Dr. Ricardo Leite, as reported by Jared Turner
Brazil’s transformation in recent years into an economic showcase has caught the world by storm. The question of how to do business in Brazil, Latin America’s biggest, most populous nation, was recently addressed by Ricardo Leite, in a discussion on “Practical Advice on Doing Business in Brazil Successfully” at a World Trade Association-sponsored luncheon. Leite is a Brazilian attorney with Cerquieira Leite & Associates, a firm in Sao Paulo specializing in international corporate and tax law.
According to Leite, “The business climate in Brazil is ripe for foreign investment as never before. However, in order to make it work for you and your business, you have to understand the system.” In his discussion on Brazil, Leite endeavored to do just that-- help the audience “understand the system” more clearly. Leite accomplished this through a summary of practical advice on doing business in Brazil, focusing on economic, taxation, labor-related, and business formation issues.
Besides being the largest and most populous country in South America, Brazil is also the fifth largest country, in both area and population, in the world. The size and growth of the $1 trillion annual Brazilian economy is demonstrated through important economic indicators: a relatively low inflation rate of 3.23% a year; a trade surplus of $42 billion; and an exchange rate of 2.14 Brazilian reales to the dollar. All of these lead Leite to foresee Brazil becoming, in his words, “A first-rate economic powerhouse.” Combine this forecast with Brazil’s enormous and well-developed agricultural, mining, manufacturing, and service sectors, large labor pool, and historically low interest rates, and it is clear why Brazil's GDP far outweighs that of any other Latin American country, competing with some of the most productive economies in the world.
Despite these apparent economic boom times, Leite identified certain negative aspects to the current business climate in Brazil. First on this list would be the Brazilian tax system, which is among the most complex and burdensome in the world. The tax system’s administrative complexity and high rates are a recognized burden to foreign investment in Brazil. According to Leite, there are three types of taxes that American businesses people should be concerned with when considering investment in Brazil: corporate income, “consumption” and property.
There are two ways to be taxed within the corporate income tax scheme: 1) “Presumed” profit, and 2) “Real” profit. Presumed profit is the “presumed” amount of profit that a company believes it will generate in one fiscal year, which is taxed between 8% and 32% on gross income. Real profit is the actual profit earned after one fiscal year of operation and is taxed between 24% and 34%. According to Leite, in deciding between using the real and presumed profit tax regimes, it is important to consider the amount of time a company has been operating in Brazil. If a new company, Leite suggests using real profit, then switching to presumed profit once the fiscal year’s profit margin is available in order to avoid paying penalties if an audit occurs and the presumed profit is substantially lower than actual profit.
The high rate of the various “consumption” taxes can be even more burdensome for American companies interested in importing goods to Brazil. To illustrate the high costs of consumption taxes, Leite used the example of importing a soccer ball from the United States: The import tax on a ball made in the U.S. is 20% (which varies according to product); “production” tax is an additional 20%, with sales tax at 18% (depending on the Brazilian state where the sale takes place, usually less if the state is trying to encourage economic growth); and “social contribution” taxes are 3.65%, making the total cost of the ball a total of 61.65%. Despite these high costs, foreign products are in high demand in Brazil. Nevertheless, foreign companies should hire an experienced tax planner if they hope to navigate the complex world of Brazilian “consumption” tax law.
Property taxes are relatively low compared to the other tax systems (a 2% tax on all property transfers). Foreigners can purchase real estate in Brazil. However, once again, the regulatory regime is oppressive. Observe the following “first step” in the regulatory maze needed to purchase property in Brazil: A foreigner needs a Brazilian ID called a CPF, which is obtained by getting your birth certificate translated into Portuguese by a certified translator and legalized by the Brazilian consulate in your home country. You then make a trip to Banco Do Brasil with your passport and birth certificate to formally apply for the CPF and pay a small fee. Upon filing with the Banco, you go to the Receita Federal to register for your assigned CPF number, which is then mailed to you at an address in Brazil.
The statutory scheme for labor laws in Brazil is established primarily in favor of employees. Among other things, Brazilian statutory provisions mandate a minimum wage of R$359/month ($163 US), a 30 day paid vacation, a 44 hour work week, payment of a year-end bonus equal to 1/13 of one month’s paycheck, five months maternity leave, five days paternity leave, and 30 days notice to terminate a worker (which is usually challenged by the worker by filing a claim). Despite these mandates, Leite believes that wages are still low enough for profitable business opportunities. This low cost of labor, he believes, substantially outweighs the high rates and complexity of the taxing regime. Leite also recommends that employers pay employees with dividends and/or shares instead of wages as neither is taxed.
Another obstacle to doing business in Brazil is the bureaucratic red tape involved in forming a business. Incorporating in Brazil requires an average of 152 days using government agencies. As such, Leite recommends that a “shell” corporation be purchased by buying out shareholders of an existing Brazilian company. Besides buying out a shell corporation, Leite recommended other possible alternatives for entity formation, including joint ventures with local companies, private limited companies (LTDA), and, the most common entity of choice, the Sociedade Anonima (SA). To finance these businesses, Leite recommends using loans from Brazilian lenders because of historically low interest rates. Leite was especially concerned with the importance of protecting intellectual property when establishing a business in Brazil.
A term often heard in Brazil is “Custo Brasil,” or the “cost” of doing business in Brazil. These are the “extra” costs of corruption, government inefficiency, legal and bureaucratic complications, excessive taxation, and sub-standard infrastructure that can present obstacles to operating a business in Brazil. If this “custo” is taken into account and managed effectively, exciting opportunities exist for companies willing to navigate the complex, yet potentially highly successful world of Brazilian business. Despite some of the drawbacks to investing in Brazil, Mr. Leite was optimistic about the future growth of his country and believes foreign companies can successfully operate businesses there.
For more information related to establishing a business in Brazil contact Dr. Ricardo Leite at atendimento@cerqueiraleite.adv.br. For additional information related to establishing and operating a business in Brazil or any other Latin American country, please contact Jared Turner of the International Practice Section of Kirton & McConkie, at jturner@kmclaw.com.