This supplement outlines the legal framework for establishing a business in Brazil, a country with one of the most important financial centres in the developing world. The author explains the principal legislation relating to foreign investment, taxation, immigration and other provisions essential for conducting business under Brazilian law.

Brazil is located in the east-central part of South America, where it borders almost all other South American countries except Chile and Ecuador. Brazil´s area of about 3,286,488 square miles covers almost 48 per cent of South America. Brazil´s seaboard extends some 7,408 kilometres along the Atlantic Ocean. Major ports are Santos, Rio de Janeiro, Tubarão and Paranaguá.

Brazil is comprised of 26 states plus its capital, the Federal District of Brasilia. The country is divided geographically into five different regions: North, North-East, South-East, South and West-Central.

The South-East region is the most prosperous and most highly industrialised, and this is where Brazil´s major cities are located:

São Paulo 10,063,000 inhabitants
Rio de Janeiro 5,603,000 inhabitants
Belo Horizonte 2,114,000 inhabitants

The North-East is the least developed region, owing in part to its physical characteristics. In addition, there is a lack of investment in the North-East because the South and the South-East have better infrastructures for industry and manufacturing. This situation is likely to change as the South and South-East become more and more saturated.

Brazil´s soil consists mostly of settled earth, with mountainous areas higher than 900 metres representing only about 7 per cent of the total surface area. Most of Brazil´s terrain is composed of plateaux and prairies. Both the Equator and the Tropic of Capricorn cross Brazil, making the climate primarily warm and tropical with an annual average temperature of 20C (68F). The population of Brazil is currently estimated at 156,840,000 inhabitants, and that number is likely to double within the next 35 years. The population is young; 65 per cent of Brazilians are under 30 years old. The country has a population density of 46 inhabitants per square mile, with 73.8 per cent of the population living in urban areas.

Brazil is a Federal Republic and has had eight Constitutions. The first Constitution was signed in 1824, and the current one was enacted in 1988. The 1988 Constitution is regarded as the most democratic in Brazilian history. The Federal Government has three branches: the Executive, the Legislative and the Judiciary. As a former Portuguese colony, the official language is Portuguese, which is spoken by 97 per cent of the population. Amerindian languages are spoken by 2 per cent of the population and 1 per cent speak other languages.
Foreign investment in the domestic securities market is permitted provided foreign investors use one the following vehicles: investment companies; investment funds; managed portfolios of individual or legal entities resident abroad; and managed portfolios of institutional investors located abroad. Brazil has at present one of the most important financial centres in the developing world, in terms of market capitalisation, which was US$160 billion in May 1994 and US%150 billion in May 1995. The São Paulo Stock Exchange, BOVESPA, is at present the largest stock exchange in South America, and responsible for approximately 85 per cent of the total national share markets. The rest is divided among eight other regional stock exchanges, the largest of which is the Rio de Janeiro Stock Exchange. The two exchanges are responsible for about 95 per cent of all trading in Brazil and are privately owned by the member firms.

The Sao Paulo Stock Exchange was founded in 1890 and today has 87 members, 40.authorised brokerage firms and approximately 555 listed shares. The Rio de Janeiro Stock Exchange was founded in 1845 and has about 77 member brokerage houses. Fifty shares account for approximately 80 per cent of market capitalisation. The largest 10 shares in market capitalisation, on which trading is concentrated, account for about 60 per cent of the total market capitalisation. Clearing in both stock exchanges is effected by independent companies. In São Paulo, the clearing of operations is ef fected by CALISPA (“Caixa de Liquida_ao de São Paulo”), which is related to BOVESPA.

Both the São Paulo and the Rio Stock Exchanges publish share price indexes, the IBOVESPA and IBV, respectively. The IBOVESPA consists of 55 shares representing about 48 per cent of the aggregate value of 80 per cent of the cash volume traded in the previous 12 months, re-evaluated every four months. The IBOVESPA was created in 1968 and has not suffered any methodological alteration since. The IBV index is weight-oriented based on a hypothetical portfolio and includes 50 shares. Trading at BOVESPA is both live and electronic via the computer-assisted trading system (“CATS”). During 1994, the average daily volume of trade in the Brazilian stock exchanges was US$360 million with 542 listed companies.

The markets are self regulated by the stock exchanges, but there is a government authority, the Securities Commission (“the CVM”), under the Ministry of Finance and the National Monetary Council (“the CMN”), vested with powers to oversee the markets; suspend participants; suspend shares; authorise issues; audit public companies and exchanges; apply sanctions; and promote liquidation. The stock exchanges are considered to be auxiliary bodies of the CVM.

Brazilian stock exchanges operate in the spot, options and forward markets.

On the spot market, as happens elsewhere, the securities are bought for immediate delivery against the apposite payment. Derivatives now answer for about 20 per cent of the total turnover of BOVESPA. With respect to the options market, the puts and calls are negotiated for a given price, for a certain date. Buyers will pay a premium to the writer, as soon as the transaction is made. The buyer will then have the obligation to either sell or buy the shares by the exercise price of the option. In the event the option is a put, the exercise will only be possible on the exercise date. In the event the option is a call, the exercise will be possible at any time until the exercise date. Naturally, the payment of the exercise price will only take place if the option is exercised. Sellers of options are required to deposit with the stock exchange the shares or an initial margin equal to twice the amount of the premium of the option or such greater amounts as the stock exchanges may establish, and they are required to make daily settlements of the respective positions. Buyers are not required to make deposits.

The forward operations are transactions by which seller and buyer agree on the value of a purchase and sale of shares to be effected in the future. The seller must deposit 100 per cent of coverage of the transaction. The buyer must deposit, as margin, an amount that may vary from 20 per cent for the shares of greater liquidity to 100 per cent for those of more restricted liquidity A variation of the stock forward operations are tlie so-called financial futures.

The Brazilian stock exchanges do not allow the concentration of positions on the risk markets and closely follow up the operations, both on-line and off line. Transactions that do not conform to the rules are cancelled and bids of the positions are made in 15 minutes, one hour, 24 hours or 48 hours thereafter. At BOVESPA, the structure of liquidation of the transactions functions as the primary security mechanism, in which it establishes the solidarity of all clearing agents and counts on a fund of liquidation of operations. All clearing agents have individual operational limits.

Much of the growth of the Brazilian stock markets in the 1990s is due to the easing of restrictions to foreign capital. Leveraged by foreign capital incursions, the Brazilian markets rose, between 1991 and early 1994, approximately 1,000 per cent in US dollar terms [sic].
In June 1995, the Brazilian Mercantile and Futures Exchange (“BM&F”), based in São Paulo and founded in 1986, overtook the U.K.-based London International Financial Futures & Options Exchange (“LIFFE”), to become the third largest derivatives exchange in the world, after the U.S.based Chicago Board of Trade (“CBOT”) and the Chicago Mercantile Exchange (“CME”), having dealt with about 72 million contracts in the first semester of 1995. Since its inception, BMF has basically serviced the local market, has grown at an average of 60 per cent a year and does not deal in share options, which are admitted for trade by both the São Paulo and Rio de Janeiro stock exchanges, or in spot contracts.

In financial terms, the items which are most negotiated at the BM&F are those contracts which deal with interest rates. In terms of commodities, the BM&F basically specialises in contracts which deal with the trade of gold, live cattle, coffee, soya beans and sugar.

The so called “Operations Statute” of the BM&F establishes that in the futures market, the following conditions must be observed:

– each transaction must be effected by a seller client and one or more buyer clients; and
– the transaction must be contracted for the terms of 30, 60, 90, 120, 150 or 180 days; however, the buyer may anticipate the liquidation of the contract.

The BM&F maintains an Operations Liquidation Fund. This Fund is formed by resources of the Clearance Members (banking sureties, public and private titles, credit insurance, currency, gold and other assets) with the purpose of guaranteeing the liquidation of operations. The Member who does not provide guarantees or does not liquidate contracts registered under its responsibility will be debited, in the corresponding amount, in its respective Fund account; the debited amount will be deposited within a certain term as established by the Administrative Council.

Notwithstanding the above, BM&F still maintains a Guarantee Fund with the purpose of assuring to the clients of the commodities, agricultural goods and cotton brokers the restitution of price differences resulting from (1) culpable damage or inaccurate execution of orders accepted for trading on the floor of the exchange; (2) inadequate utilisation of amounts received for the purchase or resulting from the sale of commodities and financial assets. The Guarantee Fund, it should be emphasised, also assures the liquidation of operations effected within the BM&F by the abovementioned brokers on their clients account.
Because of Brazil´s adherence to the Transitory Provisions of Article XIV of the Bretton Woods Agreement, which created the International Monetary Fund (“IMF”), technically, the Brazilian currency is a non-convertible currency. In accordance with Article 22, inserts VI and VII and Article 48, insert XIII of the Brazilian Federal Constitution of 1988, federal legislation approved by the National Congress (Legislative Power) is a prerequisite to the imposition of exchange rules and monetary controls. The authority of the National Congress to legislate on exchange matters has been directly exercised through Law 4.131 of September 3, 1962 (as amended by Law 4.390 of August 29,1964), which regulates foreign capital in Brazil.
Law 4.131 defines foreign capital as “any goods, machinery and equipment that enter Brazil with no initial disbursement of foreign exchange, and are intended for the production of goods and services, as well as any funds brought into the country to be used in economic activities, provided that they belong to individuals or companies resident or headquartered abroad”. This can take the form of:

(1) Currency investments. No preliminary official authorisation is required. Funds must be remitted to Brazil through a financial institution authorised to deal in foreign exchange in Brazil. Proceeds may be used to subscribe or purchase shares in Brazilian companies. The resulting investment must be registered with the Central Bank.
(2) Investments by conversion of foreign credits. The Central Banks prior authorisation is required. This investment is also subject to registration with the Central Bank within 30 days of its capitalisation.
(3) Capital contribution tbrough the import of goods without exchange cover. Subject to the prior approval of the Central Bank and the Foreign Trade Department of Banco do Brasil SA (“DECEX”)
(4) Loans. There are two types of loans which may qualify for registration with the Central Bank: cash loans or credit loans for importing goods. The former is characterised by the entry of cash into Brazil and the latter by credit abroad to pay for the import of machinery or equipment. Prior to taking out a loan, the Brazilian borrower must apply to the Central Bank for approval. The application is made indicating the basic details of the agreement, including the amount, repayment terms and applicable interest rate. The Central Bank has complete discretion regarding loan approval, but approval usually will be granted as long as the details given comply with the Bank´s requirements in existence at the time of application. The minimum period for repayment may vary according to Central Bank regulations. At this time, the minimum period for repayment is 24 months. However, one must bear in mind that foreign transfers into Brazil as loans for a term of less than six years will be subject to IOF (the Brazilian Tax on Financial Operations and Exchange) at a rate between 1 and 5 per cent. The interest rate must be considered “reasonable” in the judgment of the Central Bank and there is a withholding tax of 15 per cent at source on the remittance of interest, which may be paid either by the creditor or by the debtor. An exerription or reduction in the withholding tax may be obtained when a loan enters the country for a period of eight years or longer. The granting of this exemption is determined by the Ministry of Finance, at its sole discretion, based also on whether the loan will result in an effective reduction in the financial operating costs of the borrowing company and on whether the borrowing company´s activities are in the national interest and thus important to the national economy.

Foreign capital is registered in the currency of the original investment 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-office. In special cases, subject to the Central Bank´s prior approval, foreign capital may be registered in the currency of the country of origin of the goods or financing. Once the foreign capital is registered and the relevant Certificate of Registration (“C.R.”) is duly issued by the Central Bank, the foreign investor will be entitled to remittances of foreign currency outside Brazil, relating to principal and interest payments, within the limits specified in the C.R., subject to any temporary restriction that may be imposed by the Central Bank at the time the remittances are due. In this respect, the Central Bank is empowered to disallow remittances abroad for a limited time, including those in the form of repayment of capital, in the event of severe impairment of the balance of payments or if such impairment is foreseeable. Subject to the above mentioned restrictions, remittances of capital/principal and dividends/interest may be effected by the simple presentation of the C.R. issued by the Central Bank to any institution authorised to operate in foreign exchange in Brazil
Foreign investments that are not registered with the Central Bank cannot be repatriated in foreign currency from Brazil. However, provided a non-registered investment is supported by the necessary documentation, it is enforceable against the Brazilian party in Brazilian currency.

Any proceeds in Brazilian currency may be freely remitted outside Brazil. In the event that the remittance of Brazilian currency exceeds the equivalent of US $ 10,000 it has to be effected by means of bank transfers´ to be effected by banks authorised to deal in the Brazilian floating rates exchange market.”

Euroreal is the general designation applied to amounts of Brazilian national currency existang abroad in cash or held by aliens or non-residents in Brazil in deposit with banks operating with such funds.

Exchange operations involving Euroreais entered into outside Brazil will be governed by the laws of the country where such an operation takes place, in accordance with the principle lex loci actus. Brazilian law accepts the principle of the extraterritorial inapplicability of its body of legislation.

Many conditions imposed on remittances abroad by Law 4.131/62 (as for instance the need of prior registration with the Central Bank) are not applicable to payments in Euroreais. This is because Law 4.131/62 covers only foreign investments and/or remittances made in foreign currency. It therefore has no effect in relation to transactions in Euroreais.
Brazilian commercial law provides for several types of companies: unlimited partnership (Sociedade em Nome Coletivo), limited partnership (Sociedade em Comandita Simples), unlimited partnership between capital and labour (Sociedade de Capital e Industria), limited partnership by shares (Sociedade em Comandita por açoes), limited liability company by quotas (Sociedade por Quotas de Responsabilidade Limitada) and company by shares (Sociedade Anonima).

The law gives corporate status to these companies which thus become legal entities separate from their partners. Apart from the types of companies mentioned above, Brazilian commercial law also provides for other forms of association in the form of joint ventures and consortia which do not have a legal status separate from their participants; these do not merge their identities into one legal entity but rather continue to contract rights and obligations individually, although for the common benefit of the group.

The most frequently used corporate forms are the Sociedade Anonima (“SA´ ) and the Sociedade por Quotas de Responsabilidade Limitada (“LTDA´). This is due to the fact that in both cases the participants have limited liability The other corporate forms are rarely used, but they can sometimes fulfil specific purposes.

There are two kinds of public registrations: the commercial registration performed by the state Board of Trade, and the civil registration performed by a notary public office. All companies, whether commercial or civil, must be registered with one of these registries according to their legal nature.

The Sociedade Anonima (“SA”)

An SA is fundamentally a commercial legal entity, with its capital stock represented by shares. Liability of its shareholders is limited to the amount of the issued share capital subscribed to or acquired by them. The open capital SA is capitalised by public offer and subscription and the closed capital SA obtains its resources privately Either type of SA may be organised as an authorised capital corporation. An authorised capital SA can be incorporated with a subscribed capital ofless than the authorised share capital established in the byelaws. Although the incorporators establish a special authorised capital level, the company can function with a capital level lower than that which is authorised. The authorised capital level may then be gradually achieved by issuing shares without the need for any further approval by a general meeting ofshareholders or any change in the byelaws. There are four requirements to establish an SA:

– subscription by at least two persons of the entire allotted share capital;
– payment in cash of at least 10 per cent of the value of the subscribed capital;
– deposit in cash with the Banco do Brasil SA, or any other such establishment as authorised by the Brazilian Securities and Exchange Commission, of part of the paid-up capital stock received in cash;
– filing of acts of incorporation with the Commercial Register.

The capital of an SA may be increased by – resolution of a shareholders´ ordinary general meeting to adjust the monetaiy expression of its value for inflation – resolution of a shareholders´ ordinary general meeting or of the administrative council, subject to the provisions of the byelaws in relation to capital increases, and where the issue of shares is within the limits of the authorised share capital established by the byelaws; – conversion into shares of debentures or founders´ shares and by the exercise of the rights conferred by subscription warrants or by stock options; or

– resolution of an extraordinary general meeting of shareholders called to decide on a change in the byelaws when an authorisation for increase does not exist, or where the limit of the existing authorised capital has already been reached.
– The capital of an SA may be decreased:
– for the purpose of reimbursing a dissenting shareholder;
– on the forfeiture of shares where the relevant holder has failed to meet subscription obligations;
– when the company capital has been eroded by losses or when the capital stock exceeds the amount necessary to achieve the company objectives.

There are common, preferred or fruition shares, depending on the rights they confer to the holders. 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. All shares must be registered. The ownership of shares is completed by the register of the name of the shareholder in the nominal share register. Brazilian law does not permit bearer shares. Shares can be either with a value or without par value. Shares with a par value always have a predetermined value expressed in money In spite of their name, the shares without par value do have a price, their issue price. This price does not appear on the certificates however. The issue price of shares without par value is set by the founders at the time the company is formed, or by a shareholders´ general meeting or the administrative council at the time of a capital increase. Special rights are reserved for holders of preferred shares. These include: priority in the distribution of dividends, priority for capital return with or without premium, or both.

Shareholders may enter into shareholders´ agreements in relation to the purchase and sale of their shares, purchase of preferences or voting rights. The authority to call ordinary general meetings of shareholders normally rests with the administrative council or with the board of directors, but the law also foresees cases in which the fiscal council, a group of shareholders or any shareholder may call a shareholder meeting. Notice of the meeting is given by publishing an advertisement at least three times in the federal or state official gazette and in a widely circulated newspaper. The ordinary general meeting of shareholders will be installed, on first call, with the presence of shareholders representing at least one-quarter of the capital with the right to vote, except in the case where the ob_ective is to amend the byelaws, when the presence of shareholders representing two-thirds of the voting shares will be necessary On second call, irrespective of the objective, the meeting may begin with any number of shareholders present.

The SA may be managed by a board of directors and by an administrative council or only by a board of directors, depending on what is specified in the byelaws.

The administrative council is a body for collective decisionmaking. It is mandatory in public open-capital and authorised capital SAs and optional in closed capital SAs. Its members must reside in the country and own shares in the company. It must be composed of at´least three members, who are elected by the ordinary general meeting of shareholders and who can be removed by a shareholders´ meeting at any time. Among the responsibilities of the administrative council are: to establish the general business policy of the company, to elect and dismiss the directors, to supervise the directors´ conduct of the business, to examine the company books and papers, to request information in relation to contracts entered into or in the process of being negotiated, and any other acts related to the company´s business.

The board of directors is the executive body of the SA.Thus, it is responsible for the day-to-day operations of the company. The board of directors is composed of at least two directors, who may be shareholders or not, and who must be individuals resident in the country. Directors may be elected and removed at any time by the administrative council, or, in the absence of such council, by the ordinary general meeting of shareholders. The maximum tenure for directors is three years.

The audit council is a body elected by the ordinary general meeting of shareholders on a permanent or temporary basis, to police company operations. It is installed when shareholders feel the need to supervise closely the acts of management. It is composed of a minimum of three and a maximum of five members, with an equal number of substitutes. The members of the council need not be shareholders.

The financial reporting period of an SA is one year, the date of termination of which will be established in the byelaws. The financial statement of a company shows its financial position and reflects changes which occurred during the last period. In the case of open capital SAs the financial statements must be audited by independent audit firms or by independent auditors duly registered with the Brazilian Securities and Exchange Commission. The auditing of the statements of a closed SA is optional.

The local dissolution of an SA may be by court decree or by administrative decision of the company. The liquidation of company assets precedes dissolution in order to pay off the company´s outstanding debts. Any remainder after settling the debts is paid to shareholders proportionally according to their investment and according to the rights intrinsic to the class of stock held. The liquidation may be voluntary or imposed by judicial action.
The LTDA is often preferred by those who intend to establish a company because of the following characteristics:

– simplified formation process;
– freedom to use the firm name or denomination, wich means in effect that persons with signature power may sign for or on its behalf;
– quotaholders liability limited to the total of the company´s capital; and
– the LTDA is not subject to the considerable costs of publishing balance sheets and other relevant corporate acts incurred by an S.A.

The LTDA is established by contract and it has only one class of partners, the limited liability quotaholders.Until capital is fully paid-up, each quotaholder is liable for the entire 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.As there is only one kind of partner, any quota holder is permitted to manage the company.The articles of association specify who will manage the company´s business.Delegation of managing power is allowed.In principle, the managing quotahoder and the deligated manager are not responsible for the liability contracted in the company´s name.Nevertheless, managers will be personally liable to the company and to third parties for acts wich exceed the limits of their authority and for acts wich violate laws or the company bylaws.Such irregularities can provide grounds for the removal of the manager by majority vote of the quotaholders.The aritcles of association may be amended by resolution of the quotaholders in order to:

– increase or decrease the capital;
– extend the duration of the company;
– change the company´s name;
– change the company´s registered office ;
– admit new quotaholders;
– recognise the withdrawal of a quotaholder; or
– remove a former quotaholder´s name from the list of partners.

The capital of the LTDA is divided into quotas. The quota represents the amount in money, credits, rights or assets which the quotaholder contributes to the formation of the company. The quotas are registered in the articles of association and are not represented by certificates. Thus, any transfer of title will be made by means of an amendment to the articles signed by all of the quotaholders or, at least, the quotaholders who represent the majority of the capital. If the continuation of the participation by the quotaholders´ heirs is allowed by the articles of association, the death of one of the quotaholders does not, by itself, bring about the dissolution of the LTDA.
Income tax

There are three bases on which income tax is assessed for legal entities:

– on the real profit;
– on the estimated profit; and –
– on the imputed profit

Article 190 of RIR/95 (income tax legislation) determines that the following legal entities are required to compute their tax assessment based on real profits:

– those with gross revenue, including capital gains, exceeding R$ 12 million in the calendar year;
– open capital companies;
– those whose activities relate to commercial banks, investments, developments, public savings banks, credit institutions, financing and investments, securities, leasing companies, private insurance companies, capitalisation, private security;
– realty, building and civil construction companies;
– those with overseas partners or shareholders;
– controlled or controlling companies;
– companies who participate, directly or indirectly, in public entities;
– branches, agents or representatives of activities located abroad;
– those who were incorporated, merged or split off in´ the calendar year;
– those with tax benefits or incentives based on export profits;
– those with profits, income or gains arising abroad.

Article 521 of RIR/95 states that legal entities will have the possibility to opt for taxation based on the estimated profits, in the event their profits are R$12 million or less.Service providers of the legally regulated professions (Decree-Law 2.397/87) can opt for taxation based on real profit. Other service providers such as leasing, insurance and factoring companies are subject to tax based on estimated profits.

The main distinction between the basis of real and estimated profits lies in the fact that under an estimated basis an entity calculates its monthly income tax liability according to an estimated profit computed on gross revenue. Real profits represent the net accounting profits for the period, after making certain adjustments permitted in the tax legislation.

In the computation of estimated profits, the legislation specifies the appropriate percentage to be applied over gross revenue to determine the taxable profit. The abovementioned percentage varies: for companies in general it is 8 per cent while for banks and financial activities it is 16 per cent. The percentage for fuel suppliers is 1.6 per cent, for transport services 16 per cent and for real estate brokers, among others, it is 32 per cent. Other examples are set out in the law. The 15 per cent rate of income tax will be applied to results (tax basis). For instance, a bank has an operating income of R%1 million. By applying to this amount the percentage of 16 per cent, the resultant R_160,000 will be considered as estimated profits, on which tax will be calculated at 15 per cent.

Article 538 of RIR/95 regulates the income tax based on arbitrated profits. Arbitrated profit is a basis for assessing taxation utilised by the taxation authorities when legal persons, taxable based on real profits, fail to fulfil their obligations in determining such real profits. Examples include not properly maintaining accounting records or failing to disclose gross profits.

When the National Treasury determines the taxation on imputed profits, the most important fact is the absence of gross revenue determination. If the legal entity does not know its gross revenue value, this amount will be imposed by the authorities, which can represent an increase of 350 per cent on the real gross revenue value. However, if the legal entity kno_vs its gross revenue value (for instance R$l million), to this amount is applied the percentage of 15 per cent (R$ 150,000). To this result is applied a penalty of 20 per cent (which produces a total of R$180,000). This is the due tax.

Additional income tax
Law 9.249/95