E Camillo Pachikoski of PP&C Nexia, and Peter Thorpe, highlight the key issues that professional firms need to consider if setting up in Brazil.
A relatively stable political and economic environment, strong financial system and increasing demand for professional services has led a growing number of firms to consider setting up in Brazil.
Last year, foreign investment was around US$60bn, with this figure set to rise to over US$80bn in 2013. But there can be significant obstacles to overcome as a result of relatively inflexible rules and legislation.
The regulatory landscape
Regulation surrounding some professions, such as engineering and architecture, is fairly flexible. Firms with a commercial brand are permitted to operate within the country, as are foreign partners, provided at least one professional is resident in Brazil and assumes a technical role. This individual is required to have graduated from a certified institution and be enrolled with the relevant professional council.
By contrast, the Bar Association has acted vigorously against foreign law firms attempting to set up in Brazil. As a result, regulation concerning the practice of law, including advocacy, by foreign law firms is far more restrictive. For example, firms are not allowed to exhibit a commercial brand or the name of partners in the law firm's name. Moreover, practising law is restricted to those professionals resident in Brazil who have graduated from institutions certified by the Professional Council and are enrolled in the Bar Association.
Foreign practice
Foreign consultants who want to consult on the laws related to their own country can obtain authorisation to do so from the regional council of the Bar Association where they intend to practice. Their firms must be made up of foreign consultants only and they are limited to offering those services authorised by the regional council. Private practice in advocacy or practices by means of an instructed lawyer are expressly forbidden.
While some professions in Brazil, e.g. accountancy and audit, are allowed to enter into association agreements, partnership agreements or even company formations, Brazilian lawyers that associate with foreign consultants (or even those that belong to associations involving foreign consultants) could be in violation of Bar Association statute.
Co-operation between Brazilian lawyers and foreign consultants is, however, permitted – although law firms are limited to a relationship based on a 'best-friends' policy where, for example, the Brazilian and foreign law firm serve the same client, but one provides services based on Brazilian law while the other focuses on services related to international law. A variation of this type of relationship might involve the Brazilian law firm maintaining a direct relationship with the client while instructing the international law firm and paying its fees. But such structures can present operational difficulties and may be subject to double taxation.
Company structure
The most straightforward and flexible way to set up a business in Brazil is as a limited liability partnership, also known as a Sociedade Limitada (LTDA). This structure is governed by a 'contrato social' (articles of association). There are no minimum capital requirements, but the firm's capital must be registered at the Brazilian Central Bank in order to be recognised and to allow for profits to be remitted without incurring additional taxes in the future. All firms are taxable on their worldwide income. The capital is divided into quotas or shares, with the foreign firm able to own up to 99.9% of the shares. Any liability is limited to the capital subscribed. Setting up an LTDA in Brazil requires a minimum of two partners, and investors are required to appoint a resident citizen as an attorney.
Tax implications
The Brazilian tax rate is 15%, with taxable income over R$240,000 subject to an additional 10%, plus a so-called 'social contribution' of 9%, resulting in an effective tax rate of slightly less than 34%. Capital gains and losses have no special treatment for corporate income tax purposes and all related party transactions must take place on an arm's length basis.
Resident corporations or non-residents with a permanent establishment (PE) in Brazil are subject to Brazilian corporation tax and income tax rules. Resident corporations are taxed on worldwide profits, with relief for overseas taxes suffered; non-resident PEs are taxed on profits derived from the PE in Brazil. There are three federal taxation system options for the calculation of taxable profits.
- Pre-tax profit system is mandatory for firms with an annual gross income of over R$48m and which receive income from outside Brazil.
- Presumed profit system applies to those firms whose net income did not exceed R$48m in the previous year.
- Unified system for the payment of taxes by small businesses. This simplification is available for businesses with an annual gross income not exceeding R$3.6m and with no partners outside Brazil.
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.
