Brazil is a developing nation of approximately 200 million people incorporated as a federative republic with 26 states, a federal district where the capital city – Brasília - is located and over 5,000 municipalities, bound by a Federal Constitution dated 1988. The Brazilian economy generates over 50% of South America's total GDP.

As a civil law country, Brazil has several statutes and regulations applicable to all business activities, and a tax structure with over fifty different taxes applying at the local, state or federal level. Notwithstanding this fact, the federal government has a strong program of encouraging foreign investment due to finance and infrastructure development needs. As a general rule, except for certain sectors such as nuclear energy, banking and financial institutions, newspapers, television and the aerospace industry, for example, there is no restriction regarding the participation of foreign companies in the capital stock of legal entities incorporated in Brazil.

Although there are a few company forms, the two most common forms for incorporating a Brazilian company are the Limitada or Limited Liability Company, which is a hybrid between a corporation and a partnership; and the Sociedade Anônima or S/A (Joint Stock Company) , which is the basic Corporation form in Brazil.

The Limited Liability Company

Limitadas are regulated by the Brazilian Civil Code (Law 10,406, of January 10, 2002, as amended) and they are incorporated upon the execution of an Article of Association by, at least, two stockholders, also known as quota holders. The Article of Association must set forth, among other matters, on the Limitada's name, which shall refer to the company's corporate purpose; capital and quota division structure; management structure; the participation of each quota holder in the losses and profits; and any other provision the quota holders may choose to include.

As far as Brazilian law is concerned, there is no minimum corporate capital requirement or requirement for corporate capital to be paid-in upon the incorporation of the Limitada. The quotas represent the amount in cash, credits, rights or assets that each quota holder contributed when forming the Limitada. With regards to the management structure, through the Articles of Association (or a separate instrument if one is used), the quota holders may appoint one or more individuals to act as officers (administrators). Whether quota holders or not, and whether they are Brazilian citizens or foreigners holding a permanent visa, the officers must invariably be resident in Brazil. Legal entities cannot be appointed as officers.

The Joint Stock Company

The Sociedades Anônimas are the Brazilian corporate form governed by the Brazilian Corporations Law, which is more detailed than the regulations that apply to Limitadas. The corporate capital of a Sociedade Anônima is divided into shares that can be capitalized by public or private subscription. Sociedades Anônimas capitalized by public subscription may offer their shares to the public through the stock market and for such offering must be duly registered with and approved by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários or CVM). Their shares can be negotiated on the Stock Exchange (Bolsa de Valores) or on the over-the-counter market.

The main requirements to incorporate a Sociedade Anônima are: at least two shareholders to subscribe to all shares comprising the Sociedade Anônima's initial corporate capital; cash-down payment of, at least, 10% of the amount of the initial corporate capital which must be paid-in by the shareholders upon the formation of the Sociedade Anônima; and the registration of a General Shareholders' Meeting with the relevant Commercial Registry evidencing the incorporation of the corporation.

The management of a Sociedade Anônima may be divided among the following bodies: General Shareholders' Meeting; Board of Directors (Conselho de Administração) (who can be either Brazilian residents or individuals domiciled abroad); Board of Officers (Diretoria); and Audit Committee (Conselho Fiscal). The Board of Directors is the collective decision-making body and all publicly-held and authorized capital companies must have such a body. The Board of Directors is optional in privately held Sociedades Anônimas. The Board of Officers, on the other hand, is the executive body of the Sociedade Anônima, and its members represent the company before third parties and public authorities.

Additionally, it is worth mentioning that Brazil carries out certain controls on cross-border currency transactions. Therefore, all contributions to the capital of a Limitada or a Sociedade Anônima, in foreign currency or assets, are eligible for registration with the Central Bank of Brazil through na electronic system known as "SISBACEN". Such foreign capital registration allows the Brazilian subsidiary to remit dividends to its foreign investors and to repatriate the registered capital in foreign currency. Moreover, please note that in order to be classified as foreign capital, the relevant amounts must have originated from individuals or legal entities domiciled or with a head office outside of Brazil and must be effectively brought into the country. No preliminary official authorization is required for investment in cash.

As to the corporate profits, please note that they are only taxed at the corporate level in Brazil. Therefore, dividends paid to residente or non-resident investors, legal entities or individuals, are exempt. Furthermore, the Tax on Financial Operation (IOF) rate is currently reduced to zero on currency exchange transactions related to the outflow of funds from Brazil destined to the payment of dividends to foreign investors.

In addition to dividends, Brazilian companies may distribute interest on net equity (juros sobre capital próprio) to its investors and treat those payments as a deductible expense from the taxable basis of the Corporate Income Taxes, if the corporate taxpayer is subject to the Real Profit Regime. The payment of interest on net equity would not generate tax efficiency if the corporate taxpayer is subject to Corporate Income Taxes under the Presumed Profit Regime.

For tax purposes, interest on net equity is limited to the Brazilian long-term interest rate (TJLP), as determined by the Central Bank of Brazil, and the amount of the deduction may not exceed the greater of (i) 50% of net income related to the period in respect of which the payment is made and (ii) 50% of the sum of retained profits and profit reserves as of the date of the beginning of the period in respect of which the payment is made.

Finally, please note that payments of interest on net equity are subject to the imposition of withholding income tax – WHT at the rate of 15%. If the beneficiary is a foreign investor domiciled in a low-tax jurisdiction (a country or location that does not impose taxation, or imposes the income tax at a rate lower than 20%, or where the laws of that country or location impose restrictions on the disclosure of shareholding composition or the ownership of the investment), the applicable WHT rate is increased to 25%. The federal tax on financial transactions rate on the outflow of funds from Brazil destined to the payment of interest on net equity is currently zero.

In conclusion, it can be said that by using the Limitada form, the investor could avoid, to the extent it desires, the management structure of a Sociedade Anônima and the formalities associated with its operation. On the other hand, corporations make more sense for joint ventures and more complex arrangements, as they allow for different types of fund raising such as debentures and for more sophisticated corporate governance structures. In any event, it is always possible to transform one company form to another if so desired by the shareholders (or quota holders) through a relatively simple procedure.

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.