Issues Relating To Organizational Forms And Taxation. BRAZIL Demarest e Almeida Advogados

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1 Copyright Lex Mundi Ltd Issues Relating To Organizational Forms And Taxation BRAZIL Demarest e Almeida Advogados CONTACT INFORMATION Thiago Giantomassi Demarest e Almeida Advogados Avenida Pedroso de Moraes, 1.201, CEP São Paulo, SP, Brasil tgiantomassi@demarest.com.br 1. Identify the forms of organization available in your jurisdiction and discuss the advantages and disadvantages of each (eg., corporation, limited liability company, partnership, limited partnership, co-operative, etc.), describing which type of legal entity is mostly used or is of special interest, namely by foreign investors. In Brazil, there are two main corporate structures commonly used for most business operations: limited liability companies and corporations. There are other legal entities set forth in Brazilian laws, such as simple partnership (sociedade simples), secret partnership (sociedade em conta de participação), general partnership (sociedade em nome coletivo), limited partnership (sociedade em comandita simples) and associations. However, those types of legal entities are not commonly adopted unless there is a specific business decision or operational reason that justifies adopting these types of organization. Limited Liability Companies: representing an estimated 90% to 95% of all companies organized in Brazil, these companies are recommended if the partners desire simplicity and flexibility in the corporate structure, lower maintenance costs, and the inapplicability of several legal formalities that are mandatory in the case of a

2 corporation. It is usually appropriate in the case of wholly owned subsidiaries or restricted joint ventures. The articles of association may establish different levels of control for the company and determine which matters depend on the partners' prior authorization, in addition to the matters already provided by the law. In the event, however, that the new company has plans to issue debentures or other securities in the future, become a publicly held company, or admit other groups of investors, then the adoption of a corporation structure is preferable. A corporation is also preferable for ventures having a larger number or different groups of shareholders. Corporations: registered under the Brazilian Corporations Law (Law No. 6384/76), corporations are classified either in closely or publicly held. The latter are registered with and subject to the supervision of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários CVM), and may have securities publicly offered or traded on organized securities markets. Advantages of corporations include liability limited to their interest in the corporate capital, transferability of shareholding and improved ability to raise capital. Corporations, on the other hand, are deeper regulated and supervised than limited liability companies, especially publicly held corporations. 2. Are there attributes of the form that you consider unique to your jurisdiction? No 3. Describe the management and governance structure for each organizational form. Limited Liability Companies: Decisions regarding the company are made during partners meetings and are binding upon all partners, even if they were absent from the meeting or dissented. The company may be managed by one or more persons, partners or not, Brazilian citizens or foreigners, provided that they are residents in Brazil. The manager will be in charge of the company's management and representation. Corporation: Unless otherwise provided for by law, shareholder decisions require a simple majority of votes, without abstentions being taken into account. The corporation may be managed by a board of officers and a board of directors (only required in certain cases of publicly held corporations and authorized-capital corporations), or just a board of officers. Corporations also have an oversight council, which must be an independent corporate body and may be permanent or ad-hoc,

3 installed at the request of relevant shareholders, as prescribed by applicable regulation. The board of directors is a collective decision-making body that consists of at least three members, appointed at the shareholders' general meeting. The board of officers represents the corporation and performs all acts necessary for its normal operation. Finally, the basic function of an oversight council, when installed, is to oversee the acts of management. 4. Is there a residency requirement for management or owners? In particular, are there restrictions or prohibitions on foreign investors to perform, or have interests in, specific activities? Limited Liability Company: Managers must reside in Brazil. Corporation: Members of the board of officers must reside in Brazil. Members of the board of directors need not reside in Brazil, but they must appoint a representative who is a Brazilian resident to receive services of process in legal proceedings, according to Brazilian Corporations Law, should they reside abroad. Both: Any remittance of funds to Brazil by foreign partners, either as investment or a loan, must be registered with the Central Bank of Brazil s Electronic System. This registration is essential for future payment of profits to foreign partners, repatriation of capital (for capital investments), and/or payment of interest and principal (for loans). All foreigners that hold equity in Brazilian companies must be registered with the National Register of Legal Entities to obtain a corporate taxpayer identification number (CNPJ) if they are a legal entity, or an individual taxpayer identification number (CPF) if they are an individual. 5. Describe the extent to which management and owners are exposed to liability. According to Brazilian laws, the company's assets are not linked to the partners' net worth. The owners will only be held liable if they abuse their powers or violate the law or the articles of association. In the event that the company's assets are not sufficient to bear the company's obligations, and the capital stock has not been fully paid-in, the partners of a limited liability company shall be jointly liable up to the amount of capital stock. As a general rule, members of management are not liable for acts performed within the regular course of business. Personal liability arises for acts involving abuse of power, excess of mandate, or violation of the law or corporate documents.

4 6. Ownership interest: (i) how is it represented? (ii) is it transferable?; and (iii) is there a minimum number of owners? Limited Liability Company: The capital stock of a limited liability company is divided into quotas, which may be assigned and transferred. The number and ownership of quotas must be identified in the articles of association. Transfers of quotas to third parties are allowed, unless partners representing more than one-fourth of capital stock do not agree with the transfer. The other partners will have the right of first refusal with the transfer of company quotas whenever provided for in the articles of association or in the partner agreement. A limited liability company requires at least two partners. The partners may be legal entities or individuals, Brazilians or foreigners. If the partners are not Brazilian residents, they must have an attorney-in-fact in Brazil with powers to represent them in corporate matters in general and to receive services of process on their behalf. Corporation: A corporation's equity interest is represented by shares, which may be of different types, according to the advantages, rights and restrictions attributable to the shareholders. The two major types of shares are common and preferred. A corporation generally requires at least two shareholders, which may be legal entities or individuals, Brazilians or foreigners. Wholly-owned subsidiaries may be incorporate by means of a public deed or a result of a mandatory swap of shares. If the shareholders are not Brazilian residents, they must have an attorney-in-fact in Brazil with powers to represent them in corporate matters in general and to receive services of process on their behalf. 7. Is there a minimum capitalization? Limited Liability Company: As a general rule, no minimum capital stock is legally required. Capital stock should be consistent with the company s initial operational needs. In the event that more is needed, the partners may increase their capital at any time by amending the articles of association. The partners may pay in capital stock in cash, credits, or assets, and there is no legal time frame set forth by law for payment thereof. Services may not be rendered in lieu of paying in capital stock. Capital increases will only be allowed after full payment of the previously subscribed amount. Corporation: No minimum capital stock is generally required, however at least ten percent (10%) of the capital stock must be paid in for the establishment of the corporation. Capital increases may be performed at any time, as approved in a shareholders meeting, pursuant to applicable regulation and provisions of the bylaws.

5 The corporation may also have an authorized capital in its bylaws, thus the capital may be increased by deliberation of the board of directors. The shareholders may pay in capital stock in cash, credits, or assets, and there is no legal time frame set forth by law for payment thereof. Capital increase by subscription and payment of new shares may be performed only after at least seventyfive percent (75%) of the total capital stock is paid in. For specific industries, irrespectively of the form, a minimum capitalization is additionally required (e.g. financial institutions, certain utility companies etc.). 8. Is there a security that can be issued to the public? Limited Liability Company: As a general rule, limited liability companies are not authorized to publicly issue and place securities in Brazil, except for certain commercial promissory notes. Corporation: Publicly-held corporations are those registered with the Brazilian Securities and Exchange Commission ("Comissão de Valores Mobiliários" - "CVM"). Such corporations are authorized to issue and place to the public any securities in Brazil: while type A publicly-held corporations may publicly issue any security, offerings of type B corporations are restricted to non-equity securities. Ability by closely-held corporations to issue and place securities to the public is limited, mainly encompassing certain non-equity-related securities. 9. Can the form incur debt, or grant security for debt? Corporation and Limited Liability Company: Both forms can incur debt, or grant security for debt, subject to restrictions provided for in: (i) applicable regulation; (ii) the corporation's bylaws or the limited liability company's articles of association; (iii) partners or shareholders resolutions; and (iv) contracts or transactions to which the corporation or the limited liability company is a party or is bound to. Certain industries require prior approval by the regulatory agency for a debt or security to be entered into, or impose limits for that to occur. 10. What is the duration of the form? Can it be renewed? Corporation and Limited Liability Company: The duration of the form may be for an indeterminate term. There is no minimum or maximum term established by law. In cases in which the bylaws or articles of incorporation establish a certain duration term, it may be extended or renewed upon partners or shareholders resolution. Both a corporation and a limited liability company may be extinguished upon: (i) resolution of the partners or shareholders (dissolution); and (ii) conclusion of bankruptcy proceedings (liquidation).

6 11. Describe the process, customary time period and approximate cost of establishing the form. Limited Liability Company: In order to validly exist, the articles of association of a Brazilian limited liability company must be filed at the board of trade of the state where the company s head office is located, usually occurring during three (3) to five (5) working days. After registration at the board of trade, the company needs to obtain certain standard records, and depending on the type of business, it may be required to have other specific licenses and registrations for the company to operate (for instance, a license to be issued by the Sanitation Authority- ANVISA, or a license issued by the Foreign Trade Department, if the company imports/exports). Only after the company is duly enrolled with the National Register of Legal Entities and receives a corporate taxpayer identification number (CNPJ) will be allowed to open bank accounts in Brazil and execute contracts. The approximate cost of registration of a non-operational varies from five to ten thousand Reais. Corporation: To validly exist, a corporation must file certified copies at the board of trade of the minutes of this inaugural shareholders' meeting and the approved bylaws, a complete list of all the subscribers of the capital stock, and if the capital is paid in cash, the bank receipt for the initial ten percent (10%) payment. As a general rule, after submitting the relevant documents to the board of trade, filing occurs within five (5) working days, unless the board of trade orders a change to the documents or requests additional information. Like limited liability companies, corporations need to obtain standard registrations and others that might be necessary, depending on the type of business to be done. In the same way, a corporation s partners, whether legal entities or individuals, must be enrolled with the CNPJ or the CPF, as the case may be. The approximate cost of registration of a non-operational varies from five to ten thousand Reais. 12. Are there requirements for the government (central or local) to be part of a project or investment vehicle or receive part of the profits arising therefrom (apart from taxes)? Corporation and Limited Liability Company: No, except in cases in which the project or investment vehicle is executed by means of public biddings, such as administrative contracts or public tenders.

7 13. For what taxes is the form liable? Copyright Lex Mundi Ltd Corporation and Limited Liability Company: Both corporations and limited liability companies are subject to the same taxes, some of which are applicable considering the respective activities performed by each corporation or limited liability company. It is important to mention that there is a tax reform underway that may change several aspects of tax law in Brazil. Below are listed the main federal, state and municipal taxes applicable: Federal Taxes I. Corporate Income Tax Levied on: Taxable profits. Calculation Methods: (i) real-profit basis; (ii) presumed-profit basis; and (iii) arbitrated-profit basis. Corporate Income Tax is levied at a 15% rate, plus an additional 10% on profits that exceed R$ 20,000 (twenty thousand reais) per month. Applicability: (i) Companies with total gross revenue in excess of R$ 48 million a year, and others required by law, must calculate real profits based on quarterly or annual balance sheets. They are not allowed to calculate this tax based on presumed profits (a method for calculating profits based on a percentage of gross revenue); (ii) If taxation is based on a quarterly balance sheet, payment of taxes will be definitive, and all rules for calculating annual profits will apply to such quarterly profit (rates, additions, provisions, offsetting losses, etc.). Income tax, in this case, may be paid in three equal, successive, monthly installments or in a single installment in the month subsequent to the quarter; (iii) If the company opts for payment based on yearly profits (the most common and generally adopted system), these profits will be calculated from the profit-and-loss statement prepared in December, covering earnings for the entire calendar year, but the tax must be pre-paid monthly. Monthly pre-payment may be lowered or suspended if the taxpayer has accounting evidence that the pre-paid value until that month exceeds the tax value calculated based on real profits. II. Contribution to Finance Social Security ("Contribuição para Financiamento da Seguridade Social" - "COFINS") Levied on: All revenues (including financial income, income from varying exchange rates, etc). However, to determine COFINS, gross revenue does not include canceled sales or services and unconditional discounts, among other amounts stipulated by law. The legislation currently establishes some exemptions (for instance, for export revenues and capital gains). Applicability: The COFINS rate applicable to most companies that calculate Corporate Income Tax on real-profit basis was raised from 3% to 7.6%. Moreover,

8 for such companies this contribution became a non-cumulative tax, allowing taxpayers to deduct 7.6% of specific costs and expenses determined by law (inputs used to make goods, electricity used on the legal entity s premises, and others). Companies subject to the presumed-profit system (and other companies) are still under the COFINS cumulative system and taxed at a 3% rate in general. III. Social Contribution on Profits ("Contribuição Social sobre o Lucro") Levied on: Taxable profits. Calculation Method: calculated quarterly or annually with pre-payments (depending on the taxpayer s income-tax option) and is not deductible from income tax, at a rate of 9%. While the basis of this tax is similar to that of corporate income tax, adjustments to calculate the taxable basis of the CSLL are sometimes different. IV. Tax on Financial Transactions ("Imposto sobre Operações Financeiras" - "IOF") Levied on: General financial transactions (i.e. those involving currency, bonds and securities, credit, gold and/or insurance). IOF tax rates vary according to the nature of the taxable transaction. V. Contribution to Social Integration Plan ("Contribuição para o Programa de Integração Social" - "PIS") Levied on: All revenues (including financial income, varying exchange-rate income, etc). However, to determine the tax, gross revenue does not include canceled sales or services and unconditional discounts, among other amounts stipulated by law. The legislation currently establishes some exemptions (for instance, for export revenues and capital gains). Applicability: The PIS tax rate applicable to most companies that calculate Corporate Income Tax based on real profits rose from 0.65% to 1.65%. Moreover, for such companies this contribution became a non-cumulative tax, allowing taxpayers to deduct 1.65% of specific costs and expenses determined by law (inputs used to make goods, electricity used on the legal entity s premises, and others). VI. Import Duty ("Imposto de Importação" - "II") Levied on: The customs value of imported goods at different rates according to the goods tariff code in the Mercosul Tariff Schedule (TEC), which is based on the Harmonized System of the World Customs Organization (WCO). The customs value of imported goods is determined in accordance with the Customs Valuation Agreement of the World Trade Organization (WTO).

9 VII. PIS-Import and COFINS-Import Copyright Lex Mundi Ltd Levied on: The importation of goods and services, generally at a rate of 1.6%% (PIS- Import) and 7.6% (COFINS-Import). Depending on the case, the taxpayer is allowed to take credits on the payment made. VIII. Export Tax ("Imposto de Exportação" - "IE") Levied on: Only a few products are subject to the export tax, such as (i) raw hides and the skins of bovine (including buffalos), equine, sheep, or lamb; (ii) cigarettes containing tobacco (when exported to the Caribbean, Central and South America); (iii) weapons and ammunition (when exported to South America, except Argentina, Chile, Ecuador and Central America, including the Caribbean Islands). The tax is calculated on the export price of the goods. IX. Tax on Manufactured Products ("Imposto sobre Produtos Industrializados" - "IPI") This tax is similar to an excise tax. It is levied on most manufactured products, whether made in Brazil or imported. Although the IPI is ultimately passed on to the final consumer, it is charged on each production step or phase of independent manufacturers. The tax rate is variable according to the tax classification of the product (Mercosur Common Nomenclature NCM/ Harmonized System) shown in the IPI Levy Table [Tabela de Incidência do IPI TIPI/2.011], approved by Decree no. 7660/2011 Levied on: Manufactured products. The IPI is usually levied ad valorem. The rates are based on the type of product. The IPI is a value-added tax. A tax credit is allowed for the tax that has been paid in the purchase or importation of the raw material and components that are used in the manufacturing process of the product to be taxed or on the resale of the imported product. In the case of imported products, the IPI is calculated on the customs value, plus the import duty. Reimbursement: Taxpayers with an IPI credit balance accumulated for three months may ask the Brazil Federal Revenue Department for reimbursement in cash of the accumulated amount, or its use to offset other federal taxes. State Taxes I. Sales Tax on the Circulation of Goods and Services ("Imposto sobre a Circulação de Mercadorias e Serviços" - "ICMS") Levied on: Imported and domestic products at the time the goods leave the business premises. The ICMS due on each transaction is based on the price of products sold,

10 and a tax credit is granted for ICMS paid on the purchase or importation of the products, as it is for the IPI. The ICMS is also imposed on interstate and intermunicipal transportation services and communications services. The tax rate is variable according to the tax classification of the product (Mercosur Common Nomenclature NCM/ Harmonized System) and to the State with jurisdiction to charge. Basically, States fixe a standard tax rate (normally, 17% or 18%), but for interstate operation the tax rate varies according to the characteristics of the seller and the purchaser: If the Seller is located in the Southern and Southeastern Regions, except the State of Espírito Santo and the Purchaser (a ICMS payer) is located in the States in the Northern, Northeast Mid-Western Regions and the State of Espírito Santo, the tax rate will be 7%; For other situations, since the Purchaser be a ICMS payer, the tax rate will be 12%; If the purchaser is not a ICMS payer, the rate will be the same applicable by the State where the seller is located; For certain products, the ICMS is due according to the tax substitution regime ("Substituição Tributária do ICMS - ICMS/ST"), in which case the tax due on the entire commercial chain of the product shall be collected at once at the beginning (as a rule, by the manufacturer or the importer) based on estimated values determined by the government to be applicable to future taxable events. As a rule, this system is implemented through a state agreement ("Convênio ICMS") or throughout specific protocols ("Protocolo ICMS"). II. Tax on Donation and Inheritances ( Imposto sobre Heranças e Doações - "ITCMD") Levied on: The transfer of personal assets or rights resulting from legal or testamentary inheritance and donations. Rates vary from 1% to 8% of the fair market value of the transferred asset or right. Municipal Taxes I. Service Tax ("Imposto sobre Serviços" - "ISS") The ISS is a municipal tax levied on all services listed in Supplementary Law 116/2003 ("Lei Complementar - LC 116/2003"), except those subject to state taxation through the ICMS. Rates vary from 2% to 5%, depending on the municipality.

11 II. Copyright Lex Mundi Ltd Real Estate Transfer Tax ("Imposto sobre Transmissão Inter Vivos") Levied on: Property transfers at a progressive rate that varies depending on the property value on all transfers for value of any nature, except, as a general rule, in cases of contribution to capital stock. III. Property Tax ( Imposto sobre a Propriedade Territorial Urbana IPTU ) Levied on: property of real estate, charged annually at a 1% rate on the appraised value of the real estate; rates vary by municipality. 14. What is the tax treatment of payments to foreign owners? Remittance of Profits: Profits generated as of January 1996, paid by a Brazilian company to a foreign investor, are not subject to withholding taxes. The foreign currency to be remitted has to be purchased on the exchange market directly from any commercial bank, upon presentation of a corporate act declaring dividends, relevant financial statements, proof of the tax payment, and registration in the Electronic System of Registration of the BACEN, in the Foreign Direct Investment (Investimento Externo Direto - IED) mode. No further approval or consent of the BACEN is necessary, and there is no limitation on the amounts to be remitted if the original investment has been registered with the BACEN as described above. Currently, the rate of the IOF levied on the foreign exchange transaction related to the remittance is reduced to zero. Repatriation of Capital: Foreign capital invested in Brazil may be repatriated at any time, and there is no minimum period of investment. Repatriation of the investment up to the amount stated in the Foreign Direct Investment mode of the Electronic System of Registration of the BACEN may be made free of any tax or authorization (for this purpose, it is necessary to consider the proportional amount in comparison to the percentage of the capital reductoin). As a general rule, any surplus over the registered amount will be treated as a capital gain, subject to a 15% withholding tax (this rate goes up to 25% for investors domiciled in tax havens) Payment of interest related to loans: Interest are generally subject to withholding income tax at a 15% rate (or 25% rate if the beneficiary is domiciled in a low tax jurisdiction). Payment of services: services fees due to a foreign beneficiary may be subject to: withholding income tax (15% or 25%), CIDE (10%), PIS-Import (1.65%), COFINSimport (7.6%), ISS (2 to 5%) and IOF (0.38%).

12 15. Is there a tax treatment which would impact foreign owners differently than owners resident in the jurisdiction? For purposes of dividend distribution, the tax treatment is the same (regarding profits generated as of 1996). For purposes of capital gains, the rules for calculation of the tax basis are different in case of foreign owners in comparison to residents, and income tax rates applicable are also different (in general terms, 15% or 25% in case of foreign owners, 15% in case of individuals resident in the jurisdiction, and 34% in case of companies resident in the jurisdiction). As to investment in the Brazilian financial and capital markets, there are tax exemptions and reductions applicable to foreign investors.