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Doing business in Brazil

Executive summary 4

Foreword 6

Introduction – Doing business in Brazil 8

Conducting business in Brazil 16

Taxation in Brazil 22

Audit and accountancy 34

Human Resources and Employment Law 36

Trade 38

Banking in Brazil 40

HSBC in Brazil 42

Country overview 44

Contacts 46

Disclaimer

This document is issued by HSBC Bank Brazil SA (the ‘bank’) in Brazil in partnership with PricewaterhouseCoopers (PwC). It is not intended as an offer or solicitation for business to anyone in any jurisdiction. It is not intended for distribution to anyone located in or resident in jurisdictions which restrict the distribution of this document. It shall not be copied, reproduced, transmitted or further distributed by any recipient.

The information contained in this document is of a general nature only. It is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. This document is produced by the Bank together with PricewaterhouseCoopers (‘PwC’). Whilst every care has been taken in preparing this document, neither the Bank nor PwC makes any guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will the Bank or PwC be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions of opinion are those of the Bank and/or PwC only and are subject to change without notice. This document is not a ‘Financial Promotion’.

The materials contained in this publication were assembled in May 2012 and were based on the law enforceable and information available at that time.

Contents

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Brazil is one of the most promising emerging markets in the world. A high degree of diversification in its product exportation base, a diversified list of trading partners, internal economic stability, increasingly large work force and good social standards are helping to attract more and more global investors. In addition to this, the forthcoming 2014 Soccer World Cup and 2016 Olympics are generating a large number of infrastructure investment opportunities.

The Brazilian Government and Congress have made a concerted effort to improve the economic stability of the country and have implemented changes in Brazil’s tax legislation, governance, and regulatory background. There are still a few reforms to be implemented by the new Government, but Brazil is demonstrating that it is becoming increasingly connected with the international business network.

The purpose of this publication is to provide foreign investors with a broader view of the current economic, legal and business environment, to be faced when doing business in Brazil.

Key points for foreign investors to consider when looking at this territory:

•Brazilisthebiggestcountry in Latin America, occupying almost half of South America.

•Thebasiclegalconceptsregulating foreign capital in Brazil are defined in Laws 4131 of 1962 and 4390 of 1964, which were regulated by Decree 55762 of 1965. The legal concept of foreign capital includes tangible and intangible assets.

•InBrazilthereisawidevariety of federal programmes designed to encourage national economic development and also to promote regional development. They tend to favour operations in the poorer Northeast (SUDENE) and Amazon (SUDAM) regions. Several programmes provide export incentives.

•Relevantbenefitsaregranted to foreign investors not domiciled in tax havens and who invested in Brazil pursuant to the regulations established by Resolution 2.689.

•Therearenolegalminimumshare capital requirements for a corporation, except for financial institutions and insurance companies, and certain other legal entities with specific business purposes.

•Dividends remitted to non-resident shareholders or quotaholders are not subject to any withholding tax.

•Capitalgainsearnedbylocalresident entities are taxed at a higher rate than the capital gains of non-residents.

•Paymentsofanytypemadetotax havens are generally subject to withholding at a higher rate.

•Asageneralrule,foreignexchange transactions made in order to allow payments to non-residents, considering royalties, technical services, technical, administrative and any other assistance or any other revenue, including the reimbursement of any costs, are subject to specific financial tax (IOF – see page 14 for more information).

•On16December2009,theBrazilian government started to establish minimum capital requirement to invest through or ’the thin cap rules’, through Provisional Measure 472, with immediate effects.

Executive summary

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Currently, business opportunities reach the world over. At the time when business and economic horizons have broadened there has also been a significant increase in competition among companies. For this reason it is essential to have a secure, dependable, and well-positioned partner to stay ahead of the competition. This is what HSBC offers to our corporate clients.

HSBC Brazil is present in 545 municipalities and includes a customer base of more than 5.2m individual clients and almost 460 thousand business clients. HSBC seeks to generate excellent business relationships that perform for its clients, attending to each and every need with appropriate support.

Brazil is in the top-ten of world economies, sporting a vibrant agricultural industry that continues to grow. The country has awakened the attention of the world by creating a healthy and productive business environment. In 2008, when global markets were shaken by the economic crisis, Brazil was one of the least affected. This demonstrates Brazil’s stable and balanced economy supported by a strong and consistent economic policy. According to World Bank data,

Brazil accounts for more than half of the South American economy, and is responsible for more than 2% of the world’s GDP. Besides this, the country has experienced a remarkable growth in the sector of oil extraction. With the discovery of a layer of pre-salt basins, by 2020, Brazil could jump from its current production of 2m barrels extracted daily to 3.9m barrels per day, doubling its production in just 10 years.

Economic stability is sustained by a democratic system of the government and relies on one of the most fascinating cultures on Earth, characterised by the diversity of ethnicities that create an extraordinary legacy, revealed in music, visual arts and drama, literature, sports and traditions. Brazil is the world champion of biodiversity and is the home for some of the planet’s greatest natural assets such as the Amazon, the Pantanal and the Atlantic Forest.

For all of this, Brazil is one of the most promising and diversified business markets in the world. This guide, in partnership with PricewaterhouseCoopers, helps entrepreneurs to understand the characteristics of the Brazilian market, optimising business opportunities.

André Brandão President and Chief Executive OfficerHSBC Bank Brasil SA

Foreword

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Economic environment

Economic HistoryThe Brazilian economy is large and diverse by almost any standard. There is still a considerable state and semi-state participation in various strategic sectors, such as transport and utilities. Brazil has undergone several privatisation programmes of state-owned companies, most of which took place in 1998. Nearly all of the former state companies are now controlled by the private sector.

Natural resources and agriculture have been the traditional mainstay of the economy, supported by abundant human resources. Since the 1960s, however, the emphasis has been placed on industrial development financed largely with international loans and investments. As a result,exports today reflect a much more balanced mix of commodities and manufactured items. Moreover, the profile of imports became more restricted during the 1970s and 1980s because of the import substitution and the scarcity of foreign currency. This situation is changing following the lowering of trade barriers and the increased opening of the economy to globalisation.

The most important business sectors in Brazil are mineral and

energy resources, agricultural, fisheries and forestry. There are several other sectors that have undergone expansion during the past few years such as manufacturing, high-tech industries, service industry, transport and communications.

Current Economic ClimateOver the last year, Brazil’s benchmark interest rate (SELIC – Special Settlement and Custody System) has hovered around 11.04%. While it may seem to be a high average, it is in fact a positive improvement if one considers that the average for the previous three-year period was 19.22%.

In the beginning of 2012, the Brazilian Monetary Policy Committee (COPOM) has been showing the intention to significantly reduce the overnight market rate (Selic). A reduction of the basic rate of interest is part of a strategy adopted by the Brazilian government to protect the domestic economy of the international financial crisis, which, in the government view, threatens the consumption and growth of local industry.

During the last decade, Brazil’s risk has registered at around 800 or 900 pts, subjected to peeks mainly due to political reasons. The best recent example refers to 2002, when the year started at the Risk average around 800 pts, however,

in the second semester, owing to the presidential election, the risk went over 2,200 pts.

By February 2011, the Brazil Risk registered 184 points. In relation to the inflation rate, one of the historically most relevant indicators of Brazilian economy, numbers are also positive.

Repeating the tendency observed in relation to Brazil’s risk, in 2002, the year of the presidential election, the annual variance of inflation reached 25.30% (according to the general price index measured by Getúlio Vargas Foundation ‘IGP-M‘).

For 2011, the registered index is 6.5%.

Location and access to other marketsBrazil is the largest country in the southern hemisphere and the fifth-largest country in the world, covering nearly half of South America. It is a member of Latin American Integration Association (ALADI), the World Trade Organisation (WTO) and the Common Market of the Southern Cone (MERCOSUL), which is formed by the current members Brazil, Argentina, Paraguay and Uruguay, with Chile, Bolivia, Peru, Colombia, Ecuador and Venezuela as associated countries.

Under the MERCOSUL agreement, tariffs are abolished; the movement of labour, goods and services is unrestricted; capital investment is encouraged; macroeconomic policy is coordinated; and foreign-trade policies and tariffs for non-member countries are harmonised.

Position in Global Market/GrowthBrazil is among the top-ten economies in the world and it has experienced a sustained growth in the past two decades.

With a population of about 191m people, its consumer market is large and has potential for high growth, since in the past few years millions of people have reached the middle classes.

Availability of Customer/WorkforceIn general, adequate labour is available. Semi-skilled and unskilled labour is fairly abundant, recognised as hard-working and willing to learn, and is relatively mobile. Skilled labour tends to be in short supply. Personnel with proven technical, professional or management skills are growing as company in-house training and other courses take place.

IntroductionDoing business in Brazil

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Incentives for foreign investors

Tax or Grant incentivesRelevant benefits are granted to foreign investors not domiciled in tax havens and who invested in Brazil pursuant to the regulations established by Resolution 2.689. (This Monetary Council Normative Instruction governs the foreign investments in the Brazilian financial and capital markets by non-residents.)

Capital gains on stock and derivatives traded in stock and futures exchange are exempt from capital gain tax. In addition, income on public bonds became tax exempt, provided they were acquired by these investors after 16 February, 2006.

Regarding Private Equity and Real Estate, the good news came with the introduction of the FIP (Participation Investment Fund) which became an interesting vehicle used to hold assets through Special Purpose Companies (SPCs). A benefit for foreign investors is that they are exempt from withholding income tax due on FIP and Investment Funds in FIP quotas. This exemption is subject to compliance with the rules of concentration of investment in the fund and on the distribution of earnings established by law. The most notable among these

prerequisites is the requirement that no investor may hold more than 40% of the fund’s quotas or earnings. The National Bank for Social & Economic Development (BNDES) offers low-priced financing, in order to support the implementation, expansion, modernisation or relocation of plant, including capital goods acquisition and associated working capital. Direct foreign investment was rising significantly until 2008, reaching US$43,887m. However in 2009, owing to the global credit crunch, this direct foreign investment contracted to the sum of US$25,949m.

Brazil has various incentives available for exporters, including (under certain conditions) exemption from withholding tax, exemption from excise tax (IPI), value-added tax on sales and services (ICMS), social contribution on billing (COFINS) and contributions to the social integration programme (PIS) on exports of manufactured products, low-cost export financing.

In Brazil, there is a wide variety of federal programmes designed to encourage the economic development of Brazil and also to promote regional development. They tend to favour operations in the poorer Northeast (SUDENE) and Amazon (SUDAM) regions.

An important concept in foreign capital legislation in Brazil is the one which reflects the constitutional principle (Federal Constitution, article 5) that guarantees equal treatment to all. This principle, in Law 4131/62 and later amendments to Federal Constitution, grants to foreign capital invested in Brazil legal treatment identical to that given to local capital, under equal conditions, and any discrimination not contemplated by this law is prohibited.

Prior approval of the Central Bank is no longer required for all foreign currency loans received, but they should be documented in a formal contract, which will set out the terms and conditions, including the interest. The Brazilian Central Bank will have to be informed of all the conditions of the loan as approval is required after the loan transaction has actually been entered into. It is also necessary to obtain prior approval from the Central Bank for operations relating to the conversion of some liabilities into investment.

Capital may be repatriated without payment of tax up to the amount registered in foreign currency with the Central Bank. Amounts in excess are considered as capital gains under exchange disposition and, therefore are subject to withholding income tax of 15% (25% if the beneficiaries are domiciled

in jurisdictions considered as tax havens).

Loans may be repatriated within the terms of the registered loan contract. Interest is freely remittable within the loan contract terms subject to withholding income tax at the rate of 15% (25% if the beneficiaries are domiciled in jurisdictions considered as tax havens).

Although it may seem easy for investors to do business in Brazil, it is important to highlight a few key aspects imposed by Brazilian laws which can still be considered as bureaucratic. The most usual procedure for a foreign investor to start doing business in Brazil is by organising a company. In order to do so, the company must request a Federal Tax Number (CNPJ) by registering the Cademp (Cadastro de Empresas) at Central Bank. If the intention is to invest other Brazilian companies or if the intention is exclusively to be part of the Brazilian financial market, then the company must register itself at the Brazilian Securities Commission – CVM.Nowadays, one of the most bureaucratical procedures to be followed in Brazil is to execute the decision of winding up local presence. A lot of compliance and tax duties can be demanded in this case. The time required to close a business in Brazil may be significant.

LanguageThe official language of Brazil is Portuguese. There are no significant local dialects or other deviations from the official language, but a number of words and phrases differ from those used in Portugal. English is the foreign language most used by the business community in Brazil.

Ease of Doing Business/ Ease of LeavingThe general policy is to admit foreign capital and treat it in the same way as local capital. All inward investments must be registered with the Central Bank to ensure ultimate repatriation rights within 30 days. It should be noted that acquisitions of local companies should be thoroughly investigated to confirm their real underlying value.

The basic legal concepts regulating foreign capital in Brazil are defined in Laws 4131 of 1962 and 4390 of 1964, which were regulated by Decree 55762 of 1965. The legal concept of foreign capital includes tangible and intangible assets.

Several programmes provide export incentives. In the SUDENE and SUDAM regions, incentives are available for the implementation of new industrial projects or expansion, diversification or improvement of an existing industry. Statistics for Foreign Direct InvestmentAs reported by the Brazilian Central Bank (BACEN) website, the Census of foreign capitals in Brazil figures stress the performance of the Brazilian economy as a point of attraction for foreign capital during the second half of the nineties which deepened the process of internationalizing the country’s economy. Greater economic stability and a permanent process of structural reforms, including the approved breaking of state monopolies, was clearly reflected in increased flow of capital to Brazil.

The first indication in the Census that stresses the higher degree of foreign capital share in Brazil is the number of forms received by the Central Bank: 11,404 informants with a foreign share in excess of 10% of voting capital or 20% of total authorized capital. There was a relevant increase of 80.4% on the 6,322 informants of the previous Census that took 1995 as base-year. This increase, caused by both establishment

of new corporations and acquisition of previously existing ones, together with fresh capital sharing in those already recording some foreign ownership in 1995, was the main thrust behind the substantial changes recorded in the figures surveyed.

According to the information gathered, total paid-in capital of informants reached R$351.7bn, representing an unprecedented nominal increase of 319.7% against the R$83.8bn of 1995. Even taking the devaluation of the Real in this period into account, the figures still have a strong impact, reaching over twice the figures of the previous census (from US$86.2bn, in 1995, to US$179.8bn, in 2002, calculated based on the exchange rate in effect at the end of each period). It should be noted that in 1995 residents held the larger share of paid-in capital: 51.5% of the total. Conversely, in 2000, the largest share was for non-residents; 57.3% of the total, revealing the trend of foreign investors to share the capital of Brazilian corporations in a majority position.

On this issue, taking into consideration just the figures related to the 9,712 informants where the share of foreign capitals is in a position of majority (over 50%),

we reached the figure of R$263.4bn of paid-in capital, of which 70.3% (R$185.0bn) are held by non-residents.Seen from the viewpoint of total assets of entities featuring foreign share, the consolidated results of the survey reveal another prominent result in its total value: R$914.1bn, contrasted to the R$280.4bn of 1995. Converted by the end-of-period exchange rate, these are US$467.4bn and US$280.4bn, respectively. Also important is the growth of the total assets of entities with a majority share of foreign capital, which from the R$158.8bn of 1995, corresponding to 58.3% of the total, came to R$641.6bn, or 70.2%. Indeed, in the first census these entities counted 4,902 in a population of 6,322 (77.5%), increasing to 9,712 of 11,404 (85.2%).

Barriers, risks and downsides for foreign investors

Depending on the nature of the business activity there will be an involvement of some regulatory agencies such as:

Central Bank (BACEN) –responsible for the execution of monetary policy, exchange controls, registration and control of foreign capital and profit remittances and regulation of Banks and Financial Institutions.

Securities Commissions (CVM) – responsible for the regulation of the securities markets and listed companies.

Administrative Council for Economic Defence (CADE) – investigation and suppressing unfair business practices and anti-trust monitoring.

National Institute of Industrial Property (INPI) – responsible for patent, trade mark registration and technological development. INPI has powers over agreements for the transfer of technology.

Foreign Trade Department (DECEX) – responsible for administration of foreign trade and control of export and import licences.

Transport Limitation

Since the inclusion of government-controlled railroads to the Brazilian National Privatisation Programme, there has been significant investment in development and modernisation of the railroad network, which is mainly located in the Southeast and Southern regions, although there are plans (federal and private projects) for some major extensions in the North and Central-West regions. For the North-East region, future

investments are anticipated. Road transport is still the preferred method of transport for both long-distance and intercity travel, although most of the major federal and state highways have not been well-maintained. Nearly all road transport and haulage companies are now in the process of privatising the remaining roads which are not yet privatised.

The airline network is well-developed and the majority of the voting stock of airline companies is held by the private sector. Urban transport continues to present significant problems in major centres. Limited subway systems are now functioning in Rio de Janeiro and São Paulo. However, until a more extensive network is developed, subways will not significantly alleviate the problems of urban transport. Many companies provide private bus services to their employees.

Prohibited or restricted Industries

Government permission is required for the operation of certain types of business, such as banks and financial institutions, mining companies, oil refineries, maritime, road and air transport companies, as well as companies involved in health products and health care.

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Restrictions on foreign investor participation exist in certain areas, such as: (i) communications (television, radio stations or newspapers); (ii) aviation (Brazilian airlines); (iii) participation in classified (operations) government contracts; (iv) coastal and freshwater shipping; (v) mining and hydroelectric energy, etc.

Furthermore, the direct or indirect foreign ownership of rural land is regulated and subject to limitations as to the total area. Ownership of land near Brazil’s borders is subject to further restrictions.

Currency/exchange control

The Central Bank allows the official exchange rate to float freely, but forex trading is restricted to authorised dealers. The Central Bank intervenes when there are signs of speculative operations. There is an active parallel exchange market that, although illegal, is quoted in the daily newspapers, as well as an official tourist rate that normally approximates the parallel rate.

IOF

As a general rule, foreign exchange transactions made in order to allow payments to non-residents, in the form of royalties, technical services,

technical, administrative and any other assistance or any other revenue, including the reimbursement of any costs, are subject to the tax on financial transactions (IOF).

These transactions are subject to the maximum IOF rate of 25%. The current IOF rate for any foreign exchange transaction (both inbound and outbound) such as FDI or Intragroup loan agreement is 0.38% payable upfront; however there are many other types of foreign exchange transactions where different tax rates are applied. As a result, the IOF may not be avoided if the payment requires a foreign exchange transaction from the Real into a foreign currency, or from a foreign currency into the Real. Payments of interest, for the importation of goods and for the acquisition of an investment in Brazil by a local resident from a foreigner, are also subject to the IOF.

The IOF of 6% is charged on foreign loans with an average maturity of less than 720 days (the average term was increased on March 12, 2012 from 720 days to 1,800 days). All other foreign loans are subject to the IOF at 0% rate. The average maturity is determined based on the balance of the loan relative to the number of days of the outstanding balance of the related loan.

From October 2009, the Brazilian government changed the IOF tax rates that are levied on certain foreign currency exchange transactions related to the inflow of funds to Brazil made by Resolution 2689 to 6%, and 0% if the equities are traded through the Exchanges. As to the outflow of funds from Brazil related to investments in the financial markets, the IOF rate continues to be 0%.

Key Markets and Trade

Brazil has a very strong industrial base. It exports not only natural resources and agricultural products, but also industrial and commercial products. At the top of the list are natural resources (such as iron ore) and agricultural products (such as soy beans, coffee and sugar). Moving down the list, there are manufactured products including vehicle parts, airplanes, petrochemical products and ethanol.

Brazil is one of the leading developing countries, and is one of the four emerging markets comprising the B-R-I-Cs (i.e. Brazil, Russia, India and China). Since 2010, China has played an important role as Brazil‘s main commercial partner, followed by the United States, Argentina and Germany. These top commercial partners represent 15.9%, 12.4%, 8.2%, and 5%

respectively of total trade business.

Brazil is the largest telecoms market in Latin America and Brazilians are the biggest users of the internet in the region. Future trends include growth of Voice over Internet Protocol, convergence applications and Next Generation wireless.

Business etiquette

Handshakes are the most common form of greeting between business colleagues. In more informal situations, women will tend to greet each other with a kiss on either cheek, while men may briefly embrace.

When you meet someone for the first time, it is polite to say ‘muito prazer’ (‘my pleasure’). Expressions such as ‘como vai’ and ‘tudo bem’ are common forms of saying ‘Hello‘ once you know someone and can show you are making an effort to know them.

The use of titles and first names can vary across Brazil. Typically, it is polite to address your Brazilian counterpart with a title and surname at the first meeting or when writing to them. Once you know them, it is common to use just their first name, or else their title followed by their first name.

Brazilian companies tend to have vertical hierarchies where managers at the top make most of the decisions. Differences in class are still very prevalent in Brazilian society and business culture. Class is mostly determined by economic status and is reflected in the salaries people receive, resulting in large disparities of pay and status.There are laws against discrimination, however, and most class differences in business are subtle.

Relationships are one of the most important elements in the Brazilian business culture. By cultivating close personal relationships and building trust, you will have a greater chance of successfully doing business in Brazil.

* Source: ht tp://www.mdic.gov.br /arquivosdwnl_1298052907.pdf

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Forms of foreign Investment

Investment made by foreigners is normally structured via the acquisition of interests or financial assets or via the incorporation of new entities.

Depending on the nature of the assets to be invested, the applicable regime will be different. Basically, for assets in the financial and capital markets, the applicable rule in force is Resolution of Monetary Council 2689.

The Resolution provides that non-resident investors are not allowed to trade in securities of public companies except for the trade over (i) the stock market, (ii) electronic systems, or (iii) an over-the-counter market which is organised by an entity authorised by the Securities Commission (‘CVM’) to trade in securities of publicly-held companies.

There are situations when it is possible to transfer the ‘2689 equities’ outside of an organised market, such as in cases of: subscriptions, stock dividends, conversions of debentures into stock, indexes referenced in securities, acquisitions and sales of shares of open investment funds in securities and, when previously authorised by the Securities Commission, the cases of closing shareholders capital, cancellation or suspension of trading.

Currently, there are important tax incentives granted for the 2689 investors.

For the assets not related to financial and capital markets, but more linked to the acquisition of private companies, the basic legal concepts regulating foreign capital in Brazil are defined in Laws 4131 of 1962 and 4390 of 1964, which were regulated by Decree 55762 of 1965. The legal concept of foreign capital includes tangible and intangible assets.

The corporate forms in which a business are normally conducted in Brazil are the following:

Corporations (Sociedade por Ações – S/A) – Only corporate form that can have stocks traded publicly.

SA – Sociedade por acoes (also known as SOCIEDADE ANONIMA) – A limited liability company. It must have at least two shareholders. There is no minimum share capital except for financial institutions, insurance, utility and export trading companies. It may be public or private. Shares in public corporations are freely transferable; shares in private corporations are restricted.

Conducting business in BrazilForms of business

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Registration formalities

There are no legal minimum share capital requirements for a corporation, except for financial institutions and insurance companies, and certain other legal entities with specific business purposes.

Upon the decision to incorporate a new legal entity in Brazil, an inaugural meeting of prospective shareholders must be held to approve the bylaws, which sets up the corporation‘s core activities, appoints management, and indicates the amount of capital, registered office and distribution of shares (as per the subscription list) among shareholders (others).

Besides the requirements listed above, a corporation is required to have the subscription of all the shares into which the corporate capital stock is divided according to the bylaws, with the initial subscribers being at least two individuals or legal entities that are considered to be founders. In addition, at least 10% of the issuance price of the shares subscribed in cash, unless specific legislation requires a higher percentage, and deposit thereof at a bank. This deposit is released when the corporation has been registered with the Board of Trade (Junta Comercial) or after six months, if no registration has been made.

After the fulfilment of these requirements, a quorum of subscribers of at least one half of the capital is required for the meeting to approve the incorporation of a corporation. If this quorum is not reached, a second meeting may be held before any number of subscribers.

Upon approval of the bylaws, the shareholders should elect the members of the management bodies. There are no nationality requirements for management, but a foreigner must hold a permanent visa and be domiciled in Brazil to be eligible for the job. At the end of the meeting, the minutes shall be signed by all subscribers in attendance or by the number required to validate the resolutions. These documents must be kept at the corporation and a copy must be filed with the Board of Trade.

Ongoing filing requirements

A newly incorporated corporation acquires legal existence upon filing its incorporation documents with the Board of Trade and the subsequent publishing of its meeting’s minutes in a local newspaper and the Official Gazette (Diário Oficial). The certificate issued by the Board of Trade confirming the filing of the incorporation documents serves as a legal document for the transfer of assets used to pay in the capital and becomes a matter of public record.

An annual meeting must be held with the shareholders within the first four months of the end of the corporate financial year, to approve the annual financial statements and the management report, approve the proposed distribution of net income for the year, elect the executive officers or the board of directors’ members (if applicable) and approve the authorised capital, minimum or fixed dividends and premiums on reimbursements (if applicable). Shareholders meetings must normally be called by publishing an appropriate announcement at least three times in the Official Gazette and in a local newspaper.

When setting up a new legal entity in Brazil, given that the incorporation of a branch requires authorisation granted via a presidential decree, the process is generally bureaucratic and lengthy. In view of this, the majority of foreign businesses in Brazil are set up under the form of subsidiaries based primarily on the insulating effect that incorporation has on the liability of the foreign parent company for the subsidiary‘s acts. When incorporating a subsidiary in Brazil, the most common vehicle is the Limited Liability Company (Sociedade Limitada – LTDA) or the Corporation.

Regulatory matters/issues

In general terms, there are no restrictions on the ownership by foreign investors, except for:

i. Communications (television, radio stations or newspapers);

ii. Aviation (Brazilian airlines);

iii. Participation in classified government contracts;

iv. Coastal and freshwater shipping;

v. Mining and hydroelectric energy, etc.

Limited Liability Companies (Sociedade Limitada) – The Brazilian equivalent of a closely-held company in the United States and a private limited liability company in the United Kingdom.

Limitada or Ltda – (Sociedade por quotas de responsabilidade limitada) – Private limited liability company. It must have at least two shareholders. There is no minimum share capital. Shares are called quotas and their transferability is restricted. The liability of quota holders is limited to the amounts invested.

Joint Ventures – The form of a corporation assemble under one of the partnerships stated above.

Branches – Significant bureaucracy in its creation and maintenance renders this form limited to few multinationals.

The financial year (12-month period) of Brazilian legal entities can be freely chosen for corporate purposes. Accordingly, certain Brazilian companies adopt the same financial year of the parent company, for corporate/reporting purposes (e.g. 1 July to 30 June).

Nonetheless, as companies are required to observe the calendar-year (January through December) for tax purposes, most of domestic entities choose the same period as their corporate financial year.

Setting up a business

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Exchange Controls or restrictions on repatriation of profit

Dividends remitted to non-resident shareholders or quotaholders are not subject to withholding tax.

Profits may be remitted abroad without limitations, to the extent that there is foreign registered capital and retained earnings available. As from 1 January 1996, profits/dividends distributed to non-resident beneficiaries relating to periods beginning on or after this date, are not subject to withholding tax.

On 16 December 2009, thin capitalisation rules were introduced to the Brazilian tax system.

The new legislation set forth that interest paid or credited by a Brazilian entity to a related individual or legal entity, not resident or domiciled in a tax haven or a favourable tax regime jurisdiction, can only be considered deductible for tax purposes if such expense is necessary for the activities of the local entity, and if the amount of debt granted

by the related party does not exceed twice the amount of the participation it holds in the stockholder equity of the Brazilian entity. A second test also needs to be satisfied including the total amount of all debts with any foreign-related party. If both tests exceed the 2:1 ratio, the portion of interest related to the exceeding amount will not be tax deductible. Similar provisions are also applicable to interest paid or credited by a Brazilian entity to an individual or legal entity (related or not) resident or domiciled in a tax haven or a favourable tax regime jurisdiction. In this case, the expense would only be considered tax-deductible if the amount of debt does not exceed 30% of the amount of the participation it holds in the stockholder equity of the Brazilian entity. A second test also needs to be satisfied including the total amount of all debts with any foreign party resident or domiciled in a tax haven jurisdiction. If both tests exceed the 30% ratio, the portion of interest related to the exceeding amount will not be tax deductible.

Liabilities for Directors Company

In the most common types of entities, LTDA and SA, executive officers are not personally liable for the obligations they undertake in the name of a corporation and in the normal course of business. However, they are liable for losses and damages caused by negligent or fraudulent conduct or by violating the law or the corporation’s bylaws.

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International aspects

Foreign operationsBrazilian resident companies are taxed on worldwide income. Foreign branch profits are taxed as earned and foreign subsidiary profits are taxed when distributed or made available. Double taxation is avoided by means of foreign tax credits.

Resident individuals are subject to tax on all income from abroad but are allowed to take credit for the foreign tax paid thereon, provided reciprocal treatment is accorded to Brazilian-source income in the country from which the income is received.

Brazil has signed various treaties for the avoidance of double taxation.

Fees and other related expenses paid in Brazil for services rendered abroad are subject to withholding tax of 15%, or a lower rate under some tax treaties.

Centre of International Financial or OperationsThere are no tax breaks to encourage multinational companies to locate headquarters or administrative offices in Brazil and/or the use of Brazil as a base for offshore financial operations. However, the various Brazilian states do offer different financial

incentives – they compete between themselves – in order to attract companies.

Corporate Income Tax (IRPJ)Corporate income tax is based on the calendar year, with monthly tax payments, and is generally computed on the basis of annual or quarterly taxable income. Under the Actual Profit Method (APM), IRPJ is charged at the rate of 15% plus a surcharge of 10% on annual taxable income in excess of R$240,000 (approximately US$120,000).

Additions of expenditure to and deductions of expenditure from the accounting profit figure are required in order to calculate the amount on which corporation tax is based. These adjustments are either permanent or temporary. Permanent adjustments include gifts and donations, and temporary adjustments (which are reverted in the future) include provisions. All these adjustments should be controlled in the Livro de Apuração do Lucro Real (LALUR), Part A.

Certain companies can also apply to pay IRPJ according to a presumed profit method (PPM). The amount of (IRPJ/corporate income tax) will be obtained from a percentage

of the gross revenues. Service providers will be charged at a rate of 8% (effective tax rate). Sellers of goods and assets will be charged at a rate of 2% (effective tax rate). There are restrictions on applying the PPM Annual where gross revenues in the preceding calendar year are greater than R$48m. Financial institutions in general, leasing companies, insurance companies, and non-private pension funds are not allowed to adopt PPM. In some cases, depending on the effective rate obtained in the APM, PPM can be considered a tax incentive.

Certain classes of income receive special tax treatment. Some of them are excluded from taxation or can receive specified tax deduction.

Companies are required to file a corporate income tax return on an annual basis (generally up to the last working day of June of the subsequent year). Other corporate returns must also be filed by legal entities.

Taxation in BrazilCorporation income tax (or equivalent)

Withholding Taxes (IRRF) The current rates applicable

to the following payments to non-residents are:

i. Dividends Not Taxable

ii. Interest 15%*†

iii. Royalties 15%*†

iv. Technical and Admin. Services 15%*†

v. Other Services 25%*†

* These rates are effective unless otherwise specified by tax treaty.

† Payments of any type made to tax havens, defined as jurisdictions that do not tax income or tax income at a rate lower than 20%, are subject to withholding at a rate of 25%.

Social Contribution on Net Income (CSLL)Brazilian tax legislation also provides for a social contribution tax on profits, which also has the nature of a corporate income tax. Its taxable basis is quite similar to corporate income tax, but with certain distinct adjustments. CSLL is charged at the rate of 9%. For financial institutions, the applicable rate is 15%.

For CSLL, temporary and permanent adjustments are applied in the same way as for Corporate Income Tax.

Some companies can also apply to pay CSLL based on the presumed profit method (PPM). Service providers will be charged at a rate of 2.88% (effective tax rate). Sellers of goods and assets will be charged at a rate of 1.08% (effective tax rate).

The same restrictions on the application of the PPM method to Corporate Income tax apply to CSLL.

In some cases, depending on the effective rate obtained in the APM, PPM can be considered a tax incentive.

Tax losses carry forward (IRPJ and CSLL)

There is no time limit for the carry forward of tax losses. However, the taxable profit of each year can only be reduced by tax losses up to a maximum of 30%. Furthermore, it is neither possible to carry back tax losses nor transfer them to other Brazilian companies. Tax losses of an acquired company cannot be carried forward to be offset against the taxable income of a new activity if the following two conditions are both met:

i. modification in the ownership of the company; and

ii. modification in the activity of the company.

Capital gains Capital gains earned by local-

resident entities are taxed at the normal corporate rate (34%), while capital gains of non-residents are taxed at the rate of 15% (unless otherwise specified by international tax treaties).

Individuals are taxed at the rate of 15% on capital gains. Payments of any type made to tax havens are generally subject to withholding tax at a rate of 25%.

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The Brazilian concept of ‘tax haven‘ jurisdictions has been amended and has been in effect since 1 January, 2009. To that extent, it is likely that any other jurisdiction (not necessarily a country) that falls into the new definition (e.g. a jurisdiction that grants tax benefits to non-resident investors that do not perform business activities on it; or a jurisdiction that does not allow access to information relating to the ownership of shares of local entities, the ownership of goods, and/or rights or information regarding economic transactions) could now be subject to Transfer Pricing and Thin Capitalisation rules in relation to the rendering of services and the acquisition or selling of goods, among others.

At 7 June 2010, Federal Tax Authorities published in the Normative Instruction 1.037/10, article 1, the new list of Tax Havens. This new list includes new tax havens jurisdictions in addition to the previous list that was published in 2002 that was Andorra, Anguilla, Antigua and Barbuda, Dutch Antilles, Aruba, Bahamas, Bahrain, Barbados, Belize, Bermuda, Campione D’Italia, Cyprus, Singapore, Costa Rica, Djibouti, Dominica, United Arab Emirates, Gibraltar, Granada, Hong Kong, Cayman Islands, Cook Islands, Madeira, Isle of Man, Channel Islands (Jersey Guernsey, Alderney, Sark), Marshall Islands, Mauritius, Turks and Caicos,

U.S. Virgin Islands, British Virgin Islands, Lebuan, Lebanon, Liberia, Liechtenstein, Luxembourg (holding 1929), Macao, Maldives, Malta, Monaco, Monserrat, Nauru, Nieui, Panama, Saint Kitts, Saint Vincent, U.S. Samoa, Western Samoa, San Marino, Saint Cristobal and Nevis, Saint Vincent and the Grenadines, Saint Lucia, Seychelles, Oman, Tonga, Vanuatu.

The new members are: Ascension Island, Brunei, French Polynesia, Granada, Kiribati, Norfolk Island, Pitcairn Islands, Qeshm, Saint Helena, Saint Pierre and Miquelon, Solomon Islands, Swaziland and Tristan of Cunha. On the other hand it was excluded from the previous list the jurisdiction of Malta and the Luxembourg Holdings set up under the Law 1929.

Introduced in the Brazilian Tax system in 2008, via Law 9.430, article 24-A, 'privileged tax regime' can be defined as the regime with the following characteristics: (i) no income tax or income tax lower than 20%, (ii) tax benefits for non-resident shareholders regardless of whether they carry out economic activities in the country or dependency, (iii) tax benefits for non-resident shareholders to the extent that they do not carry out economic activities in the country; (iv) worldwide income either exempt or taxed at a maximum rate lower than 20%, and (v) no access to the identity of

shareholders, the owners of assets/rights, and no information on economic transactions. Based on the concept introduced in 2008, NI 1.037, article 2, enumerates some types of entities that fall under at least one of the characteristics above.

These entities are:

•Thefinancialinvestmentcorporations (Sociedad Anonima Financiera de Inversion, or SAFI) under the laws of Uruguay;

•TheInternationalTradingCompanies (ITC) under the laws of Iceland;

•TheoffshoreKFTsunderthelaws of Hungary;

•Thelimitedliabilitycompanies(LLC) under U.S. state laws that are not subject to U.S. federal income tax and whose members are non-residents (in the U.S.);

•TheEntidadesdeTenenciadeValores Extrajeros (ETVEs) under the laws of Spain;

•TheITCsorInternationalHoldingCompanies (IHCs) under the laws of Malta;

•TheholdingcompaniesundertheLaws of Denmark which do not excise substantive activities; and

•Theholdingcompaniesunderthe Laws of the Netherlands which do not excise substantive activities (suspended from the list).

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system imposes a lower rate (0.65%), however, it does not enable the company to record tax credits on acquisitions.

Since 1 May 2004, the PIS contribution has applied to the importation of goods and on the payment of services to non-residents. Export revenues are tax exempt from PIS. However, the PIS tax credit recorded on the acquisition of inputs and services may be kept.

Contribution for Social Security Financing (COFINS)COFINS, generally levied at 7.6%, is a monthly federal social security contribution calculated as a percentage of gross revenue. Higher rates are imposed in certain sectors. A COFINS credit system is meant to ensure the tax is applied only once on the final value of each transaction, which means that the company is granted a tax credit calculated on the acquisition of inputs and on certain expenses (non-cumulative system).

There are certain companies which must pay COFINS under cumulative system. The cumulative system imposes a lower rate (3%), but it does not enable the company to record tax credits on acquisitions. Financial institutions also have a special COFINS rate of 4% but some deductions to the tax base are allowed.

Note that different tax effects could impact transactions between Brazilian counterparts with counterparts in tax havens or with privileged tax regime entities.

It should also be noted that the tax authorities respect the exemption from withholding for all dividend payments, including dividend payments subject to withholding tax under the provisions of a tax treaty. In the case of royalties, the royalty contract has to be approved by the National Institute of Industrial Property (INPI) and filed with the Brazilian Central Bank.

Deductions for royalties are generally limited to 5% of net sales of the relevant products or services; the percentage depends on the type of product or activity.

Federal Excise Tax (IPI)This Federal Excise Tax is paid by manufacturers on behalf of their customers at the time of sale, either to another manufacturer who will further the manufacturing process or to the retailer who sells to the end user.

The tax paid is stated separately on the sales invoice. Certain exemptions are given to goods considered to be of basic necessity to the country‘s economy. The rates are defined

As from 1 May 2004, COFINS contributions also apply to imports of goods and on the payment of services to non-residents. Export revenues are tax exempt from COFINS (however, the COFINS tax credit recorded on the acquisition of inputs and services may be kept).

Financial Transactions Tax (IOF)In October 2009, the Brazilian government changed the IOF tax rates that are levied on certain foreign currency exchange transactions related to the inflow of funds to Brazil. For foreign investors entering into the financial and capital markets, the applicable rate was previously 0%. In 2010 the IOF rate was increased to 2% for inflows of equities traded through the Exchanges; however, in December 2011 the rate went back to 0%. Other inflows for the financial and capital markets will trigger IOF at 6%.

For the outflow of funds from Brazil related to investments in the financial markets, the IOF rate continues to be 0%.

For investments according to Law 4.131 (into LTDA and SA), inflows and outflows will trigger IOF at 0.38%.

by the product’s tax code according to the Harmonised System.

As mentioned above, when manufactured products are sold between producers, the IPI is imposed. However, the subsequent manufacturer is allowed a credit against its IPI liability, equal to the IPI paid to its suppliers (non-cumulative tax).

IPI is also imposed on import transactions. Export revenues are tax exempt from IPI – however, the IPI tax credit recorded on the acquisition of inputs may be kept.

Contribution for the Social Integration Programme (PIS)PIS, generally levied at 1.65%, is a Federal social contribution calculated as a percentage of gross revenue. Note that higher rates are imposed in certain sectors. A PIS credit system is meant to ensure the tax is applied only once on the final value of each transaction, which means that the company is granted a tax credit calculated on acquisition of inputs and on certain expenses (non-cumulative system).

Note that there are certain companies which must pay PIS under the cumulative system. The cumulative

Contribution for the Intervention in the Economic Domain (CIDE)Brazilian companies with royalty, licence, service and technical assistance agreements with foreign entities, shall pay a 10% CIDE, based on the amount paid abroad.

Service Tax (ISS)The ISS is a municipal tax on gross billings for certain services designated by the Federal Government. The applicable rates to be determined by each municipality can vary between 2% and 5%.

In general, the service tax is levied by the municipality in which the Company is headquartered. There are some exceptions to this rule for services involving assembly, construction and demolition, among others.

As from January 2004, important changes to the ISS legislation were made. The original list of services subject to the tax was expanded and the importation of services is now subject to ISS. Additionally, ISS is not levied on exports of services, except when the services are rendered in Brazil or the results of these services are applied in Brazil.

Transfer PricingThe rules of transfer pricing in Brazil address imports and exports of products, services and rights charged between related parties, inter-company financing transactions not registered at the Central Bank of Brazil, as well as all import and export transactions between Brazilian residents (individual or legal entity) and residents in either low tax jurisdictions (as defined in the Brazilian legislation) or jurisdictions with internal legislation that call for secrecy relating to corporate ownership, regardless of any relation.

The rules require that a Brazilian company substantiates its inter-company import and export prices on an annual basis by comparing the actual transfer price with a benchmark price determined under any one of the Brazilian equivalents of the OECDs comparable uncontrolled price method (CUP method), resale price method (RPM) or cost plus method (CP method). Tax payers are required to apply the same method, which they elect, for each product or type of transaction consistently throughout the respective financial year. However, taxpayers are not required to apply the same method for different products and services.

Residents of Brazil are taxed on their worldwide income, and non-residents are taxed exclusively at source on their Brazilian-source income. The source of income is determined by the place where the tax payer is located, irrespective of where the work is performed.

Foreigners, intending to live and/or work in Brazil, whether for a short or a long period, will become tax-resident depending on the type of visa they hold:

1. Permanent visas – Holders of permanent visas are considered residents as from the date of arrival in Brazil.

2. Temporary visas – Holders of temporary visas are also considered residents as from the date of arrival in Brazil, as long as they have an employment contract in Brazil. Otherwise, they will become tax residents as from their 184th day of presence in Brazil within any given 12-month period.

Tax rate – Income tax is normally withheld at source, at rates varying from 0% to 27.5%, depending on the income bracket. The final liability is determined upon filing the tax return. Any difference between the amounts as determined by the tax return and that withheld at source must be paid or is refunded to the taxpayer. The Brazilian Tax Authorities have issued

an annual tax table (below) applicable to income tax payable during tax year 2011.

Individuals are required to submit income tax returns by 30 April of every year. There are penalties for late and incorrect submission.

Income tax arising from employment should be withheld by the employers at the above-mentioned rates.

Social charges and other employee rights are referred to below.

Monthly Income (Brazilian currency – BRL)

Tax RateAmount to be deducted from

tax – in R$

Up to 1,566.61 – –

From 1,566.62 to 2,347.85

7.5% 117.49

From 2,347.86 to 3,130.51

15% 293.58

From 3,130.52 to 3,911.63

22.5% 528.37

Above 3,911.63 27.5% 723.95

*Source: http://www.receita.fazenda.gov.br/Aliquotas/ContribFont2012a2015.htm

Personal Income Tax

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State Value Added Tax (ICMS)

The Constitution of 1988 granted authority to the Brazilian States to collect tax on the circulation of goods and on the supply of inter-state and inter-municipal transportation services on communications, even when the transaction and the rendering of services start in another country.

ICMS is not a cumulative tax, that is, the tax is only assessed on the increase in the price of the product in each part of the supply chain. The calculation process involves a system that, in each payment period, the taxpayer must check the amount of debits and credits related to the State Value Added Tax and, if the taxpayer has more debits than credits, they will have to pay the tax on the difference between them.

It is a value added tax and is collected by most States at the usual rate of 17%, except for the States of São Paulo, Minas Gerais and Paraná, where the tax rate is 18% and Rio de Janeiro, where the rate is 19%. Some products trigger a higher rate (usually 25%) or a lower rate (automotive industry and other special industries are below 17% or 18%). Intra-states transactions are subject to lower rates, depending on the State of origin and destination.

ICMS is also imposed on import transactions. Export revenues are tax exempt from ICMS, however the ICMS tax credit recorded on the acquisition of inputs and services may be kept.

Please note that industries located in certain States of Brazil, such as Mato Grosso, Goiás, Bahia, among others, may apply for State tax incentives, which correspond mainly to reduction of tax due, deferral of tax due or recording of presumed tax credits. It is important to mention that, as most of such incentives are not supported by the necessary agreements pre-approved by all States (CONFAZ meeting), these tax incentives may be questioned.

Property Taxes (IPTU and ITBI)

A property tax – IPTU (Imposto Predial e Territorial Urbano) is levied annually based on the fair market value of property in urban areas at rates that generally vary between 0.2 and 5% according to the municipality and location of the property. Payments can be made in up to 10 monthly instalments. In a few cases it is possible to obtain exemption from this tax.

Another property tax – ITBI (Imposto de Transmissão de Bens Imóveis Inter Vivos) is levied at rates of up to 6% on sales or transfers of properties and is payable by the acquirer. A reduced rate of 0.5% applies to transactions under housing programmes financed by federal government schemes.

Sales tax/VAT Other taxes

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Audit requirements

Audited Financial statements are required for listed companies, financial institutions and insurance companies. Listed companies with total annual gross revenue above R$100m must present quarterly information reviewed by independent auditors. Other regulated segments might require audited financial statements.

In light of recent changes to the Corporate Law, all entities, independent of their statutory structure or whether they are listed or regulated entities, must have their financial statements audited by an independent auditor if they are deemed to be ‘large’. ‘Large’ companies are defined as those whose gross revenue in the last year was greater than R$300m (approximately US$150m) or held total assets over R$240m (approximately US$120m) within Brazil. These limits are applicable not only to individual legal entities but also to a group of entities under common control, even if the control is abroad. Please note that the analysis considers the operations in Brazil only.

Transição – RTT), under which, for tax purposes only, taxpayers will be allowed to calculate corporate income tax and follow the applicable accounting criteria before the enactment of Law 11,638.

The transitional tax regime was optional for the 2008 and 2009 calendar-years but has been mandatory since 2010 and is in force until a new law is enacted setting forth the tax effects (if any) stemming from the new methods and accounting criteria. In addition, the option of the RTT for the Corporate Income Tax (IRPJ) shall imply the adoption of the tax regime also for social contributions purposes (CSLL, PIS and COFINS).

Accounting Practices Adopted in Brazil

The Accounting Practices Adopted in Brazil (BR GAAP) are based on the Corporate Law, which was updated in 2008 with Law 11.638/07. This Law has approximated the BR GAAP to International Financial Reporting Standards (IFRS), although there still are many remaining differences. Although the starting point for the BR GAAP is the Corporate Law, there were inconsistencies in the accounting treatment between different companies in Brazil due to the lack of guidance in the Law, which is very superficial on accounting issues. The Brazilian Stock Exchange Securities (CVM) and other regulators, including the Brazilian Federal Council of Accountants (CFC), used to issue accounting guidance to the entities regulated by them. After a round of negotiations, from 2008 this problem tends to disappear in view of the creation of the Brazilian National Standard Setter (CPC – Comitê de Pronunciamentos Contábeis), which, from now on, will be responsible for issuing the new Brazilian accounting standards, which will be subject to the endorsement from the different regulators. Once the regulators are part of the CPC, it is supposed that most of the standards, if not all,

will be approved by them as soon as they are issued in final form. Prior to 2010, standalone Financial Statements could be prepared in accordance with BR GAAP. However, the CVM, the Brazilian Central Bank (BCB) and Insurance Regulator (SUSEP) have issued regulations determining that entities must prepare consolidated financial statements in accordance with IFRS from 2010.

The format of the financial statements in Brazil is similar to IFRS. Disclosure in BR GAAP is very limited if compared with disclosure requirements prescribed by IFRS.

The Transitional Tax Regime (RTT)

As mentioned above, Law 11,638/07 introduced new accounting principles in Brazil. In order to guarantee the tax neutrality of such changes, the Brazilian government issued Law 11,491 on 27 May 2009. The focus of this measure was to guarantee that no adverse tax consequences should be triggered from the adoption of the new accounting criteria in connection with the recognition of revenues, costs and expenses computed on the assessment of net profits. To achieve this result, Brazilian taxpayers will have the option to elect for a Transitional Tax Regime (Regime Tributário de

Audit and accountancy

36

13th Salary The employer must pay annually

to the employee, the 13th salary, which is a Christmas bonus due to employees, regardless of their remuneration. It corresponds to an additional one month salary and includes annual or semi-annual bonuses and fringe benefits.

The payment occurs, most commonly, in two instalments, 50% in November and 50% in December. An anticipation of the first instalment may be requested when the employee leaves for vacation.

Social Security Contribution

Companies are subject to the following social charges, due on the employees’ monthly remuneration:

•SocialSecuritycontributions,equal to 20% (with no ceiling), plus:

•Corporatecharges:

SESI, SESC, SEST 1.5% SENAI, SENAC or SENAT 1.0% INCRA 0.2% SEBRAE 0.6% Education Salary 2.5% Work accident insurance (from 1% to 3%) 3.0% Total (maximum rate) 8.8%

The corporate charges listed above vary according to the nature of the company’s activities.

In addition to the company’s contribution (20%), employees are required to pay a monthly social security contribution that varies from 8% to 11% of their monthly compensation, with a current set ceiling of R$405.80 (approximately US$202.50) per month (this ceiling is altered from time to time).

Working conditions/ hours workedThe Brazilian Federal Constitution determines that regular working hours should not exceed 8 hours per day and 44 hours per week. Specifically for financial institutions, working hours should not exceed 6 hours per day. A series of constitutional and legal provisions establish a shorter working week for a variety of professional categories such as bank clerks, telephone operators and so forth, who are subject to different working weeks pursuant to specific regulations. Time worked in excess of the above is treated as overtime. In general, compensation for overtime work is paid at least 50% above the compensation paid for normal working hours.

Employment and labour relations in Brazil are primarily governed by the Brazilian Federal Constitution, the Brazilian Labour Code – ‘CLT’ and Collective Labour Agreements. The ‘CLT’ imposes on the employer a series of obligations that protect employees, reflecting the paternalistic philosophy of the Brazilian Legal System.

Main Employees’ Rights

Remuneration According to the Brazilian

Labour Laws, an employment contract (written or verbal) must state the remuneration of the employee. The remuneration of an employee includes, besides base salary, fringe benefits and bonuses, amongst others.

Government Severance Indemnity Fund for Employees (FGTS)

For individuals considered as employees, the company must make a monthly deposit to the Government Severance Indemnity Fund for Employees (FGTS), at an amount equal to 8% of an employee’s remuneration. In case of a dismissal without just cause, incited by the company, an employee may withdraw this fund with an additional penalty (to be paid by the employer) equivalent to 40% of the accumulated FGTS balance. The company must contribute an additional 10% fine to the social fund.

Human Resources and Employment LawLabour Relations

Immigration law states that a foreign individual may only enter the country, to be engaged in gainful activity, under certain types of visas (permanent and temporary, type V), which will vary depending on the kind of activity performed and the period of physical presence in the country.

Temporary visa

Business Trip (Temporary visa) The business visa permits a foreign individual to enter Brazil for a short term on specific business assignments. The business visa is recommended to business owners or their representatives that come to Brazil exclusively in the interests of their companies, to offer or search for products, to learn about the Brazilian market or to close or draw up agreements, for example.

Temporary visa V – with a labour contractA foreign national who enters the country holding a temporary visa type V – with a labour contract, must have an employment relationship with a Brazilian company.

Temporary visa V – without a labour contract (technician)A foreign national entering the country without a labour contract and consequently, without an employment relationship with a Brazilian company, must be under a technology transfer and/or technical assistance contract.

Permanent visaA permanent visa is granted to foreign individuals who intend to settle in Brazil and that satisfy specific requirements established by the National Immigration Council and/or the Labour Ministry.

Wages and salaries All work of equal value must be remunerated at the same rate, irrespective of the nationality, age, sex, or marital status of the employee.

A minimum wage is established by law and is currently set at approximately US$311 per month (R$622). It should be noted that the minimum wage serves mainly as a base index for adjusting wages and certain prices. In practice, it is paid only to some rural, unskilled and migrant workers.

Foreign personnelLegal entities with 3 or more employees, are obliged to maintain a proportionality of 2/3 of Brazilian employees to 1/3 of foreign employees. The proportionality must also be observed in relation to total employee remuneration. Lower proportionality may be granted by the relevant authorities in specific circumstances (e.g. lack of Brazilian workforce in a specific sector). For proportionality purposes, foreigners residing in Brazil for more than ten years who are spouse or parent to a Brazilian national, and those of Portuguese nationality, are considered as Brazilians.

38

Import Tax (II)

Import tax is levied on the CIF price. The rate depends on the degree of necessity and is defined by the product‘s tax code according to the Harmonised System. Taxes on the importation are levied on top of one another, as follows:

i. Import tax is applied to the CIF price (FOB price plus insurance and freight).

ii. IPI is levied on the total of (i) above (CIF price plus import tax).

iii. PIS and COFINS are applied

to the total of (ii) above (CIF price, import tax, and IPI) plus ICMS due on imports and the contributions are included in their own basis.

iv. ICMS is applied to the total of

(ii) above (CIF price, import tax, IPI) plus PIS, COFINS and ICMS is included in its own basis.

Import tax (II) is a cost to the company (not recoverable). ICMS, IPI, PIS and COFINS paid on imports are generally creditable.

Tax Treaty

Currently, Brazil has double tax treaties with the following jurisdictions: South Africa, Argentine, Austria, Belgium, Canada, Chile, China, Korea, Denmark, Ecuador, Spain, Philippines, Finland, France, Netherlands, Hungary, India, Israel, Italy, Japan, Luxembourg, Mexico, Norway, Peru, Portugal, Czech Republic, Slovakia, Sweden and Ukraine.

Trade

40

All banking business is closely monitored by banks themselves and by the Central Bank of Brazil (Banco Central do Brasil). Banking rules are strictly enforced.

In addition to the extensive branch network of the major retail banks, many of which have self-service ATM halls, most services available at the bank itself are also available via internet banking.

Types of bank accounts:

Brazilian banks offer current accounts, savings and investment accounts, credit and debit card services, personal loans and overdrafts, and in some cases, foreign exchange services. Following are the details of each one:

Current accounts (conta- corrente). Usually

entitle the account holder to a chequebook and/or debit card. These accounts are normally non-interest-bearing.

Savings accounts (conta poupança). Pay monthly

interest on average daily balances for the month. This rate is currently 0.5% over the basic reference rate, (Taxa Referencial – TR). Interest earned on these accounts is tax-free. Due to a new local regulation, deposits made on May 4th 2012 and onwards, have new interest basis. Whenever the Brazilian‘s benchmark

interest rate (SELIC – Special Settlement and Custody System) is equal or under 8.5% per year, the interest paid to customer is 70% over SELIC, plus the reference rate (TR) variation.

Currently, many banks combine these two accounts into an investment account (conta investimento). Deposits are automatically routed to the savings account, and transferred to the current account to cover checks, debit card payments and cash withdrawals. These accounts are also used for investments in funds, with all investments and redemptions transiting through the account.

Salary payment account (conta salário). A simple type

of checking account which was launched by Brazilian Central Bank in 2006 (Res. 3402/06) with the following objectives:

i. Allow low income customers to withdraw their salaries through Branches or ATM's without the need to keep a normal fee chargeable checking account in the Pay roll processor Bank chosen by its Employer Company;

ii. Allow individual customers to readily transfer their salaries to a checking account held in a Bank which is not the same as the Pay Roll processor chosen by its Employer company. The idea is to stimulate competition among Banks for better quality services and lower fees.

Personal loan (empréstimo pessoal). It is

repayable in up to 24 or 36 instalments, depending on the bank. Competition is strong and rates vary from bank to bank.

Overdraft (cheque especial). It is normally

done by arrangement and subject to the proper credit analysis by the bank. Usually, on opening an account, the bank may make such a credit line available. Interest rates on such facilities are very high.

Setting up a bank account

(individual account)

The following documents are required to open a retail bank account, such as:

• Avalididentitydocument. In the case of a foreigner resident in Brazil, this will mean their foreigner’s identity card (Cédula de Identidade para Estrangeiro – CIE) which contains the foreign register (Registro National De Estrangeiro – RNE).

• IndividualTaxpayer’snumber(Cadastro de Pessoa Física – CPF).

• Proofofresidency,suchasautility bill in the name of the person opening the account.

To obtain the CPF, it is

necessary to fill out the application form at any Post Office, branch of Banco do Brasil or branch of the Caixa Econômica Federal and present the documentation required (usually the original or a certified copy of the RNE).

The applicant will receive a counterfoil with a code number and there is a small fee. Thereafter, the applicant will be notified to appear at a unit of the Federal Revenue Service and present their documents and the counterfoil in order to obtain their definitive CPF.

Banking in Brazil

42

HSBC Bank Brazil represents one of the main financial groups worldwide in our country. Based on four pillars – Stability, Proximity, Relationships and Know-how, the institution follows Principles and Values that ensure an ethical, fair and responsible standard when doing business, always focusing on the client.

Services offered by HSBC Bank Brazil include Retail, Commercial Banking, Corporate, and Private Banking.

Head Office

HSBC Bank Brazil has its headquarters in Curitiba (PR).

An International Brand

In March 1997, HSBC Bamerindus S.A. was born, which in 1999 became HSBC Bank Internacional Brasil S.A. – Banco Multipo. The HSBC logo and hexagon are used in order to adhere to the worldwide brand.

Network in Brazil

HSBC Bank Brazil is now present in 564 Brazilian cities, with 867 agencies, 390 bank service offices, 1,059 electronic service stations and 5,284 ATMs. The clients also have over 39 thousand ATMs in the network shared with other banks in Brazil and 24hr Bank.

Clients

Over 5.2m individual clients and 368,932 legal entity clients.

National Ranking

•4thlargestnon-state-ownedbank ranked by total assets¹.

•6thlargestbybranches¹.

•6thlargestbydeposits¹.

•4thpositionontheCentralBank FX ranking by volume¹.

•2ndlargestInternationalCustodian and 4th Domestic Custodian².

•6thlargestbyAUM³.

Corporate Sustainability

At HSBC, our commitment to sustainability involves taking a look at our own business and endeavouring to do more and do it, better. The target of acting sustainably can only be met if sustainability is one of the drivers for our processes, organizational culture, customer care, creation of new products and services and, above all, credit policies.

•Weapplypoliciesandprocesses to manage potential social and environmental risk in our lending and other financial activities in sensitive sectors.

•Wehelpourclientstoidentifythe opportunities presented by the shift to a low-carbon economy.

•Wetrytoreduceourownenvironmental footprint and share good practice on this with our clients and other stakeholders.

•Wefocusourcommunityinvestment (philanthropic activities) on education and the environment.

Our education programmes strive/aim to lift people out of poverty, build financial literacy and promote environmental awareness.

Our environmental programme focuses on the HSBC Climate Partnership – a five-year environmental programme to reduce the impact of climate change on people, forests, freshwater and cities. HSBC’s programme partners are carrying out original scientific research, developing demonstration projects, creating working models, and proving clear solutions so that governments can enact legislation for the adoption of low-carbon policies.

¹ ANBID – Local Banking2 CVM Brazil – SEC3 ANBID – Local Banking

Who are we?

HSBC in Brazil

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Capital city

Area

Population Language

Currency

International dialling code

National Holidays

Business and banking hours

Political structure

Stock Exchange

Brasilia

3,287,000 square miles

190,732,694*

Portuguese

Real

+55

Scheduled Public Holidays for 2012

Commercial – 9am to 6pmBanks – 10am to 4pm

Federal Republic

BM&FBovespa. Leading share indexes: IBOVESPA & IBrX

Shrove Tuesday (Carnival) 21 February

Good Friday 6 April

Tiradentes Day 21 April

Labour Day 1 May

Corpus Christi 7 June

Independence Day 7 September

Brazil’s Patron Saint Day (N.S.Aparecida) 12 October

All Souls’ Day 2 November

Proclamation Republic 15 November

Christmas Day 25 December

*Source: Censo IBGE 2010

Country overview

46

Alvaro Taiar

Tel: +55 11 3674 3628

Email: alvaro.taiar@br.pwc.com

Thierry François-Marsal International Banking Centre

Phone: +55 11 3847 5450

Email: thierry.f.marsal@hsbc.com.br

3rd Edition: July 2012

Copyright

Copyright 2012. All rights reserved.

’PwC’ and ’PricewaterhouseCoopers’ refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

Contacts 14

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