Business rules in Brazil are complex and require that anyone thinking of doing business there have a clear understanding of the local rules and regulations.
Brazil ranks as the most complex jurisdiction in TMF's Global Business Complexity Index 2021. Complexity in Brazil is driven by a multi-layered system of governance, where federal, state-level and city-level authorities all have significant legislative power; incorporating companies must register with all three of these levels of government.
However, Brazil is also an attractive destination for investment given that it is ranked as the 12th largest economy in the world by GDP and has grown rapidly in recent years.
The Brazilian government has launched initiatives to achieve fiscal sustainability and liberalise one of the most closed emerging market economies. The efforts have strengthened the country's competitiveness and provided a better environment for private sector development. This has resulted in tremendous interest from companies that have long sought to expand into Latin America's largest economy and access its (more than 200 million) consumers.
For companies looking to invest in South America, Brazil remains a top destination, home to about half of the region's population and wealth. The United States is one of the largest exporters to Brazil and one of the leading sources of direct investment in the country.
Doing business in Brazil, however, requires an intimate knowledge of the country's bureaucratic commercial environment, which is among the most complex in the world. In fact, the nation ranked 124th for 'ease of doing business' in the World Bank's Doing Business 2020 report. The rankings are based on 10 topics, including trading across borders, registering property, getting credit, paying taxes and enforcing contracts.
The poor ranking is in large part due to Brazil's history of protecting local businesses and employees, which has resulted in a plethora of local rules and regulations.
Brazil's tax environment is one of the primary factors contributing to its complexity. Various taxes are levied at each level of government, meaning that tax rates differ from city to city and state to state. There are significant tax reforms taking place, but these are complex due to the tensions between the multiple levels of government. For example, the federal government is looking to increase VAT across the jurisdiction, but such sweeping changes can affect areas very differently, as economic wealth is concentrated in some of the more affluent cities and states. The devolved structure is therefore very difficult to navigate or unify, leading to complexity for multinationals seeking to operate in Brazil.
One of the biggest challenges to investors interested in Brazil is its extensive labour legislation, which is known for its lack of flexibility and burdensome tax aspects. Much of the labour law in Brazil dates from the 1940s, though reforms in the last five years have given employers more flexibility and have led to a relaxation of strict unionisation requirements. These reforms have allowed companies to hire contract workers without the same responsibilities as permanent workers, at a time when many jurisdictions were looking to restrict the use of contract working arrangements. In addition, while all employees in Brazil were previously required to be members of a labour union, this rule has been relaxed in recent years.
In 2018, the Brazilian government moved to simplify the reporting of employment and tax-related information for private employers through a new digital bookkeeping system called 'eSocial'. The digital reporting system was part of the Brazilian Government's 'Public System for Digital Bookkeeping' initiative and was conceived as a way to enhance the government's ability to enforce employment laws, reduce fraud, promote administrative transparency, and make the reporting process smoother for both employers and the tax authority. Employers had to start using the system in 2018 but, since the older format is still in force, complying with all requirements can result in efforts being duplicated.
In 2019, the government instituted the Economic Freedom Law, which aims to establish rules for reducing bureaucracy for businessmen and legal entities, in order to improve the generation of income and employment. Some of the most important innovations introduced by the referred legislation are the integration of the systems of the commercial boards and those of city halls; streamlining processes to establish new companies and their branches across the country, also with the admission of only one partner to incorporate a limited liability company; and waiving the business licence required to carry out commercial activities considered to be low risk.
While the country has been hit hard by Covid, the pandemic has modernised many business practices, such as allowing electronic documents for a variety of business activities. However, many businesses were slow to take up support packages provided by the authorities because they were often unclear, and companies were reluctant to commit to schemes that could potentially leave them with unknown liabilities in the future.
To succeed in Brazil, businesses must do their homework and navigate the complexities of an emerging market economy. A good first step to gaining a baseline understanding of a country like Brazil is accessing a number of reputable, free resources, like this country profile library, which is available for businesses to take the first step towards informed and successful expansion.
Talk to us
TMF Group helps companies of all sizes structuring their operations in Brazil with speed, safety and efficiency. Understanding the local laws, regulations, processes and requirements is at the heart of what we do. We can help you to operate and invest in the Brazilian market, reducing risk and simplifying your operations.
Get in touch with our team of experts today to discuss how TMF Group can help your business in 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.