How Foreign Companies Can Do Business in Brazil
One of the main questions faced by foreign companies interested in doing business in Brazil is how to structure their operations.
Although incorporating a local subsidiary may be the first alternative that comes to mind, holding equity in a Brazilian company is not the only way to do business in Brazil.
This article will present you different types of structures that may be used by foreign companies to enter or expand their activities in the Brazilian market.
Such structures include incorporating local subsidiaries, entering into commercial agreements with Brazilian companies, forming joint ventures with local players, acquiring existing businesses in Brazil and acting as a foreign company in the country.
These structures are not necessarily exclusive of one another and may be used concurrently depending on the particularities of the foreign company, its business and the local market.
Subsidiaries
Incorporating a Brazilian subsidiary allows a foreign company to conduct local operations through a separate legal entity incorporated under Brazilian law.
A subsidiary may be particularly suitable when the foreign company intends to build its own local operations, hire employees directly, enter into contracts with Brazilian customers and suppliers, hold assets or establish manufacturing, distribution or service facilities. It also allows the foreign investor to retain direct control over the Brazilian business rather than relying primarily on independent commercial partners.
As a rule, foreign companies may own 100% of a Brazilian subsidiary without a Brazilian equity partner, subject to restrictions applicable to certain sectors. A Brazilian limited liability company may have a foreign company as its sole equityholder.
The subsidiary has a legal identity distinct from its foreign parent. Although the corporate structure generally provides limited liability to its equityholders, this protection is subject to exceptions under Brazilian law. Maintaining a subsidiary also involves ongoing corporate, accounting and tax compliance obligations.
The most common forms of legal entities are the limited liability company (sociedade limitada) and the corporation (sociedade anônima). The choice depends on the ownership structure, governance and funding needs of the business.
A local subsidiary, even if controlled by a foreign company, is deemed a Brazilian company. Operating through a Brazilian company may make certain relationships easier and, in some cases, possible. For instance, public bids may prevent the participation of foreign companies.
For the incorporation process, see our A Step-by-Step Guide to Incorporate a Legal Entity in Brazil. For a comparison of the available legal forms, see Types of Companies in Brazil.
Commercial Agreements
A foreign company may do business with Brazilian clients and commercial partners without necessarily having to incorporate a legal entity in Brazil.
Commercial agreements can be used to secure business relationships in the country without the establishment of a local subsidiary.
Examples of such commercial agreements include supply agreements and intellectual property license agreements.
Supply Agreements
Supply agreements allow foreign companies to supply their products to local distributors, who will import and sell the products in the country.
The supply agreement would typically address matters such as: (i) commercial arrangements (term, prices, incoterms, warranties, supply and sales volumes, etc.); (ii) exclusivity; (iii) use of intellectual property (trademarks, know-how, etc.); (iv) particular details of the products and/or their use; and (v) applicable laws and election of venue for dispute resolution.
Depending on the type of products, the foreign company could supply products directly to end customers without a local distributor. This direct supply model would typically be more suitable for transactions involving end customers with larger and/or more sophisticated structures and who need significant quantities of the products – it requires the customer importing the products by itself or with the use of a trading company. Therefore, in this case, the foreign company exports the products directly to the end customer.
The direct supply may also apply to the rendering of services by the foreign company to Brazilian customers (assuming services would not be rendered in Brazil, but rather rendered from abroad – an export of services by the foreign company).
The direct supply of products and/or services may be strengthened by agency agreements with local agents, by which the agents would intermediate the sale of products and/or services by the foreign company to Brazilian customers. Certain intermediation relationships may be subject to Brazil’s commercial representation (representação comercial) rules, which protect sales representatives and may require termination indemnities in specified circumstances.
Intellectual Property License Agreements
In certain cases, the manufacture and/or export of products from foreign jurisdictions may be operationally and/or economically less efficient than manufacturing the products, in whole or in part, in Brazil.
In this context, allowing a local entity to use the foreign company’s intellectual property to manufacture and sell products locally may prove to be more viable than the foreign company manufacturing and supplying products to a distributor or the local market.
Such arrangement can be secured by an intellectual property license agreement, by which the foreign company would authorize a local partner to use certain intellectual property to manufacture and commercialize the products in Brazil.
This type of agreement would typically contain provisions on: (i) the description of the intellectual property being licensed and details on how the intellectual property may be used; (ii) commercial arrangements (term, royalties, warranties, sales volumes, etc.); (iii) exclusivity; (iv) surveillance of the manufacturing process by the foreign company; (v) applicable services to be rendered by the foreign company to the licensee in connection with the manufacture of the products; and (vi) applicable laws and election of venue for dispute resolution.
Joint Ventures
Combining forces with a local player may be a strategic move to conduct your activities in Brazil.
A joint venture may be particularly suitable when a foreign company seeks to combine its capital, technology or products with a local partner’s market knowledge, customer relationships, distribution network or operational infrastructure. It allows the parties to share investment and business risks while defining their respective decision-making rights and responsibilities through corporate or contractual arrangements.
A joint venture between a foreign company and a local entity may be structured by the formation of a joint venture vehicle or by a contractual arrangement.
For more information on this subject, please refer to our article Joint Ventures and Shareholders’ Agreements in Brazil: Key Insights for Foreign Investors.
Acquisitions
Acquiring an existing business in Brazil may be an efficient manner to begin or expand your activities in the country.
In addition to allowing the foreign company to begin its business journey in Brazil with an existing base of clients, suppliers, working force and assets (including real property, intellectual property, machinery, etc.), in certain cases the acquisition of an existing local company may also save valuable time that would otherwise be required to obtain governmental licenses, authorizations and permits, as well as to have facilities and offices ready to operate.
As usual in most mergers and acquisitions transactions, it is prudent to conduct a due diligence on the target company before closing any deals. Brazil has a complex legal system (especially with respect to taxes and its employee-protective labor laws), so it is highly recommended that applicable contingencies are mapped out and reflected in the transaction documents (especially in sections on representations and warranties, indemnification, price adjustments and holdbacks). For more information on the due diligence process in Brazil, please refer to our article Legal Due Diligence in Brazil: What Foreign Investors Should Review Before Investing in a Company.
In addition to a well-prepared share/quota purchase agreement, a strong shareholders/partners agreement is essential when the foreign company does not acquire 100% of the target company’s equity. Such agreement would typically contain provisions on corporate governance, transfer of equity (tag along and drag along rights, rights of first refusal, rights of first offer, call options and put options), non-compete and other relevant matters elected by the parties.
Certain transactions require prior approval from Brazil’s competition authority, the Conselho Administrativo de Defesa Econômica – CADE, before closing.
Branches
Article 1,134 of Law No. 10.406/2002 (the Brazilian Civil Code) allows foreign companies to operate in Brazil, subject to a formal authorization by the Government. This is a specific authorization, different from those applicable to foreign companies investing in local entities.
Despite it being possible for a foreign company to operate as such in Brazil, in practice the use of such structure is rare.
The fact that incorporating a Brazilian subsidiary is relatively simple (especially if compared to the process of obtaining from the Government an authorization to operate) acts as a deterrent for foreign companies seeking an authorization to operate as a foreign entity’s branch in Brazil.
Tax Implications
Each structure available for a foreign company doing business in Brazil will have its own tax implications. These include federal taxes on income, state taxes on the sale of goods (ICMS), municipal taxes on services (ISS) and a recently created dual value added tax on the sale of goods and services (CBS, replacing PIS/Cofins, and IBS, replacing ICMS/ISS, through a phased transition).
Brazil has a complex tax system and understanding and considering the taxes applicable to each corporate and contractual structure is key to determine the most efficient arrangement.
Comparison Chart
Below you will find a chart comparing the requirements of each business structure with respect to equity ownership in Brazil, relationship with local employees and facilities and relationship with Brazilian customers.
| Structure | Equity Ownership in a Brazilian Company | Local Employees and Facilities | Relationship with Brazilian Customers |
|---|---|---|---|
| Local Subsidiary | Yes | Employees and facilities kept by the subsidiary | Through the subsidiary |
| Commercial Agreements | No | Employees and facilities kept by local distributors, customers and agents | Direct Supply: Through the foreign company Supply Through a Distributor: Relationship maintained by the distributor IP License Agreement: Relationship maintained by the licensee |
| Joint Ventures | Yes (although a joint venture could be structured by means of a contractual arrangement between the foreign company and the local partner) | Employees and facilities kept by the JV entity and/or by the local partner | Through the JV entity and/or the local partner |
| Acquisitions | Yes | Employees and facilities kept by the acquired company | Through the acquired company |
| Branches | No | Employees and facilities kept by the branch | Through the foreign company authorized to operate in Brazil |
MMR – Mastrocola Marcondes Rocha Advogados has solid experience with assisting foreign clients with their business ventures in Brazil. Over the years, we have advised clients from several parts of the globe, designing and implementing different types of corporate and contractual structures customized to their particular needs, drafting and negotiating joint venture agreements, investment agreements, stock purchase agreements, shareholders agreements, supply agreements, intellectual property license agreements and all other applicable instruments and documents. Please reach out to us to understand how we may help you do business in Brazil.