How to do business in Brazil

Can a local company be 100% held by foreign resident shareholders?

Yes, Brazilian legislation allows a Brazilian company to be 100% held by foreign resident shareholders.

There are regulatory laws that may impose restrictions on foreign investment. Nonetheless, these cases are exceptions. In general, a foreign investor may operate in Brazil in similar conditions to Brazilian nationals, provided that the relevant laws are followed. An attorney-in-fact resident in Brazil must be appointed to represent the foreign resident shareholder.

What are the main legal forms of companies in your country?

The two main legal forms of companies are the Limited Liability Company (Limitada or LTDA) and the Corporation (S.A.), with the main differences being:

Limited Liability Company (LTDA)

• Incorporated by executing an article of incorporation, which must be filed for registration with the Board of Trade
• Can be incorporated by having one sole quota holder
• No need to pay in advance the corporate capital subscribed by the founders
• No need to keep corporate books
• Minutes to quotaholders’ meetings must only be registered with the Board of Trade when they must have effects before third parties
• Only large-scale companies (companies, or a group of companies, with assets valued in more than BRL 240 million or with a gross revenue higher than BRL 300 million) must publish their balance sheets
• As long as the article of incorporation foresees the supplementary application of the Brazilian Corporate Law (Law No. 6,404/1976), it is possible for an officer(s) to be resident abroad (however, he/she must keep an attorney-in-fact in Brazil)
• Corporate capital increase can only be made after 100% of the subscribed corporate capital is paid
• Corporate control is held by the quota holder that owns 75% of the corporate capital 1 Although higher quorums, for qualified matters, may be agreed upon the quota holders. .

Corporation (S.A.)

• Incorporated by executing a minute to a General Incorporation Assembly, which must be filed for registration with the Board of Trade and published in the local newspaper and on the company’s web page
• Must be incorporated having at least two shareholders. 2 The Brazilian Corporate Law (Law No. 6,404/1976) allows the incorporation of a joint stock company with one shareholder if this sole shareholder is a Brazilian company.
• Founders must pay at least 10% of the corporate capital to incorporate the company
• Must have at least the following corporate books:
  • Shares Registry book
  • Shares Transfer book
  • Shareholders’ Meetings book
  • Shareholders’ Presence book
  • Officers’ Meetings book
  • Board of Directors’ Meetings book (when the company has a Board of Directors)
  • Audit Committee’s Meetings book (when the company has an Audit Committee)
• Must publish their financial statements every year
• Allows for officers to be resident abroad (however they must keep an attorney-in-fact in Brazil)
• Corporate capital increase can only be made after 75% of the subscribed corporate capital is paid
• Corporate control is held by the shareholder that owns 50% + 1 of the voting corporate capital. 3 Although higher quorums, for qualified matters, may be agreed upon the shareholders.

In both corporate vehicle forms, the rights of the parties regarding decision-making, distribution of profits, financing and other important matters can be regulated by way of a shareholders’ (or “quota holders’”) agreement and the company’s constitution. International concepts such as tag-along and drag-along rights, restrictive covenants and put-and-call options are all recognised.

Must the managing director of the company be a resident and/or a national of your country?

Limited Liability Company: as long as the article of incorporation foresees the supplementary application of the Brazilian Corporate Law (Law No. 6,404/1976), officers can be resident abroad. However, an attorney-in-fact resident in Brazil representing the managing director must be appointed.

Corporation: Corporate Law No. 6,404/1976 allows for officers to be resident abroad (however they must appoint an attorney-in-fact resident in Brazil).

Are there any foreign exchange rules applicable to foreign investment in your country? If yes, please explain briefly?

Foreign investment is subject to specific regulations related to the registration of foreign investment and exchange control for the inflow and outflow of funds in and out of Brazil.

Are there any Central Bank rules applicable to foreign investment in your country?

The Central Bank is responsible for monitoring and registering foreign investment in Brazil, as provided in the policies and regulations issued by the National Monetary Council. The capital inflow and outflow shall be recorded in the Central Bank’s system.

How long does it take to incorporate a company?

It takes at least 2 months to incorporate a company in Brazil, although depending on the required licences, it can take considerably more than 2 months.

What are the main taxes applicable to all businesses in your country?

Taxation of corporate profits

The revenues earned by a Brazilian company from the rendering of services, or the sale of goods and products, must be included in taxable income for purposes of the tax basis of Corporate Income Tax (“IRPJ”) and Social Contribution on Net Profit (“CSLL”). Brazilian companies can elect to compute IRPJ and CSLL basically under two main systems – the actual profit system and the presumed profit system.

As a general rule, IRPJ and CSLL are due at a combined rate of 34% (25% IRPJ + 9% CSLL). Different tax rates are applied to specific segments such as financial institutions in general (except banks of any kind), which are subject to a global tax rate of 40%.

In the actual profit system, the taxable profit is calculated upon the computation of revenues and expenses, adjusted by some additions (non-deductible expenditures) and exclusions (non-taxable revenues). Income earned abroad directly, or indirectly through a related company, is subject to IRPJ and CSLL.

Under such regime, tax losses assessed on each base period can be carried forward indefinitely. However, carry-forward tax losses cannot reduce more than 30% of taxable profits of subsequent tax base periods.

In most cases, the CSLL tax basis is the same as the IRPJ’s tax basis, although some specific adjustments may be required.

In the presumed profit system, the taxable income for purposes of IRPJ and CSLL is calculated upon the application of a fixed percentage over the operational gross revenues of the company. In most cases, the percentages applicable to gross revenues originating from services is 32% and from the sale of products is 8%. IRPJ and CSLL rates are applied over the presumed tax basis calculated upon the application of the fixed percentage. The recognition and offsetting of tax losses carried forward is not allowed in the presumed profit system. The presumed profit system is not allowed for companies that record annual revenues above BRL 78 million for those engaged in certain activities (e.g. financial institutions), or for companies that hold investments in legal entities located abroad.

Taxation of gross revenues

Gross revenues recorded by Brazilian companies are subject to the incidence of the Federal Social Contribution on Revenues (“PIS” and “COFINS”). Taxpayers may be subject to PIS/COFINS based on either the non-cumulative or the cumulative regime.

Non-cumulative regime

As a rule, companies that collect IRPJ and CSLL under the actual profit system are mandatorily subject to PIS/COFINS under the non-cumulative regime.

Under the non-cumulative regime, taxpayers are entitled to tax credits of these contributions related to certain inputs/expenses that are applied/incurred for the production/manufacturing of the relevant products and/or rendering of services. Under this system, financial revenues are taxed at a combined rate of 4.65%.

Cumulative regime

For companies that collect IRPJ and CSLL according to the presumed profit system, PIS and COFINS will be due under the cumulative regime, in which case they apply over the operational revenues only, and no tax credits are allowed to be registered. Under this system, financial revenues are not subject to PIS and COFINS.

One-time levy regime

Specific industries are mandatorily subject to the cumulative regime or to the one-time levy regime, where the importer or manufacturer collects PIS and COFINS on the product in advance on behalf of the entire supply chain – including wholesalers and distributors – up until the final consumer.

In general, the following rates apply: 4 The rates may change depending on the activity developed by the company or the nature of the revenue earned.

• PIS contribution: 1.65% (non-cumulative regime) or 0.65% (cumulative regime)
• COFINS contribution: 7.6% (non-cumulative regime) or 3% (cumulative regime).

Other federal taxes
 

State valued added tax (“ICMS”)

ICMS is collected by each of the Brazilian states on the sale, supply or transportation of goods and certain services, as well as on imports. As a general rule, rates vary between 7% and 25% depending on the state and the relevant taxable activity (sale, supply or transportation). Interstate transactions with imported goods are subject to a rate of 4%.

In general, ICMS paid on prior transactions can be offset against the amount due on subsequent transactions.

Nonetheless, ICMS may apply at a substitution regime (“ICMS-ST”) where the importer or manufacturer collects the ICMS that would apply to the subsequent transactions on the supply chain up until the final consumer.

Municipal service tax (“ISS”)

ISS is charged on services including engineering, construction and well drilling, as well as on service imports. The full list of applicable services is attached as an exhibit to Law No. 116/2003, and the tax rate may vary from 2% to 5% depending on the nature of the service and the classification given by the municipality where the service provider is located or where the service is rendered.

The ISS is not creditable and represents a cost to the service provider.

What is considered a permanent establishment in your internal law? Is it different from the classical OECD definition of article 5?

There is no concept of permanent establishment (“PE”) in ordinary law for the purposes of imposing Brazilian corporate income tax over foreign income derived from activities carried out abroad.

Notwithstanding, the local income tax law provides for a few rules to establish the imposition of corporate income taxes to non-residents operating in Brazil, in which case Brazilian corporate income taxes may apply over foreign income.

The circumstances in which this rule applies are very limited:

• non-residents operating in Brazil by means of a branch or agency
• commissioners operating for exporters
• direct sale through agents with biding powers in Brazil.

The Brazilian tax authorities introduced a PE definition through the Normative Ruling 1,681 in 2016 only to establish obligations related to the Country-by-Country Reporting – to comply with the obligation to share information agreed on in international tax treaties. Despite the definition adopted, the local laws have not imposed corporate income taxes on these operations, which are defined as follows:

“A fixed place of business through which an entity carries out all or part of its activity in another jurisdiction, and includes especially a head office, a branch, an office; a factory; a workshop; a mine, an oil or gas well, a quarry or any other place of extraction of natural resources; or a construction site or a construction or installation project, only if its duration exceeds 12 (twelve) months.”

The definition above has been adopted to interpret the application of tax treaties. Case law shows that Brazil adopted this concept in a few cases to judge whether a specific exemption of income tax on profits would apply to the remittance of service fees abroad.

Are there any thin capitalisation rules?

Yes, there are thin capitalisation rules that shall be met on interest paid to related parties or residents in tax havens or privileged tax regimes, as follows: 5 The privileged tax regimes are: Austria – holdings without substantive economic activity; Costa Rica – for the free trade regimes (RZF); Denmark – holdings without substantive economic activity; Iceland – international trading companies; Malta – international trading companies and international holding companies; the Netherlands – holding companies without substantive economic activity; Portugal – for the International Business Center regime in Madeira (CINM); Singapore – the specific regimes that provided for special tax rates; Switzerland – qualified legal entities subject to corporate income tax rate lower than 20%; the US – in case of an LLC(s) with non-resident partners and not subject to federal income tax; and Uruguay – for inversion financial entities or SAFIs

• interest paid to related parties is deductible up to the limit of the debt-to-equity ratio of 2:1
• interest paid to residents in tax havens is deductible up to the limit of the debt-to-equity ratio of 0.3:1.

Are there any stamp/registration duties payable upon injection of equity? Same question on intra-group loans.

With the exception of the IOF Exchange (“IOF-FX”), there are no specific stamp/registration duties upon the equity or debit (intra-group loan) inflow in Brazil.

The remittance of equity (capital increase) into Brazil is subject to the IOF-FX at a rate of 0.38% levied over the amount of the remittance. The taxpayer is the Brazilian party that receives the remittance of cash as equity.

The remittance of debt into Brazil is subject to the IOF-FX at a rate of 0% levied over the amount of the remittance. Debt may be converted into equity, and in such case, the IOF-FX also applies at a rate of 0%. In the case of a short-term loan, the IOF-FX applies at a rate of 6%.

The taxpayer is the Brazilian party that receives the remittance of cash as equity.

Is there a withholding tax on dividends?

Dividends payable by Brazilian companies to non-resident shareholders are not subject to a withholding income tax (“WHT”) regardless of the jurisdiction where the beneficiary is located.

The IOF-FX at a rate of 0% applies to the remittances of dividends abroad. The tax rates may be changed by the Brazilian government at any time without a minimum waiting period.

Profits can only be payable if the company has profits recorded in the balance sheet.

Is there a withholding tax on interests?

Loan interest paid by a Brazilian source to a non-resident is subject to WHT at a rate of 15% (25% if the beneficiary is resident in a tax haven jurisdiction).

Interest remittance abroad is subject to the IOF-FX at a rate of 0%.

Is there a withholding tax on services paid to foreign suppliers?

Withholding income tax (“WHT”)

Payments related to patent, trademark, know-how, copyright, software and services fees to non-residents are generally subject to the withholding income tax.

The taxpayer is the non-resident beneficiary, but the Brazilian party is responsible for the withholding of the income tax.

The tax basis is the service price, including the ISS tax.

A 15% tax rate is imposed in case of patent, trademark, know-how, copyright, software and technical or administrative services payable to regularly taxed jurisdictions. The rate is increased to 25% in case the beneficiary is located in a low-tax jurisdiction (LTJ). 6 Low tax jurisdictions are provided in Normative Ruling 1,037/10: American Samoa, American Virgin Islands, Andorra, Anguilla, Antigua and Barbuda, Aruba, Ascension Island, Bahamas, Bahrain, Barbados, Belize, Bermuda Islands, British Virgin Islands, Brunei, Campione d’Italia, Cayman, Channel Islands, Curaçao, Cook Islands, Cyprus, Djibouti, Domenica, French Polynesia, Saint Kitts & Nevis, Gibraltar, Grenada, Hong Kong, Isle of Man, Kiribati, Labuan, Lebanon, Liberia, Liechtenstein, Macao, Maldives, Mauritius Islands, Marshall Islands, Monaco, Monserrat Islands, Nauru, Niue Islands, Norfolk Island, Occidental Samoa, American Samoa, Panama, Pitcairn Islands, Qeshm Island, Santa Lucia, Saint Helena, Saint Pierre et Miquelon Islands, Saint Vincent & Grenadines, Seychelles, Singapore, Solomon Islands, Swaziland, Tonga, Tristan da Cunha, Turks & Caicos Islands, United Arab Emirates, and Vanuatu.

A 25% tax rate is imposed for services that do not characterise as administrative or technical. Tax treaties to avoid double taxation (“DTAs”) may reduce the WHT rate.

Import Service Tax (“ISS-Import”)

Municipalities are authorised by the Federal Constitution to levy a tax on the importation of services.

Royalties, copyrights and licences in general are not treated as services for this purpose.

The Brazilian importer is responsible for the withholding of the tax but the taxpayer is the foreign supplier of services.

The tax rate may vary from 2% to 5% depending on the nature of the service and the classification given by the municipality where the service provider is located or where the service is rendered.

Federal Contribution for the Intervention in the Economic Domain (“CIDE-Services”)

CIDE-Services is levied on payment, credit, delivery, use or remittance of technical and administrative service, royalties, at any title, by a Brazilian company to a beneficiary resident or domiciled abroad.

The tax basis is the amount object of payment, credit, delivery, use or remittance and the applicable rate is 10%. No tax credits are allowed in the current legislation.

PIS/COFINS-Import

The import of services is subject to PIS/COFINS-Import. The tax basis is the amount paid, credited or remitted abroad, before the assessment of the withholding income tax, plus Municipal service tax (ISS) and the amount of PIS and COFINS levied on such value.

The importation of services is subject to a rate of 9.25% (1.65% PIS + 7.6% COFINS).

If the importer calculates the PIS/COFINS due through the non-cumulative regime, PIS/COFINS-Import paid in customs clearance is considered as tax credit.

Financial Operations Tax on Exchange Transactions (“IOF-FX”)

The IOF-FX is a federal tax that applies to foreign currency exchange transactions performed by the Brazilian company or individual.

The tax basis is the remittance amount, and the tax rate is 0.38%. No credits are allowed.

How many tax treaties does your country have to date? Please list the main countries (notably EU) with which your country has a tax treaty in force.

Brazil has currently entered into and executed 36 treaties to avoid double taxation for income tax with:

• (EU) Austria, Belgium, Czech Republic, Denmark, Finland, France, Hungary, Italy, Luxembourg, the Netherlands, Portugal, Spain, Slovakia and Sweden
• (non-EU) Argentina, Canada, Chile, China, Ecuador, India, Israel, Japan, Mexico, Norway, Peru, the Philippines, Russia, Singapore, South Africa, South Korea, Switzerland, Trinidad and Tobago, Turkey, Ukraine, United Arab Emirates and Venezuela.

The Brazilian and UK governments signed a DTA at the end of 2022, but it is not yet in force in Brazil.

What is the applicable rate of VAT/GST?

Please refer to the explanations of ICMS and ISS under the question, “What are the main taxes applicable to all businesses in your country?”

Under your internal law, is a capital gain realised by a non-resident shareholder taxable in your country? If there is a minimum shareholding, please indicate the rate applicable.

Capital gains derived by non-Brazilian residents on the sale of shares of Brazilian companies are subject to income tax at progressive rates that vary from 15% to 22.5%, depending on the amount of the gain. If the beneficiary is resident in a tax haven jurisdiction, the tax rate increases to 25%.

The tax must be withheld and collected by:

• the acquirer when such acquirer is a resident of Brazil, or
• the Brazilian attorney-in-fact of the acquirer when such an acquirer is a non-resident purchasing assets located in Brazil from a non-resident seller.

There is no minimum shareholding for non-residents according to Brazilian legislation.

In case of change of control, is there a rule providing for the loss of tax carried forward losses?

According to Brazilian tax legislation, the Brazilian legal entity loses its tax loss carry forward if there are, between the date of tax loss calculation and its offsetting:

• change in the corporate control of the legal entity holding the tax loss, and cumulatively
• change in the branch of activity.

In addition to the rule above, Brazilian tax legislation also prohibits the use of accumulated tax losses in the incorporation, merger or demerger, on which occasion the successor legal entity may not offset the tax losses of the predecessor.

Are there indirect sale rules incorporated into the tax legislation of your country? Please explain briefly.

Except for transactions carried out with fraud or simulation to avoid taxes in Brazil, as a general rule there are no indirect sales rules in Brazil.