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Opportunities and Legal Challenges for Chinese Investments in Brazil

NORONHA ADVOGADOSGLOBAL LAWYERS

Prof. Dr. Durval de Noronha Goyos Jr.President - Noronha Advogados

Dacheng Law Firm

March 15th, 2013

London | Lisbon | Shanghai |Beijing | Miami | Buenos Aires | Johannesburg |New Delhi

São Paulo | Rio de Janeiro | Brasília | Curitiba | Recife | Belo Horizonte | Campo Grande

1. Brazil – Opportunities.

2. Brazil – Legal challenges.

3. Conclusion: Prospects for the Brazil/China Strategic Partnership.

POINTS OF PRESENTATION

Brazil - Opportunities

Map of Brazil

Strategic Advantages

Pop over 100 Millioninhabitants

GDP overUS$ 1 Trillion

GDP,Population,Agriculture

Arable land over20 millions

hectars

ARG

KZT TUR

UKR

AUS

IDN

PKT

NIG

BRAUSA

INDRUS

CHI

BGL

MEX JPN

CAN

GER UK

NLD KOR

SPN

ITA

FRA

Source:Fiesp

2005 – 1.85 million barrels a day

2006 – Brazil achieves self sufficiency in oil

2007 – Discovery of Tupi oilfield with estimated 10 billion of barrels of oil.

The discovery could double the Brazilian reserves.

2008 – Discovery of Carioca oilfield with estimated 70 billion barrels of oil.

Discovery puts Brazil's oil reserves among the world's largest 1

2010 – 2.1 million barrels a day

2011 – 2.6 million barrels a day 2

Fundamentals

Source: 1- Financial Times, July 8 20082- Petrobras, February 2011 estimate

Oil Production

Fundamentals

27 billion liters/year (2009) 70 billion liters/year (2020)* Estimate Increase in cultivated area by 67,000 hectares Creation of 20,000 direct jobs and 60,000 indirect

jobs Investments in production chain estimated at around

USD 1,5 billion for the next years CO2 emission reduction by 3.5 million tons/year

Ethanol Production

Source: Sugar Cane Industry Union - UNICA

Fundamentals

Source: Brazilian Ministry of Mines and Energy

Sources of Energy

86%

14%

55%

45%

Brazil's Social Development: Division by Classes in 2010

Source: FGV

Brazil's Economy

15%

55%

30%

Classes A/BClasse CClasses D/E

Middle Class in % of the Brazilian Population – 1992/2011

Brazil's Economy

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

10

20

30

40

50

60

32.5230.98

36.52 37.39 36.3738.69 37.64

37.64

45.0847.06

49.9653

55

0

5

10

15

20

25

30

35

40

35.03

28.65 28.82

26.8828.14

26.5928.03

22.66

19.1918.11

1615.32

Poverty in % of the Brazilian Population – 1992/2010

1993 1995 1996 1998 1999 2002 2003 2005 2006 2007 2009 2010

Source: CPS/FGV

Brazil's Economy

Brazil's EconomyUnemployment rate in Brazil

Source: Central Bank/Brazilian Institute of Geography and Statistics - IBGE

Brazil’s GDP in US$

Source: Brazilian Institute of Geography and Statistics – IBGE – World Bank

Brazil's Economy

2003 2004 2005 2006 2007 2008 2009 2010 2011

GDP(Billion)

552 663.4 882 1,006 1,300 1,378 1,922 2,090 2,480

Population(Million)

178.9 181.5 185.5 186.7 188.9 190.0 193 195 196

GDP per capita

(Thousand)3,10 3,66 4,77 5,41 6,91 7,252 9,958 10,717 12,653

Economic Growth % (GDP)

Source: Brazilian Institute of Geography and Statistics – IBGE/IEDI * Estimate

Brazil's Economy

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1

2

3

4

5

6

7

8

1.1

5.7

3.2

4

6.1

5.2

0.0

7.5

4

2

Brazil's EconomyBrazilian International Reserves

2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

250

300

350

400

49.3 52.9 53.8

85.8

180.3193.78

238.52

288.58

355378.7

Source: Central Bank *September 2012

US$ Billion

Source: Brazilian Institute of Geography and Statistics - IBGE

Brazil's Economy Brazilian Inflation Rates

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

12.53%

9.30%

7.60%

5.69%

3.14%

4.46%

5.90%

4.31%

5.91% 6.01%

5.30%

*Estimate

Foreign TradeBrazil’s Balance of Trade

Source: Development, Industry and Trade Ministry - MDIC

US$ Billion

2004 2005 2006 2007 2008 2009 2010 20110

50

100

150

200

250

300

350

400

450

500

Exports Imports Balance Flow of Trade

Bilateral Trade Brazil ChinaCurrent of Trade US$

Source: Brazilian Secretary of Foreign Trade - SECEX

US$ Billion

2002 2003 2004 2005 2006 2007 2008 2009 2010 20110.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

4.076.68

9.1512.19

16.39

23.37

36.57 36.91

56.38

77.10

Investment Flows - BrazilForeign Direct Investment: Outbound

Source: Central Bank of Brazil

US$ Billion

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

5

10

15

20

25

30

35

3.2 2.8 3.12

11.1

4

29.3 29.6

34.1

22.3

28 27.4

Investment Flows - BrazilForeign Direct Investment: Inflows

Source: Central Bank *Central Bank estimate

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

10

20

30

40

50

60

70

32.8

22.5

16.6

10.1

18.115.1

18.8

34.7

45.1

25.9

50

70

60

Taxes are not competitive;

Interest rates are very high;

Brazilian currency overvalued;

Labour costs;

Excessive bureaucracy; and

Deficient Infrastructure.

Brazil – Legal Challenges

List of Countries by Tax Revenue as Percentage of GDP

Source: Heritage Foundation 2012

Brazil France India South Africa United States0

5

10

15

20

25

30

35

40

45

34.4

17

44.640.6

17.7

36.9

26.9

39

26.9

Income tax on corporate profits – 15% + 10% over R$240,000;

Social contribution on Net Profits – 9%;

Effective tax rate on profits – 34%;

Basic Taxes in Brazil

A

Capital Gains on FDI;

Taxable at source – 15%;

Tax havens – 25%;

Basic Taxes in Brazil

B

Withholding taxes

Dividends - Zero;

Interest – 15% or 25%

Royalties – 15% or 25%

Service payments – 25%

Basic Taxes in Brazil

C

Taxation on Revenue

COFINS 7.6%

Basic Taxes in Brazil

D

Product value (CIF) = USD 200,000.00 = R$442.560,00 (US$1.00 = R$ 2,2128)

Import Duty (14% over the CIF value) = R$61.958,40 Excise Tax(IPI – 10% over the CIF value plus the Import Duty) =

R$ 50.451,84 ICMS (18% over CIF value plus Import Duty and IPI using the

Inside Calculation Method) = R$121.822,73 PIS (1,65%) = R$ 10.261,50* COFINS (7,6%) = R$ 47.265,11* AFRMM (25%) over the overseas freight (R$20.000,00) = R$

5.000,00 Total Tax Burden = R$ 296.759,58

Simulation re import taxes

World's Interest Rates

Country Nominal Rate Inflation Real Rate

Russia 7,85% 6,6% 1,25%

Brazil 9,57% 5,3% 4,27%

China 3,21,% 1,9% 1,31%

India 8,15% 9,7% -1,55%

South Africa 6,65% 5,0% 1,65%

Euro Area 1,66% 2,40% -0,74%

USA 1,81% 2,10% -0,31%

Brazil's Economy

Exchange Rates of the Real Against the US Dollar

Brazil's Economy39

371

3944

9

3981

2

3999

4

4020

7

4026

8

4032

9

4038

9

4045

1

4051

2

4057

4

4063

3

0

0.5

1

1.5

2

2.5

1.81 1.78 1.77

1.6

2.33 2.31

1.96

1.741.88

1.81 1.78 1.741.82 1.8 1.75 1.76

1.69 1.7 1.72 1.67 1.67 1.66

1.63

2.03

Two shareholders for the company;

A power of Attorney to a resident in Brazil;

Manager resident in Brazil;

Company’s registered address; and

Registration of foreign shareholders with the Brazilian internal revenue

service.

Source: Noronha Advogados

Bureaucracy – Company Formation in Brazil

Previous requirements

Execution of Articles of Incorporation;

Registration of Articles before the Board of Trade;

Enrollment of Company with the Federal Taxpayers registry;

Enrollment of Company with the Municipal Taxpayers registry;

Enrollment of Company with the State Taxpayers registry;

Special enrollments such as Securities and Exchange Commission,

Engineering Council, etc; and

Adequate capitalization – R$ 600.000,00 per visa.

Source: Noronha Advogados

Bureaucracy – Company Formation in Brazil

Incorporation and subsequent filings

Conclusion3. Prospects for the Brazil – China Strategic Partnership in 2013

Biggest Economies - Projected 2012 - GDP US$ TrillionBrazil's Economy

United States

China

Japan

Germany

Brazil

France

Britain

Italy

0 3 6 9 12 15

Brazil risingBiggest economies, 2012 GDPStrn at average exchange rates

Brazil and China will enter 2013 as two of the five largest economies in the

world;

Brazil and China will cooperate very closely in international fora;

China will maintain its position of Brazil’s largest trade partner in the world;

China will maintain its position of Brazil’s largest investor in the world;

Brazil will remain the main destination of Chinese investments in Latin

America;

Brazil will remain China’s main trade partner in Latin America;

Brazilian investments in China will increase substantially;

Brazil and China will continue to work together, for global peace, international

justice and generalized prosperity of all nations.

Prospects for the Brazil China Strategic Partnership in 2013

NORONHA ADVOGADOS

Durval de Noronha Goyos Jr.

dng@noronhaadvogados.com.brwww.noronhaadvogados.com.br