ACKNOWLEDGMENTS. João Paulo Fagundes, Founding Partner Rayes & Fagundes Advogados Associados

Transcription

1

2 American Chamber of Commerce for Brazil - AMCHAM International Affairs Department Brazil, 2012/2013

3 ACKNOWLEDGMENTS The American Chamber of Commerce for Brazil, being the largest Amcham outside the United States is constantly serving its members by building bridges for Brazilian businesses worldwide. Our foreign investment attraction efforts have also been a key leading point for Amcham. The How to Series is part of this initiative. With the support of some of our corporate members we are putting together strategic information on the most various aspects of doing business in Brazil. As part of th BRICS (Brazil, Russia, India, China and South Africa) and representing the 6 largest economy of the world, Brazil has clearly demonstrated its importance in the global market. The country s business environment as well as foreign investment numbers, despite international crisis, continues very positive. Medium and high classes are increasing, which creates a solid internal market and contributes to maintain good results in the economy. The 2014 FIFA World Cup has been estimated in USD 56.8 billions and the 2016 Olympics in USD 19.3 billions in investments. These events have had an impact on direct investments in Brazil and in infrastructure projects needed to hold them in the country. It is now more than ever a strategic time for businesses opportunities in Brazil. We welcome you and hope that the information you are about to read serves you best. Gabriel Rico - CEO, Amcham Brasil Rayes & Fagundes Advogados Associados is a full service law firm recognized for its expertise and experience in representing and advising foreign companies and individuals in Brazil. Over the years, we have learnt that it is important not only to provide specific legal support, but also to help our clients understand the whole environment in which they will make their decisions. The idea underlying this brochure is providing foreign investors and entrepreneurs with an overview of the main legal aspects for establishing a company or simply doing business in Brazil. Our relationship with Amcham is a long-standing one and comes from the great number of US companies and individuals we have been advising since the firm s inception. João Paulo Fagundes, Founding Partner Rayes & Fagundes Advogados Associados Lia Esposito Roston, Partner Rayes & Fagundes Advogados Associados

4 LAW

5 CONTENT 01 INTRODUCTION POSSIBLE BUSINESS STRUCTURES THE BRAZILIAN SUBSIDIARY THE SOCIEDADE LIMITADA THE SOCIEDADE ANÔNIMA INVESTING IN BRAZIL PRIVATE EQUITY INVESTMENT FUNDS (PE'S) VISAS FOR FOREIGN ADMINISTRATORS RELATIONSHIP WITH EMPLOYEES AND CONTRACTORS TAXATION OF THE BRAZILIAN SUBSIDIARY DIVESTMENT AND COMPANY DISPUTES ABOUT OUR SPONSOR 37

6 01. INTRODUCTION Brazil comprises almost half of South America (47.3%) with an area of 8.5 million square kilometers and a multicultural population with over 190 million inhabitants. The Federative Republic of Brazil consists of 26 States and its capital - the federal district of Brasilia. Initially a Portuguese colony, Brazil is currently a nation with a solid democracy which adopted the presidential system as its political model. FEDERAL REPUBLIC OF BRAZIL Brazil achieved one of the major rates of economic growth during the Twentieth Century. An economy that had initially been rural, has become predominantly industrialized. Brazil is member of the World Trade Organization and is part of the International Monetary Fund and the World Bank. Brazil is the 6th largest economy in the world bearing a Gross Domestic Product (GDP) of US$ trillion, per data divulged in 2011 by the Brazilian Institute of Geography and Statistics (IBGE). The Brazilian GDP per capita achieved US$ 12, The major growth observed was obtained both due to the increase in consumption and in investments. In 2011 exports surpassed US$ 256,040 million with annual growth of 26.8% and their main destinations were Asia (US$ 76,697 million), European Union (US$ 52,946 Flag Coat of Arms million), South America and Caribbean (US$ 29,293 million, excluding MERCOSUR), the MERCOSUR (US$ Capital Most populous city Official language Brasília São Paulo Portuguese 27,853 million), the United States (US$ 25,942 million), Middle East (US$ 12,261 million), Africa (US$ 12,225 million), and Eastern Europe (US$ 5,174 million). LAW Government Currency Federal Republic Real Regarding to imports, in 2011 the total amount surpassed US$ 226,243 million, with annual growth of 24.5%, being 06 US$ 70,076 million from Asia, US$ 46,416 million from the

7 European Union, US$ 34,225 million from the United States, US$ 19,375 million from South America and Caribbean (excluding MERCOSUR) and US$ 18,435 million from MERCOSUR, US$ 15,436 million from Africa, US$ 6,141 million from Middle East, and, finally, US$ 5,175 million from Eastern Europe. Brazilian exports continue to grow in 2012, reaching a total of US$ 55,080 million in the first quarter of 2012, representing a growth rate of 7.51% over the same period of 2011, while imports reached US$ 48,087 billion. Thus, the trade balance registered a surplus of US$ 2,440 million in the first quarter of The volume of Foreign Direct Investment (FDI) destined to Brazil grew 40% from 2007 to 2010, a rate considerably favorable when compared to this kind of investment in the world, which has decreased 36.9% due to the international financial crisis, as per report prepared in 2010 by the United Nations Conference on Trade and Development (UNCTAD). As a result, Brazil became the Latin American country which received most of the foreign investments in the period, around US$ 48,4 billion. This record in capturing foreign resources led Brazil to surpass other emerging Latin America economies, such as Chile and Mexico, and Asian economies. Additionally, Brazil has surpassed other maturity economies as Germany and France. Indeed, Brazil received in 2010 US$ 48,4 billion of FDI, while Mexico and Chile received US$ 18,7 billion and US$ 15 billion respectively. France and Germany received during the same period FDI equal to US$ 33,9 billion and US$ 46,134 billion respectively. In accordance with the survey of UNCTAD, Brazil is one of the most attractive economies for the direct foreign investments. Also, countless global players entered the Brazilian market where they operate under equitable conditions in relation to their domestic competitors. The Government and the Brazilian business executives have engaged themselves in the expansion and modernization of the Brazilian economy. This step has encouraged the entrance of bulky foreign investments and has led to the increment of international trade. In 2011, the credit rating agency Standard & Poor's raised the long term rating of Brazil from BBB- to BBB. Moody's, in 2011, has modified the investment rate of Brazil from Baa3 to Baa2 with a positive perspective.this boost shows the great maturity of the Brazilian companies, which has been proven by the improvement of the fiscal and foreign debt and by the perspectives of economic growth. BM&F BOVESPA is Latin America's largest securities stock exchange market. In 2011, the daily average of BOVESPA market was US$ 3,8 billion. The foreign investment represents 39% of the total volume traded in BOVESPA. Moreover, BOVESPA is the third largest stock exchange market in the world. The development of the stock exchange clearly shows the evolution that has been set forth in the Brazilian capital markets and the huge attraction of foreign investments. HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL 07

8 Among other factors, the elevation of the number of investments in Brazil, the systematic drop of real interest rates, productivity gains, a permanently low inflation rate, and the strengthening of companies have generated an enormous trading and investment flow in favor of Brazil over the past years. In this sense, the interest of foreign investors in Brazil has grown significantly, and to approach the main legal aspects involved in the establishment of a new company in Brazil is a matter of paramount importance. 08 LAW

9 02. POSSIBLE BUSINESS STRUCTURES First of all, it is important to mention the possible Foreign investors prepared to really increment their business structures that can be adopted in order that the participation in the Brazilian market, yet without foreign investor partakes of the positive results of the establishing a company in Brazil, may opt for the Brazilian economy. appointment of a commercial representative, a distributor or a franchisor. To formalize any of the latter employments The most simple business structure that can be adopted by it is necessary to be cautious, being indispensable to sign the foreign investor is the exportation of products or an agreement which clearly describes the rights and services to Brazil without hiring a representative or setting obligations of each party. In general, the Brazilian up a company in the country. The mentioned structure is legislation protects the commercial representative, the usually used by the investors who intend to try the Brazilian distributor and the franchisor, granting them several legal market prior to making a more firm investment decision. mechanisms for their defense in case any arbitrary There is less commitment of the capital and there are decision from the foreign investor with regard to their certainly fewer risks involved, though it is more difficult to scope of action, exclusivity suppression, the relationship s approach the clients. abrupt disruption, among others. POSSIBLE BUSINESS STRUCTURES Exportation Less Commercial Representation Commercial Distribution Franchise Liaison Commercial Partnerships With the Consortium Country Acquisition of equity Establishment of Brazilian Subsidiary More 09 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

10 The foreign investor that is not very familiar with the Brazilian market may also opt for a joint venture, allying its technology, know-how and trademark to the local knowledge and structure of the Brazilian partner. To carry out an undertaking in Brazil, a possible format of a commercial partnership is also the consortium between the foreign investor and the Brazilian partner. The consortium is not equipped with a legal personality and its participants respond only to the obligations they accounted for, without presuming solidarity. The consortium contract must be filed at the Brazilian Authorities (Junta Comercial), and it must envisage the purpose of the partnership, the duration, address and form of solution of disputes, obligations and responsibilities of each consortium participant, results allocation, accounting norms, representation, management fees and the form of deciding on common interest issues. The consortium format is widely adopted for major undertakings to be contracted by the Brazilian government, through public bids. Another alternative for the association of a foreign investor s efforts to a Brazilian partner is the acquisition, by the foreign investor, of equity in an already established Brazilian company, considering that the mentioned acquisition is preceded by a proper assessment of the contingencies that the Brazilian company might have and a sound negotiation of the profit and power division between the Brazilian partner and the foreign associate. In a partnership like this, it is essential to sign a quotaholder agreement and/or a shareholder agreement that encompasses the financial contributions promised, voting agreements, preference rights, tag along, drag along, and shares purchase and sales options, among other relevant issues, in order to protect the foreign investor s interests. Finally, the foreign investor may decide to open a Brazilian subsidiary; this alternative has proven to be very advantageous for the investor who really wishes to be established in the local market on a permanent basis and compete on equal conditions with Brazilian business executive peers. It is precisely about the opening of a new Brazilian company that this publication is about. 10 LAW

11 03. THE BRAZILIAN SUBSIDIARY THE COMPANIES, PERSONALITY AND LIABILITY LIMITS The carrying out of investments for the exploitation of the economic activity involves several legal forms. The Brazilian law reflects the principle of autonomous assets, separating the rights and obligations of the company from the members that form it. Thus, the integral assets of the commercial establishment belong to the company and not to its partners, and such assets may be used only to cover responsibilities attributable to the company as such company and its partners are considered different entities. As a rule, the personality of the company starts with the registration at the Brazilian Authorities (Junta Comercial), which makes the formation of a new company entity public and makes it possible to know about its existence among other economic agents. In order to make the company regular, it is essential that there is a written agreement between its partners with the adoption of the proper formalities (articles of association and bylaws). The agreement should be registered at the competent commercial board; otherwise the sanction will be the lack of liability limitation by the partners with regard to the companies' debts. It is important to note that there are norms and judicial decisions that exempt the application of the legal autonomy related to the company, enabling, in some situations, the pierce of the corporate veil and the liabilities of the partners' for the company's debts. Those situations normally involve the abuse of the legal personality characterized by deviating from the objective or by confusing the assets. As a general rule, the pierce of the corporate veil is most usually verified in circumstances such as failure to pay taxes by the partners in charge of the company's management, the ascertainment of settlement of payments of the company's labor debts, the consumers' protection and the repression of acts that are harmful to the environment. In sum, there is a tendency toward the restriction of the effects of the company's legal autonomy in the relationship with its employees, its consumers and with the government. 11 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

12 LAW 12 TYPES OF COMPANIES The companies may assume the form of a company with a collective name, limited partnership, share partnership, sociedade limitada or sociedades anônimas. Notwithstanding that the entrepreneurs can opt for any of the latter available types of company, only the sociedade limitada and the sociedade anônima have economic relevance and are worth being analyzed in this publication. The corporate capital of a sociedade limitada is divided in quotas. Each partner's liability is restricted to the value of his/her quotas, but all of them are jointly liable for the payment of the corporate capital. The sociedade anônima has its corporate capital divided in shares and is characterized by the shareholders' liability limitation to the value of subscription of their own shares. The sociedade limitada requires at least two partners and the amendments to its articles of association require the approval of at least 75% of its capital. The sociedade anônima, in turn, is operated by the decisions taken by the majority of the votes and may have one sole shareholder, in which it is considered a wholly-owned subsidiary. The sociedade limitada has some practical advantages, such as a more simple and flexible corporate structure, reduced costs, and less formality. It is extremely appropriate for the case of foreign partners with one common controller. However, if the company is detained by different groups of partners and/or it has plans to issue debentures, subscription warrants, commercial papers and other securities and stock, then adopting a sociedade anônima is more appropriate. The incorporation of a sociedade anônima is mandatory depending on the economic activities to be performed. For example, financial institutions must necessarily assume that regime. REGISTRATION OF COMPANIES AT THE BOARD OF TRADE (JUNTA COMERCIAL) Each State of the Brazilian Federation has a Junta Comercial, in charge of enrolling all the companies that exercise economic activities which comprehend the production or organized circulation of goods and services. The incorporation of companies in Brazil must be registered at the Junta Comercial of the State where their head-office is located, as well as where their branches are installed. Among the formalities enforced by the approval of the Junta Comercial for the filing request of the articles of association of the sociedade limitada (articles of association) and of the sociedade anônima (articles of incorporation and bylaws), we can find the designation by the foreign partner of a legal representative resident in Brazil with the power to receive summons and represent the foreign partner before government authorities. Said legal representative will be the person who signs, on behalf of the foreign partner, the

13 articles of association/bylaws of the Brazilian company and all its amendments, as well as the minutes of the partners' resolutions. The articles of association or bylaws of the Brazilian company to be established, duly signed by the partners and two witnesses, must contain the identification of the partners, the corporate purpose, the address of the head-office and of the branches, the subscribed corporate capital, the corporate bodies, the elected administrators, the decision process and quorums, the obligations and limitations imposed to the administrators, and the process for the resolution of disputes, among other information. The articles of association, the bylaws and their amendments must be presented at the competent Junta Comercial, enclosing the pertinent forms and payment slips of charges owed to the Junta Comercial. BOOKKEEPING Companies have the obligation to maintain their bookkeeping records under the responsibility of an accounting department with duly certified professionals. Bookkeeping has several purposes: management assessment, support for third parties' information interests and surveillance of compliance with legal obligations, mainly tax related obligations. Companies also have to compile periodical accounting reports. The legal requirements for the accounting reports of sociedades anônimas are more detailed than those for the accounting of sociedades limitadas. COMPANY NAME AND INTELLECTUAL PROPERTY The corporate name by which the company will be identified must be previously researched at the Junta Comercial because it needs to comply with the principle of novelty, as a company cannot use a name previously registered. Additionally, the company name must not cause any confusion and it has to be sufficiently distinctive to the others. The company name is an integral element of the company establishment and a property of the company's owner, being the exclusiveness of its use protected by the Brazilian law. It is relevant to mention that the foreign investor shall be concerned with not only the protection of the company name, but with the protection of possible intellectual property belonging to him/her, and that will be used by the future Brazilian company. Trademarks, industrial designs, utility models and patents already registered abroad or already being used by the foreign investor, and which will be exploited nationwide, must be registered at the National Institute of Industrial Property INPI in order to obtain exclusive 13 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

14 use protection in the Brazilian territory. In this respect, it is important to highlight that such protection in the Brazilian territory only takes place upon the effective enrollment at INPI. There are also more rigid restrictions imposed specifically on Brazilian companies controlled by foreigners for in activities such as newspapers and radio broadcasting, to purchase rural property, and to exploit mining on border zones. LAW CORPORATE PURPOSE The correct definition of the purpose of a company is extremely relevant because it is based on the corporate purpose that the specific applicable legal rules will be identified in the economic sector where the company acts. It is based on the corporate purpose that the company will be subject to surveillance, according to what is determined by the Regulatory Agencies and other Government Administrative entities, such as for example, the ANP National Oil Agency, the ANTT National Land Transportation Agency, the ANVISA National Sanitation Surveillance Agency, the ANS National Supplement Health Agency, the ANATEL National Telecommunications Agency, the ANEEL National Electric Power Agency, and the BCB the Central Bank of Brazil. Among the activities with a more accentuated regulation by the Brazilian authorities we could name as examples: the oil and gas industry, the research and mining of mineral resources, the health and general insurances, and the activities of banking institutions, telecommunications services, supply of electric power, the pharmaceutical and foodstuffs industry, and the railroad exploitation. Furthermore, the Brazilian environmental legislation interferes and limits activities that are potentially harmful to the environment, such as the battery and lightbulb industry, hydroelectric power plants, natural oil and gas industries, residue processors, among other activities that involve manufacturing and/or handling of toxic or hazardous material, deforestation of protected areas or potential risks to the environment. Finally, certain economic activities may take advantage of incentives and tax benefits from significant tax reductions. ADDRESS Determining the company's address is also an essential provision. Initially, it may be established in a venue for merely developing its representation functions, though with time and due to the type of economic activity developed, the need of allocation of a specific infrastructure will certainly be raised to better assist the Brazilian market. It is worth noting that there are regions in Brazil, such as the Region of the city of Manaus, in the state of Amazonas, which grant tax benefits to companies that are set up there. 14

15 These benefits vary from significant reduction of taxes to incentives to purchase property and to build industries. It s important to analyze the benefits of each state before establishing a company in Brazil. REGISTRATIONS, BUSINESS OPERATIONS PERMITS, LICENSES AND RECORDS As it was mentioned above, depending on activity sector and the location of the Brazilian company, certain legal specific rules are applicable, and, consequently, enrollments, operation permits and additional registrations are required by the enforcement authorities. However, in general terms, all companies must consult the municipality (city government) in accordance to the zone delimitation of the region where they are located in order to operate pursuant to the law and obtain the respective operation permits. They also need to register at the Federal Revenue Service; in order to obtain the CNPJ National Register of Legal Entities at the Ministry of Finance, as well as at State and/or Municipal Revenue Services. 15 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

16 04. SOCIEDADE LIMITADA LAW Discussing and determining the type of company of the legal entity to be established in Brazil is also indispensable for the foreign investor. The sociedade limitada or partnership is the company whose corporate capital is divided in quotas. This a type of company regulated by the Brazilian Civil Code, articles 1052 and 1087, and in a subsidiary manner by Law 6404 (Corporation Law). The company is incorporated through the filing of the articles of association at the Board of Trade (Junta Comercial). CORPORATE CAPITAL There is no stipulated minimum corporate capital and the increase or reduction of the corporate capital shall be performed through an amendment to the articles of association. An increase of the corporate capital is admitted as soon as all the subscribed quotas are paid. In order not to cause a dilution of the participation of the existing partners in the corporate capital, the Brazilian Civil Code provides that each partner has the preferential right to purchase quotas proportionally to the number of their existing quotas. The reduction of corporate capital can occur only when certain conditions are fulfilled: Occurrence of irreparable losses; or Excessive capital pursuant to the company's corporate object. PARTNERS' RESOLUTIONS The most important resolutions for the destiny of a sociedade limitada are taken by the partners representing ¾ of the corporate capital, such as the approval of the articles of association amendments, merger, company dissolution or ceasing of liquidation status. Said quorum is mandatory and cannot be reduced by the partners' agreement; however, it can be increased. There are situations whereby only a majority is demanded as quorum, a hypothesis in which the articles of association can stipulate a larger quorum. 16

17 The resolutions are taken during meetings or general meetings, pursuant to the articles of association. There is no need to publish the notice call for the meeting or general meeting when all the partners attend or state, in writing, that they are aware of the place, date, time and agenda. Up to April 30 of every year, the sociedades limitadas must hold a general meeting or a partners' meeting to: Approve of accounts, make resolutions about the assets balance sheets and the financial results; and MANAGEMENT Sociedades limitadas are managed by one or more senior managers, partners or non-partner managers. The senior managers are appointed by the partners and can be designated in the articles of association or in another separate corporate document. There is no minimum or maximum mandate period for the position of a senior manager. The partners may, at any time, remove him/her from office. Appoint senior managers, if applicable. 17 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

18 05. SOCIEDADE ANÔNIMA LAW 18 The sociedade anônima is a company whose corporate capital is divided into shares and whose discipline is pursuant to Law 6404/76. The sociedade anônima can be publicly or closely held, pursuant to its securities and stocks of issuance, being or not being able to negotiate in the stock markets; i.e., the stock exchange or the organized over the counter market. The publicly-held sociedade anônima obtains resources from the public and submits itself to the surveillance of the CVM (Brazilian Securities Exchange Commission); on the other hand, the closely-held sociedade anônima obtains its resources from its own shareholders. In this sense, the closely-held sociedade anônima has more freedom to establish its operating rules, whereas the publicly-held sociedade anônima has less flexibility. CORPORATE CAPITAL As a general rule, no minimum capital is required. However, for establishing a sociedade anônima the shareholders must subscribe and pay at least 10% of the capital prior to filing its bylaws at the competent Board of Trade (Junta Comercial). Usually the capital increase is done via an amendment of the bylaws, convening an Extraordinary General Meeting, complying with the right of preference for the already existing shareholders. Just as it happens in the sociedade limitada, in the sociedade anônima a reduction of the capital is admitted in the case of loss or excess of capital. SECURITIES The sociedade anônima can issue common, preferred or fruition shares, with or without nominal value. Should the shares have a nominal value; the price of emission of new shares cannot be less than the referred nominal value, establishing a limit for the dilution of the participation of the already existing shareholders. As for the types of shares, this depends on the nature of the rights or advantages attributed to the holders. Common shares must always guarantee the holder the right to vote. Preferred shares grant determined preferences or advantages, such as priority in receiving dividends or in receiving the capital repayment. The number of nonvoting preferred shares, or subject to restriction to exercise this right cannot surpass 50% of the total of the shares issued. The fruition shares are those that replace the integrated shares amortized for.

19 The way of showing proof of holders' shares depends on the type of company, i.e., publicly or closely held. In the closely-held company the ownership is certified in the registration of shares book, while in the publicly-held company it is certified by the custody agent. Apart from the aforementioned shares, the sociedade anônima can issue other securities, such as debentures, subscription warrants, participation certificates and commercial papers. Debentures are widely used papers in Brazil and they perfectly adjust to the needs of the financial investment of Brazilian companies. Thanks to their flexibility they have become the most important instrument of securities investment in the sociedades anônimas, both publicly-held and closely-held, granting the issuer the possibility to determine the amortization flow and their form of compensation. Debentures can eventually be converted into shares of the issuing company, in compliance with the conditions described in the respective indenture. MINIMUM DIVIDENDS The bylaws can establish the minimum dividends to be paid to shareholders as a percentage of the profit or the corporate capital, or establish other criteria to determine this. These must be regulated with precision and in detail and they Unlike the sociedade anônima, there is no demand of compulsory minimum dividends in the sociedade limitada. should not subject the minority shareholders to the will of the management bodies or of the majority. Nevertheless, should the bylaws be omissive or should the general meeting deliberate to alter the bylaws to introduce a norm on the issue, the compulsory dividend cannot be less than 25% of the net profit adjusted, pursuant to law. SHAREHOLDERS' RESOLUTIONS As a rule, the resolutions of a sociedade anônima are taken by absolute majority of votes (50% + 1 vote of the valid votes; i.e., votes of stockholders who are present, excluding annulled votes), with the exception of some issues listed in Article 136 of Law 6404, such as the company's bylaws alteration and the reduction of the minimum compulsory dividend, for which it is demanded that at least half of the corporate stock with the right to vote. Shareholders' resolutions are carried out at the General Meetings and can be of three types: Company Incorporation General Meeting; Annual General Meeting; Extraordinary General Meeting. Up to April 30 of every year, the sociedades anônimas are compelled to carry out an Annual General Meeting where 19 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

20 the following issues are voted for: Approval of the financial statements; Deliberations regarding the allocation of the annual net profit and the dividend payments; The election of the administrators and the members of the Fiscal Board, when applicable. The Extraordinary General Meetings are convened for the deliberation of any other purposes not subject to the Annual General Meeting. The shareholders may celebrate agreements regulating the ways they may exercise their voting rights, as well as for the purchase and sale of shares, preferred rights in the purchases, tag along and drag along. The Brazilian legislation attributes specific execution of latter agreements; so, should a shareholder exercise the right to vote differently from the agreement terms previously signed, the meeting chairman must disregard the attendance vote and must input it in the agreement terms. the Executive Office must be elected by the Shareholders' General Meeting. The Board of Directors is a collegiate body, mandatory in the publicly-held sociedades anônimas, and optional in the closely-held sociedades anônimas. It must consist of at least three participants who must be shareholders, individuals and resident or non-resident in Brazil. The Executive Office is an executive body, who is responsible for representing the company and practicing all the appropriate management acts. It consists of at least two participants, whether shareholders or not, who must reside in Brazil. The Executive Office's mandate is of a maximum of three years. In the sociedade anônima it is still mandatory to have a Fiscal Board, which is instated via the request of the shareholders that represent at least 0.1 (one tenth) of the voting shares, or 5% (five percent) of the nonvoting shares. FORMALITIES COMPANY ADMINISTRATIVE BODIES The sociedade anônima is managed by a Board of Directors and an Executive Office, or only by an Executive Office. The Board of Directors is elected by the Shareholders' General Meeting, and the Executive Office is elected by the Board of Directors. Should there be no Board of Directors; The financial statements of sociedades anônimas must be audited by independent auditors. Moreover, in the sociedades anônimas, it is mandatory to publish the minutes of the meetings and other corporate documents which resolution contents entail the effects on third parties. The mandatory publications must be done at the State or Federal District gazettes, according to the location of the 20 LAW

21 company's head-office, and in another widely-circulated newspaper distributed in the location where the company's head-office is located. The publicly-held sociedades anônimas are subject to the regulatory power of the CVM Brazilian Securities Exchange Commission and, therefore, they must comply with additional legal requirements, such as registration at the CVM of all the issuance of securities stock to be carried out, and the remittance of periodical reports to them. COMPARISON CHART Sociedade Limitada Sociedade Anônima General rule of inexistence of the partners' liabilities after corporate capital integralization; General rule of inexistence of the partners' liabilities after corporate capital integralization; Partners' solidarity for the amount of capital not integralized; Partners' liability is limited to the amount he/she was committed to integrate; Alteration of the Articles of Association demands ¾ of the corporate capital; Possibility of exclusion of minority partners for a fair cause; Less protection for the minority partner; Easier path for the partner that intends to leave the company; Fewer formalities. Alteration of Bylaws demands 50% + 1 of the voting capital; Exclusion of minority partners for a fair cause is controversial; Possibility to capture resources through the issuance of shares with agio, debentures, among others; Publishing the corporate bylaws and auditing financial statements is required. 21 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

22 06. INVESTING IN BRAZIL LAW FOREIGN CAPITAL The Brazilian legislation does not attribute different treatment to foreign and domestic investors, with the exception of certain specific cases. Foreign capital is pursuant to Laws 4131/62 and 4390/64 which define foreign capital in the following manner: foreign capital is considered to be, for the effects of this law, any goods, machinery and equipment that enters Brazil with no initial disbursement of foreign exchange, and are intended for the production of goods and services, as well as any funds, financial resources or cash, brought into the country to be used in economic activities, provided that, in both hypothesis, they belong to individuals or legal entities resident, domiciled or headquartered abroad. Foreign capital may constitute direct or indirect investment. Direct investments are carried out through the establishment of new companies or by the acquisition of participation shares/quotas in already existing Brazilian companies. The law does not determine a minimum amount for carrying out a foreign investment. REGISTRATION OF FOREIGN INVESTMENT Entrance of foreign capital, in the form of cash or goods, is subject to registration at the Central Bank of Brazil (Foreign Capital Registration RDE). Intangible goods, like trademarks and goodwill, may be used for the companies' capitalization provided that they are duly assessed. The Central Bank is the government authority in charge of monitoring the entrance and exit of foreign exchange from Brazil. Capital registration at the Central Bank will grant the foreign investor the right of return on the invested capital and the right of remittances of profit and dividends. This means that the currency remittances abroad can undergo restrictions whenever there is no registration at the Central Bank because the remittances of profit, the repatriation of capital and the registration of reinvestments are all based on the amounts previously registered as foreign investment. Since September of 2000, the registration of foreign investments has been performed electronically. Such registration is under the responsibility of the investment's receiver company and of the non-resident investor through his/her legal representatives in the country. 22

23 STEP BY STEP FOR CARRYING OUT A DIRECT INVESTMENT IN THE BRAZILIAN COMPANY TO BE ESTABLISHED BY THE FOREIGN INVESTOR Appointment of a Legal Representative domiciled in Brazil, by the Foreign Partner Power of Attorney notarization and legalization by the Brazilian Consulate abroad Foreign partner's documents notarization and legalization by the Brazilian Consulate abroad Sworn translation of the aforementioned documents and their registration at the Brazilian Notary Public's Office of Documents and Titles Registrations. Choice of company's administrator domiciled in Brazil Definition of company's corporate purpose, corporate name and address Establishment of corporate capital and of each partner's participation shares Preparation and Filing of Company's Instatement Acts at the competent Commercial Boards Habilitation of the Brazilian company instated at the system of the Central Bank of Brazil for reception of foreign capital Acquiring of the foreign partners' registration at the taxpayers Brazilian Income Revenue Service Foreign exchange investment contract signing and registration at the Central Bank Acquiring the Brazilian company's registration before the tax authorities, as well as the licenses; operations registration and necessary operations permits. 23 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

24 PAYMENT OF DIVIDENDS AND INTEREST ON EQUITY CAPITAL AND REINVESTMENT There is no minimum period by which the registered foreign capital must remain in Brazil; therefore, such capital can be repatriated to its country of origin, disregarding any type of previous authorization. The returns of capital in amounts higher than those registered will be considered as capital gains in benefit of the foreign investor. Thus, they are subject to income tax withholding at a rate of 15% or 25%; the latter is levied on remittances to tax heavens. Thus, the capital gains obtained in the capital repatriation, in the transfer of quotas or shares and in interest payments on the capital belonging to the foreign investor will be taxed by the revenue service in accordance with the aforementioned rates. With regard to taxation levied on the capital returns, the profit can be remitted abroad with no limitation and is not subject to income tax withholding. Reinvestments are profits gained by companies located in Brazil and attributed to individuals or companies residing or domiciled abroad which decide to reinvest such profits in the company that generated them or in another sector of the economy. If the foreign investor opts for reinvesting the profits in lieu of remitting them abroad, they can be registered as foreign capital in the same manner as the initial investment thus increasing the basis of calculating future remittances or profit reinvestments for taxation purposes. 24 LAW

25 07. PRIVATE EQUITY INVESTMENT FUNDS (PE'S) An investor can choose an alternative legal structure to make the legal entity more efficient and to decrease the tax costs levied on the foreign investment, instead of setting up a sociedade limitada or a sociedade anônima. One of the most commonly adopted alternatives is the investment in Private Equity Investment Funds (PE's). Foreign investors are able to indirectly acquire shares of publicly or closely-held sociedades anônimas through these funds. This arrangement is made because foreign investors can benefit from income tax exemptions of the PE's quotas on certain withdrawal or bailout, sale and amortization operations once the conditions that are foreseen in the law are fulfilled. PE's are destined exclusively toward qualified investors with a minimum subscription of R$ 100,000.00, they must be closed and jointly owned investments. Their resources are destined toward the acquisition of shares, debentures, subscription bonuses and other bonds and convertible or interchangeable securities, in publiclyheld or closed companies. These acquisitions must provide the Fund with decision making participation in the invested company, including effective influence in defining strategic policies as well as in its management. The PE's are a communion of resources destined towards the acquisition of shares, debentures, subscription bonuses or other bonds and convertible or interchangeable securities, in publicly-held or closed companies, with participation in the decision making process of the invested company. It is closed joint property and the name must include Private Equity Fund. Participation in the decision making process of the invested company must be carried out in such a way as to ensure effective influence in defining its strategic and management policies, especially by recommending board members. The PE's are regulated by CVM Regulation nº 391, dated of July 16, 2003 and amendments. Closed companies that receive PE investments must comply with to the following governance practices: Prohibition of the issuance of beneficiaries and non-existence of these securities in circulation; 25 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

26 Establishment of a unified 1 (one) year mandate for the entire board; Availability of contracts with related parties, stockholder agreements and option programs to acquire shares or other bonds or securities issued by the company; Choice of arbitration to resolve corporate conflicts; In case of public offer of its stocks, must commit to the fund to submit itself to a special segment of the stock exchange or the Organized OTC Market authorized by CVM that ensures minimum levels of differentiated corporate governance practices foreseen in the previous items; and name an institution authorized by the Central Bank to assume co-responsibility. The aforementioned must be carried out through a formal representation contract which, in general, is signed with the custodian. It is worth noting that the foreign investor will need a representative before the CVM as well as a representative before the Internal Revenue Service and the Central Bank. These functions can be performed by the same person. INCORPORATION The operation of the Fund can only be initiated after approval by the CVM. The following requirements are necessary for registration: Act of Incorporation of the Fund; LAW 26 An annual audit of the accounting statements by independent auditors registered with CVM. The duration of the Fund is foreseen in the Regulation, along with the requirements for any extensions. APPOINTING A LEGAL REPRESENTATIVE In order to invest in a PE, the foreign investor is obligated to appoint a legal representative that will represent said investor before the CVM. When this representative is an individual or non-financial legal entity, the investor must Sworn statement from the Fund Manager; Sworn statement with the name of the independent auditor; Information regarding the maximum and minimum number of shares to be issued, their value, all of the costs incurred, and all other information relevant to their distribution; The disclosure material to be used in the distribution of Fund shares, including the prospectus, if there is one;

27 Any other additional information that becomes available to potential investors; If there is a professional manager, a brief description of the qualifications and professional experience of the technical administrator and manager. MANAGEMENT REDEMPTION AND NEGOTIATION OF SHARES The PE regulation must explain the criteria to amortize its shares, without the possibility of redemption. The shares can be the object of private negotiations between qualified investors or negotiated in the stock market. In this case, an intermediary is necessary to ensure that who is buying the shares is a qualified investor. The Fund manager must be a legal entity authorized by the CVM. The Fund Manager and the Portfolio Manager are responsible for losses suffered by the shareholders when said managers act with negligence or fraud or if they violate the law or the rules set forth by the CVM and the Regulations. FUND ASSETS PE Funds can only invest their resources in the acquisition of shares, debentures, subscription bonuses or other bonds and convertible or interchangeable securities in company share issuances. It is prohibited to carry out operations involving derivatives, except when such operations are carried out exclusively to protect assets. TAXATION Generally speaking, the income and earnings from PE's have their taxes withheld at a percentage rate of 15%. However, the foreign investor can take advantage of a reduction to zero percent on the rate for income tax for the investment, if the following requirements are met: The investors, individually or together with 1 other people connected to them, do not hold 40% or more of the total number of shares issued by the PE Fund and the shares do not allow for earnings greater than 40% of the total amount of earnings coming from the Fund; 1. Following are those connected to the private individual: (i) their relatives up to 2nd degree; (ii) company under their control or under control any of their relatives up to the 2nd degree; (iii) partners or the leadership of a company under their control or under the control of the controller, controlled or sister firm. Connections to the legal entity shareholders: its controller, controlled or sister firm. 27 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

28 The PE Fund does not have debt security at any time in its portfolio that is greater than 5% of its net assets. The exception of this limit relates to shares in business corporations, debentures that can be converted into shares, subscription bonuses and public bonds; and The foreign investor is not a resident or is domiciled in a country that does not tax the earnings or that taxes earnings for a maximum of 20% or less. In other words, having fulfilled the aforementioned requirements, there will be no income tax levied on earnings in Brazil. In cases where investors are residents or domiciled in countries that do not tax earnings or that tax earnings at a maximum percentage rate of less than 20% - known as tax havens a 15% withholding tax will be levied on the earnings from the Fund or the capital gains resulting from the transaction of shares by the investor. Clearly, the PE's are more advantageous than the structured investments in the form of holding companies, taking into account that the later are subject to taxation just like ordinary companies, including IRPJ (corporate income tax), CSLL (the Social Contribution on Net Profits) and PIS/PASEP and COFINS. It is important to emphasize that all investment portfolios must fulfill specific rules imposed by the CVM for the formation and management of these funds, including the naming of the manager who will be responsible for collecting the taxes. 28 LAW

29 08. VISA FOR FOREIGN ADMINISTRATORS Every director of a Brazilian company must reside in Brazil. Should the foreign investor appoint a trustworthy foreign administrator that intends to move to Brazil, the request for a specific permanent residence visa is mandatory. The issuance of a permanent residence visa must be requested by the Brazilian company established by the investor and presupposes carrying out a minimum investment in Brazil of R$ 150,000.00, taking into account a commitment to generate 10 employments during the period of two years; or, otherwise, an investment of R$ 600, exempting the latter employment commitment. The minimum investment is mandatory for each foreign director. If the foreign administrator is one of the shareholders of the company, he may request a permanent visa carrying out a minimum investment in Brazil of R$ 150, In this case, he is exempted of the employment commitment, but he needs to present a business plan to be analyzed by the National Immigration Council. 29 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL

30 09. RELATIONSHIP WITH EMPLOYEES AND CONTRACTORS Once the foreign investor has decided to establish a company in Brazil, the latter will have to employ qualified professionals for the development of their activities. These professionals can be employed by the Brazilian company or work as mere service providers. LABOR RELATIONSHIP Labor Relationship Requisites: onerosity; individuality; subordination; habituality. 30 LAW

31 INSS Contribution (National Institute of Social Secuity) Employer must pay monthly contributions of 20% of the employees' gross salary. GILRAT (Labor Accident Insurance) Social contribution paid to the National Institute of Social Security by the employer. The levy varies between 1 to 3% of the gross salary paid to the employees as an extension of the risk to which the employees are subject to. Education Salary Employers must pay the INSS a monthly amount for education salary which corresponds to 2.5% levied on the employees' gross salary. LABOR TAXES AND CONTRIBUTIONS In addition to paying the benefits listed in aforementioned item, the employer's liabilities with regard to labor fees/taxes are: Other payments known as payments to third parties Employers must pay contributions to benefit some specific institutions, such as the Social Service of Commerce SESC and to the Brazilian Service of Support to Micro and Small Companies SEBRAE. Employers must deposit in a blocked bank account an amount equivalent to 8% of the gross salary paid to each employee, as FGTS (Unemployment Guarantee Fund). The deposits are made monthly to the order of the employee. 31 HOW TO ESTABLISH A BUSINESS PRESENCE IN BRAZIL