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SETTING UP IN BRAZIL – PROS AND CONS

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SETTING UP IN BRAZIL – PROS AND CONS

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Foreign businesses have several options to expand into the booming Brazilian market (where GDP growth is expected to achieve up to 7% this year). Besides directly exporting products and services to Brazil, foreign businesses may also appoint local agents or distributors, who have better knowledge of the market, but are protected by specific legislation and case law affording minimum indemnification levels should the agreements entered into with them be suddenly terminated.

Neil Montgomery - Partner, Felsberg e Associados (São Paulo, Brazil)
neilmontgomery@felsberg.com.br
Dir. Tel.: + 55 11 3141 3669
Fax: + 55 11 3141 9150

Foreign businesses have several options to expand into the booming Brazilian market (where GDP growth is expected to achieve up to 7% this year). Besides directly exporting products and services to Brazil, foreign businesses may also appoint local agents or distributors, who have better knowledge of the market, but are protected by specific legislation and case law affording minimum indemnification levels should the agreements entered into with them be suddenly terminated.

Foreign businesses may also consider having a physical presence in Brazil, by either going “greenfield” and establishing a branch or subsidiary or acquiring equity interest in an existing Brazilian company or entering into a joint venture with the same.
 
Branches are subject to prior approval being obtained from the Federal Executive Branch and are most commonly used by foreign banks and airline companies.  Due to the extremely complex procedure involved, the opening of a branch in Brazil is not generally recommended.  Subsidiaries, which are Brazilian companies established under Brazilian law, represent a more straightforward approach to establishing a presence in Brazil.  Although various types of companies exist under Brazilian law, the two most frequently used are the Limited Liability Company (Limitada) and the Corporation (Sociedade por Ações - S. A.).

The Limitada is the most simple, flexible and inexpensive type of company to operate.  A Limitada requires at least two shareholders, also known as “quotaholders”, whether or not Brazilian resident individuals or corporate entities. Foreign quotaholders must appoint an individual resident in Brazil to serve as process agent. The Brazilian subsidiary is also required to be managed by at least one individual who is also resident in Brazil. Foreigners willing to occupy such managerial position first need to obtain a permanent work permit and visa, based on the investment made in the Brazilian company. In this type of company, participants are liable only up to the value of the quotas for which they have subscribed.  However, until the capital of the company is fully paid up, their liability extends to the entire capital of the company. The corporate document governing the operation of the Limitada is its Articles of Association (or Contrato Social), which must be registered with the local Companies’ Registry

S.A.s are not as flexible and inexpensive to run as Limitadas.  The S.A. is incorporated by private subscription of the company’s capital by at least two individuals or corporate entities or any combination thereof, whether or not resident in Brazil.  An S.A. may be a listed corporation (S.A. de capital aberto) or a non-listed corporation (S.A. de capital fechado), depending on whether or not its securities, including shares, are traded on the over-the-counter market or on the stock exchange. The S.A.’s corporate purposes must be specifically and fully described in its “estatuto social” (By-Laws).  Once approved, the By-Laws must be registered and published, prior to the commencement of the company’s activities.  Corporate documents of the S.A. are also registered with the competent Commercial Registry.

The extensive provisions governing the S.A. provide a more detailed regulatory framework for corporate activities, management and shareholder relations and enhanced transparency, although at the cost of increased administrative and publication costs associated therewith.  In contrast to the S.A, the Limitada is not required to publish financial records and statements which results in cost savings and confidentiality benefits for the Limitada (although it is currently being discussed in court whether large sized companies are obligated to publish the same)..

Additionally, a shareholder in the S.A. may retain absolute control by holding 50% of the voting capital plus one voting share. In the Limitada, certain fundamental matters affecting the company require approval from quotaholders representing at least 75% of its capital.  Moreover, an S.A. is authorized to issue several classes of shares, not to mention the non-voting preferred shares, which, although lacking voting rights could pay dividends in addition to being less expensive than common shares.

Once the company has been duly incorporated, the next step is to obtain all necessary registrations, permits and enrolments. The list of the same can be longer or shorter depending on the activities to be conducted. This is usually a time consuming exercise.

It is also essential that foreign individuals and companies willing to set up a company in Brazil register their intellectual property rights (trademarks, patents, domain names, etc.) in Brazil even before the Brazilian company is incorporated. This will prevent third parties from unduly using such intellectual property.

As far as buying into an existing Brazilian company or forming a joint venture is concerned, it is advisable that the foreign investor conduct thorough due diligence at the Brazilian company to avoid unpleasant surprises resulting from successor liability and to obtain adequate representations, warranties and indemnities in the share purchase and joint venture agreements entered into. Brazilian merger review filings may also be needed depending on the turnover and market share of the parties involved in the transaction.

Finally, all remittances of capital effected by foreign shareholders or quotaholders (whether individuals or corporate entities) to companies in Brazil must be registered with the Brazilian Central Bank - BACEN within 30 days as of the respective exchange contracts being executed.  Such registration allows such foreign shareholders or quotaholders to repatriate profits and capital through the commercial exchange rate market.
 Since setting up a company Brazil is usually a not so straightforward exercise, expert legal advise must be sought from the outset in order to avoid any unpleasant surprises and to maximize the local business opportunities.

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