Valter Mattavmatta@tozzinifreire.com.br

Legal Aspects of Foreign Investment in Brazil

Brazil

Federative Republic of Brazil

Dimensions: Half of South America’s territory. 9 times size of France

Population: 189 million (5th in the world) people

Official Language: Portuguese

Federative Republic of Brazil

Federative Republic of Brazil

EXECUTIVE BRANCH

PRESIDENCY OF THEREPUBLIC

(MR. LUIZ INÁCIO LULA DA SILVA)

MINISTRIES

LEGISLATIVE BRANCH

NATIONAL

CONGRESS

FEDERALSENATE

(81 members)

CHAMBER OFFEDERAL DEPUTIES

(513 members)

Federative Republic of Brazil

JUDICIARY BRANCH

FEDERAL SUPREMECOURT

FEDERAL APPEALS COURT

STATE COURT OFAPPEALS

(2nd Instance)

STATE COURTS(1st Instance)

FEDERAL COURTS(1st Instance)

FEDERAL COURT OFAPPEALS

(2nd Instance)

Economic Indicators

GDP

US$ 1,150,000 million (2006)

GDP per capita

US$ 6,085 (2006)

GDP Growth

3.7% (2006)4.7% (2007 – estimate)

Inflation Consumers Priced Index

(12 months)

2006: 3.14% 2007: 4%*

(*) official estimate – Central Bank

Economic Activities

Largest producer and exporter of coffee, orange juice, sugar

and ethanol

Largest producer and exporter of iron ore

Largest exporter of soybean, beef and chicken

4th aircraft producer (largest producer of regional aviation jets)

9th car exporter

4th steel exporter

8th software producer

A leader in oil exploitation in deep waters

Exports

Exports in 2006US$ 137,471 billion *

(*) Ministry of Development, Industry and Commerce

Imports

Imports in 2006 *

US$ 91,394 billion

Major imports *

Machinery and electrical equipment, chemical products, and oil

(*) Ministry of Development, Industry and Commerce

2005 Total: US$ 21,638,000,000

2006 Total: US$ 22,225,000,000

Foreign Direct Investment

4,507

0,26

0,779

1,4581,661

1,3881,435

4,644

3,208

1,078 1,22

6,384

1,514

1,974

3,495

4,433

1,285

0,848 0,782 0,7450,648

0,117

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Ger

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Foreign Direct InvestmentUS$ (million)

Foreign Direct Investment

2005

US$ 21,638,000,000

2006

US$ 22,225,000,000

2007 (July)

US$ 24,700,000,000

Foreign Direct Investment

Restrictions for foreign investment:

Nuclear energy

Healthcare services

Mail and telegraph (Federal Law 6538/1978)

Domestic aviation, aerospace and airport infrastructure

Rural property ownership limited to size

Mining: companies (even under foreign control) may apply for a license to operate in the mining sector

Newspapers and broadcasting companies: foreigners cannot hold more than 30% of Brazilian press and broadcasting companies

Business Opportunities

PAC

The Federal Government has launched a program in 2007 named PAC (Growth Acceleration Program). In general terms, PAC’s target is the economic growth of Brazil, through the incentive to credit and financing, and infra-structure projects.

Amount of investments expected (up to 2010): US$ 251 billion

Main sectors:

– Energy: US$ 137 billion

– Transportation: US$ 29 billion

– Water Sector: US$ 20 billion

Business Opportunities

TRANSPORTATION

Forecast of investment in transportation 2007-2010

– Highway: US$ 16.7 billion

– Railway: US$ 4 billion

– Port: US$ 1.35 billion

– Airport: US$ 1.5 billion

– Merchant Navy: US$ 5.3 billion

Business Opportunities

Sectors:

Forestry, Wood Sourcing, Paper and Pulp

Ethanol Production

Mining

Oil and Gas

Consumer Products

Infrastructure

Investment Structures

Investment Structures

Indirect Investment:

Distribution and sales representation agreements: often

precede the establishment of a direct local presence

Direct Investment:

Incorporation of a subsidiary: where market conditions

support a local presence and associated investment costs

Joint Venture

Acquisition of a local company

Indirect Investment - Distribution

Applicable regulation: distribution agreements are not subject

to specific regulations. The general contractual provisions of the

Civil Code applies

Territory: sale by distributor is subject to defined territory

Termination: the termination is subject to distributor recovering

investments

Indirect Investment - Sales Representation

Sales Representation Agreements:

Are subject to specific regulations (Law 4886/65, amended

by Law 5420/90 and Civil Code, articles 710 to 721)

Sales Representatives:

Do not acquire products in their own name, but merely act

as intermediaries in the sale of products

Entitled to commissions based on sales (direct or indirect)

Termination:

– Fixed term agreement: average monthly commission

multiplied by ½ of remaining months

– Indeterminate term: 1/12 of commissions paid during the

life of the agreement

Direct Investment - Joint Venture

Memorandum of Understanding: preliminary, binding or non-binding document

Joint Venture Agreement: broad rules of the parties’ relationship

By-laws: the company is governed by its articles of association or by-laws

Shareholders Agreement: governs the relationship between shareholders, especially in connection with the transfer of shares and voting rights

Direct Investment - Acquisition

Memorandum of Understanding: preliminary, binding or non-binding document

Due diligence – Sensitive areas: tax, labor and environmental matters

Share Purchase Agreement

Types of Brazilian entities

Limited Liability Company (Sociedade Limitada):

Governed by the Civil Code

At least two partners (quotaholders)

Articles of Association

Transfers of quotas and capital increases require amendment to Articles of Association

Managers must be domiciled in Brazil

No Board of Directors

Types of Brazilian entities

Corporation (Sociedade Anônima - S.A.):

Governed by the Corporations Law

Must have at least two shareholders (except for wholly-owned subsidiaries)

By-laws

Transfer of capital does not need to be reflected in an amendment to the by-laws

Shares may be traded at stock exchange

Shares may be voting or non-voting (non-voting up to 50% of the capital)

May issue other securities: debentures and warrants

Shareholders meetings: Annual and Extraordinary

Types of Brazilian entities

Management of the Corporation

Administrative Council

– similar to U.S. Board of Directors

– certain corporate resolutions and election of Board of Officers

– board members must be shareholders

Board of Officers

– representation of the company

– members domiciled in Brazil

Financial Statements must be published yearly

Foreign Entities’ Branches

Yes, it is possible to open a branch of a foreign entity in Brazil, although …

Time consuming

Several requirements, including governmental authorization

Some governmental agencies are not familiar with Foreign Entities’ Branches

Any changes in the by-laws of the foreign company must be approved by the Brazilian Government to be effective in Brazil

Central Bank

Foreign Capital Registration

Must be registered with the Central Bank:

– Direct investments of Brazilian companies, either made in cash or in assets

– Cross border loans and financings

Registration entitles access to foreign exchange market to repatriate investment, receive dividend, principal and interest payments

Foreign exchange transactions require execution of a foreign exchange contract with commercial bank

Taxation

Tax Treaties for avoidance of double taxation

Argentina Austria Belgium

Canada Chile China

Czech Republic Slovak Republic Denmark

Ecuador Finland France

Hungary India Italy

Japan Korea Luxembourg

Netherlands Norway Philippines

Portugal Spain Sweden

Germany (currently not in force)

Taxation

TAX RATE

Federal Corporate Income Tax (“IRPJ”)15% + 10% on any amount in excess of

US$ 120,000/year

Federal Social Contribution on Net Profits (“CSLL”)

9%

Withholding Income Tax on Remittances Abroad15% (basic rate)

25% (tax haven jurisdiction)

Federal Individual Income Tax (“IRPF”) Progressive rate (15% to 27.5%)

Distribution of Dividends 0

Federal Tax on Manufactured Products (“IPI”) Variable as per product classification

State Tax On Distribution of Goods (“ICMS”) 7% to 25%

Municipal Tax on Services (“ISS”) 2% to 5%

Federal Contribution on Financial Transfer of Credits (“CPMF”)

0.38%

Import and Export

RADAR – MAIN TYPES

Simplified RADAR:

Import / export operations up to US$ 150,000.00 in a period of six months (cap does not apply to fixed assets)

Less control / less documentation to be provided

1 to 3 months to be obtained

Ordinary RADAR:

Higher limits to import / export operations (granted by IRS)

Strict control / lots of documentation to be provided (tax assessment, including financial capacity)

3 to 6 months to be obtained

RADAR – FINANCIAL CAPACITY

Subjectivity: IRS sole discretion

Objectives: Financial capacity to pay for import operations for 6

(six) months term. Prevention of fraud/money laundering

Assessments: Investments, assets, cash flow, previous

operations

Importation using a third Company

Importation on behalf of a third party (importação por conta e ordem de terceiros):

The trading company is a service provider to the final owner

Services Agreement submitted to IRS

Importation under order (importação por encomenda)

The importation is made by the importer with the final owners’ own financial resource (no payments in advance are allowed)

The trading company sells the imported goods to the final owner

Sales Agreement submitted to IRS

Anti-Trust

Merger Notification

Required whenever:

The companies (buyer and target) have a combined market share of 20%

Either party has gross revenues in Brazil higher than US$ 200 million

Filing within 15 business days of the first binding document

Environmental Licenses

Environmental License

Environmental Licensing Procedure

Previous license – relates to feasibility of the project

Installation license – authorizes construction of the project

Operating license – authorizes implementation of the project

– Environmental Impacts Studies (EIS) required depending on environmental impact of the project

– Licensing usually at state level (low impact activities may be licensed by the Municipalities whenever an agreement exists between the States and Municipalities) but cross border projects may require federal licensing

Labor Relations

Labor Relations

Working hours: eight hours per day and forty-four hours per week

Salary: legal minimum salary (approximately US$ 200)

Vacation: 30 days per year and a vacation bonus equivalent to one-third of monthly salary

Christmas bonus: “thirteenth salary”

Labor Relations - Cost

EMPLOYEEINDEPENDENT

CONTRACTOR PERSON

INDEPENDENT CONTRACTOR LEGAL ENTITY

OUTSOURCING (CLEANING, GUARD,

ETC)

TEMPORARY WORKER

TRAINEE

SOCIAL SECURITY CHARGES

28% 20% - - - -

COMENTS/ RISKS

Other benefits in the

collective bargainig

agreement

Services under subordination and on habitual basis:

risk of labor claim for recognition of an

employment relationship

Risk of labor claim and secondary

liability

The company has secondary liability

for labor obligations. The outsourcing is

allowed to non core business activities.

Maximum term of 90 days

extendable for equal term.

Workers should be employees of the employment

agency.

Activities relating to

the graduation

course.

_Open for

negotiation

Approximately 32% of monthly salary:

13o.salary, vacation and

FGTS

LABOR CHARGES Open for negotiation _ _

Labor Relations – Cost Simulation (Employee)

Base Salary US$ 1,000.00Monthly Christimas Bonus Reserve US$ 83.00Monthly Vacation Reserve + 1/3 US$ 111.00Severance Pay Fund "FGTS" (8%) US$ 95.00Social Security "INSS" (28%) US$ 334.00

Subtotal US$ 1,623.00

Meal US$ 269.00Transportation (up to 6%) US$ 72.00Health Insurance US$ 150.00

Total US$ 1.996.43

LABOR CHARGE CALCULATION

Labor Relations – Unions and Job Stability

Unions: Employees are legally allowed to be submitted to a Union

Job Stability

– Expectant mothers: 5 months after delivery

– Union directors: 1 year after their term in office

– Members of the Accident Prevention Committees (CIPA) –1 year after their term in office

– Employees injured due to accident at work site or professional disease: 1 year after returning to work

Other rights: set forth in collective bargaining agreements

Labor Relations – Types of Work Visa

Business: 90 days per year; may be extended for more equal term

Temporary: applicable to employee (up to 2 years) and technical assistant (up to 1 year)

Permanent: for officers/managers appointed in the by-laws

– Investment of US$ 200,000 or US$ 50,000 + 10 new job positions in the company in the next 2 years

– Same term of the appointment, limited to 5 years. May be extended

Intellectual Property

Intellectual Property

The Brazilian Patent and Trademark Office (“INPI”): granting and control of industrial property rights

Applications for trademark registration

Issuance of letters of patent

Certification of licensing agreements (registration of technology transfer, trademark licenses and patent licenses agreements)

Both foreign and Brazilian industrial property rights must be registered in Brazil

The remittance of royalties must be registered with BACEN

Dos and Don'ts for doing business in Brazil

Dos and Don´ts

Be patient…

red tape, government, licensing, regulatory instability

Dos and Don´ts

Remember that Brazil is a civil law country

Dos and Don´ts

Don’t even try to understand the Brazilian tax system

Dos and Don´ts

Register your investment with the Central Bank

Dos and Don´ts

Be patient!!

Cultural differences, delays

Dos and Don´ts

Do not focus only on numbers