The document provides an overview of key considerations for businesses looking to enter or invest in Brazil. It discusses available entry methods such as direct sales, non-equity alliances (licensing, distribution), equity alliances (joint ventures), and wholly owned subsidiaries. It also examines strategic factors to evaluate such as political stability, economic trends, social risks from stakeholders, technological infrastructure, and cultural dimensions. Regulatory structures that can be used include various types of limited liability companies and funds. In summary, the document offers insights into structuring market entry, evaluating risks and opportunities, and selecting the appropriate legal entity for businesses operating in Brazil.
Business in Brazil: An Insider's View, Regulatory and Legal Considerations
1. Entry Method
Investment &
Operations
Agents, Distributors
and Labor
BUSINESS IN BRAZIL: AN
INSIDER’S
VIEW, REGULATORY AND
LEGAL CONSIDERATIONS
dwilsonjdmba
dwilson@keglerbrown.com
David M. Wilson, Kegler Brown
2. Business in Brazil: An Insider’s
View, Regulatory and Legal
Considerations
1.
Entry Method and
Organizational Structure
-Strategic Considerations & Current
Climate
-Available Structures & Features
-Import Process, Tariffs, Taxes &
2.
Incentives
Investment and Operations in -Getting Paid
Brazil
-Regulatory Changes & Trends
-Employee Considerations
-Agents & Distributors
Agents, Distributors and Labor
-Immigration | Visas
3.
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
3. Entry Method & Organizational
Structure
Strategic
Considerations & Current Climate
Available Organizational & Entity Structures
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor
4. Strategic Considerations &
P
Current Climate
E S T
What are the Political, Economic, Social and Technological
reasons to enter Brazil?
export, manufacture, distribute, design . . .
Political
Economic
Macro trends, Currency risks
Social
The ability of government to respond to and NOT create political
risk
The ability of stakeholders to identify vulnerabilities & apply
pressure to the company to change its behavior
Technological
Infrastructure, IP Protection, Government Incentives
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
5. Strategic Considerations &
P
Current Climate
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk
Stable Republic Since 1985
Multiple Peaceful Elections
Democratic Constitution
Functioning Executive, Legislative and Judicial Branches
Multiple Party System
Increasingly developed services: Fire, Police, EMS
E S T
The unit of
measurement for
political risk is
STABILITY
Wednesday night, Brazil’s
central bank dropped the
SELIC overnight interest rate
to 8.5%
(down 4% from last year)
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
6. Strategic Considerations &
P
Current Climate
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk
The unit of
measurement for
political risk is
STABILITY
Executive Decree Authority
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
E S T
Brazilian legislatures endow presidents with broad authority, then monitor case-bycase 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
Agents, Distri
Entry Method
Investment &
Operations
butors and
Labor
7. Strategic Considerations &
P
Current Climate
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk
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
8. Strategic Considerations &
P
Current Climate
Political Risk
-The ability of government to respond to political risk
-The ability of government to NOT cause political risk
E S T
The unit of
measurement for
political risk is
STABILITY
Bureaucracy?
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
9. Strategic Considerations &
P
Current Climate
-Starting a Business -Registering
-Getting Electricity Property
-Protecting
-Paying Taxes
Investors
-Enforcing
-Resolving
Contracts
Insolvency
-Getting Credit
-Dealing with
-Trading Across
Construction
Borders
Permits
2012 World Bank, Doing Business
Report
The United
States
4th
Chile
39th
China
91st
Brazil
126th
India
E S T
132nd
Chad
183rd
Ease of Doing Business Ranking
The United
States
Chile
China
Entry Method
Brazil
Investment &
Operations
India
Chad
Agents, Distributors
and Labor
10. Strategic Considerations &
P
Current Climate
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
E S T
Level of Corruption
Transparency International 2011 CPI index
The abuse of entrusted power for private gain
Perception of corruption in public sector
2011
USA 24th of 183
Brazil 73rd of 183
86th percentile
60th percentile
1995 (year 1 of CPI)
Chile
22nd
USA
24th
Brazil
73rd
China
75th
Colombia
80th
India
95th
Russia
143rd
North
Korea, Somalia
183rd
USA: 15 of 41
New Zealand
1st
63rd percentile
Brazil: 36 of 41
13th percentile
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
11. Strategic Considerations &
P
Current Climate
Foreign Corrupt Practices Act 1977 (FCPA)
E S T
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
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, Distributors
and Labor
12. Strategic Considerations &
P
Current Climate
Foreign Corrupt Practices Act (1977)
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
E S T
Average jail term is two years in federal prison but range is very broad with one
sentence up to 15 years
Best practices
Financial controls
Contract review
Monitoring process, legitimate vendor transactions, employee advances, petty cash,
training
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
13. Strategic Considerations &
P
Current Climate
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
$12,789
$5,414
$1,389
Source: IMF 2011
Rich Commodities Base –
energy, mining, agribusiness
Largest Latin American economy
E S T
6th largest in the World
Developed financial markets
Young workforce
Brazil
39.3%
United States 30.5%
China
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 70100bn barrels
NPV of this discovery is apx
$500bn, apx 20% of GDP
Rainforest, hydro
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
14. Strategic Considerations &
P
Current Climate
96% of Brazilian
households have a
television
Population
Millions
1U.S.
2Japan
3China
4Brazil
5India
6Russia
7Mexico
8Indonesia
9Philippines
10Pakistan
313
126
1348
197
1241
143
115
242
95
177
Source: UN World Population Prospects, IMF, 2011
Private
Consumption
US$ 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
E S T
Macro Trends
99% of Brazilian
households have
electric lighting
Source: World Development Indicators, Haver, 2010
Mortgage debt is 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, Distributors
and Labor
16. Strategic Considerations &
P
Current Climate
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, Distributors
and Labor
17. Strategic Considerations &
P
Current Climate
How substantive is the
stakeholder?
Social Risk
-The ability of stakeholders to identify vulnerabilities & apply
pressure to the company to change its behavior
How intense is the threat?
Stakeholders
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, Distributors
and Labor
18. Strategic Considerations &
P
Current Climate
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, Distributors
and Labor
19. Strategic Considerations &
P
Current Climate
E S T
“Culture eats strategy for breakfast”
– Oded Shenkar
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
20. Strategic Considerations &
P
Current Climate
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
UAI
Power Distance
Individualism
Masculinity
Uncertainty Avoidance
Long-Term Orientation
www.geert-hofstede.com
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
21. Strategic Considerations &
P
Current Climate
How substantive is the
stakeholder?
Social Risk
-The ability of stakeholders to identify vulnerabilities & apply
pressure to the company to change its behavior
E S T
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, Distributors
and Labor
22. Strategic Considerations &
P
Current Climate
E S T
Technological
Infrastructure
Government
Incentives
Intellectual Property
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
23. Available Structures & Features
Direct sale from US using freight forwarder
Non-Equity Alliance
May also require
a small wholly
owned subsidiary
holding company
presence in
country
Equity Alliance
License
Agent
Distributor
Franchise
Supply agreement
Joint venture
Joint venture
Joint company
Wholly Owned Subsidiaries
Greenfield operations
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
24. Available Structures & Features
Features 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, Distributors
and Labor
25. Available Structures & Features
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, Distributors
and Labor
26. Available Structures & Features
Joint Venture
May be created with or without a full joint company
Contractual joint ventures between subsidiary company and
a partner 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, Distributors
and Labor
27. Available Structures & Features
Common Entities
Similar to US
LLC
Similar to US
Corporation
Sociedade Limitada (LTDA)
Sociedade Anônima (SA)
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
28. Available Structures & Features
Common Features
-No restrictions on foreign ownership*
LTDA & SA
-No minimum or maximum capital
requirements*
-Partner & parent company liability
limited to capital contributions
-Pierce corporate veil: Yes, 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, Distributors
and Labor
29. Available Structures & Features
Sociedade Limitada (LTDA)
Similar to US
LLC
Liability limited to partner’s quotas
Quotas may be freely transferred according to the articles of association
Quotas may not be traded publicly
Simplicity & flexibility
Reduced maintenance costs
Less formal requirements
Must have at least 2 partners
Brazilian partners are not required
May be managed by one or more persons, partners or other entity
Similar to US
Corporation
Manager must reside in Brazil
If foreign manager, must possess a permanent Brazilian Visa with
authorization to act as manager of a specific company
Generally preferred for wholly owned subsidiaries
Sociedade Anônima (SA)
May issue securities, debentures and may be publicly 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, Distributors
and Labor
30. Available Structures & Features
Product Liability
Consumer
Protection Code (“CPC”) governs
liability for goods and services in the market
causing injury to consumers
Strict liability regime requiring proof of causation
linking the product defect to the damages
Damages recoverable are “actual damages”
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
31. Investment and Operations in
Brazil
Import
Process, Tariffs, Taxes & Incentives
Getting Paid
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, Distributors
and Labor
32. Import Process, Tariffs, Taxes &
Incentives
* All US exports are also subject to US export
controls *
General Import Process
& Timeline
24 Days
17 Days
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 Brazil requires 8
documents, takes 17 days
and costs $2,275
-Document Preparation (15
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 China requires 6
documents, takes 24 days
and costs $545
20 Days
-Document Preparation (8
days)
-Customs clearance and
technical control (4 days)
-Ports and terminal handling
(5 days)
-Inland transportation and
handling (3 days)
Importing a container of goods
to India requires 9
documents, takes 20 days and
costs $1,070
Source: World Bank, Doing Business
2012
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
33. 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, Distributors
and Labor
34. Import Process, Tariffs, Taxes &
Incentives
II-Import Duty
Associated Taxes &
Duties
0-35%
varies based on product &
Country of origin
(NCM, HS)
IPI-Industrial Product
Tax
Varies based on product
(CNM) up to 300%
tobacco
Import Duty
20%
avg
PIS-Social Integration
Program Contribution
6%
VAT
19%
7.6%
ICMS-State Tax
SP 18%
Import Duty
1.65%
COFINS-Social
Security Financing
Contribution
VAT
0-35%
12%
avg
16%
0-5% raw materials,
20% finished consumer
goods, 35% autos and
luxury items
7–
25%
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor
35. Import Process, Tariffs, Taxes &
Incentives
Additional Tax
Considerations
Corporate Tax
Baseline:
-medium size business
-began operations 1/1/2009
-taxes & mandatory
contributions are measured
at all levels of government
-a range of standard
deductions & exemptions is
also factored
15%
Corporate Tax
33%
Corporate Tax
17%
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
On average, firms make 9
tax payments per year and
spend 2600 hours per year
filing, preparing and paying
taxes and pay total taxes
amounting to 22.4% of profit
On average, firms make 9
tax payments per year and
spend 193 hours per year
filing, preparing and paying
taxes and pay total taxes
amounting to 18.9% of
profit
On average, firms make 9
tax payments per year and
spend 316 hours per year
filing, preparing and paying
taxes and pay total taxes
amounting to 18% of profit
Source: World Bank, Doing Business
2012
Brazil:
2,600
LatAm: 382
OECD: 186
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
36. Import Process, Tariffs, Taxes &
Incentives
Recent Tax Changes
April 2012 – Brazilian government granted a
series of important benefits to enhance economic
activity
General
-Payroll tax exemption in certain
sectors:
IT, pharmaceutical, hotels, chemicals,
plastics, textiles, automotive, metallur
gy, 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
Investment &
Agents, Distributors
Entry Method
Operations
and Labor
that fight cancer
37. Import Process, Tariffs, Taxes &
Incentives
Recent Tax Changes
April 2012 – Brazilian government granted a
series of important benefits to enhance economic
activity
Transfer Price
Three Methods
1. Cost Plus Method (CPL)
2. Method of Comparative
Independent Price (PIC)
3. Resale Price Method (PRL)
CHANGES:
1. PRL Margin decreased from 60% to 20%
Margin
30% for chemical products, glass products, cellulose, paper, metallurgy
DECREASE
40% for petroleum, specific machinery & equipment
60% to 20%
2. Standardization of calculation rules, regardless of whether value is added in Brazil
freight & Ins now excluded from calculation
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor
38. Import Process, Tariffs, Taxes &
Incentives
Ex-tarifário Program
If no similar good is produced domestically, an importer may qualify for
reduced or eliminated tariffs
apx 16% to 0-2% II & potentially IPI, Resolução CAMEX 35/2006
Certificate or statement from appropriate body, technical reports, public
consultation among other things may be considered to determine the existence of
a similar domestic good
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, Distributors
and Labor
39. 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, Distributo
rs and Labor
40. 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
Espírito Santo (primary port
Vitória)
Infrastructure R$ 504B
Science & Tech R$ 35B
Security R$ 6.7B
Health Care R$ 4B
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, Distributo
rs and Labor
41. Import Process, Tariffs, Taxes &
Incentives
MERCOSUL
Member
Countries
Brazil
Argentina
Uruguay
Paraguay
Bolivia
Chile
Columbia
Ecuador
Peru
Observer of
Agreement
Mexico
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
Applied
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, Distributo
rs and Labor
42. 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
And . . .
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
43. Getting Paid
Classic Trade Solutions
Letters of Credit (LC)
Documentary
Collections
Standby Letters of
Credit
Bank Guarantees
Specialized Trade
Solutions
Supply Chain Finance
Purchase Order
Management (Open
Account)
Structured Trade
Solutions
Receivable and
Payable financing
Export Credit Agency
(ECA) backed
structured trade, i.e.,
Ex-Im Bank in the USA
Pre-Export Financing
Private Credit
Insurance and Political
Risk Insurance (PRI)
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
44. Getting Paid
Letter
of Credit (LC) Characteristics
Offers the most protection to the SELLER
Three independent “agreements” underline the letter
of credit
BUYER and SELLER (their contract)
Applicant and Issuing Bank (application and
reimbursement agreement)
Issuing Bank and Beneficiary (the LC)
Bank deals in documents only
The BUYER’s recourse for problems with goods is through
the contract with SELLER
Documents presented under the LC must comply with its
terms and conditions, otherwise there is no obligation to
honor
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor
45. 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
46. Regulatory Changes & Trends
Recent Regulatory Changes
January, 2012
February, 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
Multi-prong tax package, reduced IRPJ, IPI, PIS/COFINS,
payroll tax, change to transfer price rules
May, 2012
Pension Reform Bill – limits government payments to retired
public workers
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
47. 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
48. Regulatory Changes & Trends
Privatization
Airport operating rights - Auction method, public private partnership
2011
2012
São Gonçalo do Amarante Airport, Natal – R$ 170 million (3x reserve)
São Paulo Guarulhos – R$16.2 B (12.9B expected)
Brasilia – R$4.5B
Campinas – R$3.8B
Oilfield Rights
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, Distributors
and Labor
49. 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, Distributors
and Labor
50. Regulatory Changes & Trends
Brazilian Patent Law
Brazilian patent law
Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5 §§29
of the Brazilian Constitution
20 year term, from date of filing (15 for utility model)
How to obtain Brazilian patent protection
First to File
Absolute novelty
Average time for granting patents is 5-7 years
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, Distributors
and Labor
51. Regulatory Changes & Trends
Brazilian trademark law
Brazilian trademark law
How to obtain trademark protection?
Industrial Property Law, Law No. 9279/96, as amended (May
15, 1996)(Braz); article 5 §§29 of the Brazilian Constitution
International treaties
10 year term, from date of issuance
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.”
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, Distributors
and Labor
52. Regulatory Changes & Trends
Brazilian trade secret law
Brazilian trade secret law
Industrial Property Law, Law No. 195
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
53. Agents, Distributors and Labor
Employee
Considerations
Agents & Distributors
Immigration | Visas
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
54. Employee Considerations
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
55. Employee Considerations
Basic Principals
Worker Protection: the worker is considered the
weaker party in the relationship
In labor-related conflicts, at any level or
jurisdiction, whenever there is a doubt regarding
evidence, the court’s decision will 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,
Distributors
and Labor
56. Employee Considerations
Direct agreements between employees and
employers to resolve conflicts are not valid
The
Brazilian constitution provides the right to sue
as an individual guarantee
There are ways to settle
Arbitration,
union conciliation commissions. . .
but they do NOT prevent the right of individual
claims
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
57. Employee Considerations
Every 12 months employees are entitled to 30
Min wage adjusts annually
calendar days paid vacation
In addition to the
13th
Currently R$ 623 per
month
salary
Christmas bonus equal to 1/12 the salary for each month of
that year
Every month employer must deposit amount equal
to 8% of employee’s salary into a social security
fund (FGTS)
If employee is dismissed without cause, the employee
may withdraw the amount
Employer must pay a penalty equal to 40% of the
amount and an additional 10% penalty to the
government
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor
58. Employee Considerations
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,
Distributors
and Labor
59. Employee Considerations
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
60. Employee Considerations
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, Distri
butors and
Labor
61. Agents & Distributors
Agent
Distributor
Activities subject to some control by
supplier
Does NOT take title to goods
May handle products of other
suppliers; but, is less likely to do so
than distributor
Generally compensated on a
commission basis
Bears no risk of failure of payment
Activities subject to only minimal
control by supplier
Takes title to goods, buys and sells
for own account
May handle products of other
suppliers
Earnings based on resale profit
margin
Bears economic risk of failure of
payment by customer
Usually warehouses and physically
delivers goods
Uses own capital
Has no power to bind the supplier
contractually
Usually does not warehouse goods
Usually does not use own capital
May have power to contract on
behalf of the supplier
Entry Method
Investment &
Operations
Agents,
Distributors
and Labor
62. Agents & Distributors
Brazilian agency relationships is governed by the Brazilian Civil Code and by special
legislation, Law n. 4.886/1965
Exclusivity is NOT presumed unless expressly established in an agency agreement
Exclusivity is common and may be a heavily negotiated point
Exclusivity entitles the agent to compensation related to direct sales made by the company
without assistance of the agent
Contract should contain limitations, termination events, territory, products or goods,
commission structure and time of payment
Termination
There are specific enumerated “just” reasons for the termination of an agency agreement –
Art. 35
Termination is typically both difficult & costly
Generally, an agent is entitled to no less that 1/12th of the total amount received during the
time of agency or an amount equal to the monthly average compensation received multiplied
by the remaining months left in the agency contract term
If earned 80k per year for 6 years, then
80,000 * 6 = 480,000
480,000/12 = 40,000
An agent is also generally entitled to reimbursement for investments made to promote the
company, such as advertising, office rent and equipment expenses
Entry Method
Investment &
Operations
Agents, Distributors
and Labor
63. Agents & Distributors
Distributorships are regulated by the Brazilian
Civil Code and Contract Law
Unlike Agents, there are very few statutory
provisions governing the relationship (only
two)
Law
Addresses the relationship between auto dealers and auto
manufactures
Law
No. 6,729/1979 amended by Law No. 8,132/1990
No. 7,646/1987
Addresses the distribution of software products
Entry Method
Investment &
Operations
Agents, Distri
butors and
Labor
64. Immigration | Visas
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, Distributors
and Labor
65. Immigration | Visas
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, Distributors
and Labor
66. Entry Method
Investment &
Operations
Agents, Distributor
s and Labor
BUSINESS IN BRAZIL: AN
INSIDER’S
VIEW, REGULATORY AND
LEGAL CONSIDERATIONS
dwilsonjdmba
dwilson@keglerbrown.com
David M. Wilson, Kegler Brown
67. Business in Brazil: An Insider’s
View, Regulatory and Legal
Considerations
The content of this presentation is for educational purposes
only. Each legal issue is fact dependent, 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.
Export Process
Investment &
Operations
Agents, Distributors
and Labor
68. Additional Sources
Insights, Global Macro Trends, KKR, May 2012
Doing Business 2012, Doing Business in a More Transparent World, World Bank Report, October 20, 2011
UBS Investment Research: Emerging Economic Focus, UBS, August 29, 2011
A Closer Look at Brazil’s Credit Boom, Deutsche Bank EM Special Publication, July 22, 2011
Anchoring, De-Anchoring, Re-Anchoring, Bradesco Corretora Economics BBI Equity Research, September
6, 2011
Economic Outlook: Brazil, BBVA, Third Quarter 2011
Brazil Auctions Rights to Airport, WSJ, August 23, 2011
The Geopolitics of Brazil: An Emergent Power’s Struggle with Geography, STRATFOR, July 14, 2011
The Aging World, Ned Davis Research Inc, July 21, 2011
Japanese Dump Real Funds at Fastest Pace Since Earthquake: Brazil Credit, Bloomberg, September, 30, 2011
First they went for the currency, now for the land, The Economist, September 24, 2011
Brazilian superior court of justice confirms the possibility of enforcement of trademark applications, Marca Sur
Internatinoal, October 21, 2011
Global Enforcement Report 2011, TRACE International, 2011
Gaining & Sustaining Competitive Advantage Third Edition, Jay B. Barney, 2007
Executive Decree Authority in Brazil: How Reactive Legislators Influence Policy, Gary Reich, February, 2002
Privatization and the Distribution of Assets and Income in Brazil, Economic Reform Project: Global Policy
Program, July, 2000
Export Process
Investment &
Operations
Agents, Distributors
and Labor
Notes de l'éditeur
When you considerhow to enter Brazil, what do you think about? What questions jump into your mind. I generally begin with asking why? Why should you enter Brazil?Is it because your competitor entered? Is it because an article in the WSJ said Brazil is the largest economy in Latin America and the 6th largest in the world. Did your largest customer enter Brazil? Is it because the middle class is growing at an explosive rate? Is it because your organizations’ core competencies can be leveraged to do xyz? All of those could be great reasons, but the way you approach the information we are about to discuss, and the decisions you make will vary greatly based on the answer to that question.
Simply a framework to discus macro level factors, how you evaluate the factors will differ based on your organizations industry, strategy, competencies and goals; however, I try to pose a general question that you can ask yourself to begin the analysis and help identify what additional information and factors you should research.This is not a “true” PEST analysis, it is simply a collection of general facts, events and trends that may be used in a PEST analysis. The question is not, PEST reasons to enter Brazil. It is, what are the PEST reasons to _____ or to not _______ in Brazil
-First elections under the new constitution were not held until 1989-several parties (over a dozen) are represented in Congress-Police in Bahia on strike – military in Salvador-Executive Decree authority
-Executive Decree authority-Argentina Kirchner, import changes - Brazil changes while on boat
-Ask for story from audience -Share some ANVISA story-Time, communication, Tariff classifications, changes in Tariff rates, Changes in % required for taxation -End with its getting better, but stress there is still a long way to go
-Denmark was tied for 1st with New Zealand & Singapore last year (2010)-Scale is 10 – 1 , 10 is best-Somalia is worst, tied with North Korea
Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation
Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation
-OECD, organization for economic co-operation & development (primarily wealthy countries, or the countries we traditionally think of as wealthy, with current EU crisis, as I’m sure Angela Merkel would argue, that is debatable-in 2000 these countries decided to quantify what children were learning in school (Program for International Student Assessment)-at the time of the initial studyonly ½ Brazilian children completed grade school and 3 out of 4 adults were functionally illiterate. -since enrolled in the study have shown solid gains-Brazil has set a goal to reach the OECD standard over the next decade -Dilma 75,000 scholarships-roughly 80 countries in current tests and Brazil ranks in the low 50s above the bottom 3rd (but not too far, 35 percentile)
Power Distance expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of power distance accept a hierarchical order in which everybody has a place and which needs no further justification. In societies with low power distance, people strive to equalize the distribution of power and demand justification for inequalities of power.Individualism v. Collectivism The high side of this dimension, called Individualism, can be defined as a preference for a loosely-knit social framework in which individuals are expected to take care of themselves and their immediate families only. Its opposite, Collectivism, represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular in-group to look after them in exchange for unquestioning loyalty. A society's position on this dimension is reflected in whether people’s self-image is defined in terms of “I” or “we.”Masculinity v. Femininity The masculinity side of this dimension represents a preference in society for achievement, heroism, assertiveness and material reward for success. Society at large is more competitive. Its opposite, femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented.Uncertainty Avoidance The uncertainty avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. The fundamental issue here is how a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? Countries exhibiting strong UAI maintain rigid codes of belief and behavior and are intolerant of unorthodox behavior and ideas. Weak UAI societies maintain a more relaxed attitude in which practice counts more than principles.Long Term v. Short Term Orientation The long-term orientation dimension can be interpreted as dealing with society’s search for virtue. Societies with a short-term orientation generally have a strong concern with establishing the absolute Truth. They are normative in their thinking. They exhibit great respect for traditions, a relatively small propensity to save for the future, and a focus on achieving quick results. In societies with a long-term orientation, people believe that truth depends very much on situation, context and time. They show an ability to adapt traditions to changed conditions, a strong propensity to save and invest, thriftiness, and perseverance in achieving results.
-list of several available organizational structures, take a moment on this slide to discuss the importance of research, culture and selecting the right local partner. Mention that we will likely hear several stories related to this topic during the panel discussion later today. Provide a list of some research tools
-list of several available organizational structures
-you may decide that you need an actual legal presence in Brazil to execute your desired entry method. These are the most common structures employed by foreigners when creating a subsidiary for the purpose of importation
*Foreign Investment is prohibited in Nuclear energyHealth ServicesRural land, abutting international bordersPost office & telegraph servicesAirlines (except domestic routes)Foreign Investment is limited inFinancial ServicesMediaRural land in certain districts % threshold
-Judicial treatment must be granted to foreign & domestic capital under the same terms-few areas are subject to restrictions
This is a very generic process, the way that you import will vary greatly based on your individual circumstances. If you decide it is best to register as an importer, then you will need to allocate time to navigate the that process. In Brazil: Siscomex registration, RADAR registration (ordinary or simple), licensing with various ministries (by product)Colombia: Chamber of Commerce registration, obtain tax registration, locate tariff sub-regime
Some non-automatic, Brazilian environmental agency, used materials, restricted & tax benefits, RadarSimplified 150,000 import / 300,000 export from brazil every 6 monthsOrdinary real location, employees, volume of operation depends on investment
Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and servies + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and servies + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and services + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
-Venezuela signed membership agreement in 2006, not yet ratified
Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
Invest at least R$150,000, or An exception may be made if the investment is less than R$150,000. 1. The old rules (from 2004) stated that the applicant must submit a plan for a business that creates at least 10 Brazilian jobs within 5 years. Even with a plan the issuance of a visa was at the discretion of the National Immigration Council (NIC). 2. The guidance under the new 2009 resolution simply states that the NIC may consider factors such as; the number of jobs created, the type of industry, the geographic location, and the type of production or technology contribution that the investment will provide (which is even more vague).
Invest at least R$150,000, or An exception may be made if the investment is less than R$150,000. 1. The old rules (from 2004) stated that the applicant must submit a plan for a business that creates at least 10 Brazilian jobs within 5 years. Even with a plan the issuance of a visa was at the discretion of the National Immigration Council (NIC). 2. The guidance under the new 2009 resolution simply states that the NIC may consider factors such as; the number of jobs created, the type of industry, the geographic location, and the type of production or technology contribution that the investment will provide (which is even more vague).