By Robert Eugene DiPaolo
January 8, 2013
It’s been a while since I last wrote an article for www.gringoes.com and quite some time since I wrote my first. During this period a lot has changed in the world’s fifth largest country, both in terms of geographical area and population. In December 2011, Brazil surpassed the U.K. to become the world’s sixth largest economy. Unfortunately, other things have remained the same. When I wrote my first article in September 2006, Brazil ranked 121st out of 175 countries in the World Bank’s Doing Business rankings in terms of the ease of starting a business, and 115th in terms of doing business. Amazingly enough – or perhaps not – in the World Bank’s rankings for 2013, Brazil comes in at number 121st in terms of the ease of starting a business, albeit out of 185 countries rather than 175, and 130th in terms of doing business.
But, I’ve already gotten ahead of myself. What I’d like to do, given the various changes that have taken place in Brazil since I wrote my previous articles, was to provide you with a brief update about certain changes with respect to topics about which I’d previously written, in particular:
– Doing Business in Brazil; Forming a Brazilian Limitada
– Getting a Permanent” Investor Visa in Brazil
– Brazil’s Taxation of U.S. Limited Liability Companies as Tax Havens
And to provide an update about Brazil’s Emergence as a Global Economy and Investment Destination
Doing Business in Brazil; Forming a “Limitada” in Brazil
Brazil has remained a somewhat difficult place to form a new company and do business. However, the World Bank now estimates that it only takes 119 days, rather than 152, to start a business in Brazil, and 13 steps rather than 17, to form a company.
Of the variety of legal entities one can form in Brazil, the legal entity of choice remains the “limitada”. While Brazilian lawyers increasingly like to refer to limitadas as LLCs, it’s better to think of a limitada as a specific purpose partnership with limited liability for its partners, also known as “quotaholders”, of which there must be at least two. And it’s worth mentioning that despite the fact the law governing limitadas provides quotaholders with limited liability, the Brazilian tax and labor courts are known for piecing the corporate veil of limitadas to make sure that all the taxes and labor obligations are paid -even if by the quotaholders. As a result, foreign and many savvy Brazilian investors often choose to use foreign legal entities, such as U.S. LLCs, which actually do provide its members with limited liability, to act as partners of limitadas in order to add an extra layer of protection. However, the Brazilian government has seen the increased use of U.S. LLCs as partners of limitadas, in particular by savvy Brazilian investors and businesses, as a problem, as I discuss below.
Whenever the World Bank’s Doing Business rankings come out, Brazilians tend to get a bit defense. They will insist it does not take so many days to set up a company in Brazil. But, they’re thinking only in terms of Brazilians forming companies; not foreign investors. The process for foreign investors to open a company in Brazil remains cumbersome and entangled by numerous bureaucratic hurdles that drag out the process. These include that each foreign partner be represented by a Brazilian residing in Brazil or a non-Brazilian with permanent residence there, that the administrator of the limitada be a Brazilian living in Brazil or a non-Brazilian with permanent residence there, and that the company, in order to be formed, must have a commercial address suitable to the its proposed “corporate” purpose.
It’s also worth keeping in mind, that once you’ve established a limitada and obtained its tax ID, known as a CNPJ, the first order of business, even before you open a bank account, is to hire a Brazilian accounting firm. Why? Well, because taxation of companies, like many things in Brazil tends to be byzantine, bureaucratic and complicated and is based on the movement of money. As a result, Brazilian companies are required to file monthly and quarterly tax declarations with the tax authorities even if only to declare that the company had no money movements, and thus does not owe any taxes. Yes, you read that sentence correctly. And if such declarations are not filed when due, they will have to be filed later. This will mean hiring an accounting firm to file all the unfiled declarations that should have been filed since the company was established, and paying fines and interest thereon for not having done so. So, once your limitada has been established, do yourself a favor and hire an accountant.
Getting a Permanent Visa in Brazil
Since I wrote my article about getting an investor visa, Brazil’s Ministry of Labor has revised the requirements to do so. The Ministry of Labor has raised the minimum investment amount from U.S. $50,000 to R$ 150,000. It has shortened the length of the time before this type of “permanent” visa must be renewed from five years to three. In addition, the Ministry of Labor now requires investors to present a business plan for the company they are investing in, along with their visa application. The business plan, among other things, must include the number of new jobs the company plans to create for Brazilians during the initial visa period. While not specified in the law, the magic number of Brazilian employees a company needs to plan to hire with respect to each investor applying for a visa seems to be around three. Once approved by the Ministry of Labor, the applicant must finalize the bureaucratic process at a Brazilian consulate. This is not to suggest you should marry a Brazilian to obtain a permanent visa. That option has its own unique set of rules, as well as consequences, but that’s another article best left to those providing personal advice. That said, would be individual investors should be aware that getting an investor visa in Brazil is not as easy as it used to be.
Brazil’s Treatment of U.S. LLCs as Newest Tax Havens
Since I wrote that Brazil had published legislation which amended the country’s transfer pricing regulations and expanded the legal definition of countries with favored taxation, otherwise known as tax havens or fiscal paradises, Brazil’s tax authorities have indeed updated the country’s list of blacklisted jurisdictions with favored taxation to include not only Delaware LLCs, but all U.S. LLCs whose members are foreign persons not subject to U.S. taxation. This does not mean that Brazil has declared Delaware or any other U.S. state a tax haven! Rather it means all U.S. LLCs, regardless of where formed, will be taxed as if they were located in a tax haven if the LLC’s members are not subject to taxation in the U.S. There is some debate as to whether an LLC with one member that is not subject to U.S. taxation is sufficient to cause the Brazilian tax authorities to treat the LLC as if it were located in a tax haven, or if all its members must be foreign persons not subject to U.S. taxation. The law is a bit vague on this point. But it if an LLC has no members not subject to U.S. taxation the Brazilian tax authorities should not treat it as if it existed in a fiscal paradise. Interestingly enough, the law does not address other types of U.S. legal entities, such as limited partnerships, which could serve as an alternative legal structure to that of an LLC.
Brazil’s Emergence as a Global Economy and Investment Destination
Since the cover of The Economist’s November 14, 2009 edition declared “Brazil Takes Off”, devoting 14 pages to its Special Report on Latin America’s Biggest Success Story, some have begun to ask “Take off to where?”, while others have turned decided bearish. In the May/June 2012 issue of Foreign Affairs, Ruchir Sharma, head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management, in an essay entitled “Bearish on Brazil” summed it up like this “Until recently, there seemed plenty of reasons to be bullish on Brazil. Having posted record growth for a decade and weathered the financial crisis well, the country looked poised to become a global economic leader. But the would-be giant stands on feet of clay. The economy depends too much on high commodity prices, and as demand falls, so may Brazil.” Further, according to the Latin Globalization Index for 2012 published by the Latin Business Chronicle, Brazil, for the second consecutive year, continues to be the least globalized country in Latin America. Not good news for a country that was recently declared to have taken off, become the darling of the BRIC countries, and been touted as Latin America’s biggest success story.
The BM&FBovespa stock market index which climbed to 72,607 on November 1, 2010, fell below 53,000 in 2012, and recently has been trading in the 59,000 range, which is slightly above where it began this year. At the same time, the Brazilian Real, which had strengthen dramatically to a high of 1.53 Reais to 1.00 U.S. Dollar, has significantly weakened this year. The Real has been trading in the 2.00 Reais to 1.00 U.S. Dollar range for several months and looks likely to stay in that range for the near future. More dramatically, the interest rate set by the Brazilian Central Bank, which has historically been one of the highest in the world, has been cut from 12.5% in July 2011 to a current historic low of 7.25%, with promises or more cuts on the way. So much for getting high returns on money invested in Brazil. At the same time that the Brazilian Central Bank has been engaging in loosening the money supply to fuel economic growth, the cost of living in Brazil, including everything from dinning out to buying real estate, particularly in the cities of Rio de Janeiro and São Paulo, has climbed. So much so, that it’s now more expense to live in Rio and São Paulo than in New York City.
Looking Back; Looking Forward
Despite its economic slowdown, along with that of the rest of the world, Brazil’s unemployment rate remains below that of the U.S., even as large numbers of people who were once part of Brazil’s “informal economy” have moved into its “formal economy”, becoming registered employees and taxpayer for the first time. This has been accompanied by a rising middle class, the so called “C Class”, which has – for good or bad – proven to be voracious consumers, willing to take advantage of their recent access to credit to buy everything from consumer products, including, computers, iPods, iPhones and iPads to new cars, gigantic flat screen TVs and apartments to boot. As if I needed any further proof of this changing reality than the never ending stream of new cars on the roads of São Paulo, I made the mistake of going to EXTRA, a big box Brazilian retailer on what would have been the day after Thanksgiving in the U.S. Without knowing it, I’d stumbled into a “Black Friday” sale, as frantic as any I’ve had the misfortune of finding myself in, in the U.S. It was surreal. Customers were carting off everything from computers to flat screen TVs like, well like it was Black Friday, only without Thanksgiving the day before.
One of the many ironies of the rise of the middle class is the shortage of maids, something The Economist’s December 17, 2011 issue referred as “[Brazil’s] Servant Problem”. Apparently, some Brazilians, like their U.S. neighbors, will need to learn to iron their own clothes or learn to live with the “causal wrinkled look” of “wrinkle free”, “iron free” clothing that seems to have been adopted the U.S.
To wrap up, Brazil has its share of opportunities and risks. But, despite the difficulties of doing business in Brazil, with the 2014 World Cup and 2016 Olympics on the horizon, and its recent discovery of large offshore oil deposits, Brazil remains a country with vast potential and opportunity for those willing to navigate the hurdles of investing and doing business there. At the same time, it goes without saying, or at least it should, the Brazilian government needs to do more to make Brazil a more business friendly environment, by improving its infrastructure and educational system, and by modifying the laws and seemingly endless regulations that make doing business in Brazil difficult, not only for foreign investors, but for ordinary Brazilians as well.
DISCLOSURE: All information herein given is merely for elucidative purposes. It reflects current legislation, which can be modified in the future. In case of questions regarding a particular case/issue, always consult with your own attorney.
Robert Eugene DiPaolo is the founder and managing director of The Fidelis Group, a legal consultancy offering U.S. and Brazil legal capacity. Robert can be reached by email at firstname.lastname@example.org.
Previous articles by Robert:
Brazil’s Surprising Expansion of the Legal Definition of a Tax Haven
Getting a “Permanent” Visa in Brazil
Doing Business In Brazil: Part 5 – Acquisitions, Investments and Joint Ventures
Doing Business In Brazil: Part 4 – The Despachante
Doing Business In Brazil: Part 3 – Starting Your Business
Doing Business In Brazil: Part 2 – The Variety of Brazilian Companies
Doing Business In Brazil: Part 1“