Brazil Business Environment

Posted by cmiller on April 15, 2011 Leave a comment (1) Go to comments

This is the result of research I did back at the end of 2008. This may be outdated, but most of it should still be valid.

Authorization for Operations in Brazil

In order for a foreign company to do business in Brazil, the company must first complete and submit an application for approval to the Departamento Nacional de Registro do Comércio (DNRC; Created by law no 4.408, de 29 de dezembro de 1961). The application must include a list of shareholders, foreign (US) incorporation documentation, appointment of a Brazilian representative, a balance sheet and information about the services or products being offered. As a result of acceptance, this information will be published in Diário Oficial da União, do Estado ou do Distrito Federal, a federal listing system making this information public. The documentation must be translated by tradutor público matriculado em qualquer Junta Comercial. Finally, operations in Brazil must contain “do Brasil” or “para o Brasil” in the name.

Foreign businesses in Brazil are classified as subsidiary, branch agency or institution with headquarters abroad; National Company with headquarters in Brazil; a public Brazilian company operating separately from its parent; an intermediation committee; or a partnership with partners in Brazil. The best form for our business would be having Gigahost as a subsidiary of 6PS Corporation operating under 6PS Corporation do Brasil.

Additionally, there are two types of business classifications: those selling products and those selling only services. We would be the latter, of course. Companies selling products must be listed in the Junta Comercial do respectivo Estado, a state listing system, whereas those offering services only must be registered with the town. The exception to this is for corporations, which we are. As such, corporations are listed in Diário Oficial da União, do Estado ou do Distrito Federal which covers this requirement and as such no action is required for on this item.

Income Tax

The federal income tax is called Imposto de Renda de Pessoa Juridica (IRPJ). There are currently three federal taxation methods for companies operating in Brazil: real, presumed and arbitrated. Real method is a tax rate applied from a bracketed system to net income much like is done in the US. The presumed method has the company report gross revenues and a flat, “presumed,” net margin is applied to derive net income, which is then taxed using the aforementioned bracketed system. Finally, the arbitrated system is used for special types of products such as gasoline and certain types of groceries, and for companies who are not in good standing with the government; this is basically an audited approach.

Companies with overseas partners or shareholders are required to use the real method for calculating tax. Taxes for the current month are assessed at the end of the month and due the end of the following month. The corporate tax rate is 15%, subject to an additional 10% surcharge above R$20,000 per month. Deferred tax credits from losses are limited to 30% of taxable profit.

Other Taxes

Contribuição para Financiamento da Seguridade Social (COFINS) or a tax similar to Social Security is levied at a rate of either cumulative 3% from gross revenues or non-cumulative 7.6% of gross profit (note: gross profit NOT net income!!). Additionally, there is Contribuição para o Programa de Integração Social (PIS) which is another type of social service tax. PIS is levied at a rate of cumulative 0.65% from gross revenues or 1.65% from gross profit (again, gross profit NOT net income).

Next, there is the Imposto sobre Serviços (ISS), which is a VAT applied to certain services. Geraldo doesn’t believe the ISS to be applicable to hosting services similar to how sales tax isn’t applicable to hosting services in Tennessee.

Dividends have no withholdings, but are still subject to the individual’s tax basis. Interest paid to individuals and payment of royalties are subject to withholding for federal income tax. There is currently no double-taxation treaty with the USA.

There are many, many other taxes, but they apply mostly to manufacturing, real estate and financial transactions. I have outlined only those which apply to service businesses.

Payroll

There are several taxes withheld from payroll. First is Instituto Nacional de Seguridade Social (INSS), or Social Security. This is 20-28.8% paid by the employer and another 8-11% withheld from the employee’s pay. Certain types of contractors (construction, etc.) are also required to have this withheld.

Next, there is Fundo de Garantia por Tempo de Serviço (FGTS) which is a type of accrued severance pay. The amount is paid by the employer at a rate of 8.5% of the monthly remuneration. If an employee is dismissed without cause, the employee is entitled to withdraw the deposits made in the FGTS account during his/her employment relationship with the company. Further, the employer will have to pay a fine corresponding to 50% of the total amount deposited in the employee’s Fund account. From these 50%, 40% is destined to the employee and 10% to the government. The Fund is also received by the employee upon his/her retirement.

Retained Earnings

Retained earnings] for the purpose of a foreign country should be registered with the federal government as foreign capital for tax purposes. Retained earnings registered as foreign capital would reduce that period’s net income as it would increase through retained earnings equity rather than appearing as revenues for the purposes of tax.

Foreign Exchange

Capital held in the form of monetary funds can be returned outside Brazil in the form of currency exchange. Any gains realized through exchange rates will be treated as capital gain and taxable in Brazil. . Foreign currency must be converted into Brazilian currency and vice-versa through the execution of an exchange contract with a commercial bank. Foreign investments may also be made through the contribution of assets and equipment intended for the local production of goods or services.

Legal System

Brazil is based on a federal government which has overarching control over litigation within any state. Additionally, there are state level courts. Brazil does have a constitutionally supported Appellate Court system that is governed by individual states at the state level and a 5 Circuit Court of Appeals. Additionally, are two superior Courts, which are called “Superior Tribunal de Justiça” (Superior Court of Justice) and “Supremo Tribunal Federal” (Brazilian Supreme Court). The former has jurisdiction over any case decided by State or Federal Court of Appeals, if the decision rendered by any of these Courts violates any Federal Law. The latter has jurisdiction over Constitutional issues and can also revisit decisions rendered by any Court if the Brazilian Constitution happens to be violated.

Arbitration is common Brazil and in 2001 was upheld by the Brazilian Supreme Court, solidifying any doubts about its enforceability in contracts. Foreign arbitration awards are also enforceable in Brazil. However, despite the fact that Brazil has ratified the NY Convention on Enforcement of Foreign Arbitral Awards, the foreign arbitration awards must still be ratified by the Brazilian Supreme Court in order to be enforced in Brazil.

Labor

Employee rights are more strict than in the US. They are outlined in the Consolidação das Leis do Trabalho.

Business Incentives

The Brazilian Government gives investment incentives in less economically developed areas, especially in the North and Northeast of Brazil. Since that is where João Pessoa is, research needs to be done what this is. I wasn’t able to find much information on this in English, but the agency overseeing this is called Agência de Desenvolvimento do Nordeste.

Additionally, Programs for Industrial and Technological Development (PDTI) provides assistance to technology companies in the form of reduction to income taxes, exemption to the IPI (doesn’t apply to us), accelerated depreciation of assets, and accelerated amortization of expenses. Again, I wasn’t able to find much on this so research will need to be done.