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by Rodney A. Alves
Brazil is one of the largest and most diverse economies in the world. Brazil is a key nation in South America, with over 20% of surface area of Americas, 47.7% of surface area and 50% of population of South America as well as 22% of the world’s arable land surface. An emerging giant, it has a key role on FTAA, WTO. Today it is the world’s largest producer of regional jets, biggest producer of coffee, orange juice, sugar, electric power and ethanol, the leading exporter of sugar, coffee, beef and orange juice.
It is a major exporter of soybeans, aircraft, vehicles, iron ore, steel, textiles and footwear. With large and well-developed agricultural, mining, manufacturing and service sectors, Brazil is the only country, beyond US and China, with specific key factors for sustained growth.
Brazil has the world’s most modern electronic voting system, and it is the 2014 FIFA World Cup as well as 2016 Olympics Hosting Country. Its extensive use of alternative fuels makes Brazil a world leader in ethanol, as few countries are as prepared as Brazil to produce low-pollution fuels derived from renewable sources. Brazil became energy independent, discovering new 8 billion oil reserves offshore; the country will have the 10th largest oil reserves in the world.
With so many opportunities for investment, partnerships and trade, a myriad of investors are heading south. However, as a developing country, there are challenges to be overcome. Complex tax system, costly and protective labor environment, developing infrastructure and overloaded courts are just few examples of these challenges. Whether an investment or an acquisition, the first step is to understand how the legal framework of an investment operates in Brazil and this is the focus of this article.
Foreign Direct Investment
In Brazil, foreign investment means any goods, equipment, cash and or financial resources that enter Brazil for the production of goods or services, or for investment in economic activities, provided that in either case they belong to individuals or legal entities resident, domiciled or headquartered abroad. The Brazilian Constitution and some particular laws lay down restrictions to foreign investment in certain specific businesses. However, in essence three legal statutes provide the general regulatory framework for direct investment in Brazil: Law # 4131/62 (Foreign Direct Investment Law), Law # 4390/64 and Decreto (Executive Order) # 55762/65. In addition to these laws, the Brazilian Central Bank (“Bacen”) also issue Ordinances and Rulings.
Bacen is charged with registering, monitoring and following up on foreign investments, i.e. it exercises foreign exchange control. Accordingly, all foreign direct investment must be registered before the Bacen for purposes of (a) profit remittances to nonresident investors, (b) reinvestment of profits and (c) its eventual repatriation. Such registration must be made through an online proceeding, and investors have thirty (30) days from the date the money enter the country, otherwise late fine would apply. Similar to cash investments, international loans (i.e, when either the lender or the borrower is a nonresident) are also required to be registered with Bacen. Although the registration process is not complicated, the actual time to accomplish such requirement may take a while and it is advisable to take the first steps toward the registration as soon as the investment enters the country.
Whether to subscribe new shares or buy equities in an existing company, there is no prior authorization for cash investments. However, capitalization of credits is subjected to Bacen’s prior authorization. Similar to a cash investment, the capitalization of imported goods does not require Bacen’s prior approval but is subject to certain limitations: (a) only assets are eligible for capitalization, (b) capitalization of used assets is possible only if (i) such assets were not manufactured locally and (ii) investment is linked to a project that promotes the economic development of Brazil. The capitalization of intangible assets (e.g., intellectual property) is also subject to Bacen’s prior approval.
At the moment, profits can be distributed and remitted abroad without any restriction or limitations. Profits distributed to nonresidents can be reinvested locally in the same company or not. Although there is no corporate income tax on dividends, all reinvested amounts must be registered with Bacen, as if new investments.
Foreign capital registered with Bacen may be repatriated at anytime without prior authorization. However, the portion of the amount remitted abroad that exceeds the registered capital/ investment is considered as capital gain and subject to a fifteen percent (15%) withholding income tax. Bacen’s prior authorization is required for such remittances. On the other hand, there are no restrictions to the sale of interests in any Brazilian company. However, if the transaction occurs between foreign parties, the capital/interest assignment must be registered before Bacen.
Some industries are restricted or contain some limitation to foreign investment: nuclear energy, health services, mining, business abutting international borders, domestic flight routes, aerospace industry, fishing, press, telecommunication, post office and telegraph services, insurance, banking, pension funds and ownership of rural properties by aliens. A current debate is still in place on whether ownership of rural properties by Brazilian companies controlled by foreigners would be allowed.
Many are the issues surrounding an investment in Brazil. Even large corporations have incurred into unnecessary mistakes when it comes to the adequate procedures regarding their investments in Brazil. Because of the red tape, investors may suffer delays and fall into situations that would cause avoidable losses. It is important to understand the rules of this evolving country and the restrictions and limitations of each industry. To that extent, always count with the assistance from professionals who can navigate the Brazilian legal system and business environment as well as adequately translate and correlate them with the US legal and business principles.
Rodney A. Alves is an Attorney-at-Law, licensed in Brazil and CA and partner at Alves Videla Business Strategies. www.alvesvidela.com
by Lawrence P. Howorth
Athletes do it! – Adventurers do it! – Travelers do it!
Everyone we know who is about to participate in something that will stress our body (at least the experienced ones) will ensure that they are READY! They will prepare, train and do a check up of their body and their preparedness for the event. Pilots do a pre-flight check.
Doctors do a pre-op before a surgery. The more intense the potential task ahead, the more important the check-up and preparations are.
So why then, are so many US organizations so willing to try to enter one of the toughest markets in the world without any preparation, internal check-ups or for that matter, any understanding of the difficulties, business methodologies, financial resources, cultural nuances or experience required to be successful in entering the Brazil market??
This has been a mystery to me for years. And this applies not only to Brazil but most other foreign markets as well. And to be fair, it applies to organizations other than US organizations – but it does seem more prevalent in the United States.
The Wrong Solution
Many of us who have been living and working in Brazil and have successfully established businesses in Brazil have seen the disasters. And we have seen companies look for solutions in Consultants and Advisors thinking that if they find the right one, the biggest one, the one that is most widely known – that will guarantee success in entering the Brazil market. Not so.
The companies MUST be prepared internally for this initiative and if they are not, the risk of failure is extremely high.
Preparing for BRAZIL . . . the CHECK UP
So what should you consider in preparing your organization for entering the Brazilian Market?
The checklist is short but CRITICAL:
- Why Brazil? How does Brazil fit with your business strategy? You do have one, right – strategy, that is? We talk with so many companies that have already made a decision to enter the Brazil market because it’s a hot market (they’ve heard), other companies are entering the Brazil market or there is a champion in the organization who is intent on opening up a new market in Brazil. The Brazil strategy MUST tie in with the organization’s overall strategy – in terms of products, distribution, development, marketing, etc.. Working though this takes time and MUST be sanctioned at the highest levels in the organization.
- Can you afford it? So many companies try to enter the Brazil market and “try” to finance the entry with returns from the future Brazil operation. While they would NEVER try to do this in the domestic market, they seem to think in some way that they should be able to strike some deal in Brazil that will magically not cost them some kind of investment dollars. This is frustrating for firms like us who are guiding this initiative and simply does not work!! And of course, you get what you pay for!!
- Do you have the right TEAM? A visit to Brazil to see Carnival does not make someone an expert on Brazil. Nor does someone who claims that they know only “how” to enter the Brazil market. The TEAM should include internal employees dedicated to this initiative, advisors who are business operators who have “done it” and not only consulted about it, and partnering with LOCAL operating people on the ground in Brazil who are experienced in building a business linkage between the Brazil market and the company entering the Brazil market.
- Do you have the time? This seems like a simple enough question, but entering the Brazil market is not an overnight venture. (And if it is, you really are in trouble!!) I am amazed at companies who understand and can accept months of waiting for FDA approval but are surprised when I say that an ANVISA application in Brazil might take 12 to 18 months and a full RADAR in Brazil might take 9+ months.
- Are you prepared to “give”? No, I don’t mean bribery – which, by the way is NOT the way to do things in Brazil, in case you haven’t heard. What I mean by “give” is to be prepared to accept a lower margin for entry deals, accept strategic partnerships where necessary, accept local business rules and culture, accept “trial before buy” deals, and most of all to accept advice from local operators and experts and perhaps give up that control that you may have on your domestic operations. Are you prepared, if a manufacturer, to assemble and manufacture in Brazil with Brazil products and labor? Unlike China, you don’t HAVE to, but when you look at the tax and import structure in Brazil, you will change your mind.
- Do you have something that the Brazilians want? Why should you think that the Brazilians automatically want the products and technology that you have? If they don’t want it guess what, they won’t buy it – so why would you insist on trying to sell it in Brazil.
- Innovation . . . are you willing to involve local Brazilian research and development? Brazil has blossomed in their research and development capabilities. They are rapidly developing intellectual property they make very good partners in joint research and development initiatives. Are you, as a Company, prepared to engage in this and become a true business partner of Brazil?
So I have taken a little different slant to the traditional Doing Business in Brazil. Of course you want to surround yourselves with the best resources and information and especially work with experienced and trustworthy operating personnel in Brazil.
But don’t forget the very important “Check-Up – Brazil. If you don’t do your internal company check-up before embarking on a Brazil initiative, your chances of being another unhappy company failing to “make it” in Brazil is almost guaranteed! Obrigado!
Não é sorte – é a preparação!
HOWORTH International, LLC works with businesses in the USA and other countries to assist and guide their entry into the Brazil market and with their team in Brazil, executes the company’s strategy in Brazil. Lawrence P. Howorth, Founder and Director has worked in the Brazil market for several years and has developed a local team beyond pure consulting – but an experienced operating team with the ability to advise, partner and operate ventures for our clients. Copyright © 2011
by Rodney A. Alves and Rodrigo N. Totoli
The most relevant affairs of Brazilian corporations, such as election of officers, amendments to By-Laws or even approval of financial statements, are decided by the shareholders at the mandatory general meetings. According to the Brazilian Corporations Law (“LSA”), the shareholders or their representatives must be physically present at the meetings in order to exercise their voting rights.
However, many absences to these general meetings have frequently occurred, resulting in less participation of the shareholders in such relevant decisions. Shareholders of Brazilian corporations have always faced problems to attend the general meetings. Brazil is a large country and traffic in major cities is heavy, thus distance and time consuming are common issues. These two problems combined inevitably makes shareholders, especially minority, find the costs to attend meetings prohibitive, thus causing the absences.
Among the several topics set forth by Law no. 12.431, enacted on June 24, 2011 (“Law 12.431/11”), one has stood out due to its importance, since it addresses the shareholders’ votes at the general shareholders meetings of Brazilian corporations. Law 12.431/11 intends to mitigate the absence problem, by adding a paragraph to section 121 of LSA, allowing shareholders of publicly held corporations to participate and vote in the general meetings even when they are not physically present.
With the enactment of the new law allowing shareholders to vote remotely, it is believed that the lack of attendance by the shareholders to general meetings will be reduced and, therefore, more involvement of minority shareholders in the corporate affairs is expected.
External file: Private Equity.Venture Capital in Brazil_2010
External file: How_to_Export_to_Brasil_2010
External file: Why Invest in Brazil_2009
External file: DoingBusinessinBrazil
External file: Foreign Investment in_Brazil_2007