Doing Business in Brazil

Transcription

1 Doing Business in Brazil Law stated as at 01-Jan-2013 Author(s), Demarest Advogados Overview 1. What are the key recent developments affecting doing business in your jurisdiction? In June of 2012 the new Brazilian Competition Law (Law 12,529/11) entered into force, and now transactions that must be submitted to the Brazilian competition authority (Conselho Administrativo de Defesa Econômica) (CADE) must wait for CADE's approval before they can be closed (see Questions 26 and 27). Until then, transactions could be closed regardless of CADE's approval. Legal system 2. What is the legal system based on (for example, civil law, common law or a mixture of both)? Brazil has a civil law system based on codes and legislation. Brazil is a federation and its entire legal system derives from the Brazilian Federal Constitution, which provides for the organization of the Executive, Legislative and Judicial branches1, as well as the authority given to Federal, State and Municipal governments, including the Federal District. It is incumbent on the Legislative to pass the ordinary laws that will form the backbone of the Brazilian legislation, although the Executive and Judiciary branches may also perform certain acts that are deemed to be mandatory rules and to have general application as proper legislation. 1 See articles 44 to 126 of the Federal Constitution.

2 Within the legislative branch, the Brazilian Constitution grants the Federal sphere the power to legislate on a comprehensive variety of matters, which include civil and commercial relations, penal, procedural law, aeronautical, maritime, telecommunications and radio broadcasting, environment, capital market and monetary system, energy and others. Certain matters, such as environmental, consumer protection, education and tax, are subject to concurrent authority for legislation, which allows the States and Municipalities, as well as the Federal District, to pass its own bills, provided that they abide by the general principles and guidelines arising out of the Federal Constitution and Federal law. Further to that, it is important to note that Brazil follows a codified system, where the main legal rules are compiled into codes. For instance, the main civil and commercial rules are provided for in the Civil Code2, as procedural rules are provided for in the Civil Procedure3 and Penal Procedure Codes4. Finally it must be emphasized that, due to the strict civil law nature of the Brazilian legal system, judicial precedents and case law are not binding, except for certain specific statements issued by the Supreme Court for constitutional matters, which are already subject to unanimous jurisprudence5. Nevertheless, although they are not binding, relevant precedents of Superior Courts tend to be respected by Lower Courts. (b.) Brazilian Judiciary Branch Structure 2 Federal Law n /02. 3 Federal Law n /73. 4 Law -Decree n /41. 5 See article 103-A of the Federal Constitution.

3 The Brazilian Judiciary is organized by the Brazilian Federal Constitution, which divides the judicial structure into federal and state courts. In general terms, Brazilian courts have jurisdiction over any litigation somehow connected with the Brazilian territory. Federal courts have exclusive jurisdiction over any lawsuit where the federal government or any of its agencies or quasi-governmental bodies is a party of or has interest in, as well as over cases involving foreign states or international agencies6. All labor and electoral courts are also under federal jurisdiction. Nonetheless, the bulk of all private commercial litigation is entertained before the state courts7. Regardless if the lawsuit is filed either before a Federal or a State Court, parties have a constitutional right to appeal to an Appellate Court. In the state system every State has its own State Court of Appeals. The Federal Appellate System, on the other hand, is comprised by 5 (five) Circuit Court of Appeals. In a higher layer the judicial structure has 2 (two) superior Courts, which are called "Superior Tribunal de Justiça" (STJ, that stands for Superior Court of Justice) and "Supremo Tribunal Federal" (STF, that stands for Federal Supreme Court), both located in Brasília, Capital of Brazil. Broadly speaking, the former has jurisdiction over any case decided by State or Federal Court of Justice, if the decision rendered by any of these Courts violates any Federal Law or international treaties8. The latter has jurisdiction over Constitutional issues and can also revisit decisions rendered by any Court if the Brazilian Constitution happens to be violated9. 6 See articles 106 to 110 of the Federal Constitution. 7 See articles 125 and 126 of the Federal Constitution. 8 See articles 104 and 105 of the Federal Constitution. 9 See articles 101 to 103 of the Federal Constitution.

4 Foreign investment 3. Are there any restrictions on foreign investment (including authorisations required by central or local government)? There are restrictions on foreign investment in areas such as: The aerospace industry. Activities involving nuclear energy. Health services. Rural and border real estate properties. Newspapers, magazines, radio and television. Security. Airlines. Financial institutions. The Central Bank manages the flow of foreign capital in and out of Brazil. Foreign investments must be registered with the Central Bank through an electronic system of registration. Except in cases where Brazilian law imposes limitations on foreign investments, foreign shareholders (individuals or entities) can freely participate in Brazilian companies. Foreign shareholders (individuals or entities) must register as a taxpayer and obtain a federal taxpayer ID (CPF for individuals, CNPJ for entities) (see Question 8, Registration and formation) and must have an attorney-in-fact in Brazil with powers to: Receive service of process under the Corporations Law. Represent the foreign shareholder before the Federal Revenue Service.

5 4. Are there any restrictions on doing business with certain countries or jurisdictions? There are no restrictions on doing business with certain countries or jurisdictions. 5. Are there any exchange control or currency regulations? Transactions are permitted to flow both inbound and outbound, provided that: They are carried out through financial institutions which are licensed to operate in the exchange markets. The transaction is legal. The transaction has economic substance. All applicable taxes are paid (see Questions 17 and 19). All foreign exchange transactions are performed through foreign exchange agreements. Through these agreements, individuals and companies that incur foreign currency obligations exchange Brazilian reais for foreign currency from local financial institutions authorised to deal in foreign exchange markets. Conversely, individuals and entities that earn income in a foreign currency can exchange it for Brazilian reais. Generally, individuals and companies domiciled in Brazil are not allowed to have bank accounts in a foreign currency in Brazil (however there are exceptions for insurance companies when operating internationally and diplomatic representatives). Foreign loan transactions must be registered electronically at the Central Bank of Brazil, although they are not required to have any prior approval or authorisation by the authorities. The parties assume liability for the legitimacy of the documentation submitted to the financial institution licensed to operate in the exchange markets when the transaction is registered. The National Monetary Council (Conselho Monetário Nacional) (CMN) conducts exchange control policy, which regulates exchange transactions. The CMN can regulate exchange transactions, imposing temporary restrictions on imports and remittances of

6 yields on foreign capital whenever there is a serious imbalance in the balance of payments. 6. What grants or incentives are available to investors? The payment of dividends to shareholders is currently tax free. Transactions by nonresidents in the Brazilian financial or capital markets are subject to lower tax rates than those applicable to Brazilian residents. Business vehicles 7. What are the most common forms of business vehicle used in your jurisdiction? The most common forms of business vehicle used (including by foreign companies) are: Limited liability companies (limitadas) (LLCs), which offer flexibility and a lower level of formality, but cannot issue securities. Corporations (sociedades anônimas) (SAs), which are normally used for companies that wish to issue securities. They have higher formality and disclosure requirements. 8. In relation to the most common form of corporate business vehicle used by foreign companies in your jurisdiction, what are the main registration and reporting requirements? Registration and formation Formation documents must be filed with the Board of Commerce of the state where the company is headquartered, and the company must register as a taxpayer with the national, state and local taxpayers' registries. Additional registrations with other

7 agencies and government bodies may be required depending on the activities of the company, for example the: Central Bank, for financial institutions. National Health Agency, for pharmaceutical companies. Agency of Private Insurances, for insurance companies. Integrated Foreign Trade System, for import and export companies. It can take from one to six months to incorporate a company in Brazil, depending on the registrations required for its activities. Reporting requirements There are certain reporting requirements for specific corporate acts and for annual financial statements. There are fewer reporting requirements for LLCs than for SAs (for example, SAs must publish their annual financial statements in a local newspaper). Share capital Except for certain sectors and thin capitalisation rules (see Question 21), there are no minimum or maximum capital requirements. Non-cash consideration Shares can be issued for cash or asset consideration. Rights attaching to shares Restrictions on rights attaching to shares. Restrictions on rights attaching to shares can be imposed in a shareholders' agreement. Automatic rights attaching to shares. Automatic rights attaching to shares include the right to:

8 Participate in the company's profits. Participate in the company's assets on liquidation. Monitor the management of the company (requesting information and clarification from the management). Get first refusal for subscription of shares. Withdraw from the company in certain circumstances provided for in the Corporations Law (Law 6404 of 1976, as amended). 9. In relation to the most common form of corporate business vehicle used by foreign companies in your jurisdiction, outline the management structure and key liability issues. Management structure An LLC is managed by one or more individual executives (officers) but cannot have a board of directors with powers to approve certain actions of the officers. An SA is managed by a board of individual officers (Diretoria) and it can also have a board of directors (Conselho de Administração) with powers to approve certain actions of the officers. Management restrictions Officers of both LLCs and SAs must hold a valid Brazilian resident visa in order to be elected (see Question 12). Directors' and officers' liability Directors and officers have duties of loyalty and care towards their company. If they violate corporate bye-laws or the applicable law, they are held personally liable for any damages arising.

9 Parent company liability Generally, shareholders are liable up to the limit of their subscribed capital (in the case of SAs) or the total capital of the company (in the case of LLCs). However, the corporate veil can be breached in cases of fraud or abuse of form. Controlling shareholders are also liable for losses caused by acts performed through an abuse of controlling power. Employment Laws, contracts and permits 10. What are the main laws regulating employment relationships? In addition to constitutional provisions regulating employees' rights, employment relationships are governed primarily by the Consolidated Labour Law of 1943 (Consolidação das Leis do Trabalho) (CLT). Labour laws apply both to Brazilian employees and foreign nationals working in Brazil. If the work is performed in Brazil, Brazilian labour law prevails. Which law governs Brazilian employees working abroad depends on the type of visa that the employee has in the country where he is working and if the employment agreement with the Brazilian company is terminated or suspended. If it is terminated or suspended during the period in which the employee is abroad, the legislation of the place where the work is being performed applies. If the employment agreement is being performed in Brazil, (that is, if the services are being provided in Brazil), Brazilian legislation prevails regardless of the place where the employee was hired or any provision in the employment agreement.

10 11. Is a written contract of employment required? If so, what main terms must be included in it? Do any implied terms and/or collective agreements apply to the employment relationship? A written employment contract is not mandatory, although it is common. Employment contracts can be executed for limited periods of time, but most commonly have an indefinite term. Fixed-term employment contracts can be executed for a maximum of two years. If the employment relationship continues after this period, the contract automatically becomes effective for an indefinite term. Trial period contracts are considered fixed-term, and can last for a maximum of 90 days. Most Brazilian companies have a standard employment contract for different categories of employees. 12. Do foreign employees require work permits and/or residency permits? A foreign individual cannot provide services or work in Brazil without a visa. There are various visas that allow foreign persons to work in Brazil. Permanent visa This visa is appropriate for a foreign national who will occupy an administrator position, as indicated in the Brazilian company's articles of association, with powers to sign documents on behalf of the company, whether hired as an employee or a nonemployed administrator. To obtain this visa, an investment of at least BRL600,000 must be made in the Brazilian company for each foreign national employed. The investment must be evidenced by an electronic report related to the registry of foreign currency with the Central Bank of Brazil. If the Brazilian company does not have the minimum BRL600,000 foreign investment, it can obtain a permanent visa for a foreign national if both: There is a minimum investment of BRL150,000 in the Brazilian company.

11 The company commits to creating at least ten new positions in a period of two years. Temporary visa with Brazilian employment contract (item V) This visa "item V" is usually granted to foreigners that will be hired as employees in non-management positions. Foreign nationals with this visa are not allowed to sign contracts, cheques or other documents on behalf of a Brazilian company. The company and employee must follow certain requirements to obtain the visa, including: Proving that the applicant is highly skilled and essential to the operation of the Brazilian company. Executing an employment contract between the Brazilian company and the foreign national. This visa is valid for two years, renewable for an additional period of two years. Technician visa without Brazilian employment contract Technician visas are often used when a foreign person is needed in Brazil on a temporary basis. Depending on the services to be rendered, this is valid for either: 90 days, renewable for an additional 90 days. One year, renewable for one additional year. Resident visa Brazil has agreements with certain countries (the Mercosul countries (Argentina, Paraguay and Uruguay), as well as Chile and Bolivia) under which their citizens need only present a residence request in Brazil to have the same rights to work as Brazilian citizens. Timing and cost

12 The time taken for visa approval depends on the type of visa, but usually takes from 30 to 45 days. The cost (government taxes) depends on the type of visa, but usually varies between about US$300 and US$700. In general, companies in Brazil hire firms to assist applicants in obtaining their visa. These firms' fees vary from US$1,500 to US$2,100 according to the type of visa. Termination and redundancy 13. Are employees entitled to management representation and/or to be consulted in relation to corporate transactions (such as redundancies and disposals)? Unless there is a specific provision in a collective bargaining agreement (CBA) requiring the employer to consult the employees or the labour union on certain decisions, employees do not have the right to management representation or consultation. 14. How is the termination of individual employment contracts regulated? The concept of fair/justified and unfair/unjustified dismissal does not apply in Brazil. The main types of termination of employment, among others, are: For cause. This is where the violation of any legal or contractual obligation by the employee or employer gives the other party the right to terminate the employment contract. Without cause. In these cases, the employer is not legally required to justify the reason for termination. However, when the employee is given job stability, only the employee can terminate the employment. Workers who enjoy job stability include: Union managers. Members of the internal accident prevention committee. (Some companies are required to implement a committee to review practices and procedures and safe

13 systems of work. Employees serving on these committees have guaranteed employment.) Pregnant women. Insured employees who suffer an occupational accident. Co-operative managers. Employees can be granted job stability under an applicable CBA. Rights on termination Without cause. For dismissal without cause, there is a 30-day' notice period to inform the employee of the termination of his employment contract. During this period, the employee can either: Continue working for the company and receive his salary as usual for that period. Stop working and receive the equivalent of one month's salary as an indemnity, if the company does not intend to maintain the employee for the notice period. For dismissal without cause the employer must pay severance pay, which includes both: Notice of 30 days if the employee had worked 12 months, plus three days for each additional year of service. A fine of 50% of the deposits in the unemployment savings fund (Fundo de Garantia do Tempo de Serviço) (FGTS), which is calculated based on the amounts the employer deposits every month (8% of the salary (see Question 17, Tax resident employees)). Other rights such as pro rata holiday pay and 13th salary (that is, Christmas bonuses) must comply with the severance amounts and other contractual rights or rights under a collective bargaining agreement. Amounts that are vested rights (such as accrued holiday) must also be paid with the severance.

14 Severance must also be paid if the Labour Court finds that there was a constructive dismissal by the employer's gross fault. For cause. Where an employee has been dismissed for cause, there is no right to severance pay but the employee has the right to receive amounts that constitute vested rights (such as accrued holiday). Resignation. Where an employee resigns, he must give notice to his employer. The employee also receives proportional holiday pay plus one-third of the amount on top and his proportional 13th salary. 15. Are redundancies and mass layoffs regulated? Redundancies and mass layoffs (that is, mass employment contract terminations) are not regulated by law, although they may be governed by an applicable CBA. Alternatively, there is the possibility that employment contracts can be suspended for a period from two to five months, provided that, among other requirements, the (Article 476-A, CLT): Employees participate in courses during the layoff period. Suspension is provided for in a CBA. There is no law regulating mass layoffs. The Superior Labour Court has established that for the mass layoffs to be accepted there must be prior negotiation with the trade union representing the category of workers affected, and the payment of indemnities. Tax Taxes on employment 16. In what circumstances is an employee taxed in your jurisdiction and what criteria are used?

15 In principle, a foreign national must obtain either a permanent or temporary visa to work in Brazil (see Question 12). A foreign national is a Brazilian tax resident in the following situations: A person holding a permanent visa is a Brazilian tax resident from the date of arrival in Brazil. A person holding a temporary visa is a Brazilian tax resident: o o if the individual has a labour contract: from the date of arrival in Brazil; if the individual has no labour contract: if the person stays in the country for longer than 183 days, consecutive or otherwise, in any 12 month period, which starts from the date of entry into Brazil and ends on the day following the completion of the period. An individual born in Brazil is considered a Brazilian tax resident in any one of the following situations: When he resides permanently in the country. When he lives abroad, providing services to Brazilian government offices located abroad. During the first 12 months after he leaves the country either: o o temporarily; or permanently and without filing the proper Communication of Definitive Absence of Brazil with the tax authorities. When entering Brazil permanently after having previously been non-tax resident in Brazil. When he fails to prove that he lives and is taxed in another jurisdiction.

16 17. What income tax and social security contributions must be paid by the employee and the employer during the employment relationship? Tax resident employees Income tax. An employer must withhold income tax for tax resident employees on a monthly basis. Tax is levied on monthly income at the following progressive rates for the 2012 tax year, in accordance with salary level: Up to BRL1,637.11: 0%. Between BRL1, and BRL2,453.50: 7.5%. Between BRL2, and BRL3,271.38: 15%. Between BRL3, and BRL4,087.65: 22.5%. Above BRL4,087.65: 27.5%. Social security contributions. Employers must also pay monthly social security contributions which vary between 23% and 32.95% of the gross payroll (depending on the accident prevention factor (Fator Acidentário de Prevenção) (FAP)). These break down as follows: An amount equivalent to 20% of gross payroll to the Social Security Institute (Instituto Nacional do Seguro Social) (INSS). Monthly contributions to the Accident Insurance Rate (Seguro de Acidente de Trabalho) (SAT) of between 0.5% and 5.25% (depending on FAP). Monthly contributions to socially beneficial institutions of between 3.5% and 7.8%. FGTS (see Question 14) is not considered a tax or a social security contribution. It is a worker's right calculated on the portions of salary paid to the employee and deposited every month into an account held by the employee with the public Federal Savings Bank (Caixa Econômica Federal) (CEF). In case of employment termination without cause, the employer is required to pay a fine corresponding to 50% of those amounts

17 monthly deposited into the employee's account (40% of the fine is paid to the employee and the remaining 10% is kept by the government). If terminated without cause, the worker releases all those deposits made into the account by the employer. If the worker resigns or is terminated for cause the deposits are withheld and may be released after three years if the account remains inactive during the three-year period. Non-tax resident employees The Brazil-source income of non-residents is normally subject to withholding income tax of 25% (exclusive taxation). Employers Employers must withhold tax and social security contributions (see above, Tax resident employees). Business vehicles 18. When is a business vehicle subject to tax in your jurisdiction? Tax resident business Brazilian companies [**How is a Brazilian company defined? For example, is it any company established in Brazil? Demarest Comments: Yes, Brazilian companies mean any company incorporated in Brazil.] and Brazilian branches (agencies or representatives) of foreign companies must pay corporate income tax and social contribution tax on their own profits obtained worldwide. Non-tax resident business Branches of foreign companies are taxed at the same rates as resident companies.

18 Capital gains made by non-tax residents on Brazilian assets (including shares in Brazilian companies) are subject to withholding tax of 15% (or 25% for tax-residents of low-tax jurisdictions or a lower rate under a double taxation treaty (see Question 25)). Financial transactions performed by non-tax residents are taxed at variable rates depending on the nature of the transaction and the country of domicile of the non-tax resident. Services provided in Brazil by non-tax residents are subject to: Withholding tax at a general rate of 25% (or 15% for technical services see Question 20, IP royalties paid). CIDE (Contribuição de Intervenção no Domínio Econômico) at 10% on income related to technical services and assistance, administrative services and royalties. ISS at rates from 2% to 5%. PIS/COFINS-Importation at a combined rate of 9.25%. (Note this is not the same as the PIS/COFINS on internal revenues tax mentioned in Question 19.) Tax on exchange transactions (Imposto Sobre Operacoes Financeiras) (IOF) usually at 0.38%. The non-tax resident must pay the withholding tax and ISS while the Brazilian importer pays PIS/COFINS-Importation, IOF and CIDE. Certain Articles in Brazilian tax law could create tax exposure for non-tax residents who trade in Brazil if they have a permanent establishment in Brazil. Permanent establishment is not defined. However, non-residents operating in Brazil through commissionaires, legal representatives, agents and commercial representatives may be deemed to be Brazilian taxpayers and subject to taxation on profits. 19. What are the main taxes that potentially apply to a business vehicle subject to tax in your jurisdiction (including tax rates)?

19 Corporate income tax (Imposto de Renda Pessoa Jurídica) (IRPJ) This is levied at 25% of a company's profits (15% plus an additional 10% on profits over BRL20,000 each month). These profits include operational results, financial results, capital gains and other non-operational results. Social contribution on net profits (Contribuição Social Sobre o Lucro Líquido) (CSLL) This is levied at 9% of company's profits. PIS/COFINS on internal revenues These are two social contributions levied on the customs value of an imported good. There are two systems for the calculation of PIS and COFINS: Cumulative system. Under this system, PIS and COFINS are levied at the rates of 0.65% and 3% respectively, and the taxpayer is not allowed to offset any tax credits. Non-cumulative system. Under this system, PIS and COFINS are levied at the rates of 1.65% and 7.6% respectively, but the taxpayer is allowed to discount credits related to part of its costs and expenses. Excise tax (Imposto Sobre Produtos Industrializados) (IPI) This is a value-added tax (VAT) type of tax on imports and transactions involving manufactured goods, imposed by the federal government. The IPI tax rate varies depending on the product traded (see Question 24). State value-added tax (Impostos Sobre Circulação de Mercadorias e Prestação de Serviços) (ICMS)

20 This is a VAT-type of tax which is generally charged on sales transactions (including movements of goods out of the company's facility as well as certain types of services), imposed by the state government. The ICMS rates vary according to the state where the company and the acquirer of the goods are located. ISS (Imposto Sobre Serviços) The main municipal tax is the service tax, charged on the importation and the local provision of certain services at rates that vary from 2% to 5%. [**Should CIDE also be included in this section? Demarest Comment: No.] Dividends, interest and IP royalties 20. How are the following taxed: Dividends paid to foreign corporate shareholders? Dividends received from foreign companies? Interest paid to foreign corporate shareholders? Intellectual property (IP) royalties paid to foreign corporate shareholders? Dividends paid Dividends paid out of profits are not subject to withholding tax. Dividends received Dividends received from non-resident legal entities are taxable in Brazil on a worldwide basis. [**Which tax applies here? For example, is it CIDE? Demarest Comment: Corporate Income Tax (IRPJ) and Social Contribution on Net Profits (CSLL). Please also note that the required exchange transaction for the inflow of dividends is subject to 0.38% IOF tax.]] Interest paid

21 Interest remitted abroad is generally subject to withholding tax at a rate of 15% or a lower treaty rate (see Question 25). Interest paid to residents of low-tax jurisdictions is subject to a 25% withholding tax. As of December 5, 2012, loans granted by a foreign party to a Brazilian party are subject to a zero rate of IOF if the loan has an average maturity term of more than 360 days (the rate is 6% if the maturity term is less than or equal to 360 days). The IOF is paid by the Brazilian debtor. IP royalties paid The payment of royalties is generally subject to 15% withholding tax (or 25% of payments made to a low-tax jurisdiction) and a 10% special contribution called CIDE (see Question 18). Additionally the exchange transaction to remit such payment is currently subject to IOF at the rate of 0.38%. The non-resident must pay withholding tax and the Brazilian resident must pay CIDE and IOF. Remittances of royalties abroad from trade marks, patents and technical assistance that involve the transfer of know-how are subject to prior registration with, and approval from, the Brazilian Industrial Property Agency (Instituto Nacional de Propriedade Industrial) (INPI). They must also be registered with the Central Bank. Royalties are generally limited to between 1% and 5% of the net receipts derived from the product manufactured or sold. Groups, affiliates and related parties 21. Are there any thin capitalisation rules (restrictions on loans from foreign affiliates)? Generally, interest expenses incurred by companies are fully deductible for Brazilian corporate taxes (IRPJ and CSLL (see Question 19)) provided that:

22 The expense is considered normal, usual and necessary for the Brazilian company's activities. The loan is properly registered with the Central Bank (if not, transfer pricing rules apply) (see Question 23). The thin capitalisation (thin-cap) rules have been observed. Thin-cap rules, which restrict the deduction of interest expenses with related parties or with low-tax jurisdictions or privileged tax regime entities apply to cross-border loans. The Brazilian tax authorities list more than 60 jurisdictions which are treated as lowtax jurisdictions ("tax havens" or "black-list") as well as eight privileged tax regimes ("grey-list"). A low tax jurisdiction is one that does not tax income or does so at a maximum rate of 20%. Privileged tax regimes refer to a certain tax treatment applicable to some kind of companies, for example, the Bahamas, Panama, Singapore, Hong Kong are black-listed, and the taxation of the "offshore KFT" in Hungary is greylisted. All other jurisdictions or tax regimes are "non-listed", for example, the US and France. Interest is not deductible if the lender is located in a non-listed jurisdiction, and a 2:1 debt-equity ratio is exceeded. If the lender is located in a listed jurisdiction (either under the black-list or the greylist), a 0.3:1 debt-equity ratio must be observed. 22. Must the profits of a foreign subsidiary be imputed to a parent company that is tax resident in your jurisdiction (controlled foreign company rules)? All income must be included in the company's taxable results at the end of each calendar year, regardless of the source of the income and its availability. This includes the profits of a foreign subsidiary. 23. Are there any transfer pricing rules?

23 Unlike most countries, Brazilian transfer pricing rules do not follow the model of the Organization for Economic Co-operation and Development (OECD). They differ from international standards mainly with respect to profit margins and functions and risks analysis. Instead of establishing comparable transactions between unrelated parties as the underlying benchmark, the Brazilian transfer pricing rules prescribe fixed statutory profit percentages that translate into: Maximum price limitations on imports. Price floors on exports of goods, services and rights. To the extent that the imports or exports of goods, services or rights occur between related parties, a resident in a low-tax jurisdiction or a privileged tax regime will be subject to Brazilian transfer pricing rules. Customs duties 24. How are imports and exports taxed? Imports Goods imported into Brazil are subject to the following taxes, which must be paid by the importer on registration of the import declaration: Import tax (Imposto de Importação) (II). This is levied on the customs value of the imported goods at different rates depending on the good's classification in the Mercosur Common Nomenclature (NCM) (a form of classification of goods utilised by the World Customs Organisation). IPI. This is levied on the customs value of the imported good plus the II. The IPI rate also varies in accordance with the good's classification in the NCM. ICMS. This is levied on the customs value of the imported good plus the II, the IPI, and the social contributions PIS/COFINS on internal revenues (see Question 19).

24 PIS/COFINS-importation. This is levied on the customs value of the imported good, plus the ICMS, normally at a combined rate of 9.25%. Some goods are subject to different rates). Freight Surcharge for renovation of merchant marine (Adicional ao Frete para a Renovação da Marinha Mercante) (AFRMM). This is calculated at a 25% rate on the cost of international ocean freight. The customs value of imported goods is determined in accordance with the Customs Valuation Agreement of the World Trade Organization (WTO), which states that the customs value, as a general rule, is the transaction value. If the transaction value cannot be used, alternate valuation methods provided by the Customs Valuation Agreement are applied. Under Brazilian legislation, international insurance and international freight costs are included in the customs value of imported goods. The IPI and the ICMS are normally creditable taxes. This means that, generally, amounts paid in prior transactions can be offset against taxes due on subsequent transactions. The PIS/COFINS on internal revenues may also be creditable if the importer collects PIS/COFINS under the non-cumulative system (see Question 19). Exports Exports are generally free of taxes. However, the exportation of some products, such as cigarettes and weapons, is subject to export tax, which is calculated on the export price of the exported goods. The export tax rate varies from 30% to 150%. Double tax treaties 25. Is there a wide network of double tax treaties? Brazil has extended its tax treaty network in the last couple of years. Currently, Brazil has double tax treaties with 29 countries: Argentina, Austria, Belgium, Canada, Chile, China, the Czech Republic, Denmark, Ecuador, Finland, France, Hungary, India, Israel,

25 Italy, Japan, South Korea, Luxembourg, Mexico, The Netherlands, Norway, Peru, Philippines, Portugal, Slovak Republic, South Africa, Spain, Sweden and Ukraine. The double tax treaties were based on the model treaty convention of the OECD. However, since Brazil is not an OECD member country, it does not follow the interpretation commonly adopted under OECD guidelines for some of the Articles provided in the treaties. There is no formal list of countries with which Brazil has a reciprocal tax agreement. Nevertheless, the Brazilian IRS has formally recognised reciprocal tax treatment for income tax purposes with the US, the UK and Germany (IRS Declaratory Acts 28/00, 48/00 and 16/05). Competition 26. Are restrictive agreements and practices regulated by competition law? Is unilateral (or single-firm) conduct regulated by competition law? Competition authority The main competition authority is CADE (Conselho Administrativo de Defesa Econômica) ( The website gives guidance on the competition law rules. Restrictive agreements and practices It is a violation of the economic order (even if no effect is achieved) for any conduct (including agreements) to intend or be able to: Limit, restrain or in any way harm open competition or free enterprise. Control a relevant market of a certain product or service. Increase profits on a discretionary basis.

26 Abuse one's market control. Under the new Competition Law (see Question 1) the penalties now include: Corporate administrative fines. These can be fixed between 0.1% to 20% of the revenue in the business activity segment involved. There is still uncertainty with regard to the concept of business activity segment, which will be subject to further regulation. Personal administrative fines for managers. These can be fixed between 1% to 20% of the fine applied to the company. Personal criminal penalties. Criminal penalties now range from two to six years of imprisonment, plus a fine. The amendment of the law, according to the Brazilian criminal system, excludes the possibility of alternative penalties to fines, therefore entailing the necessary application of reclusion penalties. Unilateral conduct It is a violation of the economic order (even if no effect is achieved) for any company's conduct (including agreements) to intend or be able to abuse its market control. To determine whether a company's conduct is able to produce anti-competitive effects in the market, CADE can: Examine the market power effectively enjoyed by the economic agent within the relevant market. Examine the effects produced, or which are likely to be produced, in the market. Evaluate possible efficiencies generated by the conduct. CADE will then balance these factors to determine whether any efficiencies are able to offset the anti-competitive effects produced. 27. Are mergers and acquisitions subject to merger control?

27 Agreements which are able to limit or hinder free competition in the Brazilian market, or result in the dominance of a relevant market, may be subject to scrutiny by CADE (Law 12,529, of November ). Brazilian competition law requires the mandatory submission of any agreement which involves one economic group with gross revenue of at least BLR750 million in Brazil and another economic group with gross revenue of at least BLR75 million in Brazil. If the transaction meets the above thresholds, then it must wait for CADE's approval before it can be closed. Intellectual property 28. Outline the main IP rights in your jurisdiction. Patents Definition and legal requirements. Patents must be: Novel. Inventive. Have use or application in industry. Registration. Protection is through registration of the patent with the Brazilian National Institute of Industrial property (Instituto nacional da propriedade industrial) (INPI). Enforcement and remedies. Administrative actions before INPI and judicial actions in the Brazilian courts. Length of protection. The registration is valid for 20 years from the filing date (15 years for utility models). Trade marks Definition and legal requirements. Trade marks must be:

28 Distinctive. Available. Lawful. Visual. Protection. Protection is through registering the trade mark with the INPI. However, well-known trade marks are protected whether or not they have been registered Enforcement and remedies. Administrative actions before INPI and in the Brazilian courts. Length of protection and renewability. Protection is valid for ten years, renewable for successive ten-year periods. Registered designs Definition. This is the same as for patents (see above, Patents). Registration. This is the same as for patents (see above, Patents). Enforcement and remedies. This is the same as for patents (see above, Patents). Length of protection and renewability. Registration is valid for ten years from the filing date, renewable for three successive five year periods each. Unregistered designs Depending on the nature of the design, unregistered designs can be protected as copyright. Copyright Definition and legal requirements. To be protected by copyright, a work must be: An intellectual creation expressed through any means or fixed in any tangible or intangible form. Original.

29 Protection. Copyright registration is not required for protection. However, registration can facilitate proof of ownership. Enforcement and remedies. Enforcement is through judicial actions in the Brazilian courts. Length of protection and renewability. Protection is for the author's lifetime plus 70 years. Other Other significant IP rights available include: Confidential information. Software rights. Plant variety rights. Domain names. Marketing agreements 29. Are marketing agreements regulated? Agency Agency agreements are regulated by the Commercial Representation Law (No of 9 December 1965) and by the Civil Code of Distribution Distribution agreements are broadly regulated and the main issues to consider are the exclusivity of territory and indemnification in cases of termination. Franchising The Franchise Law of 1994 regulates all franchise relationships.

30 E-commerce 30. Are there any laws regulating e-commerce (such as electronic signatures and distance selling)? There are no laws relating to e-commerce. However, electronically signed documents have the same legal validity as paper documents. Advertising 31. Outline the regulation of advertising in your jurisdiction. Advertising is regulated through the National Board of Self Regulation of Advertising (Conselho Nacional de Autorregulamentação Publicitária) (CONAR). CONAR applies the provisions in the Brazilian Advertising Self Regulation Code, approved in 1978 by the 3rd Brazilian advertising congress. The provisions of the code are stated in 50 articles and 21 specific exhibits on the advertising of foods, soft drinks, beers, wines and other alcoholic beverages, automobiles, non-prescription medicines, and so on. [Demarest Comment: That is correct. Conar also regulates non-prescription medicines.] Data protection 32. Are there specific statutory data protection laws? If not, are there laws providing equivalent protection? There are no laws relating specifically to data protection (except for financial information). However, the Civil Code, the Consumer Protection Code and constitutional provisions are usually used to protect these rights. Personally identifiable information is protected under the Federal Constitution, as well as under the Consumer Protection Code (regarding consumer relations).

31 Supplementary Law 105/10 provides for the confidentiality of financial data and operations. Under the law, financial institutions must maintain the secrecy of active and passive operations and banking services. However, the following conduct, among others, does not constitute a breach of the duty of confidentiality: The exchange of enrollment information between financial institutions. Provision of enrollment information of issuers of insufficient-funds checks or borrowers in default to credit protection companies. Communication to the competent authorities about illegal practices, including the supply of information on transactions involving funds that are linked to criminal activity. Disclosure of information with express consent of those named. In addition, this law provides for the possibility of a judge-authorised breach of bank confidentiality when there is a need to verify the existence of any unlawful conduct, such as: Terrorism. Illicit trafficking of narcotics. Smuggling or trafficking of fire arms or materials for their production. Extortion through kidnapping. Crimes against the national financial system, against the public administration or against tax and social security. Money laundering. Any crimes performed by a criminal organisation.

32 Product liability 33. How is product liability and product safety regulated? Product liability is regulated by the Civil Code, the Consumer Protection Code and general regulations from regulatory agencies. Under the Consumer Protection Code: Any goods or services must meet the ordinary purposes for which those goods or services are intended and must not have any defects. Contractual clauses concerning the safety of goods and services are deemed void and unenforceable if they prevent, exempt or reduce a seller's liability, or imply a waiver of the relevant rights. Information provided to consumers must be complete, clear, definite and precise. Consumers must be adequately informed about hazardous or dangerous products. Companies must have systems and procedures in place for the recall of products. Main business organisations Federal Revenue Agency (Receita Federal) W Main activities. Federal tax agency in charge of all federal taxation and registration of Brazilian companies and foreign shareholders. Central Bank of Brazil (Banco Central do Brasil) (BACEN) W Main activities. Central Bank in charge of issuing national banking regulations, registration of inflow and outflow of funds and financial institutions in Brazil. [Demarest Comment: No fiscal control is exercised by Central Brank.]

33 Securities Exchange Commission (Comissão de Valores Mobiliários) (CVM) W Main activities. Federal agency in charge of regulation and the securities market in Brazil. [Demarest Comment: No fiscal control is exercised by CVM.] Commercial Board of the State of São Paulo (Junta Comercial do Estado de São Paulo) (JUCESP) W Main activities. Commercial Board of the largest state in Brazil. In charge of the registration of corporate documents in general (articles of association, minutes, corporate reorganisations, and so on). Table: work permit requirements Jurisdiction Work permit/residency permit requirements for foreign employees Brazil The visas that allow foreign persons to work in Brazil are: Permanent visa (for Brazilian company managers). Temporary visa with Brazilian employment contract (for foreigners that will be hired as employees in non-management positions in Brazil). Technician visa without Brazilian employment contract (for temporary foreign service providers). Resident visa.

34 Online resources [##Brazil Government (legislation portal)] W www2.planalto.gov.br/presidencia/legislacao Description. The website is maintained by the federal government and contains the official and up-to-date legislation currently in effect in Brazil. All information is in Portuguese and there is no official platform in English.] [Demarest Comments: That is correct. The website is only in Portuguese. (there is no English version).] Contributor details Lawyer Name: Managing Partner: Paulo Rocha Law Firm Name: Demarest Advogados T F E procha@demarest.com.br W Qualified. São Paulo, 1993 Areas of practice. Mergers and Acquisitions Recent transactions Goodyear Tire & Rubber Company BRASILPREV SEGUROS E PREVIDENCIA S.A Legrand

35 Los Grobo Ceagro do Brasil S.A. (Ceagro) Grupo Aliança Suominen Corporation Simon Property Group, Inc Caixa Participações SA ("CaixaPar") and several other ongoing in.