Brazil: Structures For The Transfer Of A Business In Brazil

Introduction. Whenever the intention is to transfer a business, there are some structures that may be adopted and the choice will mainly depend on the specifics of each case. Therefore, the choice for one structure or another shall be made on a case by case basis.

I will present herein just a summary with a brief description of certain structures commonly used in Brazil for the transfer of a business to another company. I will only focus on the corporate aspects, but it is essential to analyze the situation under a tax, labor and regulatory point of view as well.

First of all, I deem extremely important the analysis of the balance sheets of the companies involved in the transaction, because this analysis may influence the choice of any of the alternatives indicated herein. In addition, the existence of tax benefits or special licenses may also impact the choice for a certain structure (especially if there are non-transferable benefits and licenses which is linked to the company that operates the business).

In this sense, kindly note that, regardless of the structure to be adopted for the implementation of the transfer of the business, in the event the intention is to conduct the business in the same place where it is currently located, a previous consultation with the tax authorities shall be required in order to incorporate the new company or open branch(es) of an existing company in the same address(es) of the branch(es) that currently operate(s) the business. Please note that the existence of two legal entities in the same address is not an ordinary procedure under Brazilian law, being allowed only when authorized by the tax authorities. That is the reason why it is important to conduct previous consultation with the tax authorities before the corporate documents are filed with the Board of Commerce.

Spin-Off. A possible structure for the transfer of a business is a spin-off, which consists in the transfer of the net assets corresponding to the business to another company. Kindly note that it is possible to have in a spin-off the transfer of isolated assets or the transfer of all assets of a business integrated as an "establishment" ("estabelecimento").

As a result of this operation, in principle, the capital stock of the spun-off company will be adjusted (reduced) by an amount corresponding to the equity value of the portion of its net assets to be transferred to the recipient company. The total amount of the quotas to be cancelled will correspond to the amount of the capital reduction. In addition, through the partial spin-off and the transfer of the spun-off assets to the recipient company, the capital stock of the recipient company will be increased in the amount equivalent to the spun-off assets' value received by it, in favor of the partners of the spun-off company, with the correspondent creation of new quotas, to be totally subscribed by such partners. Therefore, as a consequence of the spin-off, the partners of the spun-off company will end up holding, proportionally, the same equity participation in the recipient company. In order to avoid discontinuation of the business, the recipient company should obtain all licenses and registrations necessary to operate the business before the spin-off.

The spin-off is a bureaucratic corporate transaction as it shall involve the approval of the spin-off in a partners' meeting of the spun-off company. A term for opposition by creditors shall also be opened and an appraisal would be required.

Drop-Down. Another alternative available to structure the transfer of a business is via drop down of the assets into another company. Under this structure, the company receiving the assets is a subsidiary of the company which will transfer the assets. As a subsidiary, the parent company would pay-in the capital stock of its subsidiary upon the transfer of the assets (and liabilities, if any) related to the business ("net assets"). Therefore, the capital stock of the subsidiary will be increased by the amount of the net assets transferred by the parent company. All employees of the business could also be transferred to this company. Kindly note that it is possible to have in a "drop-down" the transfer of isolated assets or the transfer of all assets of a business integrated as an "establishment" ("estabelecimento"). In order to avoid discontinuation of the business, the subsidiary should obtain all licenses and registrations necessary to operate the business before the drop-down.

This structure is less bureaucratic than the spin-off as it does not require special approvals (from partners or creditors). If Newco is formed as a Corporation ("Sociedade Anônima"), the contribution of the assets would require an appraisal to be prepared by a specialized firm or three experts. In the other hand, if it is formed as a limited liability company ("Limitada"), an appraisal is not be required by law, although an appraisal may be recommendable to back the amount of the contribution (in a Limitada, the partner who pays-in the subscribed quotas with assets is deemed liable for the amounts attributed to the assets).

Sale of Assets. A possible structure is the sale of assets that comprise the business. The parties involved will sign an Asset Purchase Agreement and take the necessary tax and accounting measures to comply with the law related to the transfer of the assets (issuance of invoices, payment of relevant taxes, etc) . No appraisal is required in this case. In order to avoid discontinuation of the activities of the business, the company that will operate the business should obtain all licenses and registrations required to carry out the business, before the sale of the assets related to the business. This structure may result in some tax impacts that shall be carefully considered on a case by case basis.

Sale of Establishment. Another alternative would be the sale of all the assets of the business integrated as an "establishment" (i.e., branch). Under this structure and assuming that the business is conducted exclusively in a separate branch, a company would acquire such establishment operated as a branch. In order to avoid discontinuation of the business, the recipient company should obtain all licenses and registrations necessary to operate the business before the sale of the establishment.

As per the Brazilian Civil Code, the agreement for the purchase and sale of establishment ("Contrato de Trespasse") shall be published in the Official Gazette, as well as filed with the respective Board of Commerce, being consequently of public's knowledge. Please note that, as per a normative ruling issued by the National Commerce Department, it is allowed to be published, in the Official Gazette, only a summary of said agreement, being dismissed the publication of the full agreement.

Timing. The timing involved to accomplish the transfer of the business in each alternative set forth herein is quite similar. This is because the process that would be more time consuming is the one in connection with obtaining all the licenses and permits in order to allow the recipient company to operate the business as a "stand-alone" entity. The preparation of the corporate documents to reflect the transfer of the business and the subsequent filing before the Board of Commerce does not take too long.

Luciana M. Cossermelli Tornovsky is a partner in the Corporate / M&A practice at Demarest e Almeida Advogados

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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