Incorporating a Company in Brazil
Brazil is an important market in Latin America. The country is ranked fifth in the world in terms of population, with an estimated 214 million people calling Brazil home. In addition to a huge population, the country is blessed with natural resources that have led to very strong mining, agriculture, technology, and manufacturing sectors.
While Brazil has many opportunities, it also has many intricacies that make it quite different from other jursdicitions. It is important for foreign companies to understand the local legal system, political and economic situations, rules applicable to foreign investments, contractual practices, and corporate procedures.
We have created a series of blogs that we will post over the next few weeks that will outline the process to incorporate a company in Brazil, importing goods, and other considerations that companies should know when entering the market.
Today we will start with the basic process of opening a Brazilian entity and some of the details that companies will need to know to do so.
BRAZILIAN CORPORATE ENTITIES:
When first looking to incorporate a company, it is important to understand the various types of entities that can be used to do business in Brazil.
- Branches – Foreign companies may not operate branches in Brazil unless they submit a special request to the Ministry of Industry and Commerce and receive prior authorization through a Presidential decree. In practice, since such process is very burdensome and time consuming, (approximately 8 months to obtain the final authorization), few foreign companies operate branches in Brazil.
- Other Types of Entities – Brazilian Law foresees several types of organizational structures, amongst which the two most common are the Limited Liability Companies (Sociedades Limitadas – Ltda.) and the Corporations (Sociedades Anônimas – S.A.). The S.A. is similar in form to both American and European corporations. As for the Ltda., it is similar in form to the European limited liability companies (such as French SARLs and German GmbHs).
- At a glance, Limited Liability Companies are generally simpler to incorporate and operate, but it is not the most recommended kind for structures with sophisticated management and shareholder’s relationship agreements. On the other hand, Corporations can be more adequate for sophisticated structures but have more corporate governance requirements.
- Also, it is important to consider that in Ltda., the responsibility of partners for liability is limited to the value of their quotas in the capital, albeit all partners are jointly liable for the paying-in of the capital. For the S.A., the shareholder’s responsibility is limited to the issuance price of subscribed or purchased shares, except in cases of proven violation of the law or bylaws.
- In both types of entities, the capital may comprise cash or assets, and must not be paid in the form of services.
Practical Advice –
- The definition of the most appropriate type of Business Entity depends on the complexity of the activity to be performed, size of the company, costs to be incurred, among other drivers. Our team of experts will help companies decide on the best corporate vehicle for their plans as part of the incorporation process.
- The main difference to consider when electing one or the other legal form of business is that only the S.A. is entitled to issue shares to be publicly traded in the stock exchange, while a Ltda. tends to be a more appropriate vehicle for structuring foreign direct investments in Brazil, as the management and other requirements are simpler.
Step 1 – Documentation from Shareholder
- Before incorporating a Brazilian entity, foreign shareholders (or quotaholders) must be registered with the Brazilian Federal Taxpayers Registry.
- Once registered, the shareholder is provided with a tax number. Being an individual, the shareholder/quotaholder is provided a Brazilian Individual Tax ID (“CPF”). A legal entity that is a shareholder is provided with a Brazilian Tax ID (“CNPJ”).
- The CNPJ can be obtained online through the Brazilian Central Bank. Through this system, the entity must provide basic information regarding the foreign shareholder/quotaholder.
Practical Advice –
- There is a power of attorney and other documentation required from the shareholder. These documents will need to be notarized and apostilled before sending to Brazil. Once they arrive, we will translate these documents into Portuguese so they can be submitted to the appropriate government institutions.
Step 2 – Incorporating the Company
- Limited Liability Companies require the shareholder to sign the Articles of Incorporation. Once the Articles of Incorporation are signed, and the quotaholders have tax identification numbers from the tax office, they must be filed in the Registry of Commerce in the Brazilian State where the company will be headquartered
- For Corporations, the shareholders also need to sign the bylaws, which then must be filed in the Registry of Commerce of the State where the company is headquartered. The establishment of an S.A. can be more bureaucratic if it is to issue shares that will be publicly traded in the stock exchange, since it will also require an enrollment and approval by the Securities and Exchange Commission of Brazil (CVM).
- At the time of registration, an accountant must be appointed. Please note that this professional must be registered with the Regional Council for Accountancy (Conselho Regional de Contabilidade – CRC).
Practical Advice –
- It can take time to organize the documents and power of attorney. The incorporation process cannot start until the documents arrive in Brazil and are translated. Based on our experience, it can take from 30 days to 3 months to receive the notarized and apostilled documents. It is important to take this into consideration when creating a timeline for the new entity to be operational.
Step 3 – Capitalizing the new Entity.
- Corporations’ capital must be defined in the company’s by-laws, in Brazilian Reais (local currency). Generally, there is no minimum capital requirement but at least 10% must be paid-in upon the constitution of the corporation and the remaining amount limited to five years.
- Limited Liability Companies’ capital must be defined in the company’s articles of incorporation, in Brazilian Reais. The subscribed capital must be totally paid-in in the form and period set forth in the by-laws, limited to five years.
- In both types, the capital may comprise cash or assets, and must not be paid in the form of services.
- The Brazilian Central Bank (BACEN) oversees registering and controlling all banking, investments and foreign currency and operation in Brazilian Reais. Through the SISBACEN system, all international exchange and transfer operations should be registered for auditing.
- Capital inflow should be registered within 30-days of the date in which the cash is transferred to Brazil to enable future repatriation. Foreign equity investments should be registered with SISBACEN as direct investment (RDE-IED mode). On the other hand, equity contribution in kind (assets and/or inventory) is subject to special regulations.
- The funding of a company through regular loans should be registered as financial operations (RDE-ROF module) with SISBACEN. Note that all remittances (interest and principal) made in connection with regular loans within BACEN should be updated in the corresponding RDE-ROF registry.
- Generally, there are no restrictions concerning the repatriation of share capital if the non-resident shareholder registers the original investment, capital increases and capitalized earnings with the Brazilian Central Bank. Likewise, all payments made to the shareholders should also be informed to the Central Bank.
Practical Advice –
- When reviewing how much capital you will register, it is important for companies to consider their business activities they plan to carry out. It is important to understand if the company will import, and therefore will need an import permit (RADAR). To apply for import permits, the company capital is an important consideration that will be explained in further blogs posts.
- Companies who have no requirements to import or other considerations where they need a higher capitial can incorporate with a minimal amount. We generaly recomend at least USD$1000 in these cases.
Step 4 – Choosing a Tax Regime
- Brazilian companies usually choose one of the two most common methods for calculating the Corporate Income Tax (CIT) and the Social Contribution Tax (SCT): the Actual Profit Method (“APM”) or, provided that certain requirements are met, the Presumed Profit Method (“PPM”). Generally, this option cannot be changed during the calendar year.
- By the Presumed Profit Method, the CIT/SCT basis is determined by the application of a presumed profit margin over its total gross revenue. Expenses and other tax deductions such as interest expenses and tax loss carry forwards are irrelevant for the determination of the company’s taxable income. The election to apply the PPM is made at the beginning of the fiscal year to be effective throughout the fiscal year. For legal entities which are incorporated during the fiscal year, the election is made through the payment of the first installment of the CIT/SCT due.
- Under PPM the taxable income is determined through the application of a deemed margin to the gross revenue, which can be (mainly) 8% or 32% for CIT and 12% to 32% for SCT, depending on the company’s activities. There are other percentwise, but those two are the most used. The PPM is only applicable to operating income. Non-operating income, including capital gains and revenue from financial applications, is subject to the combined 34% rate on the actual income received, or gain recognized (no deductions allowed).
- The PPM regime is commonly chosen by companies with high profit margins.
- This regime is only eligible for companies that are not obliged to calculate the CIT/SCT basis under the APM. That is the case for companies: with annual earnings lower than R$78 million, and that do not realize offshore income, enjoy tax reduction or exemption benefits, explore factoring activities or classify as a financial institution.
- On the other hand, by the APM, the tax basis for the CIT/SCT is defined by the company’s actual taxable income adjusted by exclusions (nontaxable revenues) and additions (nondeductible expenses), as provided by the Brazilian Corporate Income Tax Regulation (Income Tax Regulation edited in 2018 – RIR/18).
- The corporate income tax due may be reduced by income taxes paid or withheld and certain tax incentives may also apply.Ordinary tax losses may be carried forward with no time limit, however, losses may be offset only up to 30% of the yearly taxable income. Brazil does not have a carry back rule.
- The entity can choose to determine the CIT/SCT basis and levy the taxes quarterly or annually, but prepayments based on estimates are due every month. The prepayments are advances of the actual corporate tax due and any positive difference between them and the actual corporate tax due at the end of the period of determination (quarter or year) must be paid.
- Every year, the company must submit financial and accounting documents to the Brazilian Internal Revenue Office (RFB) for auditing. The digital Accounting Bookkeeping (ECD) and Fiscal Bookkeeping (ECF) should be submitted by May 31st and July 31st, respectively.
Practical Advice –
- One of the most challenging aspects for foreign companies operating in Brazil is taxation. Our team of tax and accounting experts will guide companies to ensure they are compliant with Brazilian tax law and are being efficient with their tax planning.
Conclusion – How can we assist?
Brazil is a great market with many interesting opportunities for foreign companies. It is relatively easy to incorporate a company, but local knowledge and know-how is required for foreign companies to navigate the business and legal aspects properly.
To help companies incorporate and operate in the most efficient way possible, Ax Legal has a partnership with Freitas Ferraz, a Brazilian law firm, located in Belo Horizonte and São Paulo. Ax Legal and Freitas Ferra work together to ensure that foreign companies entering Brazil have commercial and legal experts that can provide practical guidance at each stage of their growth.
Our typical process for incorporating a company in Brazil includes providing guidance on structuring the new entity, incorporating the company, acting as the local legal representative, using our address as the legal and commercial address, setting up the accounting and payroll, on-going legal advice, and assistance with taxation
Ax Legal is an advisory firm that works with foreign companies in Latin America. Our team of legal and commercial advisors have a distinguished track record of helping foreign technology and services companies to grow and operate in Latin America. Over the years, we have worked with starts up, mid-size businesses, and publicly listed companies. The one common factor that connects our clients is that they are leaders in their field, providing innovative technologies and services to the industrial sectors.
To better understand how we can support you in the Region, please contact Cody Mcfarlane at firstname.lastname@example.org