Doing Business in Brazil: Common Pitfalls & How to Avoid Them

The Opportunity – Why Brazil?

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Overview

• Average GDP growth rate of over 5%

• World’s 7th largest economy

• Population of 193 million

• Sophisticated technology infrastructure

• Currently the 11th largest export market for U.S. goods

• 197 of the Fortune 500 companies are direct investors in Brazil

But, Brazil is still a very peculiar emerging market…

High Street Partners Proprietary and Confidential 2011

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The Challenges

The Realities • General Taxes Overview

• Tax Schemes

Scenario #1: Tax Scheme for Brazilian Business

General Incorporation Guidelines

Scenario #2: S/A vs. Limitada

Getting Started

Real Life Situations

Questions?

Agenda

Overview • US offices: Annapolis (HQ), Boston, Atlanta, Miami, San Francisco, San

Jose, San Diego

• International offices : London, Hong Kong, Shanghai, Tokyo, Pune (India)

• Employees: 125

• Customers: 350+ in over 80 countries

How we are different • We get it – Founder opened 30+ overseas offices and is “our

customer”

• We do international business services, every day, everywhere

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About HSP

Has been helping companies expand into Brazil for over 10 years

Started his career with consulting firms focused on advisory, accounting, controlling, tax planning and mergers & acquisitions

Currently an investor and holds a seat in Investments Committee of IVP (Innova Venture Partners), an investment vehicle in partnership with Technology Center of Campinas State University

Extensive experience and background in the banking industry, specifically in treasury desk structuring investments for Multinational Corporations

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Guilherme Cruz, HSP’s In-Country Expert on Brazil

Introduction

The Challenges 6

Brazil has some of the most stringent laws in the world surrounding basic sales transactions and a highly complex tax system…

Brazil is a protected country

• For that reason there are huge opportunities for those who decide facing the challenges of investing

No EVA

Tax is collected in many different stages of business

Numerous tax Schemes and forms

Many “codes”

• Constitution (more than 300 articles)

• Tax Code

• Civil Code

• Commercial Law

Federal, State and Municipality tax authorities are not connected; different databases

Slow court system – 3 jurisdictions for tax matters

The Realities: General Taxes Overview 7

Corporate Taxation – Federal Corporate Income Taxes

Corporate Income Tax (IRPJ)

• Net taxable income, applied at 15% over collection basis

Social Contribution Tax on Profits (CSLL)

• Introduced to fund social and welfare programs, it is paid in addition to IRPJ at a rate of 9% over same collection basis of IRJP

The Realities: General Taxes Overview 8

Gross Revenue Taxes

Social Integration Program (PIS) • Cumulative: must choose real profit Scheme (1.65%)

• Non-Cumulative: presumed profit tax Scheme (0.65%)

Social Security Contribution (COFINS)

• Cumulative: must choose real profit Scheme (7.60%)

• Non-Cumulative: presumed profit tax Scheme (3.00%)

The Realities: General Taxes Overview 9

Indirect Taxes

Federal • Industrialized Tax Products (IPI)

• Import Tax (II)

State

• Tax on Distribution of Goods and Services (ICMS)

Municipal

• Service Tax (ISS)

Withholding Income Tax

• Applies for certain domestic transactions such as payment services, salaries and financial income of banking investments

The Realities: General Taxes Overview 10

Double Tax Agreements (DTA) • There is no DTA in place between Brazil and the US, only a

“Reciprocity Treatment”

Reciprocity Treatment • Income taxes withheld by customers in Brazil are available as

foreign tax credits in the US by the US supplier

• Only meaningful to the extent that they will actually lower federal US tax payments for the supplier

The Realities: Tax Scheme 11

Actual (or Real) Profit System: Net taxable income is equal to net book profit applying Brazilian GAAP and appropriate inclusions and deductions according to regulation.

Presumed Profit System: Taxable income based on net profit. Restrictions: (a) up to 48 million revenues preceding year (b) are not financial institutions (c) do not earn foreign profits, income or gains and (d) do not qualify for an exemption.

Arbitrated System: under inadequate circumstances of accounting records, tax authorities may arbitrate profits. Taxable income based on net profit.

Key Considerations: • Tax Schemes can be changed annually in the beginning of the fiscal year as of

January 1st to December 31st. • Most companies present a pre-operational period of accumulating expenses and

consequently, losses.

The Situation:

The VP of Finance learns that Brazil presents two tax schemes for fiscal purposes and needs to decide whether the company should choose Presumed Profit or Actual Profit.

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Scenario #1: Tax Scheme for Brazilian Business

Key Consideration: Understanding the maturity and operational margin for its

business abroad will support the decision of tax scheme.

The Solution:

Step 1: Determine the gross margin and pre-operational period

In the Business Plan process, viability analysis will present financial projections to be used for local tax planning.

Margin comparison

• Presumed Profit will determine margin for taxable income

• Generally, in case of services 32% and goods, 8%

• Comparing business margins with presumed margins is key for the proper choice

Business Maturity period

• Depending on company activity and permits required, it is possible to take a few months to get the business off the ground and running

• Accumulated expenses in Real Profit scenario is a great advantage

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Scenario #1: Tax Scheme for Brazilian Business

Step 2: Building scenarios for Real and Presumed profit

On a monthly basis, it is possible to create projections over financials. In our case the example refers to a goods business.

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Scenario #1: Tax Scheme for Brazilian Business

Real Profit Presumed Profit

Importation 1.500.000,00 Importation 1.500.000,00

ICMS 12,00% 180.000,00 ICMS 12,00% 180.000,00

IPI 0,00% IPI 0,00%

II 14,00% 210.000,00 II 14,00% 210.000,00

Tax Credit (PIS) 1,65% 24.750,00 PIS 1,65% 24.750,00

Tax Credit (COFINS) 7,60% 114.000,00 COFINS 7,60% 114.000,00

Revenues 3.315.000,00 Revenues 3.315.000,00

ICMS 12,00% -397.800,00 ICMS 12,00% -397.800,00

IPI 0,00% 0,00 IPI 0,00% 0,00

PIS 1,65% -54.697,50 PIS 0,65% -21.547,50

COFINS 7,60% -251.940,00 COFINS 3,00% -99.450,00

Net Revenues 2.610.562,50 Net Revenues 2.796.202,50

COGS -1.181.250,00 COGS -1.320.000,00

Deductable Expenses -1.064.076,97 Deductable Expenses -1.064.076,97

Other costs -100.034,99 Other costs -100.034,99

Profit Before Taxes 265.200,54 Profit Before Taxes 312.090,54

Income Tax Presumption 8,00% 265.200,00

Social Contribution Presumption 16,00% 530.400,00

Income Tax 15,00% -39.780,08 Income Tax 15,00% -39.780,00

Aditional Income Tax 10,00% -2.520,05 Aditional Income Tax 10,00% -2.520,00

Social Contribution 9,00% -23.868,05 Social Contribution 9,00% -47.736,00

Total Corporate Tax -66.168,18 Total Corporate Tax -90.036,00

Net Profit -66.168,18 Net Profit 222.054,54

Total Tax Burden 451.855,68 Total Tax Burden 428.833,50

Operational Margin 8,00% Operational Margin 9,41%

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Doing business in Brazil can be structured in different formats for international investors…

General Incorporation Guidelines

Less

Exportation

Commercial Representation

Country Ccommercial Distribution

Engagement Franchise

Establihsment of Brazilian Subsidiary

More

Alternatives for Structuring Business

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Scenario #2: S/A vs. Limitada

The Situation:

The VP of Finance learns that Brazil presents two different types of company structures (S/A and Limitada) and needs to decide which type best aligns with their corporate strategy.

Key Consideration: Choosing which type of company is a trade-off between

flexibility for more complex operations and limited liability and cost.

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Limitada

Similar to a Limited Liability Company

•No stipulated minimum corporate capital

•Capital divided in quotas

•Amendments of Articles of Association demands ¾ of corporate capital

•Possibility of claim for exclusion of minority shareholder for a fair cause

•Less protection for minority shareholder

•Easier path for the shareholder that intends to leave the company

•Fewer formalities

S/A

Similar to a Corporation

•General rule, no minimum capital is required however 10% of capital paid prior to filing

•Capital divided in shares

•Bylaws amendment demands 50% + 1 of voting capital

•Exclusion of minority shareholder is rare and very controversial

•Possibility of subscription for raising capital via new shares issuance

•Possibility of using goodwill, debts, and other structured instruments

•Publishing corporate bylaws and audit of financial statements is required

Scenario #2: S/A vs. Limitada

The Solution:

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Step 1: Type of Company

• Choose between a Limitada or a S/A

• For both minimum of 2 shareholders – can be entities and/or individuals

Step 2: Mandatory Representatives

• Appointment of an attorney-in-fact for representing the offshore shareholders

• Individual that holds POA must be Brazilian resident or foreigner with permanent VISA

Step 3: Documentation

• By-laws/articles or associations must be notarized and approved by the Brazilian Consulate/Embassy

• Registration with the central bank and obtaining tax payer/social security number

Getting Started

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Step 4: Legal Representative/Statutory Director

• Brazilian citizen or a foreigner with permanent VISA must be nominated as legal representative

• Two Statutory Directors in the case of a S/A

Step 5: Subsidiary Set-Up

• Company’s corporate purpose, corporate name and registered address

• Definition of stated capital and shareholders shares division

• Definition of company’s bylaws or articles of association and proof of filing on Commercial Boards

• Filing municipality, state and federal licenses/registration

• Opening bank account

Getting Started

Offer Letter & Payroll Registration

Local Incorporation: Corporate Address & Bylaw’s Activity

Legal Representative: Administration Issues

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Real Life Situations

Questions

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Questions?

+1.888.881.6576 info@hsp.com

@HSP_Inc