1. Entry Method
Investment &
Operations
Agents, Distrib
utors & Labor
LEGAL ASPECTS OF
DOING BUSINESS IN
BRAZIL
dwilsonjdmba
dwilson@keglerbrown.com
David M. Wilson, Esq.

2. Legal Aspects of Doing Business in
Brazil
Entry Method &
Organizational
Structure
• Strategic considerations
• Available structures and features
Investment &
Operations
• Import process, tariffs, taxes &
incentives
• Regulatory changes and trends
Agents, Distributor
s and Labor
• Agents & distributors
• Labor considerations
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

3. Entry Method & Organizational
Structure
 Strategic
Considerations
 Available Organizational & Entity Structures
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

4. Strategic Considerations
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk






P E S T
The unit of measurement
for political risk is
STABILITY
Stable Republic Since 1985
Multiple Peaceful Elections
Democratic Constitution
Functioning Executive, Legislative and Judicial Branches
Multiple Party System
Increasingly developed services: Fire, Police, EMS
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

5. Strategic Considerations
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk

Article 62 of 1988 Constitution grants the president



Under situations of extreme urgency
The power to issue “provisional measures” medidas provisorias
Force of law for 30 days

Then, made law by Congress or Invalid
Oversight After Delegation


The unit of measurement
for political risk is
STABILITY
Executive Decree Authority


P E S T
Brazilian legislatures historically endow presidents with broad authority, then
monitor case-by-case through amendments
Reality


All Brazilian presidents have used for routine legislation – not simply extraordinary
circumstances
If Congress fails to consider within 30 days, presidents often reissue expired decrees
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

6. Strategic Considerations
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk

P E S T
The unit of measurement
for political risk is
STABILITY
Appropriation concerns

Brazil


Long history of privatization & recent commitments
 1980s operating 250 institutions
 1991 Federal Privatization Program (NPD) – 186 firms within 2 years
Recent LatAm


Argentina
 Nationalization of YPF – Spanish oil firm Repsol – April 2012
 President Cristina Fernandez de Kirchner, the expropriation was aimed at
“recovering sovereignty” over natural resources
Bolivia
 Nationalization of Transportadora de Electricidad, Spanish – May 2012
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

7. Strategic Considerations
P E S T
The unit of measurement
for political risk is
STABILITY
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk

Level of Corruption

Transparency International 2012 CPI index



The abuse of entrusted power for private gain
Perception of corruption in public sector
2012

USA 19th of 176


Brazil 69rd of 176


89th percentile
60th percentile
1995 (year 1 of CPI)

USA: 15 of 41


Denmark
1st
USA
19th
Chile
20th
Brazil
69th
China
Colombia
80th
94th
India
94th
Russia
133rd
North
Korea, So
malia
174th
63rd percentile
Brazil: 36 of 41

13th percentile
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

8. Strategic Considerations

P E S T
Foreign Corrupt Practices Act 1977 (FCPA)
 Two key provisions:
 Prevention of bribery of (foreign) governmental officials
 Anything of value to a foreign official
 Duty to keep accurate financial books and records and have
adequate internal controls to accurately reflect the transactions
of the business
 Does it apply to me?


Applies to US companies, citizens, foreign
subsidiary, officer, director, employee, or agent of a US company or its foreign
subsidiary, any stockholder acting on behalf of the company, foreign
companies with US registered securities
Scope and operation of FCPA not restricted to USA territorial boundaries
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

9. Strategic Considerations

P E S T
Foreign Corrupt Practices Act 1977 (FCPA)
 US has pursued 3.5 formal foreign bribery enforcement actions for
every one action pursued by ALL other countries
 Companies settle, pay fines and forfeit profits
 2011 – Johnson & Johnson $70M, JGC $219M
 Recent – Wal-Mart, Morgan Stanley, Avon
 US Justice Dept. continues to focus on individuals
 Guilty employees go to jail, pay fines and must make restitution
 Average jail term is two years in federal prison, but range is very
broad with one sentence up to 15 years
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

10. Strategic Considerations

P E S T
Best practices
 Financial controls
 Monitoring process, legitimate vendor transactions, employee
advances, petty cash, training
 Contract review
 Analyze all current and future contracts to ensure scope of
services does not violate FCPA
 Outsourcing bribery
 Compliance program & culture
 UK Bribery Act, compliance defense – NOT under FCPA
 Broad definition of bribery, includes commercial bribery
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

11. Strategic Considerations

Increasing domestic demand

Growing Middle Class


Macro Trends
Over 35 million Brazilians entered the middle
class from 2003 to 2009

estimates predict an additional 20 million
will climb the ladder by 2014
Per Capita GDP larger than China or India



Brazil
China
India
$12,079
$6,076
$1,492
Brazil
Chin
a
Source: IMF 2012



Rich Commodities Base –
energy, mining, agribusiness

Largest Latin American economy
6th largest in the World

Developed financial markets
Young workforce



P E S T



Brazil
United States
China
39.3%
30.5%
29.4%
Competes with Australia as worlds largest
exporter of iron ore
Fertile Land: 1/3rd global coffee, ½ of all global
sugarcane exports, major world player in
beef, poultry, soybeans and corn
Recent oil field discovery 15bn to 70-100bn
barrels


NPV of this discovery is apx $500bn, apx 20%
of GDP
Rainforest, hydro
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

12. Strategic Considerations
P E S T
96% of Brazilian
households have a
television
Population
Millions
1U.S.
2Japan
3China
4Brazil
5India
6Russia
7Mexico
8Indonesia
9Philippines
10Pakistan
313
126
1348
197
1241
143
115
242
95
177
Source: UN World Population Prospects, IMF, 2011
Private
Consumption
US$ Trillions
10.7
3.6
2.6
1.3
0.9
0.9
0.7
0.4
0.2
0.2
Consumption
Per Capita US'
000
34.2
28.1
1.9
6.8
0.8
6
5.8
1.8
1.7
1
Macro Trends
99% of Brazilian
households have
electric lighting
Source: World Development Indicators, Haver, 2010
Mortgage debt 4.8% of GDP
9.7% in Mexico
89.4% in U.S.
Source: Insights Global Macro Trends, KKR May 2012
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

13. Strategic Considerations
Meeting
Date
174th
4/17/2013
173rd
3/6/2013
172nd
1/16/2013
171st
11/28/2012
170th
10/10/2012
169th
8/29/2012
168th
7/11/2012
167th
5/30/2012
166th
4/18/2012
Macro Trends
SELIC
Rate
7.50%
7.25%
7.25%
7.25%
7.25%
7.50%
8.00%
8.50%
9.00%
P E S T
Target SELIC Rate %
10
9
8
7
6
5
4
3
2
1
0
Source: Banco Central Do Brasil
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

14. Strategic Considerations
5/30/2012
166th
4/18/2012
Jun-12
167th
Jun-11
7/11/2012
Jun-10
168th
Jun-09
8/29/2012
Jun-08
169th
Jun-07
10/10/2012
Jun-06
170th
50
45
40
35
30
25
20
15
10
5
0
Jun-05
11/28/2012
Jun-04
171st
Target SELIC Rate %
Jun-03
1/16/2013
Jun-02
172nd
Jun-01
3/6/2013
Jun-00
173rd
7.50%
7.25%
7.25%
7.25%
7.25%
7.50%
8.00%
8.50%
9.00%
Jun-99
4/17/2013
Jun-98
174th
Macro Trends
SELIC
Rate
Jun-97
Date
Jun-96
Meeting
P E S T
Source: Banco Central Do Brasil
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

15. Strategic Considerations
Entry Method
P E S T
Investment &
Operations
Agents, Distri
butors and
Labor

16. Strategic Considerations

P E S T
Currency Risk

Transaction exposure – commitment to make payment at future date

Solutions:




Translation exposure – accounting based changes in consolidated FS


Taking the value on 1 day and reporting on your statements
Solutions:


Forward Contracts
Risk Sharing Agreements
Foreign Currency Options
Swap (assets, debts, and/or liabilities with someone else, e.g., a bank or another
company)
Economic exposure – non zero changes in expected cash flows due to
changes in currency (real not just nominal)

Solutions:

Diversification
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

17. Strategic Considerations

P E S T
Education
 Past
(2000)
- ½ Brazilian students graduated grade
school
- 3 out of 4 adults were functionally
illiterate
 Present
-Goal to reach OECD standard over
next decade
-Science Without Borders - 75,000
scholarships to attend world’s top
universities (only 9,000 a few months
ago)
-SENAI, SENAC
-Bolsa Escola/Bolsa Familia
OECD Programme for International Student
Assessment (PISA)
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

18. Strategic Considerations
P E S T
“Culture eats strategy for breakfast”
– Oded Shenkar
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

19. Strategic Considerations
P E S T
90
80
70
60
50
Brazil
40
Latin America
30
20
10
0
100
90
80
70
60
50
40
30
20
10
0
PDI
IDV
MAS
UAI

Geert Hofstede’s Cultural Dimensions

US

Brazil

Latin America



PDI
IDV
MAS
Power Distance
Individualism
Masculinity
Uncertainty Avoidance
Long-Term Orientation
www.geert-hofstede.com
UAI
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

20. Strategic Considerations
Social Risk
-The ability of stakeholders to identify vulnerabilities &
apply pressure to the company to change its behavior

How substantive is the
stakeholder?
How intense is the threat?
Stakeholders


P E S T
Shareholders, NGOs, Interest Groups, Consumers, Local
Communities. . .
Factors




Cultural Norms, Languages
Demographics
GINI index (inequality of income)
Ethnic Conflict
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

21. Strategic Considerations
Social Risk
-The ability of stakeholders to identify vulnerabilities &
apply pressure to the company to change its behavior

P E S T
How substantive is the
stakeholder?
How intense is the threat?
Solutions

Decouple your brands / products


Partner with NGOs


Charge premium on specific brands for CSR projects, not all
consumers
Reputational benefit, they understand the industry and may help keep
you up to date with shifts in pressure
Admit Wrongs

People are more likely to believe your CSR reports when you tell
them what you are doing wrong (and how you are addressing it)
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

22. Strategic Considerations

P E S T
Technological
 Infrastructure
 Government
Incentives
 Intellectual Property
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

23. Available Structures & Features
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

24. Available Structures & Features
May require a subsidiary
holding company presence
Direct Sale
from U.S.
-Freight
Forwarder
-Trading
Company
Non-Equity
Alliance
-License
-Agent
-Distributor
-Franchise
-Joint venture
Equity
Alliance
-Joint venture
-Joint company
Entry Method
Wholly Owned
Subsidiary
-M&A
-Greenfield
-Brownfield
Investment &
Operations
Agents, Distri
butors and
Labor

25. Available Structures & Features

Joint Venture
May be created with or without a full joint company
 Low cost entry and exit to new markets, industries and
industry segments
 Opportunity for learning
 Provides a “contractual” framework for operations without
generating many issues associated with an agency
relationship
 Enables each party to take full responsibility for its
contribution to the venture while minimizing the issues
associated with exclusivity
 Enables low cost entry and exit


May later evolve into full equity alliance
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

26. Available Structures & Features

Issues to consider
 Restrictions
on foreign ownership?
 Requirement of foreign partner?
 Minimum or maximum capital requirements?
 Partner liability limited to capital contributions?
 Maintenance costs?
 Product liability?
 Intellectual property protection?
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

27. Available Structures & Features
Empresa Individual de Responsabilidade
Limitada (EIRELI)*
 Sociedade Limitada (LTDA)
 Sociedade Anônima (SA)
 Sociedade Simples
 Sociedade em Nome Coletivo
 Sociedade em Comandita Simples
 Sociedade em Comandita por ações
 Sociedade em Comum
 Sociedade em conta de Participação
 Associações
 Fundações
 Cooperativas
 Consórcio

Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

28. Available Structures & Features
Sociedade
Limitada
(LTDA)
Similar to U.S.
LLC
Sociedade
Anônima (SA)
Similar to U.S.
corporation
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

29. Available Structures & Features
Sociedade Limitada (LTDA) & Sociedade Anônima (SA)
Common Features
-Normally, no restrictions on foreign ownership*
-Normally, no minimum or maximum capital requirements*
-Partner and parent company liability generally limited to
capital contributions
-Corporate veil may be pierced (Article 50, Brazilian Civil
Code 2002 Requires a deviation of purpose or
commingling of assets, not mere insolvency - intent is
also considered )
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

30. Available Structures & Features
Sociedade Limitada (LTDA)
-Formal requirements
-Must have 2 partners (person or entity)
-Partners are not required to be Brazilian
-Each partner receives quotas representing their
interest in the LTDA
-Must be managed by an individual residing in Brazil
(may be a Brazilian citizen, or a foreign citizen with
the proper documentation)
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

31. Available Structures & Features
Sociedade Limitada (LTDA)
-Simple to form and operate
-Liability limited to partner’s quotas
-Quotas may be freely transferred in
accordance with the articles of association
-Quotas may NOT be traded publically
-No obligation to publish annual financial statements
-Lower maintenance costs
-May be converted into a corporation (SA)*
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

32. Available Structures & Features
Sociedade Limitada (LTDA)
-Pursuant to C.F.R. §301.7701-3(b)(2)(B) U.S. tax law
treats a Limitada as an association
-The Limitada may elect to be taxed under U.S. law as a
partnership or a corporation which will determine how the
U.S. owner(s) will be taxed on any income derived from
the Limitada
-The tax consequences of a change in classification, need
to be studied
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

33. Available Structures & Features
Sociedade Anônima (SA)
-May issue securities, debentures and may be publically
held
-Higher maintenance costs
-More formal requirements
-Generally preferred for ventures comprised of a large
number of different shareholder groups
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

34. Investment and Operations in
Brazil
 Import
Process, Tariffs, Taxes & Incentives
 Regulatory Changes & Trends
“If you’re honest and want to comply with the tax code, you
need an accountant and a tax lawyer for life”
-The Economist, September 24, 2011 quoting a São Paulo based
economist
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

35. Import Process, Tariffs, Taxes &
Incentives
General Import
Process & Timeline
Importing a container of
goods to Brazil requires 8
documents, takes 17 days
and costs $2,275
Baseline:
-medium size business
-ship to economy’s
largest business city
-private, LLC
-non hazardous goods
-dry cargo, 20-foot full
container
-Document Preparation (8
days)
-Customs clearance and
technical control (4 days)
-Ports and terminal handling
(3 days)
-Inland transportation and
handling (2 days)
Importing a container of
goods to India requires 11
documents, takes 20 days
and costs $1,200
24 Days
17 Days
Importing a container of
goods to China requires 5
documents, takes 24 days
and costs $615
20 Days
-Document Preparation (15
days)
-Customs clearance and
technical control (4 days)
-Ports and terminal handling
(3 days)
-Inland transportation and
handling (2 days)
-Document Preparation (8
days)
-Customs clearance and
technical control (4 days)
-Ports and terminal handling
(5 days)
-Inland transportation and
handling (3 days)
* All US exports are also subject to US export controls *
Source: World Bank, Doing Business
2013
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

36. Import Process, Tariffs, Taxes &
Incentives

Import Export Process

Register with the governmental registration system



Obtain import license, if required



Secretary of Foreign Trade SECEX, SISCOMEX system
Subject to significant variability
Automatic
Non-Automatic (process may take several months)
 ANVISA, IBAMA, MAPA, DECEX, CNEN, ANP, ANEEL,
DPF, COMEX, MCT . . .
Radar


Simplified
Ordinary
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

37. Import Process, Tariffs, Taxes &
Incentives
II-Import Duty
0-35%
varies based on product
& Country of origin
(NCM, HS)
Associated Taxes &
Duties
IPI-Industrial Product
Tax
Import Duty
20% avg
VAT
0-35%
12%
avg
Import Duty
6%
16%
0-5% raw materials,
20% finished consumer
goods, 35% autos and
luxury items
VAT
19%
Varies based on product
(CNM) up to 300%
tobacco
PIS-Social Integration
Program Contribution
1.65%
COFINS-Social
Security Financing
Contribution
7.6%
ICMS-State Tax
7-25%*
SP 18%
*Current legislation & recent
Supreme Court decisions may
impact the applicable ICMS rate.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

38. Import Process, Tariffs, Taxes &
Incentives
Brazil: 2,600
LatAm: 367
OECD: 176
Additional Tax
Considerations
Baseline:
-medium size business
-taxes & mandatory
contributions are measured
at all levels of government
-a range of standard
deductions & exemptions is
also factored
On average, firms make 9
tax payments per year and
spend 2600 hours per year
filing, preparing and paying
taxes
Corporate Tax
On average, firms make 9
tax payments per year and
spend 203 hours per year
filing, preparing and paying
taxes
On average, firms make 9
tax payments per year and
spend 291 hours per year
filing, preparing and paying
taxes
15%
Corporate Tax
33%
Corporate Tax
20%
Yes
Transfer Price
Considerations
Yes
Transfer Price
Considerations
Yes
Plus 10% on taxable
income over R$240,000
-may choose deemed
profit system if under
threshold
Transfer Price
Considerations
Source: World Bank, Doing Business
2012
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

39. Import Process, Tariffs, Taxes &
Incentives
Recent Tax Changes
General
April 2012 – Brazilian government
granted a series of important
benefits to enhance economic
activity
-Payroll tax exemption in certain sectors:
IT, pharmaceutical, hotels, chemicals, plastics, textiles, automotiv
e, metallurgy, electronics, consumer goods
-Automotive industry companies that invest in technological
innovation may now use a presumed credit of the excise tax
-Deductions from Corporate Income Tax IRPJ for donations to
institutions that fight cancer
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

40. Import Process, Tariffs, Taxes &
Incentives
Recent Tax Changes
Transfer Price
April 2012 – Brazilian government
granted a series of important
benefits to enhance economic
activity
Three Methods
1. Cost Plus Method (CPL)
2. Method of Comparative
Independent Price (PIC)
3. Resale Price Minus Profit Method
(PRL)
Margin
DECREASE
60% to 20%
CHANGES:
1. PRL Margin decreased from 60% to 20%
30% for chemical products, glass products, cellulose, paper, metallurgy
40% for petroleum, specific machinery & equipment
2. Standardization of calculation rules, regardless of whether value is added in Brazil
freight & Ins now excluded from calculation
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

41. Import Process, Tariffs, Taxes &
Incentives
Ex-tarifário Program
If no similar good is produced
domestically, an importer may qualify for
reduced or eliminated tariffs

Tariff reductions generally reduce the applicable tariff
from 16% to 0-2%, II and may also reduce IPI

Resolução CAMEX 35/2006
The importer must file for the Ex-tarifário
 A certificate or statement from the appropriate
body, technical reports, public consultation among
other things may be considered to determine the
existence of a similar domestic good

Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

42. Import Process, Tariffs, Taxes &
Incentives
Ex-tarifário Program
Even if a domestic good performs a
similar function, an importer may qualify
for the program if:



Higher quality product or service
Higher productivity of equipment (may consider part of an
integrated system that increases overall productivity)
Increased efficiency




Supplies required
Consumption of energy or raw materials
Reduced delivery time
Other specific performance factors may be considered
depending on product
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

43. Import Process, Tariffs, Taxes &
Incentives

Free Trade




Manaus Free Trade Zone - ZFM
Western Amazon - AO
Free Trade Areas - ALC
General Process





Cert of importer eligibility on the SISCOMEX
Classification of imported goods HS / NCM
Submit Invoice
Register Transaction on SISCOMEX
Import Licenses
IRPJ reduced 75%
until 2013
ICMS credit to
importer
II/IPI 0%
or 88% reduction
PIS/COFINS reduced
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

44. Import Process, Tariffs, Taxes &
Incentives

Growth Acceleration Program
(PAC)




Launched by govt in 2007 to
promote large scale projects
R$ 604B planned expenditures


Key PAC Projects




Infrastructure R$ 504B
Science & Tech R$ 35B
Security R$ 6.7B
Health Care R$ 4B
Espírito Santo (primary port
Vitória)

law # 2508
FUNDAP program, State bank
provides 0% financing for ICMS
payments
Regions

Northeast




Bahia, Ceará and Pernambuco
ICMS reduction
IRPJ reduction 25-75%
Industries, Ports, Infrastructure


Porto Maravilha, Rio, Porto do
Açu, Rio
Belo Monte dam
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

45. Import Process, Tariffs, Taxes &
Incentives
 MERCOSUL
Member
Countries
Brazil
Argentina
Uruguay
Paraguay


Bolivia
Chile
Columbia
Ecuador
Peru
Observer of
Agreement
Applied
Venezuela
Not yet ratified by
Paraguay
Free from import duty with certificate of origin
Exceptions to Common External Tariff (CET)
 Brazil is permitted 93 exceptions to the CET
 June, 2009 the trade minister raised several import duty
rates:
 August, 2009 MERCOSUL members approved tariff
increases on hundreds of products within the CET
 Primarily dairy, textiles, bags, backpacks, suitcases up
to the bound level, apx 31.4%
Associate
Member
Mexico
southern common market

Mexico / Brazil revised auto tariff structure
 Decision No. 39/11 of the Mercosul Common Market
Council permits and outlines procedures for the
countries to negotiate these topics
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

46. Getting Paid
 Collection

Civil law system generally favors the debtor – NOT
creditor


in Brazil
Dual registration system for statutory lien (Alienação
Fiduciária)
 Registry of Deeds and Documents
 Real State Registry
Best Practices

Collateral
 Pledge equipment being sold & statutory lien
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

47. Regulatory Changes & Trends

Recent Regulatory Changes

July, 2011


August, 2011


1% tax on foreign derivatives, Real reached 12 year high of 1.529 per dollar
Three prong plan to continue to spur economic growth – Payroll tax exemptions,
Subsidized loans, Govt preference of 25%
September, 2011

30% Increase in industrial product tax on cars (37-55%) – Decree No. 7.567/2011
 Exempt if 65% domestic parts (Brazil, Mexico or Mercosul country)
 Oct 6, 2011 Renault SA announced plans to increase its Brazilian production
capacity by 100,000 vehicles
 Brazil will be the companies 2nd largest market after France
 Expects sales of 3 million vehicles annually by 2013 with 25% from Brazil
October 10, 2011 Chinese auto maker JAC announced it would build a factory
in Brazil – output set to begin in 2014
January, 2012
 Ministry of Development, Industry & Foreign Trade (MDIC) reduced IPI on 18
automakers by 30% until December 2012 The IPI, industrial products tax, is
levied on passenger cars, light commercial vehicles and trucks produced in
Brazil, Mercosul and Mexico


Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

48. Regulatory Changes & Trends

Recent Regulatory Changes

January, 2012


February, 2012


Multi-prong tax package, reduced IRPJ, IPI, PIS/COFINS, payroll
tax, change to transfer price rules
May, 2012


6% IOF tax (financial transactions tax) on foreign loans with maturities of
up to five years
April, 2012


Trade ministry team to publish list of products the govt may levy higher
import taxes, list will be valid until December 2014
March, 2012


95% reduction on IPI for iPads manufactured in Brazil
Pension Reform Bill – limits government payments to retired public
workers
March 2013

Brazil adopted the United Nations Convention on Contracts for the
International Sale of Goods (“CISG”)
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

49. Regulatory Changes & Trends

A Bigger Brazil:
 US$
16 Billion in tax breaks (over 2 years)
 Eliminate
 Buy
3 prong plan to continue to spur economic growth
payroll taxes for labor intensive industries
Brazil Initiative
 Allows
government agencies to pay up to 25% more
for locally produced products than similar foreign
goods

Particularly when purchasing for defense, health, or high
tech communications equipment
 Subsidized
Loan Programs
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

50. Regulatory Changes & Trends

Privatization

Airport operating rights - Auction method, public private partnership

2011


São Gonçalo do Amarante Airport, Natal – R$ 170 million (3x reserve)
2012



São Paulo Guarulhos – R$16.2 B (12.9B expected)
Brasilia – R$4.5B
Campinas – R$3.8B

Oilfield Rights

Roads and Railways


2012 (announced in August) R$133B investment over 30 years to boost growth
Government will sell licenses for private companies to operate 4,660 miles (7,500km) of
roads and 10,000 km of railways
The Brazilian President’s office emphasized, “[t]he government does not intend to get involved in
these investments. These investments are going to be a long-term, private sector affair. The
private sector must play a key role.”
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

51. Regulatory Changes & Trends
Intellectual Property Protection

Protected by Article 5 of the Brazilian Constitution & codified IP law

Provides for contracts involving technology transfer, technical and
scientific services, franchising and protection against unfair competition

Instituto Nacional da Propriedade Industrial (INPI)


Federal agency in charge of regulating and registering
patents, trademarks, industrial designs, approving licensing and other
agreements
Copyright Law, Law No. 9610, as amended (Feb 20, 1998)(Braz).

Regulates Brazilian Copyrights and some Software Law
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

52. Regulatory Changes & Trends
Brazilian Patent law
Brazilian patentLaw

Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5 §§29 of the
Brazilian Constitution

How to obtain Brazilian patent protection





First to File
Absolute novelty
Average time for granting patents is 5-7 years
20 year term, from date of filing (15 for utility model)
How can a Brazilian patent help?


Right to prevent third parties from manufacturing, using, and offering to sell
Patent infringement is both a tort and criminal offense



Damages, destruction of products, fines, imprisonment
Remedies generally only available AFTER a patent grant
Prior to grant, an applicant may send a cease-and-desist letter


A few rare cases have resulted in a cease-and-desist order during application (prior to grant)
Patent infringement trials average 3-6 years
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

53. Regulatory Changes & Trends
Brazilian trademark law
Industrial Property Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5
§§29 of the Brazilian Constitution, and international treaties

How to obtain trademark protection?




Register trademark at the National Institute of Industrial Property (INPI)
“any visually perceptive distinctive sign, when not prohibited under law, is
susceptible of registration as a trademark.”
10 year term, from date of issuance
How can a trademark help?


Owner is guaranteed exclusive use throughout Brazil
Trademark applicants may now enforce their rights against infringers, even
before the registration is granted

Brazilian Superior Court of Justice (STJ), Special Appeal No. 1.032.104-RS, published
decision on August 24, 2011
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

54. Regulatory Changes & Trends
Brazilian trade secret law
Industrial Property Law, Law No. 195, and international agreements

The Basics


Protected under unfair competition law
It is a crime to disclose, exploit, or use
confidential knowledge, data, or
information, without consent
 Exceptions
are provided for public information
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

55. Agents, Distributors and Labor
 Agents
& Distributors
 Labor Considerations
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

56. Agents & Distributors
Agent
Distributor
Activities subject to some control by supplier
Activities subject to only minimal control by
supplier
Does NOT take title to goods
Takes title to goods, buys and sells for own
account
May handle products of other suppliers; but, is
less likely to do so than distributor
May handle products of other suppliers
Generally compensated on a commission basis
Earnings based on resale profit margin
Usually does not warehouse goods
Usually warehouses and physically delivers
goods
Usually does not use own capital
Uses own capital
Bears no risk of failure of payment
Bears economic risk of failure of payment by
customer
May have power to contract on behalf of the
supplier
Has no power to bind the supplier contractually
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

57. Agents & Distributors

Agent
Under Brazilian law 4.886/65, amended by Law
8.420/92, a commercial representative is:

one that acts as an intermediary promoting a
product or service, looking for customers,
negotiating proposals and orders and forwarding
them to the seller with whom it has a contractual
relationship.
The Civil Code (Law 10406 of 10/01/2002)
refers to Commercial Representation as
"Agency".
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

58. Agents & Distributors
Agent

Often the commercial representative facilitates the
process of importing the products into Brazil as well
as domestic deliveries to buyers by working with
freight forwarders and transportation companies.

Commercial representatives may also work with
customers to facilitate product installations, product
training, warranty coverage, service, repairs and the
sale of replacement parts.

The compensation of a commercial representative is
generally structured on a commission basis.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

59. Agents & Distributors

Commercial Representative Agreement

Mandatory Provisions








Agent
Term of the agency
Obligations of the parties
Description of the products or goods that are the object of the
agency
Description of the territory
Exclusivity
Payment structure (commission and time of payment)
Termination
Commercial Representative must register with the
Regional Council of Commercial Representatives.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

60. Agents & Distributors

Agent
The agreement with the representative need not
be registered with the government.*
This allows for confidentiality of compensation and
other commercially important information.
 This is an important distinction when compared to
license and royalty agreements, which may require
registration with the Brazilian Central Bank.

Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

61. Agents & Distributors

Agent
Termination
 Brazilian law requires that all disputes between a foreign
company and its commercial representative be venued in
Brazil and judged in accordance with Brazilian law.
 Article 35 of the Brazilian Civil Code provides a list of “just
cause” reasons for the termination of a commercial
representative agreement.
 If the relationship is terminated for cause, no
indemnification is owed to the commercial representative.
However, if the relationship is terminated for reasons other
than those listed in Article 35, Brazilian law may require an
indemnification payment to the commercial representative.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

62. Agents & Distributors

Agent
Termination - FOR CAUSE
 Art. 35 provides a list of just reasons for termination of
an agency agreement, these include:




neglect of the agent in the accomplishment of his obligation(s)
under the contract,
engaging in acts which result in loss of commercial credit of
the represented,
conviction for a crime considered injurious to the represented.
The represented may retain the commissions due to the
agent if there is just cause for the termination of the
agreement, so long as retaining the funds is made with
the purpose of recovering damages caused by the
agent.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

63. Agents & Distributors

Agent
Termination - WITHOUT CAUSE



Generally, an agent is entitled to no less than 1/12th of the
total amount received during the time of agency.
If the agency is for a specific term, the agent is generally
entitled to an amount equal to the monthly average
compensation received multiplied by the remaining months
left in the agency contract term.
Plus, investments made to open the market.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

64. Agents & Distributors


Distributor
Unlike an agent, a distributor buys
products from the foreign company; takes
title to them, then sells the products on its
own account.
The distributor’s earnings come from its
resale profit margin.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

65. Agents & Distributors

Distributor
Distributorship relationships are primarily
regulated by Brazilian contract law; and,
unlike commercial representative
relationships, there are very few statutory
provisions governing distributorships.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

66. Agents & Distributors
Distributor

Brazilian contract law is primarily derived from the
Civil Code.

As long as the parties comply with the provisions
of the Civil Code respecting commercial contracts,
they are free to define their business relationship
as they see fit.

This includes agreement as to sales prices,
territory, trademarks, service and maintenance of
products, inventory requirements and termination.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

67. Agents & Distributors

Distributor
Termination
 Distributorship
relationships allow greater
flexibility in defining "just cause" for termination.
 Disputes over distributorship terminations can be
made subject to arbitration procedures which
Brazilian courts may be more likely to enforce
than clauses calling for the application of foreign
law or a foreign venue.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

68. Agents & Distributors
Agent
Distributor
Creation
Statutory requirements
Contract law
Compensation
Commission
Sells on own account
Termination
Enumerated “just cause”
reasons
Contract law
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

69. Agents & Distributors





Best Practices
If properly structured commercial representative and distributorship
agreements require less up-front investment than a more direct
presence in the Brazilian market.
The tradeoff for this can be less control over how the product is
promoted, sold and serviced in the market.
Regardless, using commercial representatives or distributors may
make sense as a means to first enter the market or even as a
permanent business model.
However, if the proper safeguards are not in place, mismanagement
of the product by the commercial representative or distributor can
permanently damage a brand.
Foreign companies should structure commercial representative and
distribution agreements with a long term strategy that preserves
maximum flexibility and may include a future more direct presence
in the Brazilian market. For this strategy to work a well-crafted
written agreement is imperative.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

70. Agents & Distributors
Best Practices

Care must be exercised to not blur the difference between a
commercial representative and a distributor.

Long term exclusive contracts should be avoided.

Short term contracts once renewed may be considered contracts for
"indefinite terms" after the first renewal, by Brazilian courts.

Foreign companies should fully understand the facts and Brazilian law
before terminating a commercial representative or distributorship
relationship.

Minimum sales requirements should be established in the contract.

Standards for product service and maintenance should be set out.

Regular and adequate reporting should be required.

Other key points to address are termination and causes for termination,
distribution points and control over distribution in case of termination.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

71. Labor
Labor: It’s more than just the 13th salary
Labor rights are outlined in the Brazilian
Constitution, as well as
laws, decrees, provisional
measures, ordinances and
regulations, international conventions and
treaties (ratified by the Brazilian
government), company policies, Supreme
Court decisions, Superior Labor Court
decisions and customs
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

72. Labor

The worker is considered the weaker party in the relationship

In labor-related conflicts, whenever there is a doubt regarding
evidence, the court’s decision will generally favor the worker





The law most favorable to the worker will be applied
The conditions most favorable to the worker will be presumed
Actual facts prevail over written documents
Protected salary (generally cannot lower an employee’s
salary)
Nondiscriminatory practices
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

73. Labor

Contractual agreements with employees to
resolve conflicts are not enforceable.
The Brazilian constitution provides the right to sue
as an individual guarantee.
 There are settlement methods.

Arbitration, union conciliation commissions . . .
 But settlement does NOT extinguish the right of the
individual’s claim!

Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

74. Labor Considerations

13th Salary


R$674.96 per month
Vacation


Mandatory “Christmas bonus” equal to 1/12 the salary
for each month of that year
Min wage currently
Every 12 months employees are entitled to 30
calendar days paid vacation, in addition to the 13th
salary
Overtime
Reading email on your cell phone, may qualify as overtime!
Daily and weekly calculation
 Base rate + 50%


100% for work on Sunday or a public holiday
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

75. Labor

Termination






Employment is NOT “at will” (must have cause)
Advanced notice (generally, 30 day min)
Payment of salary owed
Vacation
13th Salary
FGTS
 Every month the employer must deposit amount equal to 8%
of employee’s salary into an individual social security fund
(FGTS).
 Upon termination, the employee may withdraw the amount.
 If termination is not “for cause”, employer must pay a penalty
equal to 40% of the amount and an additional 10% penalty to
the government.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

76. Labor

Not at will


30 days prior notice (some agreements may require longer period of time)
Notice shall specify whether the 30 days must be worked or not worked


If worked may be absent for 7 consecutive days or may leave 2 hours early every day
For cause if:






A dishonest act
Improper conduct
Regularly doing business on behalf of himself or for a third party
Criminal conviction
Inadequate discharge of duty
Habitual drunkenness






Currently debate on this cause; many courts consider it a social problem and not a just cause
Violation of trade secrets
Act of disobedience or insubordination
Abandonment of employment
Injurious act to the honor of any person during working hours (except in self defense)
Persistent gambling
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

77. Labor

Brazilian v. Non-Brazilian
 Staff
of companies with three or more employees
must be 2/3rd Brazilian
at least 2/3rd of the payroll must be paid to
Brazilians
 And,
 Salaries
paid to employees in Brazil cannot be
based on foreign currency
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

78. Labor

Ok, but they aren’t employees; they are . . .


It does not matter what the parties call the
relationship, regardless of whether there is a
written contract
Courts will weigh factors, including:



The regular payment of salary
Required personal rendering of service
Subordination (direct control by employer, hours
worked, benchmarks)
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

79. Labor

To avoid the inadvertent creation of an employment relationship, foreign
companies must be mindful of how they interact with their commercial
representatives and distributors.

Regardless of how the relationship is described by the parties, Brazilian
courts will look to the actual behavior of the parties.

Brazilian courts consistently hold that subordination is a key factor in the
existence of an employment relationship.

If the court determines that the parties' relationship is an employment
relationship, the foreign company will be subject to Brazilian labor laws
including liability for social and welfare contributions and possibly other
taxes.

As such, while it is permissible to contract with an individual to act as a
commercial representative, to avoid employment issues the better practice
is to contract with an entity having at least two partners.
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

80. Labor

What is the relationship?




Taxes, benefits
Reimbursement for investments made to promote the company?
Exclusivity?
Termination


Compensation, territory, products, time of payment?
Rights and duties?


Review and Best
Practices
Is a written agreement required?


Agent, distributor, . . . employee?
For cause?
Permanent Establishment?


Treaties
Effectively Connected Income (ECI)
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

81. Labor (the other side)


Business Visa
Permanent Visa
 Legal
Entity Administrator
 Private Investor
 Foreign Bank Representative

Temporary Visa
Permanent
Visa
Establishment Issues
 Technical Visa 1 year / 90 Days
 Apprenticeship / Professional Training
 Touring Vessel
 Labor
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

82. Labor (the other side)

Business Visa

To attend meetings, make commercial contacts


Permanent Visa

Legal Entity Administrator


90 days, may be extended additional 90 days in 12 month period
5 years, R$ 600k registered with Central Bank of Brazil, or R$150k & plan to
generate at least 10 new Brazilian jobs within 2 years*
Temporary Visa

Technical Visa 1 year / 90 Days






3 years experience in the functional field
Permanent
Specific for customer, or training plan
Establishment Issues
Resume
Criminal background check
File with Ministry of Labor in Brasilia
When enter Brazil, register with Federal Police to obtain RNE

If d/n register, then daily fine
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor

83. Business in Brazil: Regulatory and Legal
Considerations

The content of this presentation is for educational purposes
only. Each legal issue is fact dependent, and this
presentation should not be used or viewed as legal advice;
your legal counsel should be consulted on the application
of your particular factual situation to the current law.
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor

84. Entry Method
Investment &
Operations
Agents, Distrib
utors & Labor
LEGAL ASPECTS OF
DOING BUSINESS IN
BRAZIL
dwilsonjdmba
dwilson@keglerbrown.com
David M. Wilson, Esq.