Brazilian companies, beyond paying dividends to their shareholders, may also pay interest on equity to them. And such interest is a deductible expense.
Mr Gilberto Ayres Moreira, Partner, and Mr Fabio Appendino, Associate attorney-at-law, in Gaia, Silva, Rolim & Associados, a Brazil-based law firm.
With qualified professional advice, a well-prepared market plann and a good tax strategy, investments in Brazil can be rewarding, sayMr Gilberto Ayres Moreira and Mr Fabio Appendino, Partner and Associate attorney-at-law, respectively, in Gaia, Silva, Rolim & Associados ( www.gaiasilvarolim.com.br), a law firm based in Brazil.
The firm is active in several areas of corporate legal services, such as environmental protection, restraint of trade, mining, shipping, aviation, oil and gas, finance, insurance, communications and telecommunications regulations. Apart from a team of more than one hundred professionals, in key Brazilian cities like So Paulo, Rio de Janeiro, Belo Horizonte, Curitiba and Braslia, the firm also draws on the support of correspondents in many foreign countries.
Brazil has become an important destination for Indian businesses. Two-way trade between India and Brazil has risen from below $500 million in 2000 to $2 billion in 2006, making Brazil Indias largest trading partner in Latin America. For 2010, the bilateral trade target is $10 billion. Indian investment has also been flowing into Brazil, especially in the biotechnology, technology and pharmaceuticals spheres.
Foreign investors (individuals and companies) may invest in Brazil directly or indirectly, inform Mr Moreira and Mr Appendino, interacting with Business Line over the e-mail. Direct investment occurs when a new company is incorporated or an equity participation of a Brazilian company is acquired. And indirect investment is defined as an investment in the stock market, they explain.
Excerpts from the interview, in which the duo elaborates on the legal framework for the benefit of those who would like to set up business in Brazil through the direct investment route.
First, why Brazil?
Brazil, the largest country in South America, has a growing stock market, a large population (about 180 million people), important industries, large sources of raw materials and a fizzy entrepreneurship. It is currently among the ten largest economies in the world, is an active member of Mercosur (a common market comprising Argentina, Brazil, Paraguay, and Venezuela, as members, and Chile and Bolivia, as associates) and offers a great variety of opportunities for foreign investors. Brazil also belongs to BRIC (Brazil, Russia, India and China), the so-called group of developing countries, and is about to obtain the investment grade.
What are the types of companies in Brazil?
The most common types of companies in Brazil are the limited liability company and the corporation. The success of these companies is principally due to the fact that the shareholders are not responsible for the companys liabilities. Creditors can lift the corporate veil only if shareholders act abusively, illegally, fraudulently, exceed their powers, or breach the by-laws or articles of association, as the case may be.
Similar responsibility applies to the directors and officers of the company. All companies, be they limited liability or corporation, need to be registered with the Register of Companies. Upon incorporation, the company is vested with legal personality, diverse from the shareholders, becoming thus a legal entity.
There is no minimum initial capital to be invested in a limited liability company or a corporation, except if they run certain businesses, such as banking and insurance. Non-resident shareholders of any limited liability company or corporation shall appoint an individual resident in Brazil to receive service of process in case of litigation involving them or the corporate entity.
Are there other important ways of association?
Yes, consortium and joint venture are also important ways to invest in Brazil directly.
Consortium is an association of two or more companies who agree to execute an enterprise. It is not considered a legal entity and each party is liable for its own activities (i.e., profits, losses and taxation).
There is no joint liability among the parties of the consortium before third parties, unless otherwise set forth in the contract of consortium. Although there is no creation of a legal entity, the contract of a consortium must specify the parties duties on that enterprise and it must be filed with the Register of Companies.
Joint venture is an association of two or more entities to develop a business of mutual interest. One partner may provide to the joint venture, technology, knowhow, trademarks, expertise or other intellectual property. On the other hand, the other partner may contribute with money or even knowledge about local business environment or culture. The partners may either establish a corporate or a contractual joint venture.
The significant difference between the former and the latter structures is the respective tax treatment given to each of them. The corporate joint venture pays taxes as a legal entity. By contrast, the contractual joint venture, when correctly structured, is not treated as a legal entity; thus, the partners, and not the contractual joint venture, are subject to taxation.
Does foreign investment require approval?
Foreign investment in Brazil does not require previous authorisation from the BACEN (Brazilian Central Bank), but it must be electronically registered with BACEN through the system RDE-IED (Electronic Declaratory Registration Direct Foreign Investment) within 30 days. Information about the investor, the receiver and the characteristics of the investment are to be provided to the BACEN through the RDE-IED. Remittances (dividends and reduction of capital), changes in the corporate structure ( spin-offs and mergers) and reinvestments should also be registered with the RDE-IED.
Upon registration, the BACEN provides a number to the par investor-receiver, which shall be informed to the bank handling the transfer of funds in any and every remittances (outbound) and new investments (inbound). This number is required for the execution of the exchange contract (conversion of foreign currency to Brazilian currency, the real, and vice-versa).
The repatriation of capital also does not require previous approval from the BACEN. However, the central bank may deny the repatriation if the balance sheet of the Brazilian company shows a negative net worth; in this case, the BACEN considers that the investment was diluted.
Brazilian Congress recently passed a bill allowing registration of any unrecorded foreign capital (due, for instance, to the lack of documentation or proof of entering Brazil). It is only mandatory that the capital be properly registered in the books of the company.
Finally, there are some activities in Brazil that are subject to certain restrictions for the foreign investor, such as media, banking, and air transport.
Are visa terms business-friendly?
Brazil has a policy of visas for foreign investors. Individuals investing their own funds in productive activities, non-resident directors or officers appointed to manage a Brazilian company, and technicians under transfer of technology or technical assistance agreements are entitled to visas provided certain conditions are met.
Is business restructuring encouraged?
The Brazilian Congress recently improved the bankruptcy system by enacting a law providing for the recuperation of companies, which aims to strengthen the national economy by offering to the companies in financial crisis the opportunity to reorganise and restructure their business, judicially or extra-judicially.
A brief overview of the business taxation regime in Brazil.
Regarding business income tax, under Brazilian tax law, businesses are taxed on their worldwide net income. The business income tax base is the net profits before tax, adjusted for a few additions and exclusions, and the law demands efficient and attested bookkeeping. Losses in a year can be fully offset with profits of the same year. Offsetting losses of a given year with profits of future years is subject to certain limitations.
Brazilian companies, beyond paying dividends to their shareholders, may also credit and/or pay interests on equity to them. That is another sort of shareholder remuneration. Interests on equity are subject to withholding at the rate of 15 per cent (or 25 per cent if the beneficiary is resident in a tax haven). Interests on equity are a deductible expense.
Businesses whose revenues do not exceed 48 million reais a year or 4 million reais a month, who are not engaged in financial services and do not receive profits from foreign sources, can opt to be taxed under the presumed system. The presumed system represents a simpler way to calculate the business tax due to the reduced bookkeeping requirements. The tax is assessed on a percentage of the gross revenue established by law for each business sector. For example, in the service industry the presumed profitability is 32 per cent of the gross revenues.
The choice of the more economic and efficient system depends on each case and demands a specific analysis of the business operation.
Brazil has entered into double tax treaties with many countries. The tax treat between Brazil and India has been in force in Brazil since January 1, 1993.
On the suitability of limited liability company, and the important legal provisions governing this form.
The limited liability company is the most adopted type of company in Brazil due to its simplicity and flexibility of incorporation, management and functioning. It is suitable for simple businesses with few shareholders. At least two shareholders are required to incorporate a limited liability company. The shareholders receive and hold quotas representing the capital invested in the company. Each quota shall grant one vote and the same rights to all shareholders.
As contribution for capital, the shareholders may provide money, assets, credits, and/or rights to the company. Upon incorporation, the shareholders shall agree on how and when they will pay their quota in the company. The liability of the shareholder for the payment of the capital is limited to the amount of his quotas, but if a shareholder does not comply with his duty, creditors of the company can collect the credit from all shareholders, having the right, however, to exclude the negligent shareholder from the company, reducing his stockholding proportionally or demanding the payment of the debt.
The officers of a limited liability company are appointed by the shareholders in the articles of incorporation or in a separate document. They should be individuals resident in Brazil, shareholders or not, and have the power to decide the companys internal issues, and bind the company before third parties. Their mandates shall be fixed for a defined or undefined period. It is also possible for the shareholders to impose restrictions (such as prohibition to obtain loans above certain amount) to the officers powers.
The main quorums applicable to meetings of the shareholders are:
hundred per cent of capital for the appointment of officers when they are not shareholders and the capital is not fully paid in;
three-fourths of the capital for the amendment of the articles of incorporation, and merger, acquisition and dissolution of the company;
fifty per cent of the capital plus one quota for approval of the remuneration of the officers, and for exclusion of a shareholder from the company; and
fifty per cent of the shareholders present in the meeting plus one quota for the approval of balance sheets.
When is the corporation apt? And what rules govern corporations?
The corporation is a legal entity suitable for sophisticated corporate arrangements. The capital of a corporation is divided in shares (common, preferred or fruition) that may grant different rights or privileges to the shareholders (i.e., preference to receive dividends and right to vote). The shareholders, that must be at least two, may pay the capital with money, assets, credits, and/or rights.
The corporation may be closely held or publicly held. The publicly held corporation has the right to issue and negotiate its shares and other securities in the stock market, whereas the closely held corporation does not. Note that, beyond the registration with the Register of Companies, the publicly held corporation shall be registered with CVM (the Brazilian Securities and Exchange Commission).
If control over a publicly held company is transferred, at least 80 per cent of the price offered to the shares that comprise the controlling block must be offered to all common shares of the minority shareholders. If the company is listed at some corporate governance levels at BOVESPA (So Paulo Stock Exchange), the price offered to the minority shareholders can reach 100 per cent of the price offered to the shares of the controlling block.
In a corporation, differently from the limited liability company, the shareholders are not liable for the negligence of other shareholders regarding the payment of the capital in full. Therefore, if a shareholder does not pay for his shares, the other shareholders will not have to pay for him and, cumulatively, will be entitled to exclude the negligent shareholder from the company.
The corporation is managed by the board of directors and the officers (the existence of the board of directors is not mandatory in a closely held corporation). The board of directors decides the business strategy of the company and is composed of at least three individuals, residents in Brazil or abroad, but always shareholders. The officers execute the decisions of the board of directors and shall be at least two individuals, residents in Brazil, shareholders or not.
The main quorums applicable to meetings of the shareholders are:
majority of the voting capital present at the meeting as the ordinary quorum;
majority of the voting capital for the creation of preferred shares, modification of the privileges of the preferred shares or creation of a new class of them; reduction of the compulsory dividend; merger, split-off, acquisition, and dissolution involving the corporation; participation in a group of companies; change of the companys purpose; and creation of founder shares; and
hundred per cent of the capital for the transformation of the corporation into another type of company, unless otherwise the by-laws establishes a lower quorum.
What Brazilian taxes are relevant to businessmen apart from the income tax?
The Brazilian tax system has federal, state and municipal taxes. We herein point out some of the Brazilian taxes.
ICMS (tax on circulation of goods and services): This state-level VAT (value-added tax) is assessed on the circulation of goods and certain services, such as transportation of products and people. ICMS tax rates vary from 7 per cent to 25 per cent, but 17 per cent and 18 per cent are the commonest rates.
CIDE Royalties: This federal tax is assessed on royalty, technical assistance and trademark licensing paid to non-resident individuals or entities.
IPTU (tax on urban real estate): This municipal tax is assessed on the ownership of urban real estate.
ITR (tax on rural real estate): This federal tax is assessed on the ownership of rural real estate.
IE (export tax): This federal tax is assessed on goods exported from Brazil. This tax has a political purpose. It is used by the Brazilian Government to control exports.
II (import tax): This, again, has a political purpose. The Brazilian Government uses II to control imports.
IPI (tax on industrialised goods): This federal-level VAT is assessed on industrialised goods in Brazil and its rates vary according to the essentiality of the product subject to tax.
ITBI (tax on transfer of real estate): This municipal tax is assessed on transfers of real estate. It is calculated on the value of the real estate.
ITCD (tax on Mortis Causa and donation): This state tax is assessed on donations and transfers of assets due to inheritance.
PIS/COFINS (social integration tax): These social contributions are VATs, assessed on the sale of goods and services. They finance the federal social security system.
CSSL (social contribution on profit): This social contribution is assessed on the businesses net profits before business income tax; and this also finances the federal social security system.
ISS (tax on services): This municipal level turnover tax is assessed on the gross revenues related to services rendered by companies or individuals not subject to ICMS.
INSS (social security system tax): This federal tax also finances the federal social security system and is paid by the employer (on the payroll) and by the employee (on the salary).
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Short bios: Mr Gilberto Ayres Moreira received his LL.B. from PUC-MG (Brazil), is a postgraduate in tax law from IBET (Brazil) and ITP from Harvard Law School (US). He is an international tax law professor at IEC/PUC-MG (Brazil) and invited professor at Fundao Getlio Vargas. He is an alumnus of the Trade Policy Training Program of the Brazilian embassy in Washington and a member of the International Fiscal Association (IFA) and the ABCI Institute.
Mr Fbio Appendino received his LL.B from FDSBC, is a postgraduate in business law from PUC/SP, and is studying finance in IBMEC-MG. He specialises in corporate, contracts and investment law. He is a professor of corporate law in Pos-Graduations and is a member of the Instituto de Direito Societrio Aplicado-IDSA-SP and Instituto dos Advogados de Minas Gerais-IAMG-MG.