HOW TO STRUCTURE YOUR BUSINESS IN BRAZIL
Practical Guide for business modeling in Brazil
July 2020
OFFICIAL PROGRAM
Summary
Introduction ______3
1- Agent / Representative ______4
2- Distributor ______6
3- Joint Venture ______9
4- Local Subsidiary ______12 4.1 – Intra-Company Operations ______14 4.2- Double Taxation Agreement Brazil X Switzerland ______18 4.3- Selling Services To Brazil ______19
5- Taxation In Brazil ______23
6- Tools For Business Facilitation In Brazil ______28 6.1- Ex-Tarifario ______28 6.2- SERV ______28 6.3- E-Commerce Solutions ______29 6.3- Subsidiary Management Solutions ______30
Source Of Information ______31
About S-GE______32
Our Partners ______33
Disclaimer
The information in this report was gathered and researched from sources believed to be reliable and are written in good faith. Switzerland Global Enterprise and its network partners cannot be held liable for data, which might not be complete, accurate or up-to-date; nor for data which is from internet pages/sources on which Switzerland Global Enterprise or its network partners do not have any influence. The information in this report do not have a legal or juridical character, unless specifically noted.
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Introduction
Brazil is an attractive market for international companies due to several factors: a domestic market of nearly 210 million inhabitants, availability of easily exploitable raw materials, a diversified economy that is less vulnerable to international crises, and a strategic geographic position that allows easy access to other South American countries. Differently to the consolidated markets of Europe, Brazil has a huge potential growth as most sectors still face repressed demand, Brazilian consumers crave innovation, technology and quality. This makes the country a prime spot for international companies willing to explore new markets. On the other side, all these opportunities come together with some challenges that this promising market imposes. Ranking 124th out of 190 countries in the World Bank's 2020 Doing Business report, business in Brazil is not as straight forward as it is in Europe, for example. The scenario requires some attention and careful planning in particular. Investment in Brazil remains somewhatdifficult because of negative factors including cumbersome and complex taxation, bureaucratic delays and heavy and rigid labor legislation. When facing these challenges, Swiss companies in some cases cannot determine the possible roads to the Brazilian market. This guide clears some of the aspects involved in important business decisions companies have to take when evaluating the entry options. There is no magic formula or single way, it all depends on the strategy of the company, and how much it is willing to risk or to invest in the market. A company can decide to work only with a local agent or have a distributor. If business develops further and sales increase, there is also a possibility to establish a partnership with a local company or even to open its own subsidiary in Brazil. All these options imply different investment levels and might bring different results depending on the sector. The important factor for sucess is that these decisions are taken based on a planned and structured strategy. After presenting the different entry strategies, it is key to understand the sophisticated Brazilian tax system, tax engineering will determine the limits of operations in the country and it is highly advisable to rely upon professional support. Finally, this guide presents some instruments to facilitate business develop in Brazil that can contribute to market penetration.
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1- Agent / Representative
The use of a commercial agent/representative is very common as the first approach to a foreign market. In Brazil, this practice is also frequently used by Swiss companies due to the special characteristics of the market. Considering that both countries are considerably distant – flying time is around 12 hours – it is relatively difficult to manage sales directly from Switzerland. Depending on the sector, some sales will demand several trips to Brazil per year, this could significantly increase the cost of client acquisition and require extended time for sales personell. Another important aspect is related to a cultural side of Brazil: in some cases, personal contact is key for sales. Brazilians tend to prefer business relations that are constructed upon personal contact and, for that, personal meetings are important for keeping this relation. Speaking Portuguese can be determinant for client acquisition due to the relatively poor level of foreign language skills in the country. These are all advantages of having a sales agent/representative in the country. On the other hand, it is important to pay attention to some points in order to avoid having a bad experience with this instrument. It is essential to align expectations in both parts. Brazilians tend to be sometimes over optimistic and Swiss will take for granted the promises of the local agents. The Swiss company should provide complete technical training for the sales agent and it is key to align the values of the company, after all, this professional will be the face of the company in Brazil. Having an agent/representative might bring faster commercial results with a smaller financial impact as the remuneration can be based on sales. Nevertheless, it is important to consider that the Swiss company will most likely have to cover the expenses of promoting the product. Traveling costs inside Brazil can be high considering the continental dimensions of the country and Swiss companies should not expect the agent/representative to cover theses expenses only based in sales commissions. Therefore, it is recommended for Swiss companies to forecast financial funds for product promotion within the country. Brief legal aspects of Agency/Commercial Representation relationships Agency/commercial representation relationships are regulated by Federal Law no. 4.886/65 in Brazil and said law is regarded as a rule of public policy, which means that that there are some rights and obligations that must be followed by the parties under an agency/representation agreement, which is to be performed in Brazil. The agent/representative may be an individual person or a legal entity and as a general rule the agent /representative shall be enrolled under the Regional Council of Sales Representatives. Although it is not prohibited to add a fixed monthly payment to the remuneration of an agent /representative, the Brazilian Law says that the remuneration shall be paid on commission basis and therefore the recommendation is to avoid fixed payments. The commission must be calculated on the total sales price described in the invoice to the final client, without any deduction for taxes, freight and/or insurance. If the territory is not defined, it is assumed that the relationship covers the Brazilian national territory. In the case of engaging several agents/representatives in the same territories, the obligation to double payment of commissions may arise. In principle, there is no formality for the contract and it is even possible to have verbal agreements. However, it is highly recommendable to enter into a written contract in order to have skillful evidence of the rules defined by the parties, thereby minimizing the risk of different interpretation in case of disputes.
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The agent/representative may be granted the exclusive right to the territory of his/her performance or parts thereof. It is important that the rule on whether or not to grant exclusivity is expressly defined between the parties. If there is an exclusivity clause, the Brazilian law determines that, in principle, the agent/representative will be entitled to a commission for deals concluded in his territory, even if said deals are carried out without the participation of the agent/representative. It is possible to enter into an agency/commercial representation agreement for a fixed or indefinite term. In the case of fixed-term contracts, the Brazilian law states that if, after the initial term has expired, the parties extend their term or enter into another agreement within a period of 6 months from the end of the first agreement, the relationship will be understood to be for an indefinite period in its entirety. With respect to the consequences of termination of contracts for indefinite term, Brazilian law provides the following basic rules: (i) any party who decides to unilaterally terminate the relationship without cause shall give the other party a prior notice of at least 90 days, or the former shall pay an amount equivalent to 1/3 of commissions paid within the last 3 months of the relationship; (ii) should the manufacturer be the party who decides to unilaterally terminate the relationship without cause, the agent/commercial representative is entitled to receive a compensation equivalent to 1/12 of the total commission earned in the course of the entire relationship duly updated. Companies should be aware of this compensation and should provision funds for these termination conditions that can be very costly. In Brazil, there is also a concern not to confuse the figure of the agent/representative with the figure of an employee. Otherwise, the rules of the labor laws are applied, which are much stricter than those that regulate the activity of the commercial representative. The verification of the nature of the relationship is mainly based on the factual relationship between the parties, with full independence of the agent /representative being the main factor for not configuring an employment relationship. Finally, most court decisions consider Brazil’s Representatives Law as binding regardless of the parties choosing a foreign law to govern their contracts. Distributorships are more flexible in this matter. Against this background, having your agency agreement reviewed by a Brazilian lawyer will clarify these doubts and avoid risks in the transaction.
Sales Representation
Advantages Disadvantages
Local knowledge of market and local Problems with image and company values management of sales; proximity to client alignment
Control of engagement can present Cultural and language skills difficulties especially when agent/representative is not exclusive
Relatively low cost of investment in the Termination of relationship can be costly, market but it can be predicted
Direct contact with final client
Some tips when using an agent/commercial representative in Brazil: Make a detailed written agreement with all the important clauses like type of remuneration, payment conditions and milestones that the agent has to deliver; Do not forget to explicitly lign out the existence of exclusivity and the territory coverage in the contract; Expect to have extra costs, in most cases it will involve some level of investment and not only payments over sales commissions
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2- Distributor
Agency/commercial representation can be a good option for smaller businesses, but does not work as well on a larger scale. For businesses that are large and unwilling to hire an entirely new sales force, distribution agreements are one of the best options. Unlike in an agency/representation agreement, the company will actually sell the goods to a distributor under a distribution agreement. The main difference between such structures would be the fact that the agent does not purchase the title over the goods before selling them to final clients and the distributor’s earnings are based on the difference between the purchase price from the supplier and the price for which it sells the goods to the final clients. Agent or distributor? Often the decision between appointing an agent or distributor will depend on the sophistication of the buyers (and their willingness to deal with the stresses of importing goods into Brazil) and the taxes applicable to the product, service or IP right being supplied to Brazil. Generally, foreign companies seek distributors that are willing to take all risks. While that may sound ideal from the supplier’s viewpoint, due to the heavy taxes that apply to the importing of goods and services, sales volumes are invariably affected as distributors’ margins generally price the products or services out of the market. In addition to the problems involving Brazil’s mandatory laws applicable to agents, appointing an agent places the commercial risk on the final customer, which is seldom welcome by them. Furthermore, it leaves the customers with all problems of dealing with the bureaucracy to clear customs (in the case of goods) or make foreign international payments and withhold the relevant taxes (in the case of services). Hence, it is relevant to carry out a study of the potential market and the profile of potential customers before deciding whether to appoint an agent or a distributor as a commercial partner in Brazil. It is important to notice that due to the heavy costs of import, there is always a great financial pressure upon the distributor as they have to commit and invest considerably in inventory, especially in a country with high interest rates like Brazil.
Brief legal aspects of Distribution relationships When you enter a distribution agreement, you give the distributor rights to resell your goods in a certain territory and you normally agree not to sell your goods to other distributors in that same area. Appointing a distributor in Brazil does not require any formal steps and parties have great freedom to decide on the terms of their distribution arrangements. Nevertheless, some precautions have to be taken in order to avoid problems. Brazil has specific laws dictating how contracts involving parties from different countries should be interpreted. You should not assume that just because your agreement says the law of a specific country should be appplied the Brazilian courts will automatically support such choice of law. While Brazilian laws allow some of the provisions to be freely chosen by the parties, other provisions will be ignored if contradicting the rules of law related to contract performance enacted by the Brazilian legislation. Companies with commercial partners around the world frequently have standard contracts that they use to appoint distributors in different jurisdictions. Due to Brazil’s particular rules and practices, it is important that distributorship agreements be reviewed by Brazilian lawyers before they are presented to the distributor. Relying on a choice of law and court (including arbitration) provision might not be enough to be free from Brazilian rules on a distribution relationship performed in Brazil. Thus, having a well- drafted agreement customized to the Brazilian legal environment and following its terms throughout the relationship will go a long way to minimize the exposure of the Swiss company to undesired risks.
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Since there is no specific law governing distribution agreements, the Brazilian courts decide issues arising therefrom on the basis of analogy with the rules that apply to similar contracts and in accordance with general rules of the Brazilian Civil Code. The distributor shall act for its own account. It should be emphasized that the distributor must be free to set the resale prices. It is normally prohibited for such prices to be stipulated by the supplier, although there is no prohibition on price suggestions by the supplier. The Civil Code also states that, unless the parties agree otherwise, the distributor is entitled to the remuneration relating to deals made within the distributor’s territory (even if the distributor did not bring about the deal). There are also limitation and specific ruling regarding distribution of terrestrial motor vehicles. In principle, the parties may negotiate freely the contractual conditions, including the consequences of breach and termination. However, the Brazilian courts currently tend to recognize the right of compensation for the distributor, especially if the relationship is unilaterally terminated by the supplier without cause and without giving prior notice compatible with the specific relationship. Incidentally, please note that there is a special Law regarded as a rule of public policy for distribution of terrestrial motor vehicles in Brazil. In addition to ignoring the effect of local rules on distribution relationships, as a common mistake, foreign suppliers often neglect to file for trademark protection in Brazil (which can be easily done now under the Madrid Protocol). Brazil follows the first to file trademark registration system and removing an existing trademark that was unduly registered by a third-party can be an expensive process. It is recommended that arrangements be made for registration of the trademark as soon as the decision to enter the Brazilian market is made. Other common mistakes when dealing with distributors in Brazil include ignoring the effect of transfer pricing rules (in exclusive distributorships) and not undertaking a basic due diligence of the distributor. If you are thinking of entering into a distribution agreement, you should first make sure that the distributor is reputable and successful in Brazil. You should also take it slow at first and avoid sending too much inventory all at once until you understand the capabilities of the distributor. Using a distributor may increase the risk of your product being copied or counterfeited. It is important that early on the Swiss company registers the brand in Brazil to avoid future complications and costly legal actions to retrieve fraudly registered brand names. Ownership of the brand should be with the Swiss company, avoid letting the distributor register it in Brazil. Another aspect to be carefully examined is the dealing with regulated products that require local registration: food, agriculture, medical devices, fertilizers, chemicals, electronic appliences and other. It is important to understand what the conditions of registration are and if it is possible to switch distributors without having to start registration from the beginning. Some of the large agents and distributors may manage so many product lines that not enough attention is given to yours.
Distribution Agreements
Advantages Disadvantages
Distributor’s margin can increase final price Relative flexibility on terms of agreement of product and affect competitiveness
Final consumers donnot need to deal with More exposure to product copy the bureaucracy of importing
Relative low cost of investment in the Lack of contact with final client market
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Some tips when using a distributor agreement in Brazil: Perform a basic due diligence of your potential distributor: analyze if the company is compliant with tax obligations, has any judicial litigation, is capable in terms of the financial and commercial point of view, etc. Have an agreement customized for the Brazilian legal environment Visit the distributor as regularly as possible, developing personal relationships is particularly important for Brazil. Try to work closely with the distributor: help to prepare marketing, provide training, link performance to incentives.
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3- Joint Venture
Another important business model to operate in Brazil is through Joint Ventures (JV). Joining forces with a Brazilian partner can be beneficial if you wish to sell directly to the Brazilian domestic market. You will be able to take advantage of the Brazilian partner's contacts and local knowledge, while they in turn benefit from technology transfer or your company's expertise in other areas. However, the major concern with joint ventures is finding a partner with whom you can work. Many joint ventures fail where, for example, due regard has not been given to the importance which Brazilians attach to personal relationships in business. It is often better to select a JV partner who complements you rather than a potential competitor. Plan for your exit from a joint venture from the outset - it is rare that joint ventures are permanent, and it is better to have a "pre-nuptial agreement" than a messy divorce. If you do decide to go down this route, it is essential that you carry out thorough due diligence checks on your potential partner. While no specific Brazilian law governs JVs, they are usually classified under two types - contractual joint ventures and corporate joint ventures.
Corporate JV In a corporate JV, the JV partners set up a company that becomes the vehicle for the JV. This is the most common form of JV and it is done through the constitution of a new company or, alternatively by the acquisition of shares/quotas of an existing company. Limited Liability Companies (LTDA) and Joint Stock Corporations (S/A) are usually the company types used for JVs. In both options (constitution or acquisition), the most important point of attention are the risks of contingency that will impact according to the alternative chosen. Swiss entrepreneurs have to evaluate especially the tax and labor risks that such operation will entail. In this sense, it is key that a due diligence is performed before the signing of any agreement. In the case of a new company, risks might arise from previous or parallel activities of the local partner. In the case of an existing company that would be acquired, in addition to the before mentioned risks, the problems might be already inside the company. There is no due diligence that is capable of mitigating all the risks, but if done properly, they are an important tool to allow safety in the identification of future troubles. The picture provided by the due diligence can serve as a base for the adoption of responsive measures involving price and guarantees in order to turn the business feasible. The basic script of a JV actually starts before the due diligence, with the selection of the local partner. During this entire process, it is important to pay attention to sensitive information. At any point of the negotiation, once demanded to exchange confidential information, it is highly recommendable to sign an NDA (Non-Disclosure Agreement), even if superficial information is to be shared. Once the selection of the partner is defined, normally in a previous phase to the due diligence, it is advisable to sign a LOI (Letter of Intent) or MOU (Memorandum of Understanding). The parts should establish the legal and commercial weight they would like to give to these documents, but, normally, as the name suggests, they are essentially an intention with no legal force. Nevertheless, from the commercial aspects they are very useful because they can set the tone for the final agreement with the initial negotiations regarding price, payment and other key issues in the commercial relationship. The LOI or MOU is the space to express all commercial/contractual conditions that the parts would like to be observed, that they consider to be essential and are not willing to abdicate. This can anticipate unfruitful discussions and save time and money with deals that would not strive.
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With the results from the due diligence and the establishment of responsive measures in case of future contingencies, the parts are ready to negotiate the final agreement. For a new company, the parts should agree in the Articles of Association. In the case of a company acquisition, a SPA (Sales and Purchase Agreement) should be added and the existing bylaws should be adapted accordingly. The Articles of Association should cover a variety of conditions and situations; it is highly advisable to consult with a Brazilian lawyer in order to comply with local rules and mitigate risks. The applicable majorities for approval of certain matters will depend on the specific corporate type of the joint venture, since the decision-making processes in a Brazilian limited liability company observe the provisions of the Brazilian Civil Code, and in a joint-stock company observe the provisions of the Brazilian Corporations Law. The Brazilian Civil Code sets forth different quorum levels for approval. While the general rule is the approval by the majority of the shareholders attending the meeting, certain matters are reserved for approval by the joint venture’s parties representing different percentages and even unanimity in certain cases. Before entering in JV schemes, investor should be aware of these conditions.
Contractual JV Another alternative for a JV is the establishment of a contractual JV or a consortium, an agreement under which the JV partners join efforts to implement a given project. The consortium agreement governs the JV agreement and must meet the requirements of corporation law. In a consortium, each participating company maintains its own legal identity, management, assets and liabilities. Each party is usually independent for tax purposes. A consortium arrangement may be suitable for a foreign company interested in participating in a single project, as there is no need to form a new company that might be liquidated at the end of the project. It is important to highlight that the due diligence in the case of a consortium should focus mainly on the capacity of the partner to perform the signed contract regarding both a commercial aspect as well as financial stability. Most times, the client of the consortium will require solidarity among the consortium partner, meaning that an eventual insolvency of the local partner will imply responsibilities for the Swiss partner. If we consider the term Joint Venture as a way of cooperation between different companies for the purpose of exploring the Brazilian market, we can also list other forms of associations in which the parties maintain their independence the same way as in a consortium, for example, in case of brand licensing agreements, know-how transfer agreements, etc. The nature, purpose, duration and tax implications of the project are the usual drivers for joint ventures. The different types of companies entail different treatments for matters such as capital injection and investment commitments, majorities for corporate approvals, management responsibilities and liabilities. Other drivers are frequently defined by the particularities of each situation. As the tax treatment of each type of joint venture can vary significantly depending on the joint venture’s structure, purpose, among other factors, it is not possible to give general advice on how tax charges can be lawfully mitigated. Analysis has to be made case by case. The same can be said about governance issues, there is no specific formula to deal with these questions. It depends on the dynamics of the negotiations and the peculiarities of each case.
Local Production, Swissness and IP protection In many cases, Swiss companies enter a JV in Brazil in order to engage in a local production with a Brazilian partner. This move can have important impacts on the product costs as it might be cheaper to produce locally and avoid the import costs of foreign products. In addition to the previous issues analyzed, it is key to observe two other aspects that might influence the business under such arrangements: IP protection and consumer perception.
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Swiss branding has a positive impact on Brazilian consumers: Swiss products are perceived as being of better quality and having superior technology and design. This is an advantage to Swiss producers in comparison to Brazilian competitors. Swiss entrepreneurs should evaluate how a local production in Brazil would affect the perception of the product’s “swissness”. In many cases, the market might not react in the best way if it perceives that the move affected the quality of the product. Another important theme is intellectual property protection. In the JV, IP rights are usually dealt with during the negotiation of the joint venture agreement, preceding the creation of the business enterprise. There is no specific legislation for IP in joint ventures, so most of the aspects are contractual and dictated by use and custom, in addition to general legislation on contracts and IP. The pre-owned IP rights are especially important since they are often used as part of a party’s capital contribution to the joint venture. Trademarks, technologies and databases may, for instance, be used in the new operation. In the joint venture agreement, the parties should disclose with the utmost detail all of their IP rights, and declare that they retain their ownership, if that is the case. In addition, the parties must clearly state whether any of these rights will be part of their contribution (through transfer or licensing) to the joint venture, identifying which, if any, of the rights will be a part of the operation, and which will not. The rules for use of the IP will also be subject to provisions of the joint venture agreement, including rights over further development of existing IP and any compensation or remuneration owed to the parties. If the joint venture creates a separate entity, the owners of the IP rights and the new entity should sign license agreements or transfers, thus establishing rules for the use and development rights over the relevant IP content. The applicable legislation is the same that applies to regular license agreements. Further, the joint venture agreement should also contain clauses concerning IP matters during the operation of the joint venture and after its termination.
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4- Local Subsidiary
Opening a local subsidiary in Brazil can bring your business in the country to a higher level because it can boost your presence in the market and optimize tax aspects caused by the heavy import taxes. Nevertheless, this action is surrounded by some challenges that Swiss companies have to overcome, like the famous Brazilian bureaucracy and the difficulties of managing a structure in another country, especially when it comes to tax and labor law compliance. There are many successful stories of Swiss companies that opened a local subsidiary in Brazil, this shows that all the challenges can be overcome. It is important to start in the right way, with the right partners and based on a reliable market evaluation. The feasibility of the product is, at the end, what matters the most because all other bureaucratic issues can be, with more or less effort, adjusted. Planning the structure and the business model of the new entity is key to the success of the project and it is highly advisable to count on the professional help of skilled consultants like lawyers, accounting firms and tax experts. Especially the tax and labor law issues can vary greatly according to the type of business model and the operations involved, meaning that each operation should be analyzed from a case-by-case perspective. It is also advisable not to spare time in the market evaluation and product adaptability to the market. A detailed market strategic planning is certainly one of the pillars to success in business in Brazil. Calculating the tax the subsidiary will have to pay is not an easy task considering the highly sophisticated Brazilian tax system and its innumerous variables. It is advisable to Swiss entrepreneurs not to underestimate this important step.
Local Subsidiary
Advantages Disadvantages
Possibility to be closer to your client, giving Brazilian bureaucracy, especially relating to local support when needed complex tax and labor system
Possibility to reduce base upon which Costs: Requires a relative investment even import tax prices are calculated, thus, when considering a small structure in the optimizing tax burden country
Image of company: better perceived by Difficulties in complying with Brazilian clients and gives more security especially regulations and managing activities in a purchases with high values faraway market
Better management of logistics and control More exposure to cultural clashes of sales channels
If this is the way chosen by the Swiss company, there are some measures to be taken. In order to hire employees, open a bank account and carry out a number of other tasks, it is necessary to establish a corporation. Brazilian law doesn’t allow any kind of representative office, therefore there is a need to establish a legal entity in the country.
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The vast majority of investors in Brazil adopt the subsidiary model, since their shareholders/quota holders are not responsible for the subsidiary’s debts, except for specific provisions set forth by specific rules like in the labor cases. The investor could also decide to acquire an existing company or assets, which would require a due diligence project. This situation is similar to what was already described in the JV section of this guide. The main decisions will be around incorporating or acquiring a company, both with advantages and disadvantages. The same time that a green filed initiative will not carry pre-existent risks, it will also force the Swiss entrepreneur to start from zero, having to formulate everything from the beginning. Another issue is related to which corporate format is more appropriate for the business: Ltda. or S.A. There are other types of legal entities, however, they do not apply in general to companies with foreign capital. Therefore, the majority of legal entities incorporated in the country are either “Limitada” or “S.A”. The Ltda. is usually the preferred vehicle for a wholly owned subsidiary, as formally the liability of the quota holders is limited to their capital contribution. The use of this format is recommended because a S.A. demands stricter governance rules. The Ltda. is a legal entity under private law and is defined as Limitada, because the responsibility of each partner is limited to the number and capital of shares he/she owns. The power of each partner is limited and bound by approvals defined in the Civil Code. Thereby, the autonomy of each partner is also limited. It is the best option for small and medium business owners or a startup. Pay attention to some characteristics of the Brazilian Ltda:
Brazilian Ltda company
In a Limited company, the costs for establishment and maintenance are generally lower; however, minority quota holders are equally financially responsible. There are no impediments regarding the nationality of the Local Attorney / investors, a company can be 100% foreign owned, but these owners have to Manager appoint a local representative (attorney in fact) and the company will need a legal representative (manager). In both cases – attorney and manager – they have to be resident in Brazil (can be a Brazilian or a foreigner with legal residence in the country).
There is no mandatory minimum capital for the establishment of new Ltda in Brazil. Nevertheless, a minimum of R$500’000.00 is required for the visa Minimum capital application of expats workers and other minimum values are required for the /quota holders authorization of the Import/Export license. It is also possible to establish a single owner Ltda; there is no more need of a minimum of two quota holders.
It is very common that foreign companies see their Brazilian subsidiaries as simple business units like any other branch inside their own country. Consequently they might hire for the management position professionals without the due expertise that the position requires. This can bring many problems for the future. To face all the complex issues involving operation in Management Brazil (tax, labor, financing, foreign trade and regulatory), it is highly advisable to hire an experienced professional that works together with a qualified accounting firm for the day-to-day issues and compliance requirements. There are outsourcing solutions available in the market to fulfill this management gap as you will see in section 6.3 of this guide.
The labor law aspect deserve a special attention, starting from the hiring of Labor issues the legal representative (manager). Legally, the hiring of this professional can be done in two ways: as an autonomous relation ruled by the civil law
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(similar as if the professional would be rendering a service to the company) and as a legal employee according to the rigid labor laws. The first option surely delivers more freedom, has lower costs and is more flexible, consequently, it attracts investors that tend to prefer this “easier” path. Experience has shown that it isn’t always the case. Brazilian labor law is a mandatory ruling, meaning that independently of what the parties agreed between them in contract, if there is material evidence that establishes a de facto labor relation between the company and the person hired for a job, Brazilian labor laws will apply. This means that even if the company signed a service contract (civil law), but the relationship falls under what the labor legislation establishes as a labor condition, the employee will have full labor rights and will be able to demand it in court. The employee has good chances to get all the labor package benefits in court and the company will have to pay these benefits. Given that prescription is set on a 5 year basis, this bill can be considerable. Finally, excluding special situations, it is advisable to opt for the more conservative option of the Labor ruling even if it is less flexible and more costly.
It is also important to pay attention to the timeframe required for a company to be fully operative. Starting from the moment that the decision to open the company is taken, 6 months is a safe timeframe, under normal conditions. If it is a company that will exclusively operate with services, the timeframe can be smaller. Regarding industrial companies or companies that operated with regulated products, 12 months would be a safe number to Timeframe for forecast the beginning of operations. establishment and operation These estimations also take into consideration the time required for the opening of a bank account and applications for the foreign exchange procedures of the banks. In Brazil, banks are strongly regulated and required to have full knowledge of the client’s activities as they are co- responsible in case of money laundering. Swiss entrepreneurs should expect to have a detailed scrutiny of corporate and private data when dealing with Brazilian banks.
Aspects related to trade marks, intellectual property, compliance and data protection are also to be taken into account. Recently new directives for data IP, compliance and protection have been approved and should come into force in 2020. As the data protection Brazilian law is similar to the European Union legal framework in this area, a lot of the action taken to adequate to the later could be used in Brazil, but some adaptation would eventually be required.
4.1 – Intra-company operations
If you are not familiar with the Brazilian tax system, it is recommended to read section 5 of this guide in order to understand the implication of taxes in the intra-company operations. Opening a local subsidiary enables the Swiss company to play around different alternatives of profit accumulation and intra-company operations. On the one hand, the company might choose to reduce the
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impact of the import duties by reducing as much as possible the FOB price of merchandise sold to the local subsidiary. The aim in this strategy is to enhance overall competitiveness of the product in Brazil. It is important to remember that all taxes are calculated having as base the CIF price of the imported good. If the products arrive in Brazil with a high mark-up price, this will generate an excessive payment of taxes and, consequently, a non-competitive price to the final consumer. In order to avoid this, one solution is to set the FOB price on the lowest level allowed by Swiss and Brazilian legislation. The consequences of this corporate strategy will lead to the accumulation of the profit in the Brazilian operation and then transferring it to the headquarters. Eventual profits originated by the Brazilian operation can be freely transferred to the shareholders abroad. This can have an important impact on the financing of the operation, but there are some limits that the companies have to respect regarding transfer pricing rules in both countries, including a minimum price for the imports. On the other hand, the company strategy could go in the opposite direction: sell the product with high prices in order to guarantee profitability of the Swiss headquarters even if the Brazilian subsidiary does not operate with its optimum financial level. This alternative should also evaluate the impact of the import duties on products’ competitivity inside the Brazilian market. Both strategies can work depending of the industry and market, it is important that it is a conscious choice based on calculations that will see the full scenario: income taxes in Brazil, income tax in Switzerland, and sales forecast. It is advisable to carry a tax impact study before starting operations in order to evaluate these issues and optimize the intra- company operations. Transfer pricing rules are applicable to import and export transactions carried out between a Brazilian company and a related party domiciled abroad. The effects of the legislation are triggered whenever foreign trade operations are performed between related parties. The legislation aims at identifying and levying assumptions where the profit is made abroad, what occurs in a situation where the importer pays too “expensive” in the import or sells too “cheap” in the export, and in both instances the entailed party – abroad – makes a greater profit. The same happens when a Brazilian importer pays too “cheap” in a foreign purchase; Brazilian authorities are keen on controlling this operation to prevent tax evasion on import duties. In the past, there were many cases of companies using intra-company operations to avoid the heavy import duty burden and Brazilian authorities are aware of this scheme, normally pursuing a rigid control over these operations. In Brazil, the transfer pricing rules vary according to the product. It is important to consult with local fiscal authorities to determine the minimum limit allowed for import operations between related companies (headquarters and subsidiary). This value is normally based in the production cost plus a percentage that can go up to 25% of the base costs. As for Switzerland, no specific transfer pricing legislation exists and there is no set of specific documentation required in this regard. Nonetheless, under the general tax legislation and its guiding principles, related party transactions must be commercially justified and compliant with the principle of “arm’s length”. The arm’s length principle means that entities that are related via management, control or capital in their controlled transactions should apply the same terms and conditions which would have been agreed between non-related entities for comparable, uncontrolled transactions. In determination of compliance with such rules, Switzerland generally follows the OECD transfer pricing guidelines. Another element to be taken into consideration in this strategy is the variation of the exchange rate. The Brazilian Real can suffer large variation in value in the short term and this can affect considerable the profit transference and the sales of imported products in Brazil.
Corporate Taxes (IRPJ and CSLL), Funding and Payment of Profit There are two corporate taxes on profits in Brazil, and their combined rate is approximately 34% if the company opts for the real profit system. Generally, the Corporate Income Tax (Imposto de Renda sobre a Pessoa Jurídica - IRPJ) has a basic rate of 15%, plus 10% surtax on annual taxable income that exceeds BRL 240.000. The Social Contribution on Net Profit (Contribuição Social sobre Lucro Líquido - CSLL) is applied at a base rate of 9%. This rate may be different for financial institutions.
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Besides the IRPJ and CSLL, other taxes will apply over production, commercialization and services in Federal, State and Municipal levels. For more details, please consult section 5 of this guide. All foreign investments (equity or debt) must be properly registered with the Brazilian Central Bank (Banco Central do Brasil - BACEN) in order to avoid any risks in future repatriation of capital and remittances of dividends, interest, and interest on net equity and inter-company invoices. Brazilian legal entities can be financed through equity and/or debt.
Funding through Equity The first foreign exchange inflow of the Brazilian entity is commonly the capital inflow, as set forth in the bylaws. The main advantage for a company to be financed through equity is that it is usually tax neutral, since it does not directly result in recognizing foreign exchange gains or losses at the Brazilian entity level. However, cross border capital contributions trigger Financial Transaction Tax (IOF) at a 0.38% rate. The Articles of Incorporation (bylaws) of the Company reflecting the initial share capital and subsequent changes must be filed with the Board of Trade within a 30-day period. The incorporation of a Brazilian entity by a nonresident must be registered with the BACEN via the Electronic Declaratory Registration at the BACEN’s system (Registro de Investimento Direto no Brasil - RDE-IED). Lack of proper registration may jeopardize future remittances in foreign currencies with respect to capital invested.
Funding through Debt The main benefit of funding through debt is that the interest paid would be potentially deductible for corporate tax purposes. In case the company identifies the interest expenses to be necessary to perform its economic activities, and that such expenses comply with Brazilian and Swiss transfer pricing rules and thin capitalization rules, these expenses shall be deductible for corporate tax purposes. From a formal perspective, a loan agreement must also be registered with BACEN. Lack of registration may jeopardize the payment of principal and interest abroad as well as tax deductibility of interest. IOF is currently reduced to 0% on inflows of cash related to loans with maturity date greater than 180 days otherwise, IOF is triggered at a 6% rate on inflows of cash. As the IOF legislation is constantly changing, it is important to consult a tax expert before entering into loan agreements or when existing loans be changed.
A common practice of “financing” of the local subsidiary is done by the non-collection of international trade operations, when the headquarters decides not to charge the subsidiary of its imports. Many times, this situation is triggered due to fluctuations on the exchange rate. This procedure should be avoided as it can generate penalties applicable by the monetary authorities as well as attract the questioning of fiscal authorities. Therefore, the recommendation is NOT to do it. Another possibility regarding funding is the conversion of credits (loans or imports) into capital. This is a legal procedure and is used for different reasons when there is a credit/debit situation among companies belonging to the same group. Attention should be given considering that IOF applies to transactions that do not fulfill a minimum timeframe.
Payment of Profits The most common type of payment of profits is through dividend distribution, although there is also the possibility for it to be done through payment of interest over own capital, which has a lower taxation. In Brazil, dividends are paid based on the net accounting income after taxes and are not subject to a withholding tax nor IOF. Payments can only be executed to shareholders/quota holders. In the case of payment of interest over own capital, there are some fiscal advantages, but this procedure has to respect some conditions and limitations.
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Any of these payments need to be agreed upon at a shareholders’ meeting, and registered with the Board of Trade and the BACEN before they can be executed. In Switzerland, dividend income is generally subject to corporate income tax for the recipient company. However, under the Swiss tax regime, a tax relief exists on dividend income called “partial taxation procedure”. On federal level, only 70% of a dividend received from a qualifying participation (10% quote of participation) is taxable. On the cantonal level, at least 50% of the qualified dividend is taxable. Example: A Swiss company receives a dividend payment of CHF 1’000’000 from its fully-owned Brazilian subsidiary. Such 100% participation qualifies for the partial taxation procedure. Hence, at federal level only 70% of the dividend, in this case CHF 700’000, is taxable for federal corporate income tax. Depending on the canton CHF 500’000 to CHF 700’000 will be taxable for cantonal income tax purposes. A second type of tax relief is granted for dividends received from a qualifying participation in a resident or non-resident company (10% quote or MCHF 1 fair market value of participation). This relief is called “participation exemption”. The percentage of participation relief is calculated as the ratio of net participation income (dividend income from qualified participations) to total net income and is deducted from the corporate income tax debt. This relief is however only significant, if the income received from participations constitutes a significant percentage of the total net income of the company (as is the case for holding companies), for operative companies this is usually not the case. Before opening subsidiaries oversees it is advisable for Swiss companies to analyze the optimal Swiss corporate structure in order to maximize the tax benefits under these special taxation regimes. Moreover, as mentioned above, a company could be funded through a cross-border loan. In this scenario, the company would pay interest to the lender located abroad. Interest payments or credits are subject to a 15% or 34% IRPF rate in Brazil. In order to allow the tax deductibility of interest, thin capitalization and transfer pricing rules must be observed, as aforementioned. In addition, the loan agreement should be duly registered with the BACEN. Other forms of capital repatriation can be: Payment of Royalties, Management Fees, Sharing Expenses, among others. All forms of capital repatriation should be analyzed prior to payments, to allow tax efficiency for the investor. Generally, it is advisable to repatriate profits through dividend distribution due to minimization of tax issues.
Privileged tax jurisdictions – Black and Grey lists The Brazilian Tax Authorities (Receita Federal) maintain a so-called “black list” and a “grey list” with regard to privileged tax jurisdictions. “Tax havens” that are registered in these lists are countries or dependencies that do not tax income; that tax it with a rate lower than 20%, or jurisdictions whose internal legislation does not allow the access of information concerning corporate ownership. Early on, Switzerland was one of the jurisdiction listed on the “black list”. However, from 2014 onwards this situation changed to the better. With the increasing development in cooperation between the two countries, mechanisms of information exchange were institutionalized. Nowadays, a system of automatic exchange of tax information is in place, meaning that Switzerland informs the Brazilian authorities when Brazilian nationals are economically active in the country and vice versa. Furthermore, the countries have negotiated a Double Taxation Agreement, yet another milestone for future cooperation. Against this background, in June 2014 the Brazilian Tax Authorities excluded Switzerland from the black list. Despite the exclusion from the black list, the Brazilian Tax Authorities maintained some Swiss corporate formats on a grey list: “Swiss holding companies, domiciliary companies, auxiliary companies, mixed companies, administrative companies or entities in any other corporate form via a ruling issued by the local authorities that are subject to a corporate income tax rate lower than 20% (combined federal, cantonal and municipal rate)”. This definition mainly targeted the privileged taxation of Swiss Holding companies under cantonal tax systems (Swiss holding privilege).
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Inclusion on the black and grey lists triggers various negative tax consequences, such as immediate application of Brazil’s transfer pricing rules and a reduced debt-to-equity ratio under the thin capitalization rules. In addition, when remittances are made to a black-, or grey-listed jurisdiction, the normal 15% withholding tax rate, when applicable, is increased to 25%. The withholding tax is applicable in some cases according to Brazilian law like, for example, on payments related to the importation of services. With the Swiss tax reform that entered into force in 2020, the privileged taxation system for holding companies, which was registered on the Brazilian grey list, was abolished in Switzerland. Hence, no more negative practical implications are to be expected under the grey list for Swiss companies operating in Brazil. Swiss companies can operate freely in Brazil and their transactions do not fall under special categories or suffer extended investigation. Once a national legislative revision is done to the grey list, it is expected that restrictions to Swiss corporations are formally lifted, and Switzerland be released from the grey list.
4.2- Double Taxation Agreement Brazil x Switzerland
The Brazilian and Swiss Governments signed a Double Taxation Agreement (DTA-Bra-CH) on 3 May 2018. However, as of today (July 2020), such agreement is not yet in force and still awaits congressional approval in Brazil. Hence, each country currently sets its own tax jurisdiction without any bilaterally agreed attribution of taxation rights. This entails an imminent risk of double taxation on profits and revenue from foreign investments when both states tax the same income or assets. In Switzerland, resident companies are generally subject to corporate income tax on their worldwide income, with the exception of income attributable to foreign permanent establishments or foreign immovable property. Currently, double taxation for companies can be particularly imminent in the taxation of dividends, interests and royalties. Also, different approaches in detecting the taxable income or conflicts regarding transfer prices can lead to legal uncertainty and higher tax expenses. Once the DTA-Bra-CH enters into force, double taxation will be limited through an allocation of taxation rights in different tax categories. It will also provide mechanisms for institutional consultation between the tax authorities of Switzerland and Brazil, which provides more legal certainty to companies conducting international business between the two. The DTA-Bra-CH follows current OECD standards, including Base Erosion and Profit Shifting (BEPS) measures and anti-abuse rules and is anticipated to significantly increase investment between the two countries. Under the DTA-Bra-CH profits of an enterprise of one state are only taxable in that state, unless the enterprise carries on business in the other state through a permanent establishment situated there within. A permanent establishment within the meaning of said provision is a fixed place of business through which the business of an enterprise is wholly or partly carried on, including for example a branch, office, factory etc. Regarding the repatriation of dividends, the DTA-Bra-CH does not impact the current taxation scheme, meaning that dividends generated from a subsidiary in Brazil can still qualify for the special taxation regimes (“partial taxation procedure” and “participation exemption”) as specified above. Brazil reserved the right to impose an additional tax on profits earned in Brazil by a permanent establishment of a Swiss company ("Branch Profits Tax"), should such a tax be introduced in the country. However, this tax may not exceed 10% of the gross profits of the permanent establishment, after payment of direct tax on these profits. Currently this tax doesn’t exist. With regard to transactions between associated enterprises the DTA-Bra-CH allows the tax authorities of each state to make adjustment to profits if such profits do not correspond with the arm’s lengths principles. This corresponds to the OECD standard, but the DTA-Bra-CH lacks an obligation to a “corresponding adjustment” in the case of transfer pricing conflicts. The absence of this regulation means
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a certain degree of legal uncertainty, especially as business in Brazil, with its rather strict transfer price regulations, is likely to be more prone to transfer price conflicts. For dividends, the DTA-Bra-CH envisages a general residual tax rate of maximum of 15%. If the dividends are paid to a company that holds at least 10 percent of the capital of the distributing company for a period of 365 days, the residual tax rate is reduced to 10%. However, the Brazilian national legislation is more favorable as dividends are currently not subject to a withholding tax, meaning that Swiss subsidiaries in Brazil will not pay any withholding tax when repatriating profit. The residual withholding tax rate on interests will be at 15%, which corresponds to the tax rate currently applicable in Brazil on interests paid to non-resident companies. The DTA-Bra-CH however holds an evolutionary clause that ensures that any more advantageous agreements concluded by Brazil with another OECD state in the future will also apply to Switzerland. Under Brazilian law, royalties paid to non-resident companies are generally subject to a withholding tax of 15%. For the use or right to use a trademark, the DBA-Bra-CH provides for a residual tax rate of 15 % of the royalties. In all other cases, including leasing, the residual rate is 10%.
4.3- Selling services to Brazil
The import of service is heavily taxed in Brazil and it follows its own tax regime. This has always imposed an important challenge to service companies that want to operate in the country without opening a local subsidiary. In this case, depending of the volume of the operation in Brazil, opening a local subsidiary might be key to be competitive in the market. All information related to service transactions between residents in Brazil and residents abroad must be under SISCOSERV awareness, a national system created by the government to control trading of international services. The Brazilian client (service taker) must have in mind that they will be the ones responsible for collecting all the taxes, as the government won’t be able to charge the foreign company. The taxes involved in such activity are:
Taxes Tax rates Taxpayer 15% or 25% (A 25% tax rate always applies Withholding Income Tax if the beneficiary is located in a Service provider (IRRF) black-listed low-tax jurisdiction) Tax on Services - ISS 2%-5% Service provider (ISS, depends on the city)
CIDE-Royalty 10% or 0% Service taker
Federal Taxes on 1.65% Service taker Revenue – PIS
Federal Taxes on 7.6% Service taker Revenue –COFINS
Financial Transaction 0.38% Service taker Tax - IOF
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The contribution on the intervention on the economic domain (CIDE) is a Federal levy assessed on amounts paid, credited, delivered or remitted abroad for the payment of royalties (other than for the licensing of software) and certain services. The rate is currently set at 10% and is payable by the company making the remittance. CIDE applies to:
the supply of technology; the provision of technical assistance (support and specialized technical services), where there is transfer of technology; administrative and similar services; the transfer and licensing of trademarks; the transfer and licensing of patent explorations. Imports of services, technical assistance, technology, etc., have to take into account whether or not the relevant payment is subject to the 10% CIDE royalty tax. The application of this tax will determine the applicable rate of withholding tax: where CIDE-Royalty applies, the withholding tax is usually 15%; otherwise, the rate is 25%. When the service is paid through a regular bank transfer from a Brazilian bank account, the Brazilian party will have to demonstrate a taxation document named DARF (Documento de Arrecadação de Receitas Federais – or Document for Receipt of Collection of Federal Income) and a tax payment confirmation before the money is released out of the country. As the income tax is a withholding tax, it means that from the money the Brazilian service taker transfers to the Swiss service provider the IRRF (15 or 25%) will be deducted. This creates a great impact and rises considerably the final costs of the operation. The charts below show the tax burden on payments made out of Brazil for imports of general services (not subject to CIDE-Royalty) and for technical services and technical assistance.
The following assumptions were made:
Service price is $1’000 The ISS tax rate is 5%
Sample calculation for imports of general services NOT subject to CIDE-Royalty
Tax Item Formula Value Rate Service 1’000.00 Withholding tax Service x %IRRF 25% 250.00 (IRRF) ISS Service x %ISS 5% 50.00 (SERVICE + ISS) / (1 - %PIS-Import PIS-Import 1.65% 19.09 - %COFINS-Import)) x %PIS-Import (SERVICE + ISS) / (1 - %PIS-Import COFINS-Import 7.60% 87.93 - %COFINS-Import)) x %COFINS-Import CIDE-Royalty Service x %CIDE-Royalty 0.00% - Total cost to service importer 1’157.02 Net amount received by foreign service 750.00 provider
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Sample calculation for imports of technical assistance and services subject to CIDE- Royalty
Tax Item Formula Value Rate Service 1’000.00 Withholding tax Service x %IRRF 15% 150.00 (IRRF) ISS Service x %ISS 5% 50.00 (SERVICE + ISS) / (1 - %PIS-Import PIS. 1.65% 19.09 - %COFINS-Import)) x %PIS-Import (SERVICE + ISS) / (1 - %PIS-Import COFINS-Import 7.60% 87.93 - %COFINS-Import)) x %COFINS-Import CIDE-Royalty Service x %CIDE-Royalty 10.00% 100.00 Total cost to service importer 1’257.02 Net amount received by foreign service 850.00 provider
It is not uncommon that foreign service providers require their Brazilian clients to bear the entire costs of withholding tax, meaning that they want to receive the entire amount of the services net of any Brazilian withholding taxes. In this case, the Brazilian client needs to gross-up the value of the services before calculating all applicable taxes, as follows:
Sample calculation for imports of general services subject to gross-up
Item Formula Tax Value Rate Service 1’000.00 Gross-up of the Service / (1 - %IRRF) 1’333.33 service Withholding tax Service x %IRRF 25% 333.33 (IRRF) ISS Service x %ISS 5% 66.67 (SERVICE + ISS) / (1 - %PIS-Import PIS-Import 1.65% 25.45 - %COFINS-Import)) x %PIS-Import (SERVICE + ISS) / (1 - %PIS-Import COFINS-Import 7.60% 117.25 - %COFINS-Import)) x %COFINS-Import CIDE-Royalty Service x %CIDE-Royalty 0.00% - Total cost to service importer 1’542.70 Net amount received by foreign service 1’000.00 provider
As some services might be exempt from one or more of various taxes imposed on the importing of services, it is always important to consult an experienced tax advisor in Brazil to understand the impacts of service import in the country.
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As shown above, the tax burden can be very high, especially if the Swiss service provider would like to receive the payment net of any Brazilian taxation. In general terms, services companies that want to enter the Brazilian market and forecast reasonable amount of services to be sold in the country, end up opening a local subsidiary to avoid this heavy taxation.
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5- Taxation in Brazil
Brazil is generally considered a complex tax environment, therefore, planning is essential to any business in the country. The fiscal system is based in norms and principals of the Tax Code of 1966 and in The Federal Constitution of 1988. It is structured in three administrative levels involving different government bodies responsible for its collection: municipal, state and federal levels. Another relevant aspect about the Brazilian tax system is the existence of distinct tax regimes. These regimes correspond to the set of rules that define the form of taxation of companies and determine how taxes will be charged according to the amount of collection. So, legal entities, by option or by law, are taxed in the following ways: Real Profit System The taxes are levied on the company’s actual profit and are calculated based on monthly or quarterly revenue. As established by law, some business activities must opt for this regime. It also includes companies whose annual gross revenue is higher than BRL 78 million. Presumed Profit System The Presumed Profit System is based on a presumed net profit, which is calculated by applying a predetermined presumed profit rate on the gross revenues of the company. The profit rates are determined by the Federal Government and vary according to each company’s activity. However, this system is not always possible because of several restrictions, including a maximum turnover of BRL 78 million in the previous year. Simplified Profit System The Simplified Profit System (Integrated Payment of Taxes and Contributions from Micro and Small Companies) is a simplified tax regime applicable to micro and small companies that meet specific gross revenue thresholds and other legal requirements. The Simplified regime allows these companies to calculate taxes applying reduced rates and calculation bases, and it also provides them with the possibility of paying several taxes together, including federal, state and municipal taxes using one single payment slip. There is a constellation of different taxes involving business operations in Brazil. In the following sections those of higher importance for the activities of Swiss companies in Brazil are presented:
PIS – COFINS – IPI – II – ICMS – ISS – IOF – AFRMM – Corporate Taxes (IRPJ / CSLL)
Corporate Taxes (IRPJ and CSLL) There are two corporate taxes on profits in Brazil, and their combined rate is approximately 34%. Generally, the Corporate Income Tax (Imposto de Renda sobre a Pessoa Jurídica - IRPJ) has a basic rate of 15%, plus 10% surtax on annual taxable income that exceeds BRL 240.000. The Social Contribution on Net Profit (Contribuição Social sobre Lucro Líquido - CSLL) is applied at a base rate of 9%. This rate may be different for financial institutions.
Federal Taxes on Revenue – PIS and COFINS The Contribution to the Employees’ Profit Participation Program (Programa Integração Social - PIS) and the Contribution to the Financing of the Social Security (Contribuição para o Financiamento da
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Seguridade Social - COFINS) are federal taxes charged on gross revenues, on a monthly basis and under two regimes, cumulative and non-cumulative. Under the cumulative regime, the combined rate is 3.65% and no credit mechanism is applicable. In other words, under this regime, the PIS and the COFINS are a cumulative tax, not VAT. Companies that adopt the presumed profit system for taxes on profits must calculate their PIS/COFINS under the cumulative regime. Generally, companies under the actual profit system will apply the non-cumulative regime, which subjects taxpayers to a combined PIS and COFINS rate of 9.25%. However, under this regime, tax credits for PIS and COFINS levied on certain inputs are available. Both PIS and COFINS are also due on the import of goods and services, generally at a combined rate of 9.25%.
PIS and COFINS under Actual Profit System
Acquisition of goods 600’000.00 Gross Revenue 1’000’000.00
Credit of PIS (1.65%) 9’900.00 PIS (1.65%) 16’500.00
Credit of COFINS (7.60%) 45’600.00 COFINS (7.60%) 76’000.00
Total Credits (B) 55’500.00 Total Debits (A) 92’500.00
Total tax due (A-B) 37’000.00
The example above only shows the dynamics involving PIS and COFINS. In such operations other taxes might also apply like IPI and ICMS.
Tax on Manufactured Products - IPI The Tax on Manufactured Products (Imposto sobre Produtos Industrializados - IPI) is a federal tax levied on the import and manufacture of goods. In many aspects, it operates as a VAT tax which is charged on the aggregated value of the final product. As a general rule, IPI paid on a previous transaction can be used to offset the IPI liability arising from subsequent taxed operations as a tax credit. The applicable rate changes according to the product and its classification under the Table of Excise Tax Levy (Tabela de Incidência do Imposto sobre Produtos Industrializados - TIPI) which generally follows the Brussels Harmonized Tax Codes. These rates may vary considerably, from 0% to more than 300%, according to the products. As an excise tax, IPI rates can be higher for “non-essential” products such as cigarettes, perfumes and others. Since the IPI tax has a regulatory nature, the federal government may increase or decrease its rates at any time by decree as a way to implement financial and economic policies. On import transactions, as a general rule, an IPI tax credit for the amount of the tax paid on the import is granted in cases in which the subsequent transaction involving the same product, or another product in the manufacturing process of which the imported product was used is subject to the IPI.
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Input – Raw Material Output – Final product
Acquisition 100.00 Sales 200.00
IPI 10% IPI 15%
Credit 10.00 Debit 30.00
IPI due 20.00
Import Tax - II The Import Tax (Imposto de Importação - II) applies to the customs value of imported products at variable rates. The assessment base is the customs value and the rate is indicated in the Mercosur Common External Tariff (TEC). As it is considered an effective import cost, it is not recoverable, thus it does not generate credit. Import taxes are generally high in Brazil and it can have a great impact in product competitivity in the country, especially because it composes the base upon which other taxes will be calculated, causing a “cascade effect” in the amount of taxation. Reducing, thus, the impact of the Import Tax is the goal of some mechanisms presented in this guide like lower intra-company prices and ex-tarifario regimes. Import tax will vary according to the country of origin of the product. In general terms, products from Mercosur countries don’t pay import taxes. It also applies for countries and economic blocks that Mercosur has Free Trade Agreements. Currently, Mercosur is still under negotiation with EFTA and, for the time being, there is no effective FTA with Switzerland.
Value Added Tax on Goods and Services - ICMS The ICMS is a type of state VAT tax generally levied on imports (customs clearance), sales, transfers and other transactions involving goods (including electricity), inter-municipal and inter-state transportation services and communication services. For imports of goods and transactions within the same state, the regular ICMS rates range from 17% to 19%. However, for some specific goods, the applicable rate on import operations and sales within the state may differ from the regular ones. When transactions involve two different states, the rates are 7% or 12%, depending on the states involved. The applicable rate is 4% on inter-state transactions with imported goods, regardless of the states involved, with some minor exceptions. The ICMS tax is also due either when a product is resold in the domestic market or when it is physically moved from a manufacturing facility. Given the fact that it is a VAT, ICMS taxpayers are generally entitled to a tax credit for the amount of the tax paid in the previous transaction with the same goods (inputs), provided that the purchaser is an ICMS taxpayer regarding that product. The tax credit may be offset against future ICMS payables. Importers are generally entitled to recognize a tax credit at the amount of the tax paid and to use it to offset future ICMS liabilities. ICMS represents the highest level of complexity when calculating because it has many exceptions and given different scenarios, the value of the tax may change. For example, these are some of the conditions that will have an impact on the ICMS:
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Type of Product Depending on the type of product, ICMS might change
Inter-state cross-border As mentioned before, operations between different transactions states will have different taxation. Due to this, it is important to determine the port in which the import will be made and estimate your local market according to the state to which the local subsidiary will sell the product.
Type of operation Depending on the use of the product the ICMS might change, if the product will be resold or if it will be used as component of an industrial process, different rates apply.
Parties involved Depending on who is buying (ICMS taxpayers), there will be implications in tax credits.
Due to this complexity, it is highly advisable to undertake a case-by-case study when planning ICMS operations. There is no general rules that can be applied to all products and, normally, these calculations are done by accounting firms responsible for the company’s accounting. In special cases, with a higher degree of complexity, it is advisable to get a second opinion from a tax expert. The implications of inter-state cross-border transactions are not only fiscal, but also operational as one single transaction may generate tax invoices in different states. Companies have to pay ICMS separately, increasing significantly the paper work required to comply with fiscal obligations. Another issue is that the company has to observe the rules of each one of the 27 states in Brazil, meaning that prices may vary according to the ICMS practiced by each Federal member. IPI, PIS and COFINS are federal taxes, this way; they do not vary with inter-state cross-border transactions.
Tax on Services - ISS The Services Tax (ISS) is a municipal tax levied on revenues derived from the provision of services and on the import of services. Although it is a municipal tax, the specific services subject to the ISS are listed in a federal law. The tax base for the ISS is the price or value of the service. The rates vary from 2% to 5%, generally depending on the municipality where the service provider or importer is located, where the service is provided and the type of service.
Financial Transaction Tax - IOF The Tax on Financial Transactions (Imposto sobre Operações Financeiras - IOF) is a federal tax levied on credit operations, foreign exchange transactions, insurance and securities transactions executed through financial institutions and includes inter-company loans and some operations with gold. The rates vary according to the nature of the transaction and the maturity term. Since IOF rates have been constantly changing over the past several years, it is recommended to carry out a careful and updated analysis regarding this topic prior to entering any such transaction.
Freight Surcharge for Renewal of Merchant Marine - AFRMM Freight Surcharge for Renewal of the Brazilian Merchant Marine (Adicional ao Frete para Renovação da Marinha Mercante - AFRMM) is a fee to support the development of merchant marine and shipping
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construction. AFRMM is charged at a general rate of 25% over the international maritime freight and at 10% over the coastal navigation freight.
Which taxes apply to an import process? Import of goods includes the following taxes:
Import duties are calculated according to the table below:
TAX Calculation Base II CIF IPI CIF + II PIS CIF COFINS CIF ICMS CIF + II + IPI + PIS+ COFINS AFRMM Freight value
The CIF price is the base for calculating the II, PIS and COFINS. The IPI is calculated based on the CIF price plus the tax due in II. The ICMS is calculated considering as base all the previous taxes added to the CIF price. It is important to state that apart from the II, all the other taxes are recoverable, meaning that the payment generates a credit that can be used afterwards when the company resells the good. This information should be taken into consideration when planning the financial flow of a local subsidiary. Import transactions in Brazil may face additional costs and fees, such as Siscomex fee, harbor, warehousing, foremanship fees, etc. Before importing goods into Brazil, it is recommendable to verify all these abovementioned costs and fees to better assess the entire import process.
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6- Tools for business facilitation in Brazil
6.1- Ex-tarifario
The Ex-Tarifario regime was created to foster and modernize the Brazilian industrial production, by promoting the importation of capital goods, IT and telecommunications goods (including parts and components) with no similar production in the national territory. If an applicant can give evidence that there is no equivalent national production of a good, the Import Tax (II) can be temporarily reduced to zero for a period of 2 years by means of an Ex-Tarifario. Recent legislative changes have helped to streamline the procedure considerably, thereby increasing the possibilities of obtaining ex-tariff concessions. Most notably, a newly-introduced electronic system allows applications, submissions, and contestation to be done online. Furthermore, various deadlines have been reduced and potential contestations by actors of the local industry have to obey stricter standards in order to be considered. With the concession of the temporary reduction of the II, the Brazilian government provides a relevant tax reduction to the nationalized product. Considering that the II is the basis for the calculation of other taxes, such as IPI and ICMS, as detailed in previous topics of this guide, securing an Ex-Tarifario for a Swiss product can directly impact its competitiveness in Brazil. For every Ex-Tarifario concession, an “Ex” (the abbreviation for exception) number is created in the NCM, which is a list of products organized by the Mercosur according to the Harmonized System (HS). Each product is described with very specific details that distinguish it from all other goods within the NCM position. The Ex-Tarifario can be an important tool for Swiss companies to reduce the burden of the import duties when entering the Brazilian market. As most of the technology developed in Switzerland has no direct competition from local companies in Brazil, the chances for Swiss companies to access this special regime are comparably high. To claim it, a Swiss company has to rely on the support of a local partner. More details on the key steps and updated procedures for such concessions can be accessed in S-GE website.
6.2- SERV
In order to minimize risk with international finances and avoid problems with non-payment of foreign clients, Swiss companies can hire the official insurance called SERV. The Swiss Export Risk Insurance (SERV) covers the export business of Swiss companies in every sector against financial and political risk. It gives exporters the assurance that their goods will be paid for. SERV products also make it easier for exporters to finance their business and preserve their liquidity. In addition to export of consumer and capital goods, SERV also covers export of services such as construction, maintenance and engineering works and licensing and know-how agreements. As a public institution of the Swiss Confederation, SERV insurance supplements the offerings of private credit insurers. SERV insurance helps to boost the international competitiveness of Switzerland’s export industry and preserves and creates Swiss jobs. Applications can be done directly with SERV under the website: https://www.serv-ch.com
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6.3- E-commerce Solutions
E-commerce in Brazil is in the rise and offers great opportunities for companies that are able to present their products in the digital platforms. Brazil is the 10th largest e-commerce market in the world with annual online sales of USD 19 billion. Growing double digit every year, e-commerce is already an important platform of sales nowadays and has an even brighter future as internet penetration is high in the country and consumers are everyday more inclined to online shopping. Brazilians are one of the top internet users of the world and e-commerce is a tendency that knowns no boundaries inside the country, despite all the multiple challenges arising from the logistics structure of a continental territory. Nevertheless, this promising opportunities are out of reach for companies that would like to operate their overseas online platforms. Circumstances are such that the current bureaucratic arrangements almost block foreign companies to operate online in Brazil unless they establish a local entity and sell the products through local transactions. Some factors that contribute to this situation: Import duties block operation: Overseas online shops cannot deliver their products to customer´s door because paying import duties from abroad is forbidden. This way, customs duties must be paid by the e-shopper to the Brazilian customs, compromising the delivery to the final address. Products can be blocked at the customs till the payment of the duties and this falls under the responsibility of the e-shopper. The same way, there is no possibility to track the delivery once it goes under the scope of the Brazilian customs. For clients, this is not a practical solution for shopping. Billing Brazilian clients from abroad can impose some challenges: Only 20% of Brazil’s 80 million active credit cards are enabled for international purchases. In addition, 50 million Brazilians do not have a credit card and must rely on cash-based payments to buy online, a Brazilian dedicated payment slip called “boleto bancário”, very popular as a payment method in the country. Another difficulty relates to the local purchasing culture of instalment payments, Brazilian are used to buy everything in installments. In 60% of e-commerce spend, transactions are made using interest-free installment plans, which are made available by Brazil’s local banks. Not being able to compromise with these local conditions of payment will significantly reduce the chances of success in online sales in Brazil. In order to overcome these barriers, Swiss companies have 2 choices: either opening a local subsidiary and establishing online operations in Brazil or recurring to third party fulfillment solutions. Nowadays, due to these complexities, several companies offer fully integrated e-commerce fulfillment solution that offers a single system for orchestrating the entire flow of commerce, from pricing, pre- analysis, import management, customs clearance, inventory, and delivery. These solutions normally imply establishing a local inventory under the service provider and local sales to clients under a Brazilian gateway of payment integrated to the webshop, allowing Brazilian clients to pay in local currency and under local purchasing conditions. In many cases, these services also include after sales support like reverse logistics and local customer care with phone support. These solutions can be an excellent alternative for companies interested in operating in e-commerce in Brazil because they solve all the questions related to the complex Brazilian tax compliance and the logistics; products can be delivered to clients’ doors including tracking solutions. In general, hiring the services of these providers will increase the cost of the product or decrease the margin of the Swiss producer, but at the same time it will, in many cases, enable the operation in the country and prompt sales.
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6.3- Subsidiary Management Solutions
Due to all the challenges presented in this report, it is possible that Swiss company feel insecure to open a subsidiary in Brazil, especially fearing the compliance with local bureaucracy. This is a situation that many companies face and that prevents them to invest in the country and further develop the market. To solve this problem, several consulting companies with expertise in business management in Brazil created a service of interim management / foreign subsidiary management. Depending on the service provider, the range of activities can vary, but most of them offer services of local legal representation and financial/tax management. Services that can be outsourced to these providers: Administrative and back-office management Financial planning and management: cash flow models, payable and receivable processing, invoicing Accounting and tax compliance Reporting to headquarters Legal representation, attorney-in-law, board member HR recruiting and management, labor compliance Import and logistics management These services can be of great help for foreign companies that don’t want to go deep into Brazilian bureaucracy and would like to focus on the commercial aspects of the market. The price of the service can vary according to the scope and the service provider chosen, but flat rate schemes are available in the market, so Swiss companies can know the comprehensive costs in advance for annual planning. The subsidiary management solutions are especially important for two aspects: local compliance and external reporting. As a highly complex market, managing a Brazilian subsidiary can impose serious challenges for general directors. Bringing an expat for this function can cause many delays in the project as the learning curve might take a long time. It is advisable, when possible, to use experienced local managers and not to underestimate the complexities and difficulties of managing a company in Brazil. Reporting can also represent a challenge. As many subsidiaries are created only to manage local commercial operations, normally, their structures are very slim. They might not have all the infrastructure and human resources necessary to report in high-level demanded by the headquarters, especially when it comes to financial planning. A reliable subsidiary management solution can avoid these problems.
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Sources of Information http://lawsofbrazil.com/2019/11/05/appointing-an-agent-in-brazil/ http://lawsofbrazil.com/2019/10/24/appointing-a-distributor-in-brazil/ https://oliveiralawyers.com/about-brazil/business-brazil/distribution-agreements/ https://www.lexology.com/library/detail.aspx?g=56546243-05ce-4ac4-bb85-4f2bb2110865 https://www.natlawreview.com/article/key-aspects-sales-representation-agency-and-distribution- agreements-brazil http://brazil1stedition.doingbusinessguide.co.uk/the-guide/market-entry-and-start-up- considerations/ https://www.lexology.com/library/detail.aspx?g=6a190cdc-6631-4d5f-b5d1-6742d3e607fa https://www.global.practicallaw.com/shareholdersrights-guide http://lawsofbrazil.com/tax-and-customs/ https://thebrazilbusiness.com/article/cost-of-importing-services-to-brazil SOARES DA SILVA, David Roberto. Brazil tax guide for foreigners: A comprehensive guide to investing and surviving in one of the most complex tax systems in the world. São Paulo: Eskalab, p.453-455, June 2017 How to Import into Brazil. American Chamber of Commerce for Brazil, 7th Edition, 2017 How to Manage Corporate Taxes in Brazil. American Chamber of Commerce for Brazil, 2018 How to Plan your Legal Corporate Structure in Brazil. American Chamber of Commerce for Brazil, 2018 Joint Ventures: A Global Guide From Practical Law 2nd edition. Edited by: Gianmatteo Nunziante, 2015.
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About S-GE
Switzerland Global Enterprise (S-GE) guides its clients on the path to new markets. On behalf of the Swiss Confederation (State Secretariat for Economic Affairs SECO) and the Swiss cantons, S-GE promotes exports and investments by helping its clients to realize new potential for their international businesses and thus to strengthen Switzerland as an economic hub. As the driver of a global network of experts and as a trusted and strong partner to clients, cantons and the Swiss government, S-GE is the first point of contact in Switzerland for all questions relating to internationalization. S-GE is represented abroad by Swiss Business Hubs. These local teams are based at a Swiss Embassy or Swiss Consulate-General. The Swiss Business Hubs support Swiss companies expanding their activities in their respective countries and inform foreign companies about the advantages of Switzerland as a business location. All hubs have a first-rate network of contacts abroad on account of their official status. In Brazil, Swiss SMEs can count with the Swiss Business Hub Brazil, based at the Swiss Consulate in Sao Paulo. We can assist you in structuring your business in the country.
Contact us
FABIO SPECIALE BRUNO ALOI Switzerland Global Enterprise Swiss Business Hub Brazil Senior Consultant South America Deputy Head [email protected] [email protected] +41 44 365 54 35 +55 11 3372 82 08
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Our Partners
For this guide, SG-E counted with the collaboration of the following partners:
GM Venture is a consulting and management company established in 2006 and based in São Paulo. Specialized in supporting foreign companies’ investments in Brazil with particular focus on day-by-day activities (company, branch management) and extraordinary activities (M&A, market penetration). GM Venture acts as interim managers for several foreign groups/clients, taking care of all financial, administrative and accounting tasks and offering activities of outsourced CFO or general management.
Contacts: www.gmventure.com www.linkedin.com/company/gm-venture/ +55 (11) 95053-7872 [email protected]
The firm of Stüssi-Neves Advogados has existed since November 1977. Its lawyers (partners, associate lawyers and consultants) are divided between the São Paulo and Rio de Janeiro offices in the proportion of around 50% each. Its clients are mainly European companies (the majority German-speaking) with Brazilian subsidiaries, companies wishing to start operating in Brazil or companies wishing to or already doing business with Brazil. Stüssi-Neves Advogados’ main area of practice is corporate law, meaning that they are capable of rendering all services that a company needs in order to get established in Brazil, either by incorporating a subsidiary or by acquiring an existing Brazilian company or even through a joint venture, as well as assisting companies in their daily business routines, in tax, contractual, corporate, labour, litigation areas, compliance, data protection, among others. Its clients are active in all types of industries, such as automotive, metallurgic, machinery, capital goods (for beverage, food, paper and tobacco industries, among others), medical, chemical and pharmaceutical industries, as well as consultation, engineering, logistics and financial services. Contacts: +55 (11) 3093 6612 www.stussi-neves.com Mr. Gustavo Stüssi Neves – Founding Partner [email protected]
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ExportHelp s-ge.com/exporthelp [email protected] T 0844 811 812
Switzerland Global Enterprise Stampfenbachstrasse 85 CH-8006 Zürich T +41 44 365 51 51
Switzerland Global Enterprise Corso Elvezia 16 – CP 5399 CH-6901 Lugano T +41 91 601 86 86
Switzerland Global Enterprise Chemin du Closel 3 CH-1020 Renens T +41 21 545 94 94 s-ge.com