution (8% to 11% of the gross salary) is directly withheld by the employer. Furthermore, employers have to make a monthly deposit equivalent to 8% of each employees gross salary in order to finance the Government Severance Indemnity Fund for Employees (FGTS). The money is blocked on a personal account at the Caixa Econmica Federal. However, the employee may withdraw it if he/she:

Retires Intends to buy a real estate property, or Is diagnosed with a serious disease/illness.

The employee can also gain access to the FGTS in the case of any lawful unjustified dismissal made by the company. In this specific instance, the employer will also pay the employee an additional 40% penalty (of the correspondents FGTS account) and an additional 10% penalty to the government. The main charges and taxes on payroll are: Description Rate (%) INSS (Brazils Social Security system) 20.0% SESI 1.5% SENAI 1.0% INCRA 0.2%


RAT (insurance for work accidents) 1.0% to 3% Education allowance 2.5% SEBRAE 0.6% FGTS (Government Severance Indemnity Fund for Employees)

8.0%

Depending on the sector and activity, with the exception of the compulsory INSS and FGTS contributions, some taxes may not apply. If the employee is a director or manager who receives a pr-labore and not a standard salary, the company has to only pay INSS (20%). 6.13.1 INSS Employee Contribution (2012) Salary base (R$) Rate (%) Up to 1,174.86 8.0% 1,174.87 to 1,958.10 9.0% 1,958.11 to 3,916.20 11.0%7 The INSS maximum base is R$ 3,916.20. 6.13.2 Illustrative examples of employer labour costs For a classic employee remuneration (CLT contract) (R$) (a) Monthly gross salary 13,055.56 Base INSS 3,916.20 (b) INSS Employee (11% on base INSS) 430.78 INSS Company (20% on gross salary) 2,611.11 SESI (1.5%) 195.83 SENAI (1.0% 130.56 INCRA (0.2%) 26.11 RAT (3.0%) 391.67 Education allowance (2.5%) 326.39 SEBRAE (0.6%) 78.33 FGTS (8%) 1,044.44 (c) Total payroll charges (36.8% on gross salary) 4,804.45 Number of dependents 2 Deduction per dependent 164.56 (d) Total dependents deduction 329.12 (e) Base IRRF (a-b-d) 12,295.66 (f) IRRF e* 27.5% - 756.53 2,624.78 Net salary (a-b-f) 10,000.00 (g) Christmas bonus cost (8.33%) 1,087.53 (h) Holiday additional cost (2.77%) 361.64

7 Source: Ministrios da Fazenda e da Previdncia Social


Total cost for the company (a+c+g+h) 19,309.17

For a Pr-labore remuneration (managerial function)

(R$) (a) Monthly gross salary 13,055.56 Base INSS 3,916.20 (b) INSS Manager (11% on base INSS) 430.78 INSS Company (20% on gross salary) 2,611.11 Number of dependents 2 Deduction per dependent 164.56 (d) Total dependents deduction 329.12 (e) Base IRRF (a-b-d) 12,295.66 (f) IRRF e* 27.5% - 756.53 2,624.78 Net salary / Pr-labore (a-b-f) 10,000.00 Total cost for the company (a+c) 15,666.67


7. Personal taxation The income tax rate for individuals in Brazil ranges from 7.5% to the maximum rate of 27.5%. The rates are progressive and ascendant in relation to the individuals annual income. The monthly withholding income tax is based on salary and advances paid over the month. It is calculated on the gross salary, minus (INSS), with several deductions fixed by law. See the taxable income brackets below, which currently apply: Withholding tax (IRRF) 2012 Salary base (R$) Rate (%) Deduction (R$) Up to 1,637.11 - - 1,637.12 to 2,453.50 7.5% 122,78 2,453.51 to 3,271.38 15.0% 306,80 3,271.39 to 4,087.65 22.5% 552,15 From 4,087.65 27.5% 756,53 Individuals must file an annual tax return by 30th April in the year that immediately follows the year the income was obtained. Dividends are not subject to taxation. Tax residence is determined by the actual domicile of the individual. If a foreign resident moves his or her domicile to Brazil (even on a non-permanent basis) they must register as a Brazilian taxpayer. Payment of salaries and bonuses out of payroll and use of full time service providers (PJ: Pessoa Jurdica) with employment characteristics are examples of existing practices. If these are reviewed or inspected by a tax or labour authority, these operations may be reclassified as labour contracts (CLT) and authorities may request the payment of unpaid charges (up to the last five years) and interest, in addition to imposing penalties of up to 150%. In cases of labour claims made by the employee, the employee may request the payment of employment benefits (extra hours, holidays, Christmas bonus, etc) from the previous two years of the employment relationship.


8. Double taxation agreements Brazil has a number of Double Taxation Treaties (DTT) in place and the government continues to negotiate with new jurisdictions. To benefit from an international tax treaty, Brazilian taxpayers must be able to produce proper documentation, such as invoices, contracts and records. In addition, a foreign company must supply a certification of tax residence in order to apply the preferential rates established by the treaties. Currently, Brazil has nearly 30 DTTs signed, including: Argentina, Austria, Belgium, Canada, Chile, China, Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, Norway, Peru, Philippines, Portugal, Slovakia, South Africa, South Korea, Spain, Sweden, Ukraine.


9. Sales and use taxes 9.1 State Tax on Circulation of Goods (ICMS) The ICMS is a State tax levied on the importation of products and circulation of goods, interstate and inter-municipal transportation and communication services. As a State tax, the rates and its rules may vary in each State of the Federation (26 States and the Federal District of Brasilia). ICMS internal tax rates range from 7 to 19%. These can be increased to 25% in certain situations (for example, communication services), depending, among other aspects, on the type of good, its origin and destination, and on regional tax incentives (see ICMS map below). Almost every situation is specific and has to be checked before importation and/or circulation of goods and services in Brazil. Its important to also note that ICMS applies to internal state as well as interstate operations (imported and non-imported) and that ICMS credits may be obtained by the company on raw materials and goods acquired for resale. It is possible to offset this credit against future amounts of ICMS to be paid. When a company purchases goods that includes ICMS without being a registered ICMS taxpayer, it will not be eligible for corresponding tax credits.


The Brazilian government recently unified Brazils taxes on interstate trade of imported goods. The Senates Committee for Economic Affairs (Comisso de Assuntos Econmicos - CAE) approved on 17 April 2012 the unification proposal (Resolution 72), and the Senate subsequently agreed the proposal on 24 April 2012. By applying a unified 4% interstate ICMS to imports (internal state rates remain unchanged and the law does not concern non-imported products), the government is aiming to reach its objective of 2% by 2015.


As a result of high ICMS rates, several states created local benefits to grant tax reductions and boost imports performed through their airports and harbours. It has led to the so-called War of Harbors. By imposing a unified interstate rate, the governments goal is to avoid such local incentives. For information on other trade tax incentives and regimes, including special customs duties and regimes, please see section 3 of this guide.


10. Portfolio investments for foreigners Non-residents investing in financial and capital markets in Brazil will be subject to various withholding income tax rates on revenues generated from these investments. These are typically:

10% when investing in swap operations, stock funds and future market operations carried out, with the exception of stock or mercantile exchange markets

15% in other cases, including fixed income investments 0% in cases of capital gains, which are defined as earnings linked to stock, commodities and

other similar transactions, or gold traded. These capital gains do not apply to commodity exchange markets and gains distributed by foreign investment funds

0% for income obtained through Brazilian government bonds since February 2006 and for mutual funds whose portfolio is constituted with 98% or more of these bonds

0% for investment in FIPs (Fundos de Investimento em Participao) and FMIEEs (Fundos Mtuos de Investimento em Empresas Emergentes) or funds investing in these funds quotas.


11. Trusts No information avaialble at present


12. Practical information 12.1 Transportation Brazil is making sizeable investments in its transport infrastructure, although there are strong regional variations. Most international flights go via Guarulhos International Airport in So Paulo or Galeo International Airport in Rio de Janeiro. Belo Horizonte is the main international airport outside Rio de Janeiro and So Paulo. 12.2 Language The official language is Portuguese, spoken by 99% of the population. English is increasingly studied by the population at school and in many international business environments is spoken and understood. In 2002, Brazilian Sign Language (Libras) was made the official language of the Brazilian deaf community 12.3 Time relative to Greenwich Mean Time (GMT) Brazil has three time zones. The Braslia Time (BRT), the destination visited by most international tourists (includes Rio de Janeiro, So Paulo, Brasilia) is three hours behind GMT. The Amazon Standard Time (AMT) is four hours behind GMT, and the Fernando de Noronha Archipelago is two hours behind GMT. Most of the southeast of Brazil observes Daylight Savings Time, including the states of Rio Grande do Sul, Santa Catarina, Parana, Sao Paulo, Rio de Janeiro, Espirito Santo, Minas Gerais, Bahia, Gois, Mato Grosso, Mato Grosso do Sul and the Federal District. Summer (daylight saving) time is in effect from midnight of the third Sunday of October each year, until midnight of the third Sunday of February the following year, in the determined parts of the country. 12.4 Business hours Regular business in Brazil is conducted between 9.00am and 7.00pm. Lunch is usually taken around 2.00pm, and long business lunches are common. Most business offices are closed on Saturday and Sunday. 12.5 Public holidays The national statutory holidays observed by businesses and government offices are:

World Day of Peace/New Years Day (Confraternizao Universal) 1 January Easter (Pscoa) varies according to church calendar Tiradentes (national hero of Brazil) 21 April Labour Day (Dia do Trabalho) - 1 May Brazilian Independence Day (Independncia do Brasil) - 7 September


Nossa Senhora Aparecida (Our Lady of Aparecida) 12 October All Souls' Day (Finados) 2 November Proclamation of the Brazilian Republic (Proclamao da Repblica) - 15 November

(or nearest Monday) Christmas Day (Natal) - 25 December

Half Day holidays are observed on Christmas Eve (24 December) and New Year's Eve (31 December). Several carnivals are also celebrated.


13. Appendices 13.1 Privileged tax regimes Denmark Holding companies without economic activity Hungary Offshore KFT companies Iceland International Trading Companies (ITC) Malta International Trading Companies (ITC) and International Holding

Companies (IHC) Uruguay Sociedad Anonima Financiera de Inversin (SAFI) incorporated until

December 31st, 2010 United States of America

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

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


13.2 Tax haven jurisdictions

1.2 Area and population

Documents

Tax Guide - Brazil