On behalf of Noronha-Advogados, I would like to thank the Latin-American Chamber of Commerce for the honourable invitation to participate of this CROSSAIR-EMBRAER event.
I intend to give you today an overview of Brazil as a destination for foreign investment. In so doing, I will comment on the main issues that should be taken into account by foreign companies intending to invest in Brazil or trade with a Brazilian company.
Given the above, and for a better understanding, I have divided my presentation as follows:
Privatisation and Joint Ventures;
Taxation of Business and Services in Brazil;
Consumer Law and Competition; and
Conclusion.Before I actually initiate my comments on the legal aspects of doing business in Brazil, I consider that it is important to give you an idea of the general economic environment of that country.
In terms of purchasing power, Brazil has the 9th largest economy in the world, estimated at US$ 1.039 billion. Fifty per cent (50%) of Brazil´s GDP comes from the service sector, with 39.3% coming from industry and the remaining 10.7% from agriculture. 
Brazil has a diversified foreign trade profile and its main trading partner is the European Union (EU). In 1997, 27.4% of Brazil´s export (53 billion) went to the EU; 24.7% to Latin American Integration Association (LAIA); 17% to the USA; 5.7% to the OPEC countries; and 20% to others.
In the same year, 26.7% of Brazil´s imports (US$ 61.4 billion) came from the EU; 23.3% from the USA; 21.8% from the LAIA countries; 5.9% from Japan; 3.3% from OPEC countries; and 19.1% from others.
With respect to financial numbers, Brazil has the largest foreign debt of all the developing countries in the world, at approximately US$ 200 billion.
Brazil is very dependent on external lending and foreign investment. Brazil´s privatisation programme has brought in unprecedented amounts of foreign investment, from US$ 1 billion in 1993; US$ 2.2 billion in 1994; US$ 5.1 billion in 1995; US$ 10 billion in 1996; US$ 17.5 billion in 1997; and US$ 20.3 billion in 1998. Figures for 1999 indicate investments in the order of US$ 20 billion up to the end of June. From 1991 to 1999, 88 federal and 29 state companies were privatised in Brazil, the majority of which were in the petrochemical (27 companies); telecommunications (25 companies); and steel (8 companies) sectors.
Brazil´s public deficit is approximately 50% of GDP, even after a substantial part of revenue generated by the privatisation program was utilised to offset loans. In an attempt to balance the public accounts, the government has resorted to ever-increasing raises in taxation and reductions in investment. Federal tax revenue rose 58.9% between 1995 and 1998, whilst the real growth of the GDP was less than 10%. In 1998, the overall burden of the 70 taxes that exist in Brazil was 30% of corporate income. This year, it will reach 35%. Next year, it will exceed 37.5%.General
As already seen, since 1993, foreign investment in Brazil has substantially increased, due to the measures relating to the liberalisation of some important sectors.
A few sectors are still reserved to domestic firms, although the list is steadily being reduced. Examples of the sectors still subject to restriction are : the press, radio and television and air transportation. As far as air transportation is concerned, it is important to note that both the Brazilian Constitution and the Brazilian Air Code (Law 7,565 of 19th December 1986) restrict the direct ownership in air companies by foreign companies to 20%.
Foreign companies wishing to buy a stake in an already existing Brazilian company or to set up a Brazilian company may invest freely in Brazil. The foreign investment is however subject to registration at the Central Bank of Brazil, as it will be seen below.
Brazil has exchange controls. Law 4131 of 3rd September, 1962 (as amended by Law 4390 of August 29, 1964) regulates foreign capital in Brazil.
According to Law 4131/62, foreign capital is defined as the assets, machinery and equipment brought into the country without initial capital expenditure which are to be used in the production of goods and services, as well as the financial or monetary funds brought into the country to be invested in economic activities, whether they belong to individuals or corporate entities, resident, domiciled or having head-offices abroad.
Thus, there are four main types of foreign capital:
a. direct investments, in the form of capital goods, machines and equipment;
b. direct investments in the form of economic and financial funds, i.e., cash and credit;
c. foreign currency loans and financing; and
d. use of know-how, in the form of technical, administrative, scientific or professional assistance, trademark licensing, patent or manufacturing agreements.
In all the above cases, the actual entry of goods, money or know-how from a foreign country must be evidenced.
The economic destination of the foreign capital is essential. It must be invested in the production of goods and services or any other economic activity. Thus, a direct foreign investment must be represented by shares of an S.A, or quotas of a Limitada or, in general, evidence of interest held in companies. Foreign loans, transfer of know-how, trademark licensing and/or patent or manufacturing agreements must be formalized in written contracts.
The Central Bank is responsible for keeping a special register of all foreign capital, irrespective of the procedure used to bring them into the country. Records are kept of the following transactions:
a. of direct investments and loans, whether in cash or goods;
b. remittances of income to a foreign country, whatever their nature may be;
c. reinvestment of foreigners´ earnings;
d. capital increases of companies, effected in accordance
with the law in force.
The application for registration of foreign capital must be made within 30 days of the date of entry into the country or, in case of reinvestment of profits, within 30 days of the date the respective capitalization of the profits is done by the Brazilian company.
Foreign capital is registered in the currency of entry, and in the case of financial imports and investments in the form of goods, in the currency of the creditor´s or investor´s domicile or head-offices, respectively. In special cases foreign capital may be registered in the currency of the country of origin of the goods or financing, provided prior approval is granted thereto by the Central Bank.
Upon completion of an analysis by the Central Bank to determine whether a foreign investment complied with the bureaucratic norms, a Certificate of Registration (CR) is issued on behalf of the foreign investor stating the amount of the investment made.
Reinvestment of earnings is allowed by the Central Bank. Reinvestment of this type is registered by simply being added to the stated amount of the CR. Reinvestment necessarily implies that the Brazilian company must realize profits on the original investment, as the law clearly states that in order to be considered a reinvestment profits must have been earned by the company located in Brazilian territory and reinvested in the same company or in another company also located in the Brazilian territory. The currency of the reinvestment is that of the country of the investor.
Once registration is made and the Certificate thereof is duly issued by the Central Bank, the foreign investor will be qualified to remit profits and dividends abroad pursuant to Law 4131/62 and other norms which may be in force.
Remittances of foreign capital from a foreign country into Brazil and remittances of foreign currency from Brazil to a foreign country must necessarily be processed through banks authorized to operate with exchange, under the supervision of the Central Bank.
An application must be submitted to the bank retained to make the remittance, along with evidence of the availability of the foreign investor´s earnings, by means of documents evidencing the existence of profits (such as a copy of the balance sheet of the Brazilian company or a resolution of the shareholders regarding the distribution of the profits, among others).
Repatriation of foreign capital invested in Brazil is also permitted at any time. Brazilian exchange control legislation does not establish any limits in relation to such remittances. Therefore, no restrictions can legally be imposed on remittances up to the amount indicated in the CR, which reflects the capital invested (and profits reinvested) in the country.
Therefore, the owner of the foreign investment duly recorded in the CR issued by the Central Bank may, in principle, repatriate funds up to the limit stated in said CR, regardless of approval by the Central Bank. However, practice has shown that the Central Bank, when exercising control over foreign capital flowing in and out of companies, may eventually present impediments to repatriation remittances if it determines unreasonable the sale price of shares/quotas in relation to certain factors such as the effective profitability of the same, their equity value, relevance of fixed assets in relation to total assets, the company´s economical standing during the previous five years, etc.
Moreover, it must be remembered that the Central Bank has general authority to disallow remittances abroad for a limited time, including those in the form of restitution of capital, in the event of severe impairment of the balance of payments or if such impairment is foreseeable.
The remittance to a foreign country of eventual capital gain, i.e., the amount to be repatriated in excess of the registered investment, must be granted prior approval by the Central Bank.
The National Institute of Industrial Property (Instituto Nacional da Propriedade Industrial – “INPI”) is the government entity in charge of industrial property in Brazil. All investment involving royalties, including franchises and technology transfers, must be registered with the INPI, as well as with the Central Bank, in order to permit that payments relating thereto be made abroad, as well as to allow tax deductibility in relation to royalties paid by a Brazilian subsidiary to its controlling company abroad. Finally, it is important to note that transfer of trademark fees are limited to 1% of turnover and royalty deductions are limited to 5% of product sales.Privatisations
The official National Privatisation Program started in 1990. Brazil´s privatisation initiatives have evolved with dynamism in both the federal and state levels.
Foreign take-overs of Brazilian companies in non-restricted sectors are permitted under the same rules as domestic. Foreigners are free to participate in privatisations and the previous 40% limit on their share of voting stock was eliminated in 1992.
The usual company types preferred by business and widely utilised in Brazil are limited liability ones: the company by shares (“sociedade anônima“, the so-called “S.A.”) and the limited liability company by quotas (“sociedade por quotas de responsabilidade limitada“, the so-called “Limitada”). Accordingly, joint ventures are structured around these types.
The S.A. is fundamentally a commercial legal entity, with its capital stock represented by shares. The liability of its shareholders is limited to the amount of the issued share capital subscribed to or acquired by them. The S.A., which can be an open capital company (when it is capitalised by public offer and subscription) or a closed capital company (when it obtains its resources privately) may be organised by an authorised capital corporation. Its capital is divided into shares representing part or fractions of the share capital. The shares may be common, preferred or of fruition, depending on the rights they confer to the holder. Common shares entitle the holder to common or essential shareholders rights; preferred shares have special rights of a financial or policy nature; and the fruition shares result from the amortisation of the common or preferred shares. The minimum number of shareholders necessary to incorporate an S.A. is two.
The Limitada, which also requires at least two quotaholders, is often preferred by those who intend to establish a company business because of the following characteristics: (i) simplified formation process; (ii) quotaholders´ liability to the total of the company´s capital (until the capital is paid-up, each quotaholder is liable for the full amount of the capital and not only for his quotas; from then on the quotaholders will have no further liability to the company or to third parties); and (iii) that it is not subject to the considerable costs of publishing balance sheets and other relevant corporate acts incurred by an S.A.
As you will probably know, when negotiating a preliminary phase in a joint venture, it is common for the parties contracting under the Anglo-Saxon system, to make use of the so-called memoranda of understanding or heads of agreement. I would like to call your attention to the important fact that, in Brazil, they are very seldom utilised, in view of the fact that under domestic law an obligation to contract or even a business proposal is binding. Therefore, a default under a memorandum of understanding will be subject to damages and lost profits, to which one should add court fees and legal costs. For this reason, the parties often prefer to have a complete set of documents ready (often with a suspensive clause or with a condition for implementation at a later date) rather than signing a memorandum of understanding.
Finally, and as regards the legal structure adopted for joint ventures relating to privatisations, it has been common to see the utilisation of “consortia” in Brazil. These are contracts regulated by the S.A. law with the purpose of implementing a given project, with no legal personality, and which foresee the incorporation of a company only after the objective of the “consortium” has been secured. The formation of a “consortium” requires a written agreement, which must indicate a name to designate the venture. The objective of the enterprise must be well defined as well as its duration and headquarters. The obligations of the parties must be clearly indicated as well as any contributions and share of common expenses. A typical consortium contract for privatisation purposes would establish as its objective the purpose of bidding for the specific company or rights, in accordance with a given bidding notice. Mechanisms and quorum for the determination of the bidding price should be established. A business is subject to a wide variety of taxes in Brazil. Normally, its profits will be subject to income tax, payable through annual returns.
Income Tax on profits by a Brazilian company
Income tax is payable based on the taxable profits.
The law provides a graduated tax rate for calculating the income tax due. The basic rate is 15% over the real profit, and an additional rate of 10% will be applied on the annual real profit parcel which exceeds R$240.000.00.
The law further provides that all taxed profits when attributed to shareholders, quotaholders and partners of incorporated business organisations will not be subject to any additional taxation.
Companies must file annual tax returns with the Brazilian Internal Revenue Service in the financial year following each tax period (corresponding to a calendar year).
(ii) Special Charges
In addition to Income Tax, other charges are levied on the operation of legal entities established in Brazil. These are PIS, COFINS and Social Contribution charges, the main provisions of which will be described below.
Companies that sell merchandise and/or services are subject to Social Integration Program (PIS), which is calculated by the application of 0.65% tax rate over gross revenue.
COFINS is a special charge created for the purpose of funding investments to benefit Social Security. The tax is levied at the rate of 3% (three percent) over gross revenue.
The Social Contribution was introduced for the purpose of helping to fund the Brazilian State-administered Social Security system and is charged at a rate of 8% over the company´s profits. Exceptionally for 1999 the rate was increased to 12%.
(iii) Social Security Charges
Social Security in Brazil is funded through the means of charges levied upon employers and employees. The charge for the company (the employer) will be levied monthly on the value of its payroll at the rate of 20% .
The remuneration received by partners and directors and high level officers in general will also be included in the basis for calculation described in the previous item.
(iv) Taxation of Remittances from Brazil to Abroad
Income, capital gains and other gains, paid, credited, delivered, used or remitted, from a source located in Brazil, to an individual or a legal entity resident or domiciled abroad are taxed at source at 15% rate.
Furthermore, a 25% rate is assessed over the remuneration from services (whether under a labour contract or not) and over the gain in transactions in which the beneficiary is resident or domiciled in a country that taxes income at less than 20%.
There are certain instances however where 0 % tax rates are charged, basically, on income obtained from Brazilian sources by foreign residents, and which include, inter alia : (i) income received from the rental of foreign aircraft; (ii) commissions paid to agents by exporters; (iii) remittance abroad exclusively for payment of promotional and research expenses; and (iv) hedging operations, etc.
Dividends or profits paid or credited by a Brazilian legal entity to an individual or legal entity domiciled or headquartered abroad are not subject to any withholding income tax.
Income tax shall be withheld at source at the rate of 15%, for amounts paid, credited, delivered, used or remitted, from a source located in Brazil, to beneficiaries domiciled abroad under the nature of interest, commissions, discounts, financial expenses and the like.
Income from the rendering of technical services, technical and administrative assistance and similar services rendered in Brazil and received by an individual or legal entity resident or domiciled abroad, shall be taxed at source at the rate of 25%.
Finally, the remittance of any amounts abroad as royalties and/or payments of rights of any kind is also subject to a withholding income tax at the rate of 15%.
In view of the above, the principal withholding income tax rates applicable in Brazil, in the absence of a lower rate available under a prevailing treaty to avoid double taxation are the following:
(a) Dividends 0
(b) Capital Gains 15
(c) Interest 15
(d) Royalties 15
(e) Services 25
Finally, Brazil has entered into tax treaties with the following countries: Austria, Argentina, Belgium, Canada, China, The Czech and Slovak Republics, Denmark, Ecuador, Finland, France, Germany, Holland, India, Italy, Japan, Korea, Luxembourg, Norway, Philippines, Spain and Sweden. There is therefore no Double Taxation Treaty between Switzerland and Brazil.
(v) Import, Production, Sales, Circulation and other Taxes
Besides the above mentioned taxes, the main taxes that may be imposed on a given activity of a Brazilian company are listed below:
a) Import tax (Imposto de Importação – “I.I.”): imposed on transactions of import of goods and calculated over CIF price.
b) Tax on manufactured goods (Imposto sobre os Produtos Industrializados – “I.P.I.”): this is a sort of “value-added tax”, which is due at the moment the manufactured goods leave the factory and calculated over its sales price. I.P.I. is a federal tax charged on industrial products at selective rates, which vary according to the class of products per the classification in the table included in the I.P.I. tax law.
The I.P.I. depends on the fiscal classification of the goods in the CNM – Common Nomenclature of Mercosul, which is based on International rule and listed in the CET- Common External Tariff, varying from 0% to 30%.
In the case of imported products, I.P.I is due at the moment of the customs clearance and the tax rate is calculated on the price of the product added to the amount of the I.I. paid. The export products are currently I.P.I. free.
In addition to I.I. and I.P.I., imports will also be subject to a state tax called Tax on the Circulation of Goods and Services (Imposto Sobre Circulação de Mercadorias e Serviços – “ICMS”). This is a “value-added” tax on the circulation of goods and services. The rate of tax is determined by each State and varies depending upon the destination of the goods and services. Thus, varying rates can exist if the goods circulate within the same state or outside the originating State. On the circulation of goods within the Federal District of Brasília the rates vary from 12% to 25% depending on the product.
Services are also subject to a Municipal Service Tax (Imposto sobre Serviços – “ISS”). The basis for calculation of the tax will be the price of the service. In the Federal District of Brasília the ISS rate varies from 0,5% to 5%.
It is important to note – and this may be of special interest for companies exporting to Brazil – that Brazilian legislation grants a export incentive which allows the suspension, exemption or restitution of taxes relating to the import of some products which will be used in the production of any good that will be exported. This regime, known as drawback, consists of the suspension, exemption or restitution of II, IPI and ICMS, amongst others.
The Brazilian Civil Code (“CC”) determines that anyone causing damages to other individuals or entities as a result of voluntary actions or omissions, negligence, imprudence or malpractice shall make good the damages so caused.
There is however, a much more onerous responsibility affecting the supplier in addition to the above-mentioned civil responsibility. This additional and more onerous responsibility is determined by the Code of Consumer Protection, in accordance with which those denominated as “agents of consumer relations”, including the manufacturer, the contractor, the businessman, and the importer or distributor of imported products, are liable to the consumer, irrespective of fault, for injury caused by use of the product.
Given the limited time available, I shall not extend my comments in relation to this matter. However, it is important to note that product liability under the Code of Consumer Protection is not restrictive and lends itself to flexible interpretation, thereby extending significant protection to the consumer. Liability rests with the most identifiable party to the transaction resulting in consumer harm. In most cases, liability is held by the producer, that is the manufacturer of the finished product or its component parts or the supplier of the raw materials used. If the producer or importer of the product is not identifiable, other parties in the chain of distribution, such as the retailer, may be held liable. The purpose of this broad definition is to ensure that the consumer is protected in the event he is harmed. Finally, it is also important to note that the Code of Consumer establishes the joint liability of the manufacturer, producer, constructor, importer and retailer.
Brazil´s current antitrust legislation is composed basically by Law 8884, of 13th June, 1994, as amended by Law 9096, of 29th June, 1995, which contains provisions detailing violations of the economic order in terms of effects such as abusively exercising a dominant position or acts such as collusive behaviour or unfair business practices.
Specifically, it determines that a violation of the economic order is considered to be any act, regardless of the form or the non-fault of the offending party, that is intended to produce or is likely to produce, even though unconsummated, any of the following anti-competitive effects: (i) to limit, defraud, or in any other manner cause harm to free competition or free initiative; (ii) to dominate relevant markets of goods or services; (iii) to increase profits arbitrarily; and (iv) to exercise a dominant position in an abusive manner.
It is important to note that the law holds the company and each of its officers jointly liable for violations of the economic order. Companies or entities within the same economic group, either “de facto” or “de jure” shall also be held jointly liable for violations of the economic order.
Penalties for violations of the economic order include fines ranging from one to thirty percent of the gross pre-tax revenue for companies. A personal and an exclusive fine may be imposed on managers who are directly or indirectly responsible for violations from ten to fifty percent of the fine imposed on the company. It is important to point out that the company cannot pay the fine which must be totally borne by the manager.
As far as monitoring mechanisms are concerned, the law provides that any act or agreement that has the effect of limiting or restraining competition or that results in control of a relevant market must be submitted to the Administrative Council for Economic Defence – CADE, which is the administrative body, with quasi-judicial functions, in charge of an antitrust enforcement in Brazil.
Finally, it is important to note that certain acts (such as mergers or incorporations, constitution of a holding company to serve as a vehicle for the exercise of control or any other form of company groupings that involve some form of economic concentration), depending on whether they result in a 20% share of the market, and on the registered annual gross sales of the participants (if it is equivalent to US$ 200 million) must be submitted to CADE, for clearance. As above seen, in recent years, Brazil has implemented a number of measures in a clear move towards a free market system. In so doing, it has erased any distinction between Brazilian companies of national capital and of foreign capital, granting them equal treatment under the law, and has liberalised very important sectors of its economy. The programme of privatisation implemented in Brazil so far is impressive and mechanisms designed to allow the consumer protection and to prevent antitrust policies have also been put into place.
Therefore, it is clear that Brazil´s foreign investment policies not only are non-discriminatory but also seeks to encourage companies world-wide to invest in Brazil.
Given however the peculiarities of the country, and also the fact that the Brazilian legal environment is highly volatile, where the law changes very often, it is essential that the above comments be taken as a general guide only and that any party interested in investing in Brazil seek detailed advice pursuant to its own business needs.
Graduated at the Law School of the University of São Paulo in 1983; undertook post-graduation course at University College London, University of London, in 1985-1986.