When

doing business in Brazil

, it is in some cases advantageous to open a local branch as part of your home corporation. However, Brazilian law does not favor the opening of local branches by foreign companies. The approval procedure is often complex and anyone commencing should hold out for a considerable time.

The local branch of a foreign company is subject to Brazilian tax and accounting rules, without prejudice to those applicable by the company’s home jurisdiction. Think twice about opening a branch in Brazil, consider the advantages and disadvantages thoroughly. Most of the times it is more efficient to open a new, entirely Brazilian company (which requires enough paperwork already...).

In Brazil you can incorporate companies either as a limited liability company (Sociedade Limitada – Ltda.) or as a corporation (Sociedade por Ações – SA). Note that while both SA and Ltda provide limited liability to their shareholders or members, the notion of limited liability in Brazil does not necessarily carry the same significance as it does in the USA and Europe.

In those parts of the world the

liability of the shareholders

of a corporation and that of members of an LLC is limited to their capital contribution. In Brazil however, it is possible for the creditors of a company to pursue not only the shareholders or members, whose liability can exceed their capital contributions, but the managers and directors as well.

While in the USA state law governs the formation and operation of corporations, LLCs and other

legal entities, in Brazil

such entities are governed by federal law. However, while the laws governing legal entities in Brasil are uniform throughout the country, the registration process, as well as the length of time required to process the registration of a new company, can differ, and substantially so, from state to state. To give a rough idea, according to the World Bank, the easiest states in which to register a new company are Minas Gerais and Rio Grande do Sul. The most notoriously complicated are Sao Paulo, Ceara, and Maranhao.

Fortunately, certain states have begun to take measures to streamline the registration process. For instance, Minas Gerais has introduced a one-stop shop to reduce the number of procedures from 17 to 10. However, even in Minas Gerais each procedure can still require multiple documents and steps to be taken. As mentioned before: patience is the way to go when opening shop in Brazil…

Limited Liability Company

(Sociedade Limitada – Ltda.)

Legislation governing limited liability companies is included in the federal Civil Code. In Brazil the Limitada is the most basic legal person able to carry on business, while offering limited liability to its members (their liability is restricted to the actual disbursement of the amount of subscribed capital). To a large extent the Brazilian Ltda. is similar to US LLCs and the Ltd. models of various European countries.

Like an LLC it is a hybrid between a partnership and corporation, with its capital being divided into equity units referred to as quotas, which are registered rather than represented by a share certificate. Under Brazilian law the Ltda. is treated as a corporation concerning tax legislation. In order to establish a Ltda. a minimum of two member is required, which can be companies or private persons (either or not living in Brazil). In principle there is no seed capital required.

The memorandum of association (contrato social) must indicate the company´s main place of business (i.e. an address in Brazil) and the Ltda. should be managed by someone either Brazilian or by a foreigner officially residing in Brasil. Naturally, members of the Ltda. that meet this requirement can manage the company.

The construction of a Ltda. allows the members to structure allocation of profits any way they desire (default arrangement is based on their percentage interest in the capital). The regulations can be drawn up to meet the preferences of the members, for example special management controls and buy-out procedures. Naturally, for some acts such as the changing of the regulations of incorporation or the conversion of the Ltda. into a corporation (SA), certain percentages of member consents are required by law.

When the members are not the managers of the Ltda., the authority of the assigned manager is usually restricted in the regulations or in the appointment resolution. Various acts on behalf of the Ltda. are subject to prior written authorization of the members, like buying or selling goods exceeding a certain sum, buying or selling real estate, retaining and discharging audit services, filing for bankruptcy or reorganization procedures. Some management powers cannot be taken from the assigned manager though, like hiring staff and representation of the company before the authorities.

In principle the Ltda. is the simplest and cheapest way to establish a corporate presence in Brazil.

Business Corporation

(Sociedade Anônima – SA)

In order to establish a corporation in Brazil, a minimum number of two shareholders is required (their liability is curtailed by the actual payment for the shares subscribed ). The memorandum of association must indicate the company´s stated capital (either issued or authorized) and main place of business (i.e. an address in Brazil). Corporations are regulated under the provisions of the federal Corporation Law. This law requires corporations to keep record of their shareholders, bearer shares are not allowed.

The SA can be a public or close corporation. In both cases the initial shareholders must subscribe all the issued shares and pay - minimum paid-in capital – not less than 10% of their value. There are no minimum stated capital requirements, debt/equity restrictions or thin capitalization rules. Capital may be money or assets. Public issue of stock is subject to prior registration with the Brazilian Securities and Exchange Commission (CVM).

If the corporation has a net asset value of more than R$ 1,000,000 and more than twenty shareholders, it is required to publish its memorandum of association, financial report and the minutes of the board and shareholder meetings in the State Official Gazette (Diário Oficial do Estado) and in one local newspaper of its headquarters.

The memorandum of association may permit one or more types of shares and authorizes the conversion of one class of stock into another, although restricted by the provisions of the Corporation Law concerning the protection of shareholders’ basic rights and the one vote per share rule. Basic rights of a shareholder are earning dividends, distribution of net assets upon liquidation, inspection rights and preemptive rights.

The shares can thus be divided into certain types, with for instance several preferences, limitations and relative rights. These are to be confirmed in the memorandum of association. Preferences may apply to dividends, voting rights and liquidation. Nonvoting shares or shares with limited rights to vote are allowed, but the number is limited to half of the total of shares issued.

The Corporation Law requires that the SA is to be administered by its Officers (diretoria) or by the Officers in cooperation with the Board of Directors (conselho de administração). In Brazil having a Board of Directors is only mandatory for public-issue and authorized capital corporations.

The management of a SA should consist of at least two officers of Brazilian nationality or foreigners residing in Brasil. The number of officers must be stated in the memorandum of association. Their actual authority includes any express authority provided in the memorandum of association, approved by the shareholders or determined by a resolution of the Board of Directors.

The Corporation Law allows nonresident foreigners to serve on the Board of Directors, as long as the directors are shareholders. In order to live up to this statutory requirement, one share is assigned (with a buyback provision) to Officers elected for the Board as well as to individual directors.

The Board of Directors is granted among others the following authorities: overall policy decisions, selection and removal of officers, inspection of corporate books and records, calling shareholder meetings, recommending or approving contracts and deals, authorizing the sale of company fixed assets and retaining and dismissing of external audit.

If respecting regulations of the Corporation Law, it is thus possible to draft the memorandum of association in a manner so as to allow for the involvement of the Board of Directors in the day-to-day operation of the SA. However, representation of the company before third parties is statutorily restricted to the company Officers (in the manner prescribed in the memorandum of association).

The main advantages a SA is offering are the possibility of managing the local company (through the Officers) without establishing residence in Brazil and raising funds by issue of stock.

Both the Ltda. and the SA must comply with the following:

• Not less than two members/shareholders;
• Managers/Officers must be either Brazilian or residing foreigners;
• Nonresident members/shareholders must appoint an attorney in Brazil (in order to receive service of process) and enroll in the federal tax register (including the appointment of an attorney in fact to act before the Federal Revenue Service);
• Both legal entities are treated as companies with regard to Brazilian income tax purposes. (Note: unlike a U.S. or European corporation the distributions or dividends paid to shareholders and members are not taxed other than at entity-level. As you might imagine this taxation scheme leads to all sorts of creative tax planning.)
• Conversion procedures allow one type of entity to become another one (a Ltda. can become a SA or vice versa).

Steps to be taken in order to found a Ltda. or a SA:

1. Application for tax registration numbers of new company foreign members/ shareholders.
2. Drafting of Memorandum of Association and identifying company office(s) and address for principal place of business.
3. Filing of Memorandum of Association with the Registry of Companies (Junta Comercial).
4. Application for tax registration number (CNJP) of the new company.
5. Remittance of initial capital disbursement to new company bank account.
6. Registration of initial capital disbursement with the foreign Investment Registry of the Central Bank of Brazil.

Controlling the company:

In the 1950s and 1960s, foreign investors preferred fully-owned subsidiaries as vehicles for their investments in Brazil. Nowadays direct investment is often made in association with Brazilian companies or individuals. Here the relations between controlling and shareholders minority become a relevant topic.

From the perspective of the foreign investor, the most secure arrangement is to have the Brazilian company owned by a foreign entity (usually a SPC – ‘special purpose company’) with a place of business in a well-known jurisdiction (for instance USA state, UK or The Netherlands). By the way, full ownership can be at a maximum of 99%. Next, the Brazilian partner owns shares of this SPC. Now the relationship between the parties is arranged by the rules familiar to the foreign investor.

In fact, the Brazilian company is managed abroad and any disputes between the partners will be dealt with under the laws of the SPC’s jurisdiction. Nevertheless, a convenient construction like this is often only theory; there Brazilian businessmen and investors usually do not have a lot of overseas experience, they tend not to do business with foreign SPCs as partner for a joint venture in Brasil.

Consequently, the most common vehicle for strategic alliances between Brazilians and partners from abroad is a SPC incorporated in Brazil. In this situation the foreign partner obtains an equity stake in the Brazilian SPC and controlling the company is adjusted through voting and consent rules set in the memorandum of association and/or a shareholder agreement.

In such arrangements it is wise to pay special attention to statutory special quorum or voting necessities and rights, as the Corporation Law and the Civil Code (for Ltdas) permit several cases by a prescribed vote or approval of shareholders.