Based on a strong economic development program, Brazil's inflation rate has stabilized and its economy has grown over the last few years. This scenario has triggered international investors' interest in the country. The country contains an increasing consumer market with unlimited potential. For this reason, Brazil is one of the major economic forces in the global market place. Foreign investors are focusing their investments in Latin America mostly in Brazil.
In order to maintain Brazil's economic growth and potential, a wide range of government incentives are available for start-up projects in Brazil. Generally speaking, the international investor has equal access with local investors to these incentives.
Certain federal incentive programs, such as subsidized-rate financing to small and medium-sized businesses and capital equipment purchases, include specific restrictions stating that the programs are not available to companies that are not majority-owned by Brazilian nationals.
However, as noted above, generally there are no restrictions on the access of foreign companies to state and municipal programs and to federal incentives for export promotion, import substitution, and location in less developed regions.
II.FEDERAL INCENTIVES EMPLOYED
Based on a government based investment policy, the use of government incentives is a significant feature of the Brazilian business environment used to encourage local and foreign investments. Incentives usually take the form of subsidized-rate loan financing and tax exemptions or reductions, rather that cash grants.
These incentives can be of various types as described in further detail below.
II.1.Municipal, State, And Federal Incentives
While Federal government incentive programs aim to promote domestic policy objectives, including the growth of exports and the capitalization of domestic private industry, State and Municipal incentive programs are directed toward specific objectives such as increasing local employment opportunities.
State and Municipal governments commonly use an exemption or deferral of indirect and property (real estate) taxes and provide assistance to potential investors in obtaining access to available federal programs.
Under this mechanism, a company that has decided to establish a new plant for export production and which is eligible for federal programs, for example, can also seek the best available package of local incentives when deciding where to locate a plant.
II.2.Incentive Maintenance And Revision
Once an incentive is duly granted by a governmental body, certain conditions initially met by the investor must be maintained throughout the incentives term. In some cases a shorter time-span will apply where the conditions are slowly lifted.
Additionally, Brazilian government incentive programs are subject to frequent revisions, both in relation to their basic approach and the specific categories and rates of tax incentives given. Accordingly, companies planning to avail themselves of incentive programs should as a first step obtain the latest available information.
III. CAPITAL GRANTS
Municipal, State or Federal governments do not adopt any policy which gives cash grants to reduce initial outlays on industrial buildings and equipment. Exceptionally, capital grants in the form of land can be obtained from Municipal governments and are often provided through State development agencies.
IV. LOW-COST FINANCE
There are also government incentive programs providing low-cost finance. This is due to the fact that in recent years, Brazil has experienced chronic inflation and for this reason adopts some of the highest worldwide interest rates. Under these circumstances, subsidized rate financing has often been very important for certain sectors of the Brazilian economy, and has formed the basis for the expansion and modernization of Brazilian agriculture.
It should also be mentioned that since inflation is more under control than in the past, such an incentive is less attractive nowadays than it used to be.
Therefore, based on the diversity of programs, complexity of the rules governing individual programs and the frequent modifications in these rules, companies should verify and analyze their options in the preliminary stages of any proposed investment.
V.GENERAL TAX INCENTIVES
V.1.Federal Tax Investment Incentives
As an alternative to paying an equivalent amount of income taxes, corporate taxpayers are encouraged to invest up to 24 percent of their basic income tax liability in investments located in the northeastern (under the SUDENE federal agency) and Amazon (under the SUDAM federal agency) regions.
The companies established in these regions or in economic sectors qualifying for use of tax-incentive investment funds are granted a partial or full income tax exemption for a limited period of time, together with the other tax and financial concessions addressed hereinafter.
V.2.Regional And Industry Related Incentive Programs.
Other concessions are offered in Brazil, either on a regional or industrial basis, through the offering to taxpayers of the opportunity to invest part of their income tax liability, or by granting the following fiscal incentives for approved investments:
(i)Investments In The SUDENE Area:
The geographical definition of the northeastern region includes the states of Maranhao, Piaui, Ceara, Rio Grande do Norte, Paraiba, Pernambuco, Alagoas, Sergipe, Bahia and the semiarid region in the northeastern part of the state of Minas Gerais.
The investment incentive plan under the administration of SUDENE offers the following fiscal benefits:
- Exemption from federal taxation on imposed equipment used in new industries established in the region.
- Exemption from income taxes for a period of ten to fifteen years for new industrial or agricultural investments.
- A 50% (fifty percent) reduction in income taxes for other industries operating in the region.
- Eligibility to receive tax liability investments from other companies. However, in this case, the SUDENE company's own resources must represent at least 25 to 75 percent of tax liability investments, depending on the relative participation of foreign capital and the project priority.
- Government loans or loan guarantees from the Bank of Northeastern Brazil or the Federal Economic and Social Development Bank (BNDES).
- Authorization for the importation of equipment without foreign exchange coverage.
The general eligibility for these concessions depends on SUDENE's approval of an industrial project or the planned expansion of an existing industry which must be feasible. SUDENE not only evaluates the project for its technical and economic feasibility, but also verifies whether the project is suitable within the overall economic development of the region.
New investments may also receive a partial exemption from State taxes. Some State governments have granted maximum exemption by establishing that companies should deposit the amount of the tax exemption in the state development bank for investment in projects approved by State governments, either as reinvestment in the depositing company itself or as new investment in third parties' projects.
It should be pointed out that to the extent of the income tax exemption reduction for the above mentioned cases, companies must account for and capitalize an equivalent amount from income. In addition, tax liability investments will be considered local currency investments and, accordingly, any income therefrom will not qualify for overseas remittance.
The fiscal benefits available to the SUDENE region are also granted to companies investing in the Amazon region of Brazil. SUDAM is the federal government agency overseeing development in this region. The region includes the States of Acre, Par , Roraima, Rond"nia, Amap , Amazonas, Tocantins, Mato Grosso, Mato Grosso do Sul and Goi s.
The incentives under SUDAM include:
(ii)Manaus Duty Free Zone
Manaus is a city located on the junction of the Amazon River. The city and its surroundings contains over 600 industries which are eligible for the tax incentives offered by its duty free zone, designed to encourage occupation and development of the Amazon region.
The federal agency which supervises investment in the region is the Superintendency for the Development of the Amazon (SUDAM). The duty free zone is administered by the Superintendency of the Manaus Duty Free Zone and is known as SUFRAMA .
A company operating in Manaus, with a technical and commercial project duly approved by the competent governmental bodies, is eligible for the following tax incentives:
(1) Exemption from income taxes (not including the social contribution tax on profits) for 10 years with the possibility of being granted an extra term of 5 (five) years. The tax exemption values credited must be accounted for as a capital reserve and cannot be distributed as dividends.
(2) Import duties suspension until the products` departure from exit the duty free zone. If the imported product is used in the manufacturing process within the duty free zone, a reduction of import duties will be granted.
(3) Exemption from excise taxes (IPI) on the importation of products which remain in the duty free zone, and for products manufactured within the duty free zone provided that companies employ local labor, incorporate new technologies into their production process, increase levels of productivity and reinvest profits in the region.
(4) Granting of a presumed sales tax credit on the purchase of products from other states in Brazil and a refund of a percentage of the sales tax paid ranging from 52 percent to 100 percent depending on the industry.
(iii) Industrial Development Council Projects
The Industrial and Agro-industrial Technology Development Programs (PDTI and PDTA) aim to stimulate industrial technology development by creating and maintaining a permanent structure of technology management and by establishing associations between companies and research institutes.
Decree-law 2.453 of 1988 sets forth the federal government's industrial development policy. Projects approved by the Industrial Development Council (CDI) are eligible for several tax incentives. All projects must be registered with the CDI.
Such Tax incentives can include:
(1) Accelerated amortization for intangible assets.
(2) Accelerated depreciation on domestically produced equipment. Double deduction for income tax purposes of qualifying technology development expenses (limited to 8% (eight percent) of a company's tax liability).
(3) Withholding income taxes can be reduced by up to 50 percent for remittances of royalties and technical service fees, provided there is an investment commitment of twice the amount of the tax benefit (where the technology transfer contract is approved by the Federal Intellectual Property Agency (INPI)).
(4) Deduction for the local company of expenses with royalties and technology transfer is increased to 10 percent of related gross sales (with INPI approval of the contract).
(iv)Other Tax Incentives
The following tax incentives are also available:
Cultural and Audiovisual Incentives - In order to provide funds for cultural activities in Brazil, including the domestic motion picture industry. Companies may deduct investments in cultural projects approved by the Ministry of Culture. These deductions are limited to 40% of donations and 30% of sponsorship investment, or 2% of tax liability. Companies may also deduct the investments as business expenses. Additionally, such Corporate taxpayers are also eligible for tax incentives on investment in approved domestic movie production, up to a limit of 1% (one percent) of total tax liability.
Foreign movie producers and distributors can also reduce their income tax liability by 70% if that amount is invested in the co-production of motion pictures, pursuant to a project approved by the Ministry of Culture.`
The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.
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