HSBC Global Connections — Brazil (Retrieved 15Feb15)

2/15/2015 HSBC Global Connections — Helping businesses grow internationally

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Brazil is one of the most promising emerging markets in the world. Diversification inits product exportation base and trading partners, internal economic stability, a largework force and good social standards are helping to attract more and more globalinvestors. In addition, the forthcoming 2014 Soccer World Cup and 2016 Olympicsare generating a large number of infrastructure investment opportunities.

Executive summaryWelcome to our guide to doing business in Brazil. In this publication we hope toprovide you with an insight into the key aspects of undertaking business andinvesting in Brazil and answer many of the questions overseas businesses andentrepreneurs have when making their first venture into the Brazil market.

The guide also covers some practical issues that face business entities whenentering Brazil, such as human resources, employment law and banking.

Whilst the guide does have an emphasis on corporate entities, an overview of thetaxation obligations for individuals and its administration is also presented.

Brazil is one of the most promising emerging markets in the world. A high degreeof diversification in its product exportation base, a diversified list of tradingpartners, internal economic stability, increasingly large workforce and goodsocial standards are helping to attract global investors. In addition to this, theforthcoming 2014 Football World Cup and 2016 Summer Olympics aregenerating a large number of infrastructure investment opportunities.

The Brazilian Government and Congress have made a concerted effort to improvethe economic stability of the country and have implemented changes in Brazil’stax legislation, governance and regulatory background. There are still a fewreforms to be implemented by the new Government, but Brazil is demonstratingthat it is becoming increasingly connected with the international businessnetwork.

Brazil offers foreign investors a number of competitive advantages, including:

Brazil

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Brazil is the biggest country in Latin America, occupying almost half of SouthAmerica.

The basic legal concepts regulating foreign capital in Brazil are defined in Laws4131 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.In Brazil there is a wide variety of federal programmes designed to encouragenational economic development and also to promote regional development. Theytend to favour operations in the poorer Northeast (SUDENE) and Amazon (SUDAM)regions. Several programmes provide export incentives.Relevant benefits are granted to foreign investors not domiciled in tax havens andwho invested in Brazil pursuant to the regulations established by Resolution 2.689.There are no legal minimum share capital requirements for a corporation, except forfinancial institutions and insurance companies, and certain other legal entities withspecific business purposes.Dividends remitted to non-resident shareholders or quota holders are not subject toany withholding tax.Capital gains earned by local resident entities are taxed at a higher rate than thecapital gains of non-residents.Payments of any type made to tax havens are generally subject to withholding at ahigher rate.As a general rule, foreign exchange transactions made in order to allow payments tonon-residents, considering royalties, technical services, technical, administrativeand any other assistance or any other revenue, including the reimbursement of anycosts, are subject to specific financial tax (IOF – see page 14 for more information).On 16 December 2009, the Brazilian government established a minimum capitalrequirement to invest and thin cap rules through Provisional Measure 472.

This document is an overview of some common issues that investors should beaware of when operating in Brazil, but it does not constitute financial, legal, taxor other professional advice. You should not act upon the information containedin this publication without obtaining specific professional advice.

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

HSBC Brazil is present in 545 municipalities and has a customer base of morethan 5.2m individual clients and almost 460,000 business clients. HSBC seeks togenerate excellent business relationships with its clients, attending to each and



every need with appropriate support.

Brazil is a member of the G20 of large global economies, possessing a vibrantagricultural industry that continues to grow. The country has awakened theattention of the world by creating a healthy and productive businessenvironment. In 2008, when global markets were shaken by the economic crisis,Brazil was one of the least affected. This demonstrates Brazil has a stable andbalanced economy supported by a strong and consistent economic policy.

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

Economic stability is sustained by a democratic system of the government andrelies on the diversity of ethnicities.

Brazil is one of the most promising and diversified business markets in the world.This guide helps entrepreneurs to understand the characteristics of the Brazilianmarket and optimise business opportunities.

André Brandão

President and

Chief Executive Officer

HSBC Bank Brasil SA

IntroductionThis guide, Doing Business in Brazil, provides a high level overview of theBrazilian business environment, including the common types of business entitiesused by foreign investors to enter the Brazilian market and the taxation andstatutory environment.

GeographyBrazil is the largest country in the southern hemisphere and the fifth-largestcountry in the world, covering nearly half of South America.

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 havereached the middle classes.

Since the inclusion of government-controlled railroads to the Brazilian NationalPrivatisation Programme, there has been significant investment in developmentand modernisation of the railroad network, which is mainly located in theSoutheast and Southern regions, although there are plans (federal and privateprojects) for some major extensions in the North and Central-West regions. Forthe North-East region, future investments are anticipated.

Road transport is still the preferred method of transport for both long-distanceand intercity travel.

The airline network is well-developed and the majority of the voting stock ofairline companies is held by the private sector.

Economic environmentEconomic HistoryThe Brazilian economy is large and diverse by almost any standard, but there isstill a considerable state and semi-state participation in various strategic sectors,such as transport and utilities. Brazil has undergone several privatisationprogrammes 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 theeconomy, supported by abundant human resources. Since the 1960s, however,the emphasis has been placed on industrial development financed largely withinternational loans and investments. As a result, exports today reflect a muchmore balanced mix of commodities and manufactured items. Moreover, theprofile of imports became more restricted during the 1970s and 1980s becauseof the import substitution and the scarcity of foreign currency. This situation ischanging following the lowering of trade barriers and the increased opening ofthe 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 haveundergone expansion during the past few years such as manufacturingindustries, high-tech industries, service industries, transport andcommunications.

Current Economic ClimateOver the last year, Brazil’s benchmark interest rate (SELIC – Special Settlementand 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 forthe previous three-year period was 19.22%.

In the beginning of 2012, the Brazilian Monetary Policy Committee (COPOM) hasbeen 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 bythe Brazilian government to protect the domestic economy from the internationalfinancial crisis, which, in the government view, threatens the consumption andgrowth of local industry.

In the past decade, Brazil’s investment risk was rated high by various ratingagencies with a number of peaks due to political reasons. By February 2011;however, Brazil's risk profile had fallen sharply. In relation to the inflation rate,one of the historically most relevant indicators of Brazilian economy, numbers arealso positive.

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

For the first half of 2013, the average rate of inflation was is 6.43%

Key sectors and trading partnersBrazil is a member of the Latin American Integration Association (ALADI), theWorld Trade Organisation (WTO) and the Common Market of the Southern Cone(MERCOSUL), whose current members comprise Brazil, Argentina, Paraguay andUruguay, with Chile, Bolivia, Peru, Colombia, Ecuador and Venezuela asassociated countries.

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

Brazil has a very strong industrial base. It exports not only natural resources andagricultural products, but also industrial and commercial products.

At the top of the list are natural resources (such as iron ore) and agriculturalproducts (such as soy beans, coffee and sugar). Moving down the list, there aremanufactured products including vehicle parts, airplanes, petrochemical productsand 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). Since2010, China has played an important role as Brazil’s main commercial partner,followed by the United States, Argentina and Germany. These top commercialpartners represent 15.9%, 12.4%, 8.2%, and 5% respectively of total tradebusiness.

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

Foreign investmentThe general policy is to admit foreign capital and treat it in the same way as localcapital. All inward investments must be registered with the Central Bank toensure ultimate repatriation rights within 30 days. It should be noted thatacquisitions of local companies should be thoroughly investigated to confirmtheir real underlying value.

The basic legal concepts regulating foreign capital in Brazil are defined in Laws4131 of 1962 and 4390 of 1964, which were regulated by Decree 55762 of1965.

The legal concept of foreign capital includes tangible and intangible assets.

An important concept in foreign capital legislation in Brazil is equal treatment toall reflecting the Federal Constitution, article 5. This principle, in Law 4131/62and later amendments to Federal Constitution, grants foreign capital invested inBrazil legal treatment identical to that given to local capital, under equalconditions, and any discrimination not contemplated by this law is prohibited.

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

Capital may be repatriated without payment of tax up to the amount registered inforeign currency with the Central Bank. Amounts in excess are considered ascapital gains under exchange disposition and therefore are subject towithholding income tax of 15% (25% if the beneficiaries are domiciled injurisdictions 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 withholdingincome tax at the rate of 15% (25% if the beneficiaries are domiciled injurisdictions considered as tax havens).

Incentives for foreign investorsTax or Grant incentivesRelevant benefits are granted to foreign investors not domiciled in tax havensand who invested in Brazil pursuant to the regulations established by Resolution2.689. Such resolution establishes that International Investors (institutions andindividuals) are allowed to hold any asset class available to domestic investors inBrazil and, given that international investors are not established or resident in thecountry, the CMN (Brazilian Monetary Council) Resolution 2689, requiresinternational investors to hire institutions to act as:

Legal Representative: Responsible for presenting all investor registrationinformation to the Brazilian Authorities.Fiscal Representative: Responsible for taxes and fiscal issues on behalf of theinvestor before the Brazilian Authorities.

In addition, the financial assets and securities traded must be registered, held incustody or maintained in deposit accounts at an appropriated authorizedinstitution authorized by the CVM or Brazilian Central Bank.

Capital gains on stock and derivatives traded in stock and futures exchange areexempt from capital gain tax.

In addition, income on public bonds became tax exempt, provided they wereacquired by these investors after 16 February, 2006.

Foreign investors are exempt from withholding income tax due on FIP andInvestment Funds in FIP quotas. This exemption is subject to compliance with therules of concentration of investment in the fund and on the distribution ofearnings established by law. The most notable among these prerequisites is therequirement that no investor may hold more than 40% of the fund’s quotas orearnings.

The National Bank for Social & Economic Development (BNDES) offers low-pricedfinancing in order to support the implementation, expansion, modernisation orrelocation of plant, including capital goods acquisition and associated workingcapital.

Brazil has various incentives available for exporters, including (under certainconditions) exemption from withholding tax; exemption from excise tax (IPI);value-added tax on sales and services (ICMS); social contribution on billing



(COFINS); contributions to the social integration programme (PIS) on exports ofmanufactured products and low-cost export financing.

In Brazil, there is a wide variety of federal programmes designed to encouragethe economic development of Brazil 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. In the SUDENE and SUDAMregions, incentives are available for the implementation of new industrial projectsor expansion, diversification or improvement of an existing industry.

Statistics for Foreign Direct InvestmentAs reported by the Brazilian Central Bank (BACEN) website, the census of foreigncapital in Brazil figures (please check copy) stress the performance of theBrazilian economy as a point of attraction for foreign capital during the secondhalf of the nineties which deepened the process of internationalizing thecountry’s economy.

Greater economic stability and a permanent process of structural reforms,including the approved breaking of state monopolies, were clearly reflected inincreased flow of capital to Brazil.

The first indication in the census that stresses the higher degree of foreigncapital 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 previouscensus that took 1995 as its base-year. This increase, caused by bothestablishment of new corporations and acquisition of existing ones, together withfresh capital sharing in those already recording some foreign ownership in 1995,was the main thrust behind the substantial changes recorded in the figuressurveyed.

According to the information gathered, total paid-in capital of informantsreached 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 figuresstill have a strong impact, being over twice the figures of the previous census(from US$86.2bn, in 1995, to US$179.8bn, in 2002, calculated based on theexchange rate in effect at the end of each period). It should be noted that in 1995residents 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 amajority position.

Barriers, risks and downsides for foreign investorsDepending on the nature of the business activity, there will be involvement ofsome regulatory agencies. Examples include:

Central Bank (BACEN) –

responsible for the execution of monetary policy, exchange controls, registrationand control of foreign capital and profit remittances and regulation of Banks andFinancial 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-trustmonitoring.

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 importlicences.

Legal and regulatoryGovernment 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 inhealth products and healthcare.

Restrictions on foreign investor participation exist in certain areas, such as:

communications (television, radio stations or newspapers);aviation (Brazilian airlines); participation in classified (operations) governmentcontracts;coastal and freshwater shipping;mining and hydroelectric energy.

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



borders is subject to further restrictions.

Workforce and cost of livingAvailability of Customer/WorkforceIn general, adequate labour is available. Semi-skilled and unskilled labour is fairlyabundant, recognised as hard-working and willing to learn, and is relativelymobile. Skilled labour tends to be in short supply. Personnel with proventechnical, professional or management skills are growing as company in-housetraining and other courses take place.

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

Business etiquette and cultureHandshakes are the most common form of greeting between businesscolleagues. In more informal situations, women will tend to greet each other witha kiss on either cheek, while men may briefly embrace.

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

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

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

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



The futureIn the last years market players recognized that global growth and commodityprices are more and more driven primarily by developments in the Emergingcountries, like China, India and Brazil.

The general policy of Brazilian governments has been to promote overalleconomic growth and to fight poverty. However, this policy has been adverselyaffected over the years by problems related to lack of infrastructure, of long-term investment financing and tough economic measures that have been taken toshackle inflation, including the adoption of high interest rates.

There is a clear political need to improve the overall living conditions of low-wage earners by assuring adequate housing, healthcare and food supplies atreasonable prices.

There is a general recognition that uncertainties concerning the political andeconomic climate over the years have deprived Brazilian business of thenecessary investment to modernize and become internationally competitive. Thecountry is now viewed by most of the international community as a much morepredictable place in which to invest.

The realization of global sporting events like the FIFA World Cup in 2014 and theOlympic Games in 2016 in Brazil provides a unique opportunity to promote andattract investments, leveraging the potential of the country and helping reducethe infrastructure deficit. Strategic and financial (private equity investors) arestrongly considering investments in the area and are supported by the BNDES(the Brazilian development bank).

As the World Cup and the Olympic Games are world events, the expected gains interms of visibility for Brazil are huge. Therefore these are considered greatopportunities for the country to improve its international image. An increase ofabout 1 per cent in Brazil's GDP is expected in the year of each event.

Doing business

Forms of businessForms of foreign InvestmentInvestment made by foreigners is normally structured via the acquisition ofinterests or financial assets or via the incorporation of new entities.

Depending on the nature of the assets to be invested, the applicable regime willbe different. 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 insecurities 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 anentity authorised by the Securities Commission (‘CVM’) to trade in securities ofpublicly-held companies.

There are situations when it is possible to transfer the ‘2689 equities’ outside ofan 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, whenpreviously authorised by the Securities Commission, the cases of closingshareholders’ 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 theacquisition of private companies, the basic legal concepts regulating foreigncapital in Brazil are defined in Laws 4131 of 1962 and 4390 of 1964, which wereregulated by Decree 55762 of 1965.

The legal concept of foreign capital includes tangible and intangible assets.

The corporate forms in which a business is normally conducted in Brazil are thefollowing:

Corporations (Sociedade por Ações – S/A) -

The 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 nominimum share capital except for financial institutions, insurance, utility andexport trading companies. It may be public or private. Shares in publiccorporations are freely transferable; shares in private corporations are restricted.

Limited Liability Companies (Sociedade Limitada) –

The Brazilian equivalent of a closely-held company in the United States and aprivate 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 isno minimum share capital. Shares are called quotas and their transferability isrestricted. 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 limitedto few multinationals.

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

Regulatory matters/issuesIn general terms, there are no restrictions on the ownership by foreign investors,except for:

Communications (television, radio stations or newspapers);Aviation (Brazilian airlines);Participation in classified government contracts;Coastal and freshwater shipping;Mining and hydroelectric energy, etc.

The financial year (12-month period) of Brazilian legal entities can be freelychosen for corporate purposes. Accordingly, certain Brazilian companies adoptthe 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 (Januarythrough December) for tax purposes, most of domestic entities choose the sameperiod as their corporate financial year.

Setting up a businessRegistration formalitiesThere are no legal minimum share capital requirements for a corporation, exceptfor financial institutions and insurance companies and certain other legal entitieswith specific business purposes.

Upon the decision to incorporate a new legal entity in Brazil, an inauguralmeeting of prospective shareholders must be held to approve the bylaws, which



sets up the corporation‘s core activities, appoints management, and indicates theamount of capital, registered office and distribution of shares (as per thesubscription list) among shareholders (others).

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

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

Upon approval of the bylaws, the shareholders should elect the members of themanagement bodies. There are no nationality requirements for management, buta foreigner must hold a permanent visa and be domiciled in Brazil to be eligiblefor the job. At the end of the meeting, the minutes shall be signed by allsubscribers 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 withthe Board of Trade.

Ongoing filing requirementsA newly incorporated corporation acquires legal existence upon filing itsincorporation documents with the Board of Trade and the subsequent publishingof its meeting’s minutes in a local newspaper and the Official Gazette (DiárioOficial). The certificate issued by the Board of Trade confirming the filing of theincorporation documents serves as a legal document for the transfer of assetsused to pay in the capital and becomes a matter of public record.

An annual meeting must be held with the shareholders within the first fourmonths of the end of the corporate financial year, to approve the annual financialstatements and the management report, approve the proposed distribution of netincome for the year, elect the executive officers or the board of directors’members (if applicable) and approve the authorised capital, minimum or fixeddividends and premiums on reimbursements (if applicable).

Shareholders’ meetings must normally be called by publishing an appropriateannouncement at least three times in the Official Gazette and in a localnewspaper.



Liabilities for Directors CompanyIn the most common types of entities, LTDA and SA, executive officers are notpersonally liable for the obligations they undertake in the name of a corporationand in the normal course of business. However, they are liable for losses anddamages caused by negligent or fraudulent conduct or by violating the law or thecorporation’s bylaws.

Although it may seem easy for investors to do business in Brazil, it is importantto highlight a few key aspects imposed by Brazilian laws which can still beconsidered as bureaucratic. The most usual procedure for a foreign investor tostart doing business in Brazil is by organising a company.

In order to do so, the company must request a Federal Tax Number (CNPJ) byregistering the Cademp (Cadastro de Empresas) at Central Bank. If the intentionis to invest in other Brazilian companies or if the intention is exclusively to bepart of the Brazilian financial market, then the company must register itself at theBrazilian Securities Commission – CVM.

Nowadays, one of the most bureaucraticprocedures to be followed in Brazil is toexecute the decision of winding up local presence. A lot of compliance and taxduties can be demanded in this case. The time required to close a business inBrazil may be significant.

Taxation

Corporation income taxForeign operationsBrazilian resident companies are taxed on worldwide income. Foreign branchprofits are taxed as earned and foreign subsidiary profits are taxed whendistributed or made available. Double taxation is avoided by means of foreign taxcredits.

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

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

Fees and other related expenses paid in Brazil for services rendered abroad aresubject to withholding tax of 15%, or a lower rate under some tax treaties.However, other taxes may also apply on importation or services, such as PIS,COFINS, CIDE, ISS and IOF.



Centre of International Financial or OperationsThere are no tax breaks to encourage multinational companies to locateheadquarters or administrative offices in Brazil and/or the use of Brazil as a basefor offshore financial operations. However, the various Brazilian states do offerdifferent financial incentives – they compete between themselves – in order toattract companies, mainly the manufacturing plants.

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 asurcharge of 10% on annual taxable income in excess of R$240,000(approximately US$110,000).

Additions of expenditure to and deductions of expenditure from the accountingprofit figure are required in order to calculate the amount on which corporationtax is based. These adjustments are either permanent or temporary. Permanentadjustments include gifts and donations, and temporary adjustments (which arereverted in the future) include provisions. All these adjustments should becontrolled in the Livro de Apuração do Lucro Real (LALUR), Part A.

Certain companies can also apply to pay IRPJ according to a presumed profitmethod (PPM). The amount of (IRPJ/corporate income tax) will be obtained from apercentage of the gross revenues. Service providers will be charged at a rate of8% (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 wheregross revenues in the preceding calendar year are greater than R$78m (this capwas recently increased from the prior R$48 million prior cap). Financialinstitutions in general, leasing companies, insurance companies, and non-privatepension funds are not allowed to adopt PPM.

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

Certain classes of income receive special tax treatment. Some of them areexcluded 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). Othercorporate returns must also be filed by legal entities.

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 distinctadjustments. CSLL is charged at the rate of 9%. For financial institutions, theapplicable rate is 15%.

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

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

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

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

Tax losses carry forward (IRPJ and CSLL)There is no time limit for the carry forward of tax losses. However, the taxableprofit 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 toother Brazilian companies.

Tax losses of an acquired company cannot be carried forward to be offset againstthe taxable income of a new activity if the following two conditions are both met:

modification in the ownership of the company; andmodification in the activity of the company.

Capital gainsCapital gains earned by local-resident entities are taxed at the normal corporaterate (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 typemade to tax havens are generally subject to withholding tax at a rate of 25%.

Withholding Taxes (IRRF)The current rates applicable to the following payments to non-residents are:

Dividends Not TaxableInterest 15%*†Royalties 15%*†Technical and Admin Services 15%*†



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 nottax income or tax income at a rate lower than 20%, are subject to withholding ata rate of 25%.

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

At 7 June 2010, Federal Tax Authorities published in the Normative Instruction1.037/10, article 1, the new list of Tax Havens. This new list includes new taxhavens jurisdictions in addition to the previous list that was published in 2002that 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 theGrenadines, 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 andMiquelon, Solomon Islands, Swaziland and Tristan of Cunha. On the other hand itwas excluded from the previous list the jurisdiction of Malta and the LuxembourgHoldings 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 followingcharacteristics: (i) no income tax or income tax lower than 20%, (ii) tax benefitsfor non-resident shareholders regardless of whether they carry out economicactivities in the country or dependency, (iii) tax benefits for non-residentshareholders to the extent that they do not carry out economic activities in thecountry; (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 ofassets/rights, and no information on economic transactions. Based on theconcept introduced in 2008, NI 1.037, article 2, enumerates some types ofentities that fall under at least one of the characteristics above.

These entities are:

The financial investment corporations (Sociedad Anonima Financiera de Inversion, orSAFI) under the laws of Uruguay;The International Trading Companies (ITC) under the laws of Iceland;The offshore KFTs under the laws of Hungary;The limited liability companies (LLC) under U.S. state laws that are not subject toU.S. federal income tax and whose members are non-residents (in the U.S.);The Entidades de Tenencia de Valores Extrajeros (ETVEs) under the laws of Spain;The ITCs or International Holding Companies (IHCs) under the laws of Malta;The holding companies under the Laws of Denmark which do not excise substantiveactivities; andThe holding companies under the Laws of the Netherlands which do not excisesubstantive activities (suspended from the list).

Note that different tax effects could impact transactions between Braziliancounterparts with counterparts in tax havens or with privileged tax regimeentities.

It should also be noted that the tax authorities respect the exemption fromwithholding for all dividend payments, including dividend payments subject towithholding tax under the provisions of a tax treaty. In the case of royalties, theroyalty 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 relevantproducts 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 atthe time of sale, either to another manufacturer who will further themanufacturing process or to the retailer who sells to the end user.

The tax paid is stated separately on the sales invoice. Certain exemptions aregiven to goods considered to be of basic necessity to the country‘s economy. Therates are defined 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 creditagainst 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 fromIPI – 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 apercentage of gross revenue. Note that higher rates are imposed in certainsectors. A PIS credit system is meant to ensure the tax is applied only once on thefinal value of each transaction, which means that the company is granted a taxcredit calculated on acquisition of inputs and on certain expenses (non-cumulative system).

Note that there are certain companies which must pay PIS under the cumulativesystem. The cumulative system imposes a lower rate (0.65%), however, it doesnot enable the company to record tax credits on acquisitions.

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

Contribution for Social Security Financing (COFINS)COFINS, generally levied at 7.6%, is a monthly federal social security contributioncalculated as a percentage of gross revenue. Higher rates are imposed in certainsectors. A COFINS credit system is meant to ensure the tax is applied only onceon the final value of each transaction, which means that the company is granted atax 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 thecompany to record tax credits on acquisitions. Financial institutions also have aspecial COFINS rate of 4% but some deductions to the tax base are allowed.

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

Financial Transactions Tax (IOF)In October 2009, the Brazilian government changed the IOF tax rates that arelevied on certain foreign currency exchange transactions related to the inflow offunds to Brazil. For foreign investors entering into the financial and capitalmarkets, the applicable rate was previously 0%. In 2010 the IOF rate wasincreased to 2% for inflows of equities traded through the Exchanges; however, in



December 2011, the rate went back to 0%.

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

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

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

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

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

As from January 2004, important changes to the ISS legislation were made. Theoriginal list of services subject to the tax was expanded and the importation ofservices is now subject to ISS. Additionally, ISS is not levied on exports ofservices, except when the services are rendered in Brazil or the results of theseservices 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 financingtransactions not registered at the Central Bank of Brazil, as well as all import andexport transactions between Brazilian residents (individual or legal entity) andresidents in either low-tax jurisdictions (as defined in the Brazilian legislation) orjurisdictions with internal legislation that call for secrecy relating to corporateownership, regardless of any relation.

Exchange Controls or restrictions on repatriation of profitDividends remitted to non-resident shareholders or quotaholders are not subjectto withholding tax.

Profits may be remitted abroad without limitations, to the extent that there isforeign registered capital and retained earnings available. As from 1 January1996, 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 Braziliantax system.

The new legislation set forth that interest paid or credited by a Brazilian entity toa related individual or legal entity, not resident or domiciled in a tax haven or afavourable tax regime jurisdiction, can only be considered deductible for taxpurposes if such expense is necessary for the activities of the local entity, and ifthe amount of debt granted by the related party does not exceed twice theamount of the participation it holds in the stockholder equity of the Brazilianentity. A second test also needs to be satisfied including the total amount of alldebts with any foreign-related party. If both tests exceed the 2:1 ratio, theportion of interest related to the exceeding amount will not be tax deductible.

Similar provisions are also applicable to interest paid or credited by a Brazilianentity to an individual or legal entity (related or not) resident or domiciled in a taxhaven or a favourable tax regime jurisdiction. In this case, the expense wouldonly be considered tax-deductible if the amount of debt does not exceed 30% ofthe amount of the participation it holds in the stockholder equity of the Brazilianentity. A second test also needs to be satisfied including the total amount of alldebts with any foreign party resident or domiciled in a tax haven jurisdiction. Ifboth tests exceed the 30% ratio, the portion of interest related to the exceedingamount will not be tax deductible.

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

For intercompany loan agreements made between Brazilian and foreign relatedparties, Brazilian transfer pricing regulations differ in some aspects frominternational standards mainly with respect to profit margins and functions andrisks analysis requirements.

On September 2012, a law was introduced (Law 12715) requiring that interest onrelated party loans, even when registered with the Brazilian Central Bank shouldcomply with maximum and minimum interest rates and subsequently Law 12,766defined how to calculate these limits.



The interest paid or credited to a related party abroad, or to a beneficiary locatedin a low-tax jurisdiction or under a privileged-tax regime, will be deductible forincome tax purposes up to the amount that does not exceed the ratesdetermined based on the following rules, plus a spread to be determined by theMinistry of Finance based on an average market spread:

Brazilian sovereign bonds rate issued in US dollars in foreign markets, fortransactions in US dollars subject to fixed interest rate;Brazilian sovereign bonds rate issued in Brazilian Reais in foreign markets, fortransactions in Brazilian Reais subject to fixed interest rate; andLIBOR for the period of six months, for any other transactions.

In the case of transactions carried out in Brazilian Reais, subject to floating rate,the Ministry of Finance may determine a different base rate.

Regarding the transactions covered in item III above in currencies for which thereis no specific Libor rate disclosed, the LIBOR for US Dollar deposits must beconsidered.

The deductibility limit must be verified on the contract date and it will applyproportionally for its term, during the full contract term, and the new rules willaffect transactions to be carried out as of January 1, 2013. It should be notedthat, for this purpose, the renewal and the renegotiation of contracts will betreated as a new contract.

In the case of loans provided by Brazilian entities to a foreign related party thecriteria mentioned above must be considered to determine the minimum interestincome to be subject to taxation in Brazil.

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

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

Permanent visas – Holders of permanent visas are considered residents as from thedate of arrival in Brazil. Temporary visas – Holders of temporary visas are also considered residents as fromthe 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 inBrazil within any given 12-month period.



Monthly Income (Brazilian currency -BRL)

TaxRate

Amount to be deducted in tax from tax - inR$

Upto 1,710.78 - -

From 1,710.79 to 2,563.91 7.5% 117.49

From 2.563.92 to 3,418.59 15% 293.58

From 3418.60 to 4,271.59 22.5% 528.37

Above 4,271.59 27.5% 723.95

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

Tax rate – Income tax is normally withheld at source, at rates varying from 0% to27.5%, depending on the income bracket. The final liability is determined uponfiling the tax return. Any difference between the amounts as determined by thetax return and that withheld at source must be paid or is refunded to thetaxpayer. 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 theabove-mentioned rates.

Social charges and other employee rights are referred to below.

Sales tax/VATState Value Added Tax (ICMS)The Constitution of 1988 granted authority to the Brazilian States to collect taxon the circulation of goods and on the supply of inter-state and inter-municipaltransportation services on communications, even when the transaction and therendering of services start in another country.

ICMS is not a cumulative tax, that is, the tax is only assessed on the increase inthe price of the product in each part of the supply chain. The calculation processinvolves a system that, in each payment period, the taxpayer must check theamount of debits and credits related to the State Value Added Tax and, if thetaxpayer has more debits than credits, they will have to pay the tax on thedifference 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 is18% and Rio de Janeiro, where the rate is 19%. Some products trigger a higherrate (usually 25%) or a lower rate (automotive industry and other specialindustries are below 17% or 18%). Intra-states transactions are subject to lowerrates, depending on the State of origin and destination.

ICMS is also imposed on import transactions. Export revenues are tax exemptfrom ICMS, however, the ICMS tax credit recorded on the acquisition of inputsand services may be kept.

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

Other taxes and incentivesProperty Taxes (IPTU and ITBI)A property tax – IPTU (Imposto Predial e Territorial Urbano) is levied annuallybased on the fair market value of property in urban areas at rates that generallyvary between 0.2 and 5% according to the municipality and location of theproperty. Payments can be made in up to 10 monthly instalments. In a few casesit 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 bythe acquirer. A reduced rate of 0.5% applies to transactions under housingprogrammes financed by federal government schemes.

Tax Incentives for Financed Debentures on Infrastructure ProjectsSince 2011, with the enactment of the Law No 12,431/11, the Braziliangovernment has granted tax benefits for investments in infrastructure madethrough debentures. These are issued by the so-called ‘Sociedades de PropósitoEspecifico - SPE’s’ (Specific Business Purpose companies), whose objective is todevelop infrastructure projects according to governments’ requirements.

The tax benefit applies to bonds issued by non-financial private companies;whose purpose is the financing the development of R&D projects andinfrastructure.

For foreign investors, the tax benefit consists of the reduction of the withholdingtax applicable to the interests generated by investments in bonds and funds



which allocate their resources in the debentures issued by the companiesmentioned above.

The granting of the benefit is conditional on several requirements, among others;

minimum term of 4 years;periodical interest payments made with the minimum interval of 180;simplified documents which proves that the companies’ resources are effectivelyallocated in R&D and infrastructure projects;the government approval granted by the Ministry which holds jurisdiction over thearea that relates to the infrastructure project.

Special tax incentives for the FIFA Football World Cup (2014)Law 12,350, published on December 21, 2010, introduced a series of exemptionson federal taxes. Federal Decree 7,578/2011 and Normative Instructions 1,173,1,174 and 1,176/2011 set out the main requirements for entitlement to the taxincentives under Law 12,350. Please find below the main programmes introducedby this legislation.

RECOPA

RECOPA is a special tax regime for the construction, expansion, reform ormodernization of football stadiums which will host the official matches of the2013 Confederations Cup and the 2014 World Cup, to take place in Brazil. Aspecific license is required prior to being able to take advantage of the associatedbenefits. Legal entities that hold construction/reform projects approved by theMinistry of Sports may be entitled to the following benefits:

Suspension of II, IPI and PIS/COFINS on the import of machinery, workinginstruments, equipment and construction materials to be used in, or incorporatedin, the construction of football stadiums.Suspension of PIS/COFINS and IPI on local acquisition of the above mentionedgoods.Suspension of PIS/COFINS on import of services by the RECOPA beneficiarySuspension of PIS and COFINS on local provision of services to RECOPA’sbeneficiaries.

Other incentives for the 2014 FIFA World Cup

The Brazilian Government also grants tax benefits to those involved with theorganization of the FIFA Confederations Cup and the 2014 Football World Cup inBrazil, provided that these entities involved, and the events themselves, havebeen licensed by the Brazilian tax authorities, based on a list provided by FIFA.

These benefits include tax exemptions on the import of certain perishable goods



or merchandise for use and consumption in the organization of the eventspromoted by FIFA and its related entities. These benefits do not apply to theimport of durable goods and equipment, which shall be imported through theSpecial Temporary Admission Customs Regime (which also involves thesuspension of taxes).

Law 12,350 also sets out a series of exemptions on federal taxes grantedexclusively to certain bodies:

FIFA itself and related entities domiciled abroad;to FIFA’s Brazilian subsidiary and to the Brazilian Broadcasting Channels;to FIFA’s service suppliers established in Brazil; andto non-resident individuals hired for, or engaged to work in the events.

Furthermore, acquisitions carried out by FIFA or its subsidiary in the local marketshall be exempt from indirect taxation.

These exemptions will apply to taxable events that take place between January 1,2011, and December 31, 2015.

Audit and accountancy

Regulatory requirementsAccounting Practices adopted in BrazilThe Accounting Practices adopted in Brazil (BR GAAP) are based on the CorporateLaw, which was updated in 2008 with Law 11.638/07.

This Law has approximated the BR GAAP to International Financial ReportingStandards (IFRS), although there still are many remaining differences. Althoughthe starting point for the BR GAAP is the Corporate Law, there wereinconsistencies in the accounting treatment between different companies inBrazil due to the lack of guidance in the Law, which is very superficial onaccounting issues. The Brazilian Stock Exchange Securities (CVM) and otherregulators, including the Brazilian Federal Council of Accountants (CFC), used toissue accounting guidance to the entities regulated by them. After a round ofnegotiations, from 2008 this problem tends to disappear in view of the creationof the Brazilian National Standard Setter (CPC – Comitê de PronunciamentosContábeis), which, from now on, will be responsible for issuing the new Brazilianaccounting standards which will be subject to the endorsement from the differentregulators. Once the regulators are part of the CPC, it is supposed that most ofthe standards, if not all, will be approved by them as soon as they are issued infinal form. Prior to 2010, standalone Financial Statements could be prepared inaccordance with BR GAAP. However, the CVM, the Brazilian Central Bank (BCB)



and Insurance Regulator (SUSEP) have issued regulations determining that entitiesmust prepare consolidated financial statements in accordance with IFRS from2010.The format of the financial statements in Brazil is similar to IFRS. Disclosurein BR GAAP is very limited if compared with disclosure requirements prescribedby IFRS.

The Transitional Tax Regime (RTT)As mentioned above, Law 11,638/07 introduced new accounting principles inBrazil. In order to guarantee the tax neutrality of such changes, the Braziliangovernment issued Law 11,491 on 27 May 2009. The focus of this measure wasto guarantee that no adverse tax consequences should be triggered from theadoption of the new accounting criteria in connection with the recognition ofrevenues, costs and expenses computed on the assessment of net profits.

To achieve this result, Brazilian taxpayers will have the option to elect for aTransitional Tax Regime (Regime Tributário de Transição – RTT) under which, fortax purposes only, taxpayers will be allowed to calculate corporate income taxand follow the applicable accounting criteria before the enactment of Law11,638.

The transitional tax regime was optional for the 2008 and 2009 calendar yearsbut has been mandatory since 2010 and is in force until a new law is enactedsetting forth the tax effects (if any) stemming from the new methods andaccounting criteria. In addition, the option of the RTT for the Corporate IncomeTax (IRPJ) shall imply the adoption of the tax regime also for social contributionspurposes (CSLL, PIS and COFINS).

Audit requirementsAudited Financial statements are required for listed companies, financialinstitutions and insurance companies. Listed companies with total annual grossrevenue above R$100m must present quarterly information reviewed byindependent auditors. Other regulated segments might require audited financialstatements.

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



Human resources and employment law

Employment lawEmployment and labour relations in Brazil are primarily governed by the BrazilianFederal Constitution, the Brazilian Labour Code – ‘CLT’ and Collective LabourAgreements. The ‘CLT’ imposes on the employer a series of obligations thatprotect employees, reflecting the paternalistic philosophy of the Brazilian LegalSystem.

RemunerationAccording to the Brazilian Labour Laws, an employment contract (written orverbal) must state the remuneration of the employee. The remuneration of anemployee includes, besides base salary, fringe benefits and bonuses, amongstothers.

Government Severance Indemnity Fund for Employees (FGTS)For individuals considered as employees, the company must make a monthlydeposit to the Government Severance Indemnity Fund for Employees (FGTS) at anamount equal to 8% of an employee’s remuneration. In case of a dismissalwithout just cause, incited by the company, an employee may withdraw this fundwith an additional penalty (to be paid by the employer) equivalent to 40% of theaccumulated FGTS balance.

The company must contribute an additional 10% fine to the social fund.

13th SalaryThe employer must pay annually to the employee, the 13th salary, which is aChristmas bonus due to employees, regardless of their remuneration. Itcorresponds 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 and50% in December. An anticipation of the first instalment may be requested whenthe employee leaves for vacation.

Social Security ContributionCompanies are subject to the following social charges, due on the employee’smonthly remuneration:

Social Security contributions, equal to 20% (with no ceiling), plus:Corporate charges:



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’sactivities.

There are some sectors which are allowed to pay the Social Security taxes, atreduced rates equivalent to 1% or 2% on the gross revenue, instead of applyingthe tax rate on the payroll.

Among the sectors which Social Security tax rate was reduced to 2% are: (i)passenger transportation; (ii) engineering and technology research anddevelopment; (iii) infrastructure industry

Among the sectors which Social Security tax rate was reduced to 1% are: (i) retailtrade and maintenance; (ii) repair of vessels, cargo transportation (by train orbus); (iii) journalism and radio broadcasting

In addition to the company’s contribution (20%), employees are required to pay amonthly social security contribution that varies from 8% to 11% of their monthlycompensation, 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 shouldnot exceed 8 hours per day and 44 hours per week. Specifically for financialinstitutions, working hours should not exceed 6 hours per day. A series ofconstitutional and legal provisions establish a shorter working week for a varietyof professional categories such as bank clerks, telephone operators and so forth,who are subject to different working weeks pursuant to specific regulations. Timeworked in excess of the above is treated as overtime.

In general, compensation for overtime work is paid at least 50% above thecompensation paid for normal working hours.

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



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

Foreign personnelLegal entities with three or more employees are obliged to maintain aproportionality of two thirds of Brazilian employees to one third of foreignemployees.

The proportionality must also be observed in relation to total employeeremuneration. Lower proportionality may be granted by the relevant authorities inspecific circumstances (e.g. lack of Brazilian workforce in a specific sector). Forproportionality purposes, foreigners residing in Brazil for more than ten yearswho are spouse or parent to a Brazilian national, and those of Portuguesenationality, are considered as Brazilians.

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

Temporary visaBusiness Trip (Temporary visa)

The business visa permits a foreign individual to enter Brazil for a short term onspecific business assignments. The business visa is recommended to businessowners or their representatives that come to Brazil exclusively in the interests oftheir companies, to offer or search for products, to learn about the Brazilianmarket 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 – witha labour contract, must have an employment relationship with a Braziliancompany.

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

Permanent visa



A permanent visa is granted to foreign individuals who intend to settle in Braziland that satisfy specific requirements established by the National ImmigrationCouncil and/or the Labour Ministry.

Trade

Import dutiesImport tax is levied on the CIF price. The rate depends on the degree of necessityand 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:

Import tax is applied to the CIF price (FOB price plus insurance and freight).IPI is levied on the total of (i) above (CIF price plus import tax).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.ICMS is applied to the total of (ii) above (CIF price, import tax, IPI) plus PIS, COFINSand ICMS is included in its own basis.

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

Documentation proceduresIn order to perform any international trade transaction, entities established inBrazil must first obtain an import/export permit (also known as RADAR). Thispermit is granted by the Federal Revenue Services and enables entities to accessthe international trade electronic system, SISCOMEX, in which companies registertheir import declarations or export registrations.

Moreover, some products may require special import licenses. If a license isrequired, automatic licensing may be obtained for certain products as well asunder the drawback regime (see below).

Non-automatic licensing is required for imports of used goods, imports underspecial concessions, goods subject to governmental control or tax incentives andothers. Imports may be performed either through fully prepaid letters of creditwhich can be financed by local banks, or through credit arrangements. Termslonger than 360 days are subject to special procedures associated with exchangecurrency procedures.

The following is a brief summary of the documentation procedures:

License to use SISCOMEX – the electronic platform for register imports and exports;Filing of an application for a non-automatic import license, when applicable, before



the goods’ shipment, This should include the required general informationconcerning the importer, exporter, manufacturer, country and port of origin, port ofunloading, description of the merchandise, FOB price in foreign currency, andsupplementary documents as required (these documents do not have to be filed inadvance for automatic import licenses and imports which do not require licenses).Payment of the application fee.Issue of the import license.Completion of the import declaration, which is the basic document for customsclearance, containing all data related to the respective import, including duties andtaxes incurred.

This should be carried out after arrival of the merchandise but before customsinspection.

The inspection procedures are based on the type of inspection required by theCustoms authority’s system (green, yellow, red or grey channel). The greenchannel requires no inspection, the yellow channel requires only documentaryinspection, the red channel requires physical and documentary inspection andthe grey channel requires physical and documentary inspection, as well as specialcustoms procedures (including price control).

Customs clearance then finally takes place. Other formalities may be required incertain cases, mainly for imports which are granted special concessions or taxincentives. Transportation in Brazilian vessels may also be required.

Anti-dumping measuresLaw 9.019/95 and Decree 1.602/95 lay down the anti-dumping measures.Dumping is defined as the entry of a product into the local market (includingunder drawback) at a price lower than its normal price. If entry is considered athreat to the local market, anti-dumping measures are employed.

Currency/exchange controlThe Central Bank allows the official exchange rate to float freely, but forextrading is restricted to authorised dealers. The Central Bank intervenes whenthere are signs of speculative operations. There is an active parallel exchangemarket that, although illegal, is quoted in the daily newspapers, as well as anofficial tourist rate that normally approximates the parallel rate.

IOFAs a general rule, foreign exchange transactions made in order to allow paymentsto non-residents, in the form of royalties, technical services, technical,administrative and any other assistance or any other revenue, including thereimbursement 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 IOFrate for any foreign exchange transaction (both inbound and outbound) such asFDI or Intragroup loan agreement is 0.38% payable upfront; however, there aremany other types of foreign exchange transactions where different tax rates areapplied. As a result, the IOF may not be avoided if the payment requires a foreignexchange transaction from the Real into a foreign currency, or from a foreigncurrency into the Real. Payments of interest for the importation of goods and forthe acquisition of an investment in Brazil by a local resident from a foreigner, arealso subject to the IOF.

The IOF of 6% is charged on foreign loans with an average maturity of less than360 days (the average term was decreased on December 5, 2012 from 720 daysto 360 days).

All other foreign loans are subject to the IOF at 0% rate. The average maturity isdetermined based on the balance of the loan relative to the number of days ofthe outstanding balance of the related loan.

From June 2013, the Brazilian government changed the IOF tax rates that arelevied on certain foreign currency exchange transactions related to the inflow offunds to Brazil made by Resolution 2689 to 0%, also if the equities are tradedthrough the exchanges. As to the outflow of funds from Brazil related toinvestments in the financial markets, the IOF rate continues to be 0%.

Local representationLocal agentsDue to the bureaucratic documentation procedures and the language barrierfrequently encountered, it is recommended to use a local customs agent orbroker. They are particular useful in dealing with the Customs and Taxauthorities.

Sales agent or subsidiariesProducts shipped to Brazil and invoiced directly by the foreign supplier to itscustomer in Brazil are only subject to Brazilian corporate income tax, if the salesagent or representative domiciled in Brazil, who acts as an intermediary, has theauthority to bind the overseas seller contractually. However, if the agent doeshave such binding powers income taxes are calculated on the deemed profit,based on a percentage of gross income (which varies depending on the activity),plus an additional surcharge of 20 per cent. It is accordingly advisable for theformal representation agreement to expressly preclude the sales agent or therepresentative from contractually binding overseas principal in any sales contract.



A sales subsidiary in Brazil may be established and is subject to the same taxesas any other local company.

Tax treatyCurrently, Brazil has double tax treaties with the following jurisdictions: SouthAfrica, Argentina, 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.

BankingAll banking business is closely monitored by banks themselves and by theCentral Bank of Brazil (Banco Central do Brasil). Banking rules are strictlyenforced. 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 bankitself are also available via internet banking.

Types of bank accounts:Brazilian banks offer current accounts, savings, 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. Theseaccounts are normally non-interest-bearing.

Savings accounts (conta poupança)Pay monthly interest on average daily balances for the month. This rate iscurrently 0.5% over the basic reference rate, (Taxa Referencial – TR). Interestearned on these accounts is tax-free. Due to a new local regulation, depositsmade on May 4th 2012 and onwards, have new interest basis. Whenever theBrazilian benchmark interest rate (SELIC – Special Settlement and Custody System)is equal or under 9% 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 accountand transferred to the current account to cover cheques, debit card paymentsand 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 Bankin 2006 (Res. 3402/06) with the following objectives:

To allow low income customers to withdraw their salaries through Branches or ATMswithout the need to keep a normal fee chargeable checking account in the payrollprocessor bank chosen by its employer company;To allow individual customers to readily transfer their salaries to a checking accountheld in a bank which is not the same as the payroll processor chosen by itsemployer company. The idea is to stimulate competition among banks for betterquality services and lower fees.

Personal loan (empréstimo pessoal)Personal loans are repayable in up to 24 or 36 instalments, depending on thebank. Competition is strong and rates vary from bank to bank.

Overdraft(cheque especial). This is normally by arrangement and subject to the propercredit analysis by the bank. Usually, on opening an account, the bank may makesuch 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;

A valid identity document. In the case of a foreigner resident in Brazil, this will meantheir foreigner’s identity card (Cédula de Identidade para Estrangeiro – CIE) whichcontains the foreign register (Registro National De Estrangeiro – RNE).Individual Taxpayer’s number (Cadastro de Pessoa Física – CPF).Proof of residency, such as a utility bill in the name of the person opening theaccount.

To obtain the CPF, it is necessary to fill out the application form at any PostOffice, branch of Banco do Brasil or branch of the Caixa Econômica Federal andpresent the documentation required (usually the original or a certified copy of theRNE).

The applicant will receive a counterfoil with a code number and there is a smallfee. Thereafter, the applicant will be notified to appear at a unit of the FederalRevenue Service and present their documents and the counterfoil in order toobtain their definitive CPF.

HSBCHSBC 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 andresponsible standard when doing business, always focusing on the client.

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

Head OfficeHSBC Bank Brazil has its headquarters in Curitiba (PR).

An International BrandIn March 1997, HSBC Bamerindus S.A. was born, which in 1999 became HSBCBank Internacional Brasil S.A. – Banco Multipo. The HSBC logo and hexagon areused in order to adhere to the worldwide brand.

Network in BrazilHSBC Bank Brazil is now present in 564 Brazilian cities, with 867 agencies, 390bank service offices, 1,059 electronic service stations and 5,284 ATMs. Theclients also have over 39,000ATMs in the network shared with other banks inBrazil and 24hr Bank.

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

National Ranking4th largest non-state-owned bank ranked by total assets¹.6th largest by branches¹. 6th largest by deposits¹.4th position on the Central Bank FX ranking by volume¹.2nd largest International Custodian and 4th Domestic Custodian².6th largest by AUM³.

Corporate SustainabilityAt HSBC, our commitment to sustainability involves taking a look at our ownbusiness and endeavouring to do more and do it, better. The target of actingsustainably can only be met if sustainability is one of the drivers for ourprocesses, organizational culture, customer care, creation of new products andservices and, above all, credit policies.

We apply policies and processes to manage potential social and environmental riskin our lending and other financial activities in sensitive sectors.We help our clients to identify the opportunities presented by the shift to a low-carbon economy.We try to reduce our own environmental footprint and share good practice on this



with our clients and other stakeholders. We focus our community investment (philanthropic activities) on education and theenvironment.

Our education programmes strive/aim to lift people out of poverty, buildfinancial 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 onpeople, forests, freshwater and cities. HSBC’s programme partners are carryingout original scientific research, developing demonstration projects, creatingworking models and proving clear solutions so that governments can enactlegislation for the adoption of low-carbon policies.

¹ ANBID – Local Banking

² CVM Brazil – SEC

³ ANBID – Local Banking

Country overviewCapital City Brasilia

Area 3,287,000 square miles

Population 190,732,694*

Language Portuguese

Currency Real

International dialling code +55

Business and banking hours Commercial - 9am to 6pm

Banks - 10am to 4pm

Political structure Federal Republic

Stock Exchange BM&FBovespa. Leading share indexes: IBOVESPA & IBrX

*Source: Censo IBGE 2010



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HSBC Global Connections — Brazil (Retrieved 15Feb15)

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