How to Start your business in Brazil?

THE FISRT STEP...

    The very first step in moving to Brazil is deciding what
type of structure best suits the business. Incorporating a
foreign company’s branches in Brazil is usually a very
time-consuming bureaucratic process. The establishment
of a branch requires prior approval from the federal
government by Presidential decree (articles 1,134 to 1,141
of the Civil Code), which is a very lengthy process. The
federal government must also authorize any amendments
to the branch’s Bylaws. Unlike subsidiaries, branches are
considered to be part of the foreign entity in Brazil. In this
regard, a branch’s foreign controlling company may have
unlimited responsibility for its debts in the event that the
branch is unable to fulfill such obligations. Branches are
subject to Brazilian laws and courts with respect to acts
and transactions that occur in Brazil.
    Given this information, the vast majority of investors in
Brazil adopt the subsidiary model, since their shareholders
are not responsible for the subsidiary’s debts, except for
specific provisions set forth by specific rules.
Once that is established, the investor shall need to decide
which format is more appropriate for his/her business.
The investor could also decide to acquire an existing
company or assets, which would require a due diligence
project. One could also form a Joint Venture, which
could take the form of a Limited Liability company or a
consortium agreement, which is commonly adopted for
relevant infrastructure projects in Brazil. Therefore, the
main decisions will be around incorporating or acquiring
a company. Below both models are described:

INCORPORATE A LTDA. OR A S.A.
    The majority of legal entities incorporated in the
country are either “Limitada” or “S.A.”: a “Limitada”
(Sociedade Limitada or “Ltda.”) – is a limited liability
company, and a “S.A.” (Sociedade Anônima) – is similar
to a corporation. A Ltda. is usually the preferred vehicle
for a wholly-owned subsidiary as it is more flexible in
regards to limitations of liability and is easier to manage.
A S.A. is generally more complex from a compliance and
management perspective. 

REQUIREMENTS FOR ACQUIRING A
COMPANY IN BRAZIL

    If you want to start business in Brazil with an already
operational company, you can acquire a business with
a CNPJ in the country. 
    An acquisition between two companies of the same
nationality is a highly complex process and must be wellplanned.
Therefore, it is necessary to perform careful due
diligence in order to maximize the possibility of success.
In an operation between companies of different
nationalities (cross-border transaction), the due diligence
process is even more important and major care should be
taken in the prior assessment of corporate cultures. This
is mainly regarding the culture of adherence of the key
people who will be destined for the new challenges.
Also, tax issues that arise from acquiring legal entities in
Brazil depend, to some extent, on the residency of both
purchaser and seller. In general terms, capital gains are
taxed in Brazil even in the case of transactions performed
entirely abroad, when the assets (or shares) sold are
located in Brazil.
    Share deals are generally more common than asset deals
in Brazil because even in the case of an asset purchase,
there is a significant risk that the tax liabilities of the
previous business may be attached to the acquired assets.
Additionally, share deals generally result in lower levels
of documentation and indirect taxation for acquirers. A
case-by-case analysis is always recommended for the
company in order to decide the ideal acquisition structure.
When properly structured, the most significant advantage
of a share deal over an asset deal is that the amount (or
part thereof) paid in excess of the target’s net equity may
generate an amortizable premium or goodwill in the tax
base of depreciable or amortizable assets.
    This potentially amortizable step-up is subject to
several tax, legal, accounting, business and substance
requirements, and must be very carefully analyzed and
supported in order to mitigate any risks associated with
such an acquisition structure. (AMCHAM)

Daniel Majzoub

daniel@hmpattorneys.com