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Business in Brazil - Guide for Foreign Investors

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By: Walther Bottaro Castro

Introduction

Brazil is worldwide recognized as one of

the most complex places in terms of legal

and tax requirements. In this sense, this

material was produced in order to

summarize the main features which the

foreign investor should be aware when

conducting business in Brazil.

This material was divided in three parts: 1)

Establishment of business 2) Taxes 3) Labor

charges.

For more information, please contact:

wblc@wblc.com.br

General information about Brazil:

Brazil is the largest country in South

America and in the Latin American region,

and the world's fifth largest by land area

(equivalent to 47% of the South American

territory). Brazil’s population is over 202

millions of citizens. It is the only country in

America where the population mainly

speaks Portuguese as well as being one of

the most multicultural nations and

ethnically diversity, due the strong

immigration from many immigrants of the

world, especially from Italy, Germany and

Japan.

Brazil’s economy is the largest in Latin

America and in the Southern Hemisphere

and the seventh largest in the world, both

nominally and by purchasing power parity.

1. Establishment of Companies in Brazil

1.1. Subsidiary in Brazil:

For a foreign company to invest and create

a subsidiary in Brazil it is required a registry

in the National Registry of Legal Entities -

CNPJ of the Ministry of Finance. With the

CNPJ, the foreign company may be a

partner of any Brazilian company

(exception to some regulated segments).

There is a debate whether Brazilian

companies with foreign partners (eg, a

Brazilian subsidiary of an Italian group)

need a Brazilian partner. In the past, it was

very common that foreign companies

allocated, symbolically, 1% of the capital

for a Brazilian entrepreneur, usually the

CEO and the founder of the subsidiary in

Brazil. However, this practice is not

necessary and it is not recommended, as a

possible demise of this "partner", the

company will be involved in inheritance

processes that can become bureaucratic

and should pay for this "1%".

It is worth noting that Brazilian law does

not require that every company has a local

partner, yet the law requires that a

company made up exclusively of foreign

partners, has an administrator and

representative of Brazilian or foreign

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nationals with permanent visa. This person

will represent the companies with local

agencies such as the IRS and the Board of

Trade. Importantly, the foreign partners

have authority to dismiss them at any time

and should allocate another local

representative.

1.2. Foreign citizens:

Just as happens with foreign companies,

foreign nationals partners of Brazilian

companies should have a Physical Person

Registration (CPF), similar to the CNPJ.

With this document, the foreign person is

able to be a partner in a Brazilian company.

If the foreign partner lives in Brazil and has

a permanent visa, a Brazilian

representative becomes unnecessary to

represent the foreign company.

If none of the foreign partners are resident

in Brazil, the company must have a

representative in Brazil, as in the case of

foreign companies.

2. Taxes

Brazil is renowned in the world for the

complexity of taxes and there is a

considerable list of them imposed on the

operations in the country. We will address

taxes into two major groups, income tax

and indirect taxes.

2.1. Income tax

There are mainly two taxes in Brazil:

Income and CSLL - Social Contribution on

Net Income. Income tax in Brazil has three

optional modes: SIMPLES, Lucro Presumido

(presumed income) and Lucro Real, which

option is restricted to some factors.

The rate of income tax is fixed at 15%.

Profits exceeding R$ 20 thousand a month

are taxed at a 10%, totaling 25%. The

Social Contribution on Net Profit (CSLL) is

fixed at 9%, with the exception of financial

institutions which are 15%.

2.1.1 SIMPLES

SIMPLES mode was created in 2000 in

order to facilitate and unify all taxes

(including taxes on operations) in a single

tax rate on revenues which varies

according to turnover and according to the

business’ activity. However, this option is

forbidden for companies with foreign

partners residing abroad. For this reason,

we will not go into details. For more

information, please contact us:

wblc@wblc.com.br

2.1.2 Lucro Presumido

The Lucro Presumido mode is the form of

tax where the income tax and social

contribution tax are paid on a presumed

income previously defined in relation to

the Company's activity which varies

according to the company's activity:

Activity Presumed

Profit by

tax

authorities

in relation

to billing

Approximate

tax rate on

revenues

Commerce

and

8% to

income tax

and 12% to

2% to income

tax and 1.08%

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Industry CSLL to CSLL

Services 32% to IRPJ

and CSLL

8% to income

tax and 2.88%

to CSLL

Commercial and industries classified in the

presumed income pay about R$ 3.08 for

every R$ 100 billed, since the service

providers pay R$ 10,88 for every R$ 100

billed.

Companies that earned up to R$ 48 million

per year can choose from the presumed

income and taxable income. Companies

with revenues exceeding this limit are

compulsorily unframed presumed income.

2.1.3 Lucro Real

Some companies such as banks and

insurance companies are required to Lucro

Real mode. In this scheme, the income tax

is determined from the accounting profit

plus adjustments (positive and negative).

This tax scheme requires rigorous controls

of financial transactions, since the rules to

the costs can be deducted from the TAX

basis. All company’s expenses must be

supported by valid documents and fiscally

covered suitability. Food expenses of board

members and directors, donations, gifts

and accruals (except related to 13° wages,

vacation and technical reserves) are

disregarded for tax expenses and should be

removed from the calculation basis of

income tax and added to profit accounting

for the calculation of income tax.

2.1.4 Tax Planning – Lucro Real VS Lucro

Presumido

The choice between Lucro Real and Lucro

Presumido must to be accompanied by a

detailed study in order to minimize the tax

burden. The Lucro Real is generally

recommended for companies with lower

net margins presumed margins in the form

of Lucro Presumido. Such analysis should

be done taking account the effects of

taxes: PIS and COFINS, as tax rates change

in Lucro Real and Lucro Presumido

schemes. On Lucro Presumido, the tax

rates of PIS and COFINS on billings are

respectively 3% and 0.65%. For companies

in “Lucro Real” the tax rates are

respectively 7.6% and 1.65%, however in

this case, such taxes can be deducted of

the goods costs.

2.2 Indirect Taxes

Unlike most countries, Brazilian taxes

burden is concentrated mainly in indirect

taxes. Such taxes are responsible for the

great Brazilian tax burden and amount to

about 50% of total revenue. In developed

countries, this percentage is 30% and in

emerging countries it is 25%.

The main taxes in this category are: ICMS,

ISS, PIS, COFINS and IPI.

2.2.1. ICMS:

The ICMS (Tax on Circulation of Goods and

Services) is a tribute of competence of the

states. Such tax is due mainly on the

movement of goods. In this case, whether

the sale of merchandise was committed or

not, what matters is that there was

circulation and it is charged. The ICMS is

not a cumulative tax, and it focuses on

each step of the movement of goods

separately. In practice, ICMS is a VAT paid

by companies on product gross margin.

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The applicable tax rates change in the type

of operations: operation within the state

and interstate operations.

2.2.1.1 Operations within the state:

The states adopt cheaper rates for basic

services and other more expensive

merchandise particularly as regards

superfluous products, such as alcohol,

smoke and perfumes, whose rate is 25%

For conventional goods ICMS internal rate

is 18% in São Paulo state, 19% in the state

of Rio de Janeiro and 17% in the other

states.

2.2.1.2 Aliquots Interstate:

In transactions between states the tax

rates vary according to the region of Brazil

where the goods is being sent and if the

goods are sold to ICMS taxpayer:

ICMS taxpayers:

Rate 7% to:

• North (Acre, Amazonas, Roraima,

Rondonia, Para, Amapa and Tocantins

states).

• Northeast Region (Maranhao, Piaui,

Ceara, Rio Grande do Norte, Paraiba,

Pernambuco, Alagoas, Sergipe and Bahia

states).

• Central West Region (Goiás, Mato

Grosso, Mato Grosso do Sul states and the

District Capital)

Rate of 12% to:

• Southeast (Minas Gerais, Espírito Santo

and Rio de Janeiro states)

• Southern Region (Paraná, Santa Catarina

and Rio Grande do Sul states).

In some states, ICMS ST - Tax Substitution

is adopted, which transfers (substitute) for

Industry the obligation to collect the ICMS

that will be generated along the production

chain, hence the Tax Substitution name.

This ICMS-ST is calculated based on the

Value Added Index, which varies by

product. Thus products with ICMS ST do

not generate ICMS during his chain, only at

baseline.

2.2.2. IPI - Tax on Industrialized Products

IPI (Tax on Industrialized Products) is

applied both to industry and to importers.

This tax is used by the government for

economic control, thus its rate varies

according to the type of product. The list of

product codes (NCM) can be found on the

website of the Receita Federal (Brazilian

Tax Entity). Its rate may vary between 0%

and 15%.

2.2.3 PIS and COFINS

2.2.3.1. Cumulative system

ICMS

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PIS and COFINS are certainly two of the

most complex Brazilian taxes. Companies

classified in the “Lucro Presumido” regime

have fixed rates of 0.65% and 3% levied on

revenue, and named Cumulative system.

However, if these companies perform

imports, tax rates on imports are 7.6% and

1.65% respectively, and they cannot take

credit. Because of these characteristics, it is

very important that foreign importing

companies make a tax planning to choose

the best regime.

2.2.3.2. Not Cumulative system

The non-cumulative system of PIS and

COFINS is to be deducted from each

contribution calculated debts of their

claims allowed by law. Hence the name not

cumulative, as the tax will be paid on

"added value" of the product. It is

noteworthy that just a few credits are

allowed. In this case, PIS and COFINS are

respectively 1.65% and 7.6% levied on the

income.

Costs that are generally accepted to shoot

down the basis for calculation of PIS and

COFINS are: cost of goods purchased for

resale, cost of goods and services used as

inputs in the manufacture of products

intended for sale or provision of services,

electricity, rents paid to companies and

depreciation on buildings and

improvements in own or third party real

estate.

2.2.4 ISS - Service Tax

The service tax is the responsibility of the

municipalities and is applicable to the

provision of services. In rare cases the

incidence of ISS or the IPI and the

definition of the operation with

industrialization or Service Delivery can be

confusing. In this sense, it validates the list

of consultation of relevant services defined

in Law 116/2003.

These rates vary from 2% to 5% according

to the municipality and the type of service.

2.2.5 Importation Taxes

In the importation of goods the taxes

already mentioned before: ICMS, IPI, PIS

and COFINS are incidents and must be paid

at the time of clearance of goods.

Additionally the II - Import tax is due and

must be calculated on the FOB value of the

product, with varying rates.

In the case of import of services the taxes

due are: ISS (5%), PIS, COFINS and the

import duty will be applied.

In the case of foreign currency payment

will be due the IOF - Tax on financial

transactions in the rate of 0.38%.

3. Labor Charges

Brazil has a established and consolidated

labor law system. When a company hires

employees in Brazil, shall take into account

tax and labor costs, worth mentioning:

• Holidays - To each year of service the

employee is entitled to 30 days of paid

vacation. Paid holidays correspond to the

value of one month's salary over a third.

• 13th salary (salary bonus) - Brazilian law

requires that at the end of the year the

company pays the employee an extra

salary bonus. For employees hired during

the year, the company will pay the 13th

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salary in proportion for the worked

months.

• FGTS. The company is obliged to pay the

monthly 8% above the employee's salary.

This amount is deposited in the employee's

name and may be redeemed by him in the

dismissal by the Company or upon

retirement.

• INSS - Social Security. The company

should collect monthly Social Security tax

whose value ranges from 20% to 23% of

the employee's salary. Such taxed is

intended to fund the Brazilian public

welfare.

In addition, the company is required to

collect other amounts on income tax and

employee social security, but such values

are deducted from paid employee salary.

Final Considerations

This material does not intend to exhaust all

subjects, but sketch and answer the most

frequently asked questions regarding the

legal aspects of foreign investment in

Brazil. If you have additional questions or

need clarification, do not hesitate to

contact us: wblc@wblc.com.br.

The WBLC Consulting is a company

specialized in financial-accounting

consulting and administrative accounting

outsourcing by foreign companies. The

WBLC is a CH group member company.

Av.Susana. 185, Sáude, São Paulo - SP. CEP 04130-000

+55 11 3280 6635

wblc@wblc.com.br - www.wblc.com.br