FURRIELA ADVOGADOS DOING BUSINESS IN BRAZIL Dr Fernando

FURRIELA ADVOGADOS DOING BUSINESS IN BRAZIL Dr. Fernando Nabais da Furriela

Summary 1. 2. 3. 4. 5. 6. 7. 8. Structure of a Business Organization 9. Taxation of Interests 10. Profit and Dividend Remittances Related Corporate Issues 11. Royalties Funding the Subsidiary 12. Foreign Investments and Labor & Employment Infrastructure Projects Termination Agency and Distribution Agreements 13. Environmental Licensing 14. Bidding – Foreign Participation Foreign Capital 15. Private Public Partnerships Intercompany Loans DOING BUSINESS IN BRAZIL

1. Structure of a Business Organization The limited liability company or “sociedade limitada”, is limitada” somewhat similar to the German type of company known as G. m. b. H. It is the most widely used type of company. It is commonly referred to as "Ltda. ", but substantially different from a U. S. partnership.

1. Structure of a Business Organization Basic requirements for the incorporation and operation of a “Ltda. ”: § Minimum of two members (called “quotaholders"), § Individuals or companies, § With domicile or head offices in Brazil or abroad. § One General Administrator § May have any title, like General Administrator, President or Superintendent etc. ; § Has to be a permanent resident in Brazil; § Does not need to be a Brazilian citizen;

1. Structure of a Business Organization Basic requirements for the incorporation and operation of a "Ltda. " § There is no minimum capital requirement; in theory, the equivalent of 1 USD is permitted, however, the company should be capitalized to cover its initial expenses; § The name of the company shall be followed by one or more expressions necessary to identify its main activities and the term "Ltda. "; § It must have an office at a place, not conflicting with zoning regulations (e. g. a factory cannot exist in a residential area); § The company can have as many branches as desired;

1. Structure of a Business Organization Basic requirements for the incorporation and operation of a "Ltda. " The powers of the manager should be stated in the Articles of Incorporation ("Contrato Social"). Usually it is established that certain major acts such as the sale or encumbrance of substantial assets require approval of the majority (of) quotaholder(s); The quotaholders can hold any percentage of the capital agreed upon, such as 50%, 1%, etc. ; Profits may be distributed in different proportions than the capital participation.

1. Structure of a Business Organization Basic requirements for the incorporation and operation of a "Ltda. " § The Articles of Incorporation should also establish the basic rules for the distribution of dividends, capital increase and other major corporate acts, which may be carried out either by unanimous decision or by a decision by the majority of quotaholders. Dividends may be distributed every month, but this has to be indicated in the Articles of Incorporation; § The corporate purpose must be clearly defined in the Articles of Incorporation. Contrary to the U. S. , a company cannot be incorporated "to conduct any lawful activity";

2. Related Corporate Issues The general administrator/legal representative is personally liable with all his/her assets for the proper payment of all taxes and fees of the company. However, once the capital is completely paid-in, the administrator/legal representative is only liable for acts practiced beyond his/her powers, or acts in violation of the law or the Articles of Incorporation.

2. Related Corporate Issues Lately, Labor Courts have been holding both administrators and quotaholders responsible for unpaid salaries of employees. Although the piercing of the corporate veil is more commonly accepted in Labor Courts, it is important to note that it is always limited to an illicit act.

2. Related Corporate Issues A foreign quotaholder has to appoint an attorney-infact ("procurador") to represent him/her in the incorporation of the company and to receive service of process regarding all matters pertaining to the company.

2. Related Corporate Issues Foreign legal entities owning inter alia equity participations in Brazilian companies are obliged to register before the Brazilian federal tax authorities in order to obtain a taxpayer identification number called “CNPJ”.

3. Funding the Subsidiary § “Transfer of funds to cover operational expenses. ” § Capital investment § Inter-company loans

4. Labor & Employment 4. 1 The Employment Relationship according to Brazilian Law Characteristics of the Employment Relationship : (Article 3 of the Brazilian Labor Law, “CLT”) § Individual; § Non-occasional rendering of services (regularly developed activity); § Subordination (the employee is directly controlled by the employer, accepting and executing orders); § Regular payment of salary; § Personal rendering of service (general rule is the prohibition of substitution).

4. Labor & Employment 4. 2 Labor Fees Owed by the Employer § Payment of Salary; § Annual Vacation (the employee has the right to a 30 days paid vacation period every 12 worked months); § Value increase of 1/3 of the employees’ salary during vacations; § 13 th Salary (Christmas bonus); § “Ticket transportation” (if applicable); § “Family Salary” (if applicable);

4. Labor & Employment 4. 2 Labor Fees Owed by the Employer § Mandatory Fund for Unemployment Benefits (“FGTS”): a monthly value corresponding to 8% of the employee’s remuneration is deposited by the employer in a special account on behalf of the employee plus 0. 5% relative to social contribution; § Additional remuneration if applicable (overtime, night shift, dangerous and hazardous work premium etc. ); § Other fees owed under Brazilian Labor Law, from the professional employees’ category, as well as due to the General Agreement that may have been settled by the employer.

5. Termination § Advanced notice right (minimum 30 days); § Residue of salary; § Vacation plus the constitutional third (variable in accordance to the case – simple, proportional or double); § 13 th proportional salary; § Liberation of FGTS before the presentation of a receipt “AM”, under code 01, payment of Social Security penalty of 50% (40% of which shall de destined to the employee and 10% to the Federal Government); § Additional of remuneration if applicable (overtime, night shift, dangerous and hazardous work premium, etc. ) § Collection of values regarding to INSS and Income Tax; § Delivery of the receipt for the collection of the unemployment secure

6. Agent/Distributor Agent § Introduces buyer and supplier; § Offers supplier’s products to the buyer; § Receives commission from the supplier calculated on the effective sales of products; § Sells supplier’s products directly to the buyer; § Agency is regulated by the Brazilian Civil Code and Law N. º 4. 886/65

6. Agent/Distributor § Buys supplier’s products at a lower cost than market cost and sells them to the buyer with additional value; § Sells supplier’s products directly to the buyer; § Profits from the sale made to the buyer with additional value.

6. Agent/Distributor - Differences AGENT DISTRIBUTOR Activities usually subject to control Activities subject to only minimal by the supplier control by the supplier Does not take title to the goods Takes title to the goods and buys and sells for own account May handle products of other suppliers (but is less likely to do so suppliers than a distributor) Generally compensated commission basis on Bears no risk of failure of payment a Earnings based on resale profit margin Bears economic risk of failure of payment by customer Usually does not warehouse the Usually warehouses and physically goods delivers the goods Usually does not use own capital Uses own capital May have power to contract on Has no power to bind the supplier

6. Agency – Mandatory Provisions § General terms and conditions of the Agency Agreement; § General or specific identification of products or goods covered by the Agency Agreement; § Term of the Agency Agreement (specific/indefinite period) § Territory where the agency shall be exercised; § Exclusivity (is presumed if not expressly provided otherwise, may be partial or total, or for specific term); § Agent’s remuneration (commission) and time of payment, which depends on the effective accomplishment of the business, and receipt, or not, by the represented, of the respective amounts;

6. Agency – Mandatory Provisions § Obligations and responsibilities of the parties; § Cases in which the restriction of the granted exclusivity area is justified; § Agent’s indemnification in case the Agency Agreement is terminated without just cause (Art. 35 of the Agency Law). § In case the agreement has a specific term, the indemnification shall be equivalent to the average monthly commission paid until termination, multiplied by half of the months left until the end of the term. § In any case, indemnification shall not be less than 1/12 of the total amount of the commission received during exercise of the agent’s activities.

6. Agency – Mandatory Provisions Art. 35. The following are just causes for the termination of the agency agreement, by the principal: a) the negligence of the agent in the carrying out of his/her obligations under the contract; b) the practice of acts which discredit the business of the principal; c) the non-compliance with any obligation under the agency agreement; d) the final conviction for a crime; e) a act of God. Art. 37. The principal may retain the commissions due to the agent, if there is just cause for the termination of the agreement; and such retention is made with the purpose of recovering for damages caused by the agent, as well as, in the hypothesis of Art. 35, for

6. Agency – Mandatory Provisions Art. 36. The following are the just causes for termination of the agency agreement by the agent: a) reduction of the sphere of activity of the agent, in violation of the terms of the agreement; b) direct or indirect breach of the exclusivity, if provided for in the agreement; c) abusive price-fixing regarding the agent’s territory, with the exclusive scope of making the agent’s regular activities impossible; d) non payment of agent’s remuneration (commission) in due time; e) act of God.

6. Agent / Distributor Art. 710 Brazilian Civil Code: In an agency agreement, a person undertakes, on a nonsporadic basis and without dependency, the obligation to promote, on behalf of another person, upon payment of a fee, the realization of certain deals in a certain territory, the distribution is characterized when the agent has at his disposal the object to be negotiated.

7. Foreign Capital Definition and Legislation The Brazilian law defines “foreign capital” as: • the goods, machinery and equipment entered into Brazil at no cost of foreign currency, destined for the production of goods or services as well as, • financial resources entering the country for investment in economic activities provided that, both belong to individuals or legal entities resident, domiciled or headquartered outside of Brazil. Foreign capital in Brazil is regulated by: Law nº. 4. 131 of 1962 (Foreign Capital Law) and Law nº. 4. 390 of 1964 respectively. Both laws are ruled by the Decree 55. 762/65.

7. Foreign Capital Registration and Treatment § Foreign capital must be registered with the Brazilian Central Bank. This registration is essential and obligatory in order to allow profit remittances, capital repatriation and profit reinvestments. All exchange operations in foreign currency are consolidated through exchange contracts registered with the Central Bank. § Although the registration is obligatory, it is not subject to any type of analysis or verifications by the Central Bank, since the register merely declares the company as a recipient of the foreign investment. § Investments in foreign currency also do not depend on any authorization by the Brazilian authorities. To endorse the capital or acquire shares in an already existent Brazilian company, it is only required to transfer the investments through a bank establishment authorized to operate in the exchange market.

8. Intercompany Loans § BACEN Regulation nº. 2. 997, Article 10, DOES NOT consider investments, the profits originating from the operations in the financial and capital markets. Under-capitalization: § Loans: profit reduction and consequently taxation reduction; § Interests: deductible as expense to the debtor company which reduce the tax basis of the tax due. Tax Fraud – Disguised Distribution of Profits

9. Taxation of Interests Law 12. 766/12: Interest on related party loans, is deductible only up to the amount that does not exceed: (i) US$ transaction with prefixed interest rate: rate of Brazilian sovereign bonds issued in US$ in foreign markets; (ii) BR$ transaction with prefixed interest rate: rate of Br. Sovereign bonds issued in BR$ in foreign markets; (iii) in all other cases: LIBOR rate for the period of 6 months. § In Brazil, there are three ways of sending remittances by interest payments: Interests from loans Susceptible to exchange variations and 15% income tax Interests over own capital Law nº. 9. 249/95 and 15% income tax Interests by the acquisition of goods to term Income tax of 15%

10. Profit and Dividend Remittances The remittances, capital returns, dividends, profits, interests, amortizations, reinvestments or royalties do not have governmental restrictions, but their registration with the Central Bank is necessary and obligatory, according to Law nº. 4. 131/62, changed by the Law nº. 4. 390/64; It's only necessary to observe the following procedures:

10. Profit and Dividend Remittances § Capital may be repatriated free of tax up to the amount registered in foreign currency with the Central Bank. § Any excess is considered a capital gain subject to exchange provisions and is therefore subject to withholding income tax at 15%. § Profits may be remitted abroad without limit, up to the level of registered foreign capital and available retained earnings. § From January 1, 1996 profits/dividends distributed to non-resident beneficiaries relating to periods beginning on or after this date are not subject to withholding income tax (Law Nº 9. 249/1995).

10. Profit and Dividend Remittances § Loans may be repatriated only within the terms of the registered loan contract. § Interest on Loans can be freely remitted within the loan contract terms, but is subject to 15% withholding income tax. § Supporting documentation must be presented for approval of all applications for repatriations and remittances. § Proof must also be furnished that the applicable withholding income tax has been paid.

11. Royalties are fees of any nature paid for the use or concession of the use of author rights of literary, artistic or scientific works (including cinematographic films, recordable tapes of television programs or radio fusion), of patents, industry trademarks or commerce, drawings or models, plans, formulas or secret processes, as well as the plain use or concession of use of industrial, commercial, scientific equipment and by information correspondent to the experience acquired in the industrial, commercial or scientific sectors. However, some international treaties which regulate double taxation between two countries have a different understanding considering royalties expenses related to rentals, expenses of technical assistance or specialized technical services.

11. Royalties Legislation The following legislations concern royalties : Law 4. 131/62: Dispose about the application of foreign capital and capital remittances. Articles: 3º. ‘b’, 09º, 11º, 12º, 13º, 14º. Decree 3. 000/99: Articles 353, 355 Law 4. 506/64: Dispose about income tax of any nature. Article: 71 Decision 09/00: Expenses deductibility with royalties, technical, scientific, administrative, or similar. Ordinance nº. 436/58: Establishes the maximum perceptual to the deduction of royalties, by the exploration of trademarks and patents, of technical, scientific, administrative or similar, amortization, considered the types of production, according to the grade of essentiality. Decree nº. 55. 762/65: Regulates the law nº. 4. 131/62 Law nº. 8. 661/93: Dispose about tax incentives to the technological capacity of the industry and farming and other providences.

11. Royalties Taxation: Important Aspects § According to the law nº. 4. 131/62, royalties are considered profits by the exploitation of patents, trademarks and service marks for technical, scientific, administrative or similar assistance and they are taxed according to the Article 43 of the above- mentioned law. § The due amounts as royalties, can be deducted from the declaration of income tax at a maximum limit of 5% (five per cent) of the gross profit of the product manufactured or sold, according to Article 12 of the law; § Such royalties remittances are not allowed between the subsidiary company established in Brazil and it’s headquarters in another country when the majority of the company’s capital belongs to the recipients of the royalties. (Art. 14);

11. Royalties Income Tax Deductibility Decision 09/00 DEDUCTIBILITY OF EXPENSES WITH ROYALTIES AND TECHNICAL, SCIENTIFIC, ADMINISTRATIVE ASSISTANCE SIMILAR. OR They are deductible, the expenses with royalties and technical, scientific, administrative assistance or similar correspondent to the period of submission of approval of the registration process at the INPI of the respective contract. This period, therefore, retroact only until the date of the submission of the requirement of registration, not being allowed the tax reduction of such expenses when incurred in the period previous to this date. LEGAL DISPOSITIVE: Decree nº 3000, of March 26 th, 1999, art. 353, incise IV, “a”, art. 354, incise I e art. 355, § 3º and Legal Directive nº 76, of October 05 th, 1976

11. Royalties Income Tax Deductibility Directive nº. 436/58: 1º GROUP – PRIMARY INDUSTRY § Electric Energy and Distribution, Oil and Derivates, Transportation in urban trains, communication, cars, trucks, auto parts and pneumatic, chemical products, iron, steel and aluminum, electric material, marine construction: 5% 2º GROUP – TRANSFORMATION INDUSTRY/ESSENTIALS § Packing materials, food products, chemical products, pharmaceutical products, footwear, metal, cement, electrical material, equipment, rubber material = 2% to 4% § Hygiene and Personal Care Products = 2% § Other Industries of Transformation = 1%

11. Royalties Recent Jurisprudence § The 2 nd Specialized Court of Judges of the Federal Regional Tribunal – 2 nd Region upheld the INPI decision, limiting the sales net price of recordable CD´s (CD-R) to 5% the value of royalties that can be charged by Philips due to the exploitation of patents in Brazil. The national industries have escaped to pay royalties until 20%, which would turn the CDs more expensive in the country. § The Court of Judges also recognized the competency of INPI to analyze the values of royalties for the registering of technological transfer contracts. INPI lawsuit is protected by the Law of Industrial Property (9. 279/96) and in delegation to the competency of the Central Bank, which allows the evaluation by the INPI about the accomplishment of the Exchange legislation and foreign capital.

11. Royalties Recent Jurisprudence Pipeline §The 2 nd Specialized Court of Judges of the Federal Regional Tribunal decided to maintain by unanimity the understanding of the first instance about two requirements of pipeline patents by Monsanto. The patents, about related processes to transgenic were denied by INPI and the Justice agreed with the understanding of the Institute. §The pipeline was a mechanism created by the Industrial Property Law to protect chemical and pharmaceutical requirements which had already been deposited at INPI and could not generate patents, according to the legislation in force until 1996. By the new Law, these requirements were deposited again and would receive by the reminiscent term counting of the first requirement done abroad, limited to 20 years.

12. Foreign Investments and Infrastructure Projects § A foreign company may perform business activities in Brazil. § Art. 5 – Brazilian Federal Constitution: Both Brazilian and foreign persons/entities shall be equally treated. § There are some restrictions to foreign investments.

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments § § § § Health Care Navigation and Coasting Trade Journalism, Broadcasting, Sound and Image/Frontier Area Cable Television Broadcast Mining and Hydroelectric Cargo Road Transportation National Airline Companies Colonization and Rural Allotments in Frontier Area

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Health Care § Foreign companies can not have direct or indirect interests in companies pursuing activities in health care. §Exception: donations derived from international entities related to the United Nations, and those derived from entities of Technical, Financing and Lending Cooperation. §Legal Grounds: Art. 199, 3 rd paragraph – Brazilian Federal Constitution Art. 23 – Law n. 8. 080 /1990

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Navigation and Coasting Trade § Firm name: may be held only by Brazilian individual § Company: 51% of ownership interest shall be held by Brazilian individuals/entities § Administration: shall be exercised by Brazilian individuals or it shall be empowered with all management powers § Legal Grounds: Art. 178 – Brazilian Federal Constitution; EC n. 7/95 Art. 1, art. 2 , “a” and “b”- Executive Order n. 2. 784/1940 Law n. 9. 432/1997

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Journalism, Broadcasting, Sound and Image/Frontier Area • A minimum of 70% of ownership interests shall be directly or indirectly held by natural-born Brazilian individuals or individuals who were naturalized at least 10 years ago, which will manage the company. • 30% of ownership interest may be indirectly held by individuals naturalized as Brazilian citizens less than 10 years ago, by means of a Brazilian legal entity.

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Cable Television Broadcast § Shall be based in Brazil § 51% of voting capital shall be held by natural-born Brazilian individuals or individuals naturalized at least 10 years ago, or held by companies based in Brazil controlled by natural-born Brazilian individuals or individuals naturalized at least 10 years ago.

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Mining and Hydroelectric § The rights to explore mineral and hydroelectric resources may be granted by the State to Brazilian individuals; companies based and organized under the laws of Brazil; or companies with head offices and administration in Brazil.

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Cargo Road Transportation § Such activity may only be exercised by independent Brazilian carriers, or by companies based in Brazil. §At least 75% of the ownership interest shall be held by Brazilian individuals/companies.

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments National Airline Companies §The right to perform such activity will only be granted to companies based in Brazil. §At least 75% of the ownership interest shall be held by Brazilian individuals/companies.

12. Foreign Investments and Infrastructure Projects Restrictions to Foreign Investments Colonization and Rural Allotments in Frontier Area § At least 51% of the ownership interest shall be held by Brazilian individuals/companies

12. Foreign Investments and Infrastructure Projects • Transporte – Departamento Nacional de Infraestrutura de Transporte • http: //www. dnit. gov. br/institucional • http: //www. dnit. gov. br/licitacoes/minutas-de-edtais-padrao/editais-deobra/minutas-com-consorcio • http: //www. dnit. gov. br/licitacoes/minutas-de-edtais-padrao/editais-deobra/minutas-sem-consorcio • http: //www. dnit. gov. br/licitacoes/editais-da-sede • Infraero • http: //licitacao. infraero. gov. br/portal_licitacao/details/normas_cadastro_f ornecedores. jsp • http: //licitacao. infraero. gov. br/portal_licitacao/details/normas/NI_6. 01_D_LCT_ DOC_COMPLETO_13072007. pdf • http: //licitacao. infraero. gov. br/portal_licitacao/details/normas/RLCI. PDF

13. Environmental Licensing § Infrastructure projects that may cause environmental impacts, as defined by law: environmental licensing is mandatory. § It may be done by federal, state or municipal authorities. §Licensing process consists of 3 phases: §Issuance of Preliminary License; §Issuance of Installation License; and §Issuance of Operating License.

14. Bidding – Foreign Participation § Legal Grounds: Law n. 8. 666/1993 http: //www. planalto. gov. br/ccivil_03/Leis/L 8666 cons. htm § Equal treatment of Brazilian companies and foreign companies § International Bidding: §Payment in international currency § National Bidding: §Payment in national currency §Forms of participation: §Individually §Consortium

14. Bidding – Foreign Participation National Bidding § Requirements: §The company shall have a legal representative in Brazil, granted with powers to be served on behalf of the company, and to represent it in the administrative and judicial spheres. §The company shall prove its authorization to operate in Brazil. §The company shall prove the regularity of its incorporation and legal capacity. § Consortium: §A Brazilian company shall lead the consortium

14. Bidding – Foreign Participation Preference for National Products § Purchase and Hiring of IT Products and Services: The State shall give preference to those made and based on Brazilian technology. §Legal Grounds: Art. 3 , I - Law http: //www. planalto. gov. br/ccivil_03/Leis/L 8248. htm n. 8. 248/1991

15. Private Public Partnerships §Legal Grounds: Law n. 11. 079/2004 §http: //www. planalto. gov. br/ccivil_03/_ato 2004 -2006/2004/Lei/L 11079. htm Law n. 8987/1995 http: //www. planalto. gov. br/ccivil_03/Leis/L 8987 cons. htm Minimum value: R$ 20, 000. 00 §Contracting Period: 5 - 35 years §Form of Partnership: Concession Contract

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