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07 Dec

FAQ: What Are The Basics of Doing Business In Brazil?

FAQ: What Are The Basics of Doing Business In Brazil?

It’s hard to round up everything you could possibly want to know about starting a business in a foreign country, especially if that country is Brazil. I’m 100% sure you’ll still have questions after reading this. Brazil is a complex beast, after all.

But the following are the 10 most common questions my clients ask on a regular basis—I hope they serve as a sturdy jumping-off point for your research on the Brazilian business environment.

1. How long does it take for an international company to set up a private business in Brazil?

It’s important to define “set up,” because it means different things to different people. For most of my clients, that means ready to start marketing and selling goods and services, and includes banking. It’s critical to be able to generate invoices, pay taxes and bills as well as receive electronic payments. Most payables and receivables in Brazil are electronic. So “set up” usually includes the following:

  • Definition of corporate officer or business administrator;
  • Definition of a physical address;
  • Having the corporate entities legally established and registered at municipal; state and federal levels; &
  • Having bank account(s) open and able to complete transactions.

While not trying to be evasive, the short answer is it really all depends. Don’t get me wrong! It’s not hard or expensive, but there are certainly a lot of variables that can impact schedule. Part will depend on the complexity of the onshore and offshore corporate structures, as well as the nature of the business. If we believe the World Bank’s data regarding company formation in foreign countries, Brazil tops out at almost 3 months—84 days to be exact.

For most companies and situations, I would say 3 months is about right. Certain things can run in parallel, but other things are sequential, and you can’t get around it. The biggest variable nowadays that can lengthen the process is not actually the corporate registration and Brazilian bureaucracy (45-60 days), but the process of getting the bank accounts open and able to receive money because of FATCA and banking compliance.

If you have a good relationship with your bank (meaning you do a lot of business with them and can bring some pressure to bear) and they have a reasonable presence in Brazil, then we can get a company set up usually in around 10 weeks. If not, it likely can take around 12 to 14 weeks to get everything completed.

Certain sectors and industries such as banks, investments firms, insurance, entities that are in highly regulated markets or companies that wish to be publicly listed can take significantly longer.

2.) What are the important factors in choosing where to set up a Brazilian business?

Brazil is a huge country. “Setting up a business in Brazil” is a vague topic, so we need to narrow down exactly which part of the country is best.

You really want to choose the place that will provide the best access to the goods and services you require for your business, as well as proximity to the principal players and clients that will drive growth for your company. For most companies, your main choices are the principal state capitals. São Paulo is the de facto business and financial capital of the country. Rio de Janeiro is the oil and gas hub. Belo Horizonte is the mineral resources capital of the country. Capitals like Goiania, Cuiaba and Campo Grande are agricultural centers.

Most major metropolises have much to offer and are suitable business centers. But, don’t forget to take into account other important factors like infrastructure, education, safety, flexible air & freight connections. You need to be able to focus on your business, attract and maintain good quality people and get the goods and services that serve as the backbone for your future growth.

3.) What is the best corporate structure for setting up a Brazilian business?

There are 7 primary structures to choose from when setting up a business in Brazil:

  • Limited liability companies, similar to North American LLCs (Sociedade limitada or Ltda.);
  • Corporations (Sociedade anônima or S.A.);
  • Non-profit organizations (Sociedades simples);
  • General partnerships (Sociedade em nome coletivo);
  • Limited partnerships (Sociedade em comandita simples);
  • Covert/overt partnerships (Sociedade em conta de participação);
  • And finally, limited partnerships by shares (Sociedade em comandita por ações).

Since non-profits and the four kinds of partnerships aren’t typically used by foreigners, we’re mainly concerned with the first two—limitadas and corporations.

First, let’s look at the key concepts of limitadas:

  • Relatively easy to form;
  • Companies capital is divided into quotas and listed in the articles of incorporation;
  • Partners have limited liability (kind of);
  • Usually no minimum capital requirement or capital reserve obligation;
  • Unnecessary to publish financial statements annually;
  • And, limitadas can be transitioned into corporations.

If you’re founding a limitada, you’ll need a minimum of two partners, both of which can be foreigners. Partners can also be legal organizations or individuals. However, limitadas have to be administered/managed by a resident of Brazil—either a Brazilian or a foreigner with residency. Foreign shareholders also need to establish their CPF/CNPJ and at a minimum have a power of attorney established to be represented by a Brazilian or a foreigner with residency.

There is also an individual limited liability company, or Eireli, that allows an individual to establish a limited liability company. In general the rules are similar to a normal Ltda., but there are certain restrictions on capital as well as having an individual be the shareholder.

Corporations (S.A.) are more flexible in terms of financial structures, especially if the company is planning on publically listing on the Brazilian Stock exchange (Bovespa). In general, there are more governance and reporting requirements, and it’s a little more complex structure in general. For an S.A., expect:

  • Limited liability for shareholders;
  • To provide an intricate framework for business activities;
  • Required audit committees;
  • A board of directors, with a bare minimum of two Brazilian citizens;
  • 10% of capital must be deposited in a bank account;
  • Must publish annual financial summaries.

In general, in keeping with the KISS principal, most clients start out with a Ltda., and as the company grows and looks to create more flexibility in raising capital migrate over to an S.A. Because of the complexities involved, it’s best to work with a professional and explore the advantages and disadvantages of the alternatives before committing to any one business structure.

4.) Is it better to grow organically or make an acquisition?

What’s better depends entirely on you and your company’s objectives and available resources. Organic growth is certainly possible, especially when bringing new technology or advances from the international marketplace. Brazil is a country bursting at the seams with potential and opportunities. There also aren’t any of possible passive outstanding liabilities associated with an operating company. But, it’s slower and requires solid planning, management and execution.

Mergers and acquisitions are generally faster, and generally already come with an established management and market presence. The acquiring company should be getting quick access to growth and revenues, but it’s important to make sure the price is right and that a complete due diligence has been performed to make sure there are no passive or hidden outstanding liabilities, which is very common depending on the competency of the previous management. At the end of the day, any acquisition should be value accretive over the mid to long term.

5.) What are the critical elements to look at when working through a due diligence?

Due diligence is absolutely critical when operating a business in a foreign country. It’s all about reducing risk and uncertainty. Due diligence is meant to uncover a company’s:

  • Present and future liabilities;
  • Ways to handle those liabilities;
  • Business structure and legal aspects;
  • And just as importantly, how to structure and close the transaction.

Outstanding liabilities are one of the most significant things that need to be looked, especially as it relates to the following items:

  • Environmental compliance;
  • Tax liabilities;
  • Labor laws (CLT);
  • Legal actions; &
  • Intellectual property.

Many of these items can have a significant period of time over which these liabilities can accumulate, especially as it relates to federal regulations. Because of the slowness of the bureaucracy, it can take a long time for these problems to surface and in many cases the regulators can review the previous 5-8 years of operations. It’s critical to have a reliable, experienced company provide guidance and look through in detail.

6.) Are their controls or restrictions on investment or capital flows?

Brazil has openly encouraged foreign investments for years now. Those investments come in two flavors—direct and indirect. Direct investments occur either through the foundation of new businesses or via acquisitions of participation in existing Brazilian companies.

On the other hand, indirect investments refer to those made in security and financial markets—with no obligation to create or acquire a business.

For the most part, direct foreign investments have no minimum value, but there are very tight controls over capital movements and every foreign investment has to be registered with Brazil’s central bank (Banco Central).

That being said, there are some important restrictions to make note of. As a foreigner, you may only be a minority investor in certain sectors like media, insurance companies and finance. Banks, however, may be acquired with approval from the government. Certain sectors are also subject to operational restrictions. Foreigners are also restricted from operating in important border areas with other countries, as well as certain rural zones.

7.) Are there many tax incentives?

There are significant municipal, state and federal tax incentives to encourage investment in key sectors, infrastructure and underdeveloped areas that Brazil considers essential or important. These incentives can range from free or low cost land and infrastructure to large reductions (75%) or exemptions (100%) in certain taxes for a period of time. In many cases, these fiscal benefits can be applied for and extended. There are also incentives to invest in certain cultural and artistic projects. Industrial and agricultural technology is another sector where tax credits and incentives are available

There is a long list of tax incentives, and it’s worth investigating where they may be available and what industries are targeted. Also, don’t forget that everything is open to negotiations so do your research and be ready to drive a hard bargain. Now having said that, be aware that sometimes while the tax incentives are legislated, it doesn’t always mean that things flow smoothly or in a timely manner. There are ICMS and PIS/COFINS tax credits, for example, that are available to many companies. The documentation that needs to be presented is expansive and depending on the economic scenario, it can be challenging to collect and take advantage of in a timely manner. But don’t give up and keep pressing for your rights.

8.) Is it safe?

Much of what you see in the press are safety concerns in the big cities like São Paulo and Rio de Janeiro. Robberies, drugs, and gun fights seem to be much more news worthy than ever. Brazil has gotten the reputation for being dangerous. And this is true—if you spend a lot of time walking through the the wrong part of town or dark streets at night.

But would you do that in any other city? Taking simple precautions (like not advertising your wealth by wearing expensive jewelry, watches, etc.) goes a long way towards avoiding altercations with thieves. Use you common sense and don’t take any silly chances. Take cabs at night, stay away from deserted streets, and definitely don’t wander around loud and intoxicated.

9.) What are normal business hours?

Business hours can vary wildly across cities, and even within cities. Generally though, many businesses open their doors between 8 am and 5 or 6 pm.

Of course, that doesn’t include the Brazilians’ fondness for the lunch break, a phenomenon that may seem foreign to North Americans accustomed to quick 15-minute trips to grab fast food, followed by another 15 minutes eating that food while hunched over your computer. By law, CLT workers are allowed an hour for lunch. Regardless most people get up out of their chair and go out for lunch.

Also, don’t be surprised if companies you expect to be open at 8 am sharp can’t be reached until 9 or 10. It’s going to happen eventually.

10.) What is appropriate business attire?

Yes, Brazil overall has a laid-back attitude towards many things. As a general rule of thumb, err on the side of caution with regards to business attire —meaning, better to be slightly overdressed than show up to a critical meeting in jeans.
The traditional fields such as banking and legal typically wear suits or more formal attire. Men typically wear dark suits with ties, while women stick to either a skirt and jacket or a dress. In many of the other industries, business casual is usually appropriate. A nice pair of slacks and dress shirt are just fine.

Attire is important and in general Brazilians are very fashion conscious. Your clothes must be clean and tidy, fit well, and be free of wrinkles. That being said, Brazil can be very hot; lightweight fabrics are probably a must if you’re accustomed to colder climates.

Also depending on the time of year and umbrella is key. It can rain sheets, and it’s not unusual for you to have to duck into a shop or restaurant to escape the downpour. Check the forecast often and be prepared.

Did I miss anything?

I’m certain I did! Entire books could be written on each of these points. But I hope to have answered many of the burning questions in the back of your mind—and hopefully made you think of more. Many of these topics we will go through in greater detail in future postings.

Starting a business in Brazil is a complex and difficult process with the potential for massive, continuous rewards down the road. Continue doing your homework—because if you’re anything like me, you won’t regret it.

Until next time.