Brazilian Guide to Foreign Investors. Summarized version

Transcription

1 Brazilian Guide to Foreign Investors Summarized version

2 Authors: Fabio Buccioli Scientific Coordinator Samantha Lopes Alvares Ellen Key Passini Mariana Conti Craveiro Guilherme José Braz de Oliveira Thiago Munhoz Agostinho Geraldo Rodrigues Filho External Advisors: Marcos Galileu Lorena Dutra Lenk Alves da Silva Julia Morassutti 2

3 Resume Fabio Buccioli Senior partner, having led Buccioli & Advogados Associados since A graduate of the University of Bologna, he has taken postgraduate courses in Corporate Law at the same institution and in International Trade Law and International Contracts at Turin s International University of European Studies. Fabio moved to Brazil in 1991, and his legal career in this country started with two years at a renowned international law firm in São Paulo. He was called to the bar in Brazil in 1997 following the ratification of his degree by the Law School of the University of São Paulo. Samantha Lopes Alvares A graduate of the Law School of the University of São Paulo in Master s degree in Civil Procedural Law in 2003 from the São Paulo s Catholic University and currently studying for her doctorate at the same University. Works in the civil and commercial litigation areas, and frames national and international contracts. Mariana Conti Craveiro A graduate of the Law Scholl of the University of São Paulo in Master s degree in Commercial Law in 2007 at the same University. Specialist in corporate law, she actively participated since an under-graduate in the academic activities of this area at the University of São Paulo and at Fundação Getúlio Vargas. At the latter, she was an assistant teacher on the post-graduate program lato sensu (GV Law) in 2002 and Her areas of expertise include incorporation of business associations, structuring of joint ventures, due diligence and reports, reorganization and general corporate law practice. Guilherme José Braz de Oliveira A graduate of the Law School of the University of São Paulo in 2002, and currently taking his master s degree in Civil Procedure Law at the same University. Works with administrative law, as well as the civil and commercial litigation areas, and frames national and international contracts. 3

4 Ellen Key Passini A graduate of the Mackenzie Presbyterian University Law School in Sao Paulo in 2002, having previously earned a degree in accounting science from the University of São Paulo in She completed a specialization in tax law at the Brazilian Institute of Tax Studies (IBET) in Works with tax consultation and foreign trade, with a focus on operations involving the Brazilian Central Bank. Thiago Munhoz Agostinho A graduate of the São Paulo s Catholic University Law School in Works with tax law and foreign trade with a focus on operations involving the Brazilian Central Bank. Geraldo Rodrigues Filho A graduate of the Law School of the University São Francisco in Works with preventative labor consultation and litigation. 4

5 External Advisors: Marcos Galileu Lorena Dutra A graduate of the Law School of the University of São Paulo in Master s degree in Business Administration at Fundação Getúlio Vargas and currently studying for his doctorate at the University of São Paulo. Works in the Brazilian Securities and Exchange Commission (CVM) and he is a member of the Court of Appeal of the Brazilian Financial System (composed of members of the Securities and Exchange Comission as well as of the Brazilian Central Bank). Lenk Alves da Silva A graduate of the Law School of the University São Judas in Works with preventative labor consultation and litigation. Julia Morassutti A graduate of the Law School of the University of São Paulo in Works with tax consulting. 5

6 INTRODUCTION: BRAZIL A SHORT PRESENTATION Brazil is the fifth biggest country in the world (with an extension of ,59 kilometers), after Russia, Canada, the United States and China. Besides that, Brazil is the fifth most populated nation in the world, with aproximately inhabitants. Considered the most important country in South America, Brazil has, as the official language, the Portuguese. Its capital is Brasilia and its most important cities are São Paulo, Rio de Janeiro, Salvador, Belo Horizonte, Fortaleza, Curitiba and Porto Alegre. Brazil is divided administratively in 26 states (Acre, Alagoas, Amapá, Amazonas, Bahia, Ceará,Espírito Santo, Goiás, Maranhão, Mato Grosso, Mato Grosso do Sul, Minas Gerais,Pará, Paraíba, Paraná, Pernambuco, Piauí, Rio de Janeiro, Rio Grande do Norte, Rio Grande do Sul, Rondônia, Roraima, Santa Catarina, São Paulo, Sergipe and Tocantins) and one Federal District. Geographically, the States and the Federal District are grouped according to their location, which form, in this way, the regions North, Northeast, Southeast, South and Central West. The national currency is Real, which abbreviation is R$. The medium rate for exchanging money (R$/EUR) is 2,70 reais for 1 euro, while comparing the real with the dollar the medium rate is 2,00 reais for each dollar. Regarding the Brazilian economy, there is an economic increasing estimate of 4,2% in 2008, according to the International Monetary Fund FMI. In 2006, the Brazilian commercial balance closed with an asset of 46,077 billions US dollars. The Brazilian Gross National Product (GNP) has been increasing, comparing the years 2006 and The 2006 inflation rate closed in 3,11%, and the interest annual rate, in 13,25%. The Brazilian Federal Constitution has been promulgated in 1988, establishing our country as a Federative Republic, which governmental system is the presidential one. The Brazilian Federative Republic is constituted as the indissoluble Union of the States, Towns and the Federal District. Our political system is based on the separation of powers, which are: Executive, Legislative and Judiciary at the spheres of the City, the State and the Union. In accordance to the separation of powers principle, each one (of the powers) has got specific attributions, besides being independent between each other. One of the Executive power s function, in the person of the President, for example, is to have the law accomplished, to conduct the country s economical politics, to promote the national interests, through the external relation. As Brazil had adopted the presidential regime, the President is, at the same time, the Government chief ( head Government) and the State chief (head State). The presidential 6

7 term is four years which is renewable only once. Therefore, the States Governors and the Cities Mayors are also considered as Executive s members. It is for the Legislative power to elaborate the laws, in the municipal sphere (Municipal Camera) in the State s one (Legislative Assembly), as well as in the Federal sphere (National Congress, composed by the Deputies Camera and by the Republic Senate). Competes to the National Congress to define the national legislation, to approve the Government financial law, to control the accounts and the Executive actions. The function of the Legislatives Assemblies is to elaborate and to vote the laws, concerning the State sphere. At last, the Municipals Cameras have the competence to defend the interests and to analyze the subject concerning to the City. The Judiciary power, in the context of the separation of powers, has, as the main function, to look for the law respect, reaching the justice and keeping in safe the individuals rights. Its structure is divided in a hierarchical way: it is divided in levels, which allow all decisions to be re-exanimated in each level. The maximum organ in the Judiciary Power is the Federal Supreme Court STF, whose function is to safeguard the Federal Constitution. It is composed by 11 members, all of them named by the President. The juridical system adopted in Brazil is the codified one, with the promulgation by the Federal, Municipal and State Government, respecting each other the competence sphere. The judiciary decisions are based on the faithful law application to the real fact. On the hypothesis of law omission, the judge can give the decision according to the uses, the general principals of law and analogy. On December/2004, after 12 years, the Judiciary Reform had been approved. Between the main innovations, we can mention: the adoption of the previous binding decision ( súmula vinculante ) and the creation of the National Counsel, which has to control the Judiciary power. The 1988 Brazilian Federal Constitution had also established the competence to legislate in the federal, state or municipal spheres, with aiming to avoiding conflicts between the organs, in the elaboration of the laws. Therefore, only the Federal Government can create laws concerning Civil, Commercial, Work, Criminal, Processual, Elective, Agrarian, Maritime, Aeronautic, Exchange, Credit Politics, Insurance, External Commerce, Mining, Nationality, Citizenship, Expropriation, Water, Energy, Informatics, telecommunication, Radio Diffusion, Monetary System rights, etc. However, there are some subjects that can also be treated by the State and Municipal Legislative Power, as: Tax, Financial, Security, Education law, etc. The Brazilian legislative system is generically organized in order to have the Federal Constitution as the highest normative of the system, that guarantees the citizen fundamental rights, besides establishes the administrative politics organization of the Brazilian Federal Republic, the tax system and defines the competences of the Powers. 7

8 The main legislative texts in Brazil are compiled in the codes that, sometimes, contains the specific legislation for each subject. Exemplifying this kind of normative, we can mention the following: Civil Code, Processual Civil Code, Penal Code, Processual Penal Code, National Tax Code and Labor Code. 8

9 S U M M A R Y 1. COMPANY LAW Introduction general aspects Different types of companies according to Brazilian law The limited liability company ( Ltda. ) Incorporation Registration Joint capital Transfer of quotas Company decision-making The observance and exemption of formalities with regard to meetings and assemblies Company administration Permanent Residence Fiscal Council Corporations ( S/A ) Incorporation The Company Statute Main features of Joint Stock Companies Other options for the foreign investor: Creation of a secondary head office (branch)/office The new bankruptcy law Operations The Purchase and Sale of Company TAX LAW Introduction an overview of the tax system Major Taxes Individual income tax The concept of residence Company Income Tax Income Tax for Brazilian companies IRPJ Social Contribution on Corporate Profits CSL Social Contributions PIS and COFINS Withholding Income Tax on international remittances Revenues in general Remittance of profits or dividends to non-residents Transfer of technology Treaties for the avoidance of double taxation Import and Export operations Import Tax (II) Tax on Manufactured Products Importation (IPI/Importation) Tax on the Circulation of Goods and Services (ICMS/Importation) Contributions PIS and COFINS Importation

10 Export Tax (IE) Taxes on Internal Operations Tax on the Circulation of Goods and Services (ICMS) Tax on Industrialized Goods (IPI) Services Tax (ISS) Tax on Financial Operations IOF Provisional Contribution on Financial Operations CPMF Tax Incentives and Special Customs Regimes Manaus Free Trade Zone (Zona Franca de Manaus) Western Amazon ( Amazônia Ocidental ) Temporary Admission Dry Ports Drawback FOREIGN CAPITAL IN BRAZIL Introduction Central Bank of Brazil Foreign Direct Investment Modalities of Foreign Direct Investment Financial Operations Cash Loans Financing Imports Compulsory fiscal register for individual and legal entities Registration of Legal Entities CNPJ Individual Taxpayers CPF Special customs control procedures Integrated System of Foreign Trade SISCOMEX Radar Exporters and Importers Register R.E.I Customs Clearance Import Declaration DI The Simplified Declaration of Imports DSI BRAZILIAN RESIDENCE VISA Introduction Investment made by a Foreign Companies Permanent Visa for an Natural Person Temporary Working Visa linked to employer obligations in terms of full employment status Temporary Visa not linked to obligations in terms of full employment status as in the case of Technology Transfer CIVIL LAW Contracts Introduction Contracts of purchase and sale Commercial Representative or Agency Contract Distribution Contract

11 5.5. Service Contract Franchising Contract Leasing Contract Administrative Contracts GUARANTEES Personal guarantees Real Guarantees CONSUMER LAW INDUSTRIAL PROPERTY Introduction The legal system and the protection of brand names Acquisition and transferal of trademark ownership Invention Patents, utility models and industrial design Granting and licensing the use of a patent International Transference of Technology: typology and contractual purpose Contracts involving non-patented technology Transference or supply of industrial technology Technical services Software Registration of name and website SYSTEM FOR THE SETTLEMENT OF DISPUTES The Judicial Procedure and the Structure of the Brazilian Jurisdiction Emergency measures: provisional proceedings and advance relief Methods of demanding compliance with an obligation Ratification and implementation of a foreign court decision Arbitration LABOR LAW Labor legislation in Brazil Labor contract Types of labor contracts International labor contract Basic rights arising from labor contracts Modalities for terminating a work contract Charges arising from work contract Collective workers rights Labour Courts Ministry of Work and Employment

12 ECONOMICS AND BUSINESS BUSINESS ENTERPRISES AND COMPANIES 1. COMPANY LAW 1.1. Introduction general aspects The regulation of companies according to Brazilian law has recently been modified by the new Civil Code which came into force in January 2003 and sets the general guidelines relating to the setting up and functioning of companies. Firstly, it should be clarified that Brazilian law does not allow the creation of singleperson limited companies once the concept of company, as set forth in the Civil Code, pre-supposes two or more persons coming together for the accomplishment of a common goal. Should the entrepreneur wish to do business on an individual basis, his responsibility would be regarded as unlimited. The same understanding applies to branches/headquarters of legal entities previously set up (see below). Another point of interest to foreigners investing in Brazil, is that it is not compulsory, as it is in other countries, to have a Brazilian partner. The capital may be entirely held by foreign partners Different types of companies according to Brazilian law The predominant types of companies in Brazil are those whose partners have limited liability over the company s debts, that is to say, LIMITED LIABILITY COMPANIES and JOINT STOCK COMPANIES. These companies are legal entities whose assets are independent from the ones of their quota or shareholders. The quota or shareholders would only be responsible for the company s debts in which the legal entity is disregarded The limited liability company ( Ltda. ) Limited liability companies ( Ltda. ) correspond to the most used type of Brazilian company operating within the Brazilian economy. With the advent of the New Civil 1 However, it should be observed that there are limits to foreign participation in specific sectors, such as mining, publishing houses, land purchases, particularly in border areas. 2 The disregarded of the legal entity occurs where a misuse of the legal entity has taken place by one of the company s partners or administrators, entitling the judge to rule that private assets should be used to settle any debts owed by the company. Although the law does permit its application in exceptional cases, to annul, for example, the effects of an illicit act, or to prevent confusion regarding equity between the company and its partners, Brazilian courts have adopted the disregard doctrine as common practice. 12

13 Code, the broad flexibility with which it was possible to draw up the Articles of Incorporation document has been appreciably reduced and replaced by more stringent regulation Incorporation Limited liability companies must be incorporated by a minimum of two partners, physical or legal entities, who require neither Brazilian citizenship nor residence Registration Only after the normal of registration of the Articles of incorporation document with the Commercial Registry/Board of Trade may a limited liability company take on the characteristics of this type, particularly with regard to the liability of its partners 3. The main points to be considered when drafting the Articles of Incorporation document are the following: The Company Name: the core business and the main activities to be developed by the company must be stated within its name; Object: there are specific rules limiting the presence of foreign investors in companies which carry out certain types of business activity, such as media, education, as we have previously noted. (footnote nº 1); Head Office: it is necessary to verify that the business location chosen for the company head office is compatible with the business activities that will be conducted there, in order to avoid disputes with government departments Joint capital Unlike that of other countries, Brazilian legislation does not require any subscription or minimum deposit of minimum joint capital in order to set up a limited liability company. The joint capital is divided into quotas. Each quotaholder subscribes the quotas according to the amount of investment to be made. Until each quotaholder has not paid up yet all the quotas he has subscribed, in case of company debts, he remains jointly responsible to the total capital value. After the quotaholder has already paid up all his own quotas, he is no longer responsible for company debts 4. The joint capital may be paid up with cash or assets within a period set forth in the Articles of Incorporation. There is no maximum period for paying the capital up, but the joint capital must be already totally paid up prior to any increases in capital. 3 Not until the registration of the Articles of Incorporation with the Board of Trade, will the company be considered legal, nor will its partners enjoy limited liability. 4 Please see Footnote nº 2, above. 13

14 Transfer of quotas The articles of incorporation must stipulate the procedure for the circulation of quotas, otherwise, the law sets forth that the partner shall be able to transfer his own shares to another partner or a third party without the consent of the remaining partners. The admission of a new partner may, however, in any event, be rejected by partners who hold at least a quarter of the joint capital. In this way, it is very common to regulate the transfer of quotas through the adoption of clauses which confer preemption and/or first offer or first refusal rights to all or one of the partners Company decision-making Decisions must be taken by the quotaholders at a Quotaholders Meeting or Assembly (the latter being mandatory for companies with more than 10 partners). An ordinary meeting or assembly must be held at least once a year, within the first four months after the end of the annual audit to approve the administration s financial statements. The law specifies a fixed number of deliberating quorums which may not be reduced. It should be noted that most of legal quorums are higher than the ordinary majority, with real controlling quotas being set at 75% of joint capital The observance and exemption of formalities with regard to meetings and assemblies With regards to the formalities involved in the convening, setting up and functioning of quotaholders meetings and/or assemblies, it should be pointed out that the meetings can be organized according to the Articles of Association, in such a way as to render them less formal, as opposed to assemblies, whose statutes are rather formal and detailed. However, should the quotaholders decide unanimously, and in writing, on a particular item, summoning of the aforementioned will not be necessary Company administration The ordinary administration of a company is normally carried out in accordance with the modalities set forth in the Articles of Association, in compliance with the following rules: 14

15 a) Only individual natural persons who are nationals or who hold permanent resident visa in Brazil can be nominated as managers of the company. In addition, the person must not have any restricting legal precedents 5 ; b) Partners (jointly or severally) or even third parties, if authorized by the association of articles can be nominated; c) The administration can be carried out either solely by one or by several managers; d) In the case of two or more managers, the representation of a company within third parties may be jointly or individually conducted. e) In case of several managers, it is also possible to provide a Board, a joint body to take on the position; f) As per the manager s term on the role, the articles of incorporation may provide either an established term or that the manager shall be on charge until its dismissal by the quotaholders. There is no legal provision for a maximum duration concerning this position. The manager is appointed by election of different quorums: if the manager is nominated on the Articles of Incorporation, 2/3 of the joint capital is required, whereas if the nomination is set forth in a separate statute, the absolute majority is required. The nomination of third parties as managers requires even a greater quorum and may be allowed by the quotaholders when drafting the Articles of Incorporation. While the managers are not personally liable for company obligations, they are nevertheless responsible before the company and third parties, jointly and unrestrictedly, for any acts that are in contravention to the law, in violation of the regulations as set forth in the Articles of Incorporation, as well as for all acts deemed an abuse of power Permanent Residence Irrespective of whether the administrator is a partner or not, the law requires, in either case that the elected person possess a residence permit prior to assuming the position Fiscal Council Partners are permitted by law to provide for a fiscal council on the Articles of Incorporation which may comprise 3 or more members and which may or may not function on a permanent basis. 5 Not having committed any crime which may prevent the person from conducting any commercial activity, nor charged with any contravention which may, albeit temporarily, prevent access to any positions in the public sector; or with bankruptcy, embezzlement, bribery, corruption, extortion, pilferage; or offences against the national finances, anti-trust regulations, consumer relations, public interest or property, for the duration of the effects of such charges. 15

16 1.4. Corporations ( S/A ) The Brazilian joint stock companies or corporations ( S/A s ) are governed by Law nº 6.404/76 and by its subsequent amendments (Laws nº s 9.457/97 and /2001). Generally speaking, the joint stock companies or corporations have as their main features: the division of share capital into shares; the possibility of offering its shares and other titles to the general public (on capital markets); the liability of the shareholder being limited to the face value of the subscribed or purchased shares. Joint stock companies are subdivided into listed corporations, whose shares are publicly traded on the stock market, and closely held companies which do not collect funds on the market Incorporation The law requires certain procedures for the incorporation of a joint stock company or corporation: (i) subscription by at least two persons of the entire allotted share capital; (ii) shareholders shall pay up at least 10% of the subscribed capital in cash (excepting in cases where the law requires a higher percentage such as, for example, financial institutions for which an initial share of 50% of share capital is required); (iii) the deposit of the initial minimum paid up capital in the Banco do Brasil or another financial institution authorized by the Brazilian Securities and Exchange Commission ( CVM ), an equivalent body to Italy s CONSOB or the SEC in the United States. The incorporation of a joint stock company may follow either of two procedures: a) a public incorporation: resourced by investors in the capital market. b) private incorporation: restricted to founding partners. Formalities and Procedure 1. Registration of the request for (not required) incorporation with the CVM: presentations of economic and financial feasibility studies concerning the Statute project and the document which will be presented to investors (prospectus); as a means of checking the formalities provided by the law. 2. The presence of a financial institution to act (not required) as intermediary in the operation. 3. Summons for the founding general 1. Deliberation by the founding 16

17 shareholders meeting, with the election of the first board members after the full subscription of the share capital. 4. The company statutes must be filed with the Commercial Registry and published in the Official Gazette and in a widely circulated newspaper. members convened at a general shareholders meeting, or via public notary and signed by all subscribers. 2. Registration of the minutes of the Shareholders Meeting and the company statute with the Commercial Registry and published in the Official Gazette and in a widely circulated newspaper The Company Statute The statute of a joint-stock company must indicate: a) Company Name; b) Registered Office; c) Duration; d) Business Purpose; e) Company capital and its division into shares; f) Rights conferred by each share class; g) Rules governing Annual General Meetings; h) Form of company management; i) Rules governing Fiscal Council; j) Fiscal year and destination of the profit; k) Rules governing the liquidation of the company Main features of Joint Stock Companies Share capital Share capital, stated in the company statute and denominated in the local currency country is subdivided into shares at face value Paying up the Shares The paying up of subscribed shares may be effected through cash payment or with assets, providing they possess the equivalent cash value, according to what the General Board Meeting that provided the subscription has decided on the matter. In the event that total share capital is paid up with assets, the law provides a special procedure in terms of assessing its value 6. If the capital is paid up with credits, the party responsible for its transfer to the company will be liable for its existence as well as for the solvency of the debtor, in such a way as to prevent fraud and preserve the full amount of the share capital. 6 The drawing up of a technical report by three specialists, or a specialized company, and the deliberation of the Board concerning the technical report. 17

18 Capital increase The share capital may be increased on condition that 3/4 of the said capital had previously been paid-up. The shareholders must agree upon an increase in the course of an Extraordinary Shareholders Meeting, deciding upon the amount of the increase and the criteria to be used in order to determine such an increase, in addition to the subsequent amendment to the company statute. These rules are not applied to companies subject to authorized capital system 7. The shareholder has the right to participate in each increase of capital in proportion to his/her share of total share capital, with the possibility of transferring this right to third parties. The increase of capital may be effected without any actual new inflow of resources into the company, for example, when emanating from a) conversion of company bonds; b) company profits or reserves; c) money owed to the shareholders by company Shares The share comprises the main security issued by a joint stock company and represents the shareholder s unit of participation in the share capital. Its property represents a series of rights and duties towards the issuing company. Shares may be classified in accordance with three distinct criteria: type, class and form. As regards type, shares may be: a) ordinary, conferring to the shareholders all the rights reserved by the law towards ordinary shareholders; or b) preferred, guaranteeing its shareholders a number of advantages, such as: (i) priority in terms of the distribution of dividends, and (ii) priority regarding the reimbursement of capital in the event of a company s liquidation. This type of share can be subject to a number of restrictions over shareholders rights, such as the right to vote (which may be restricted or non-existent). According to the law, share capital may not consist of more than 50% of non-voting preferential shares, or with restrictions of this right. The following can be said as regards types of shares: 7 According to this system, the by-law establishes a maximum capital value and until it is not reached, the Board of Directors is authorized to effect subsequent increases to the same value of the approved capital, without the need for further authorization from the Shareholders Assembly. 18

19 preferred shares may be subdivided into classes, according to statutes and a whole complexity of rights and restrictions which govern them; ordinary shares, on the other hand, are divided into different types only in the case of closely held companies. Such a division may be made on the basis of (i) their convertibility into preferential shares; (ii) possible demands for Brazilian nationality on the part of its holder; (iii) the granting of rights to vote separately for members of administrative bodies of company. In relation to form, shares maybe divided into nominative and book shares, in accordance with their modality of circulation: the transference of nominative shares may take place by means of a simple entry of this operation in the company register; considering that book shares are deposited with a financial institution, their circulation takes place through registering their operations with the institution in question, debiting the account of the seller and crediting that of the purchaser Other Instruments issued by Joint Stock Companies The Joint Stock Company, which intends to capitalize itself through recourse to the market may issue other securities as indicated in the chart below: Instrument Debentures Founder s Shares (without Value) Par Subscription Bonus Main characteristics Granting the holder a credit owed by the company in compliance with conditions stated on the certificate, should one exist, and in the deed of issuance. These may be converted into stock, in accordance with the conditions set forth in the deed. Debentures must possess a nominal value, even if the price of the issuance may be fixed at a higher or lower rate than the nominal value, depending on prevailing market conditions. These are negotiable instruments without par value which bear no relation to share capital and which give the bearers the right to possible future credit, which consists of profit sharing of the issuing company. Its conversion into shares may be determined by the company statutes. These are instruments which grant their bearers subscription rights to shares from the issuing company, based on a future increase in the capital of the company itself Shareholder agreements These are outlined in article 118 of the Law nº 6.404/76, which legally confer the characteristic of specific performance. The matters provided in such agreements are: (i) 19

20 purchase and sale of shares; (ii) the right of preference to purchase; (iii) the right to vote; and (iv) controlling powers, even though other issues may be regulated. For the above mentioned matters, not only will conditions laid out in the agreement be binding on the shareholders that had signed it, but also on the company itself Main rights and duties of shareholders Shareholder Rights: a) The right to profit-sharing; b) The right to company asset-sharing; c) The right to oversee the handling of company business; d) Pre-emptive rights over new share issues. Shareholder Duties: The main obligation of the shareholders is to pay up the shares, according to the terms established on the By-laws and by the General Shareholders Metting, effecting payment by the stipulated date, subject to the penalty of being considered in default. Furthermore, loyalty towards the company is incumbent upon shareholders. For example, the shareholder may not put his own interests before those of the company General Shareholders Meeting The Annual General Assembly ( AGM ) represents and brings together both those shareholders who have voting rights as well as those that do not. There are two types of meeting, whose distinction is based on the subjects to be discussed and decided upon: Ordinary Shareholders Meeting and the Extraordinary Shareholders Meeting. The law provides for a number of formalities to be adhered to in order to convene, arrange and hold shareholder meetings Ordinary Shareholders Meeting The holding of an Ordinary Shareholders Meeting is stipulated by law and must be held annually, in the four months following the end of the financial year, with the following agenda: (i) Examinations of management accounts, discussions and voting on financial statements; (ii) deliberation concerning the allocation of company profits and the distribution of dividends; (iii) election of board members and members of the Fiscal Council, if called for; (iv) approval of the company s financial statements. 20

21 Extraordinary General Meeting An Extraordinary Shareholders Meeting is held whenever the agenda concerns matters other than those tabled for the Ordinary Shareholders Meeting Administrative Bodies Brazilian law provides two systems of administration regarding joint stock companies: a) a direct system by means of which a Board of Directors with a minimum of 2 members is appointed at the Annual General Shareholders Meeting, or b) an indirect system, through which the General Shareholders Meeting appoints members of the Consultive Board, a non-executive body which, in its turn, appoints members of the Board of Directors whose duty will be to represent the company. This system is mandatory for all listed companies and for those falling into the category of authorized-capital companies. Regular administrative by-laws do not hold board members liable for those obligations undertaken in the company s name in the course of administrative tasks, except if these members wield their power excessively or violate a law or statute. Consultive Board - This should consist of at least 3 members, who must be shareholders, and who may be resident abroad, provided that they appoint a representative who is a legal resident in Brazil; - The statute may, in addition, provide for a representative, directly elected by the employees, to have a sit on the Board; - In the case of listed companies, the law requires the presence of a shareholder member: (i) appointed by shareholders with 15% of shares and voting rights; (ii) appointed by shareholders with a 10% of privileged shares and without voting rights, provided that a representative has not already been elected, by virtue of a statutory measure providing such a right. Board of Directors The main characteristics of a Board of Directors associated with Joint Stock Companies are as follows: - A structure of at least two members, shareholders or otherwise 8 ; - The requirement that its members should possess a permanent residence visa for Brazil. 8 It is possible for a third of the Board of Directors members to be elected to the position of director. 21

22 Fiscal Council The Fiscal Council, a supervisory body of the administration, must be provided in the company statute. However, it does not have to have permanent tenure and can be set up by the shareholders at any time which may be considered convenient. Its main characteristics are as follows: - A minimum of 3 and a maximum of 5 members, deputy members of equal number, whether shareholders or otherwise, who must be elected at the Annual General Shareholders Meeting. Eligibility Criteria: - Legal residence in Brazil; - A university degree or a previous position as company administrator, or member of an audit council for a minimum of 3 years; - The absence of any link with the company, with its employees and/or administrators Rules concerning Financial Statements Brazilian Law makes it incumbent upon companies to draw up at the end of each financial year a set of financial statements, which should clearly set forth the state of the company s total assets and demonstrate the variations in its performance during the same year. There are four types of financial statements provided for by the law: a) total balance sheet; b) statement of retained earnings and accumulated losses; c) income statement of the financial year; d) Statements of changes in the financial position. The balance sheet indicates assets and liabilities as well as the net equity of the company at the end of the financial year. Statements of retained earnings and accumulated losses indicate the profits that have been made and not distributed among the company s shareholders, or losses which have not been absorbed. The income statement for the financial year reveals the profit obtained by the company at the end of the financial year. Finally, the purpose of the statements of changes in the financial position is to show the flux of company assets, identifying the operations which generated them and the destination of the investment. It should be pointed out that the balance sheets shown by Brazilian companies must be in compliance Brazilian accountancy regulations, certain aspects of which differ from 22

23 the IFSR/IAS. However, these variations are not significant to the extent that it is possible to apply most of the tenets originating from these norms Other options for the foreign investor: Creation of a secondary head office (branch)/office The foreign investor may only operate in the Brazilian market through a representative office or through a branch company, on receiving government authorization. The operations of branch companies are subject to legal restrictions, being considered foreign companies operating directly in the Brazilian market. Although this option seems simpler because it does not require a partner in the business, the legal requirements in setting up such a company are far more bureaucratic when compared with that of a Limited Liability Company (Ltda.) or a Joint Stock Company (S/A). Furthermore, branch offices located in Brazil have no status as a legal entity, distinct from its foreign head office, and any problems which may arise in the future being passed on to the head office. For these as well as other reasons the alternative of operating through representative offices or branch companies is not commonly adopted The new bankruptcy law The new Brazilian bankruptcy law enacted on February, 9 th, (nº /05) resulted from a need to reform the previous law which dated back to 1.945, and which had been ineffective for a long time, removed from the economic context in which Brazil finds itself today. In practice, the previous system offered neither protection nor any type of guarantee to either suppliers or workers. Not even banks, which were always given the greatest legal guarantees, were able to recover their debts. The arrangement with creditors option ( concordata ) also proved to be inadequate, capable only of debt negotiation with suppliers and leaving to one side fiscal, labor and bank liabilities, which as a general rule, account for the greatest part of company costs. The new law was enacted with the express purpose of doing away with such irregularities. It represents the culmination of the combined efforts jurists, Brazilian and foreign lawyers, working under the supervision of the Central Bank of Brazil and with the support of the World Bank. One of the major changes brought about by the new law was the provision made for the extra-judicial recovery of failed businesses, by means of negotiations between the company and its creditors of a recovery plan whose objective was an economy of production units and job creation. If the plan is approved by a majority of creditors it 23

24 will be submitted to the Judiciary for a brief period before being approved and standardized, thereby altering the deadlines and circumstances of the debtor obligations. Another radical change came about through the possibility of stipulating priority payment of credits linked to a real guarantee, in order to contribute towards keeping open lines of credit and to the reduction of respective charges and interest payments. Currently, the summoning of creditors for negotiation does not imply an open declaration of company bankruptcy. Concerning foreign investors, there are two important aspects regarding the bankruptcy of a Brazilian company: In the case of Brazilian companies with the participation of a foreigner as partner and where liability is limited, the assets of the latter would be affected only in the event of bankruptcy fraud and/or disqualification of the legal entity; In the case of a Brazilian company where the creditor is a foreigner, the latter must be included in the judicial list of creditors to enable him or her to recover the debts from the company Operations The Purchase and Sale of Company General Aspects The purchase and sale of companies or company shares poses as an alternative to admitting a foreign investor and incorporating him/her with local partners. As a rule, the acquisition and sale of a company may be understood to mean: (i) the acquisition and sale of company shares, which may or may not represent the total share capital of a particular business, or (ii) the purchase and sale of a business, that is of particular assets of a legal entity, arranged to carry out a particular kind of corporate business. However, it is important to clarify that the hypothetical option of purchasing and selling a business is the most difficult to implement due to the strict regulations set forth in the provisions of the Civil Code concerning its use. For instance, the provision that the effectiveness of the property transfer depends on the payment of all the supplier s creditors, if there are insufficient assets to cover the liabilities. 24

25 The Acquisition Process Heads of Agreement document Bearing in mind the initial and generic information available, the purchaser interested in the acquisition of a particular company will proceed to the next phase of the procedure, which is the signature of a Heads of Agreement document with the seller. This document sets forth the general rules so that the negotiation process may be conducted without risk to either of the parties, such as confidentiality and exclusivity agreements, in addition to the level of involvement of the parties in the initial proposal. Once the heads of agreement has been signed, the parties may initiate the third phase of the process: the due diligence, by means of which the purchaser may obtain a clear picture of company s actual value through the verification of all the commercial practices adopted by the company, its impact on its assets, judicial claims against the target company, as well as those practices which will continue to put the life of the company at risk as carriers of possible hidden liabilities. In Brazil, the purchaser of a company takes over all the rights and obligations, especially where tax and labor rights are concerned. For this reason, the exact verification and fulfillment of procedures relating to accounting, tax and labor is the focus of background checks that need to be carried out Effects on the price and handling risks The outcome of due diligence, once it has been completed usually impacts on negotiation in terms of the price, and the handling of responsibilities relating to past events, which may lead to consequences after the acquisition has taken place. By way of providing for such liabilities it is a common business use to set aside an amount equal to part of the price which is deposited in an escrow account 9, or by means of a bank guarantee by the seller A Definitive Contract of Purchase and Sale Once the prices and conditions have been agreed upon, the parties will sign a definitive contract of purchase and sale of the company shares which will include all the negotiated aspects, particularly those agreements related to the handling of eventualities and hidden liabilities of the company The Closing of the deal In addition to the signing of the contract there are certain formalities which need to be carried out, according to Law before the deal can be concluded and for there to be an effective transference of shares to the purchasers. 9 A little-used institution in Brazil, due to absence of related legislation. 25

26 In the case of a Joint Stock Company (S/A) sellers and purchasers will have to sign the necessary terms relating to the transference of shares in the Registry book for the transference of registered shares, as well as registering the shares in the respective files in the same book. Where limited liability companies (Ltda.) are concerned it will be necessary to alter the articles of association, with the entrance of the purchaser into the company. The latter will then need to be registered with the Board of Trade to make it binding on third parties. 26

27 TAX SYSTEM 2.TAX LAW 2.1. Introduction an overview of the tax system For those interested in investing in Brazil, or simply becoming familiar with its legal system, a close look at certain aspects of Brazilian taxation is of prime importance, since only in this way can investors and researchers gain a general perspective of the kind of taxes levied on business operations conducted within the country. The legislative power and administration of taxation in Brazil are set out and divided between the Federal Government ( União ), States (including the Federal District) and Municipalities, each with its own power to create taxes and collect revenues. This authority is set forth in the Federal Constitution. Tax authority in Brazil is inherently linked to the principle of legality, meaning that no tax may be created, increased, reduced or abolished except by law. In this way, the entire tax system is set forth in the Federal Constitution, in the National Tax Code and in sundry legislation which includes ordinary laws, regulations, administrative acts and the remaining acts emanating from the competent powers. The administration and collection of taxes in the federal realm competes to the Federal Revenue Department (SRF). The duties of the SRF include planning, coordination, supervision, execution and control of the federal tax administration, as well as the collection of taxes. The States, the Federal District and the municipalities also possess departments responsible for managing the collection of taxes within their jurisdiction Major Taxes The Brazilian Tax System presents us with five types of taxes as follows: taxes, duties, a government surcharge on property tax specific to the improvement of infrastructure ( contribuições de melhoria ), social contributions and extraordinary taxation. We consider it is necessary to study only those taxes and special contributions, the reason being that it is these which are relevant to Businesses in Brazil. The principal forms of taxation in Brazil are the following: Federal Taxes: Income tax ( IR ); Import duty ( II ); Export tax ( IE ); 27

28 Tax on manufactured products ( IPI ); Taxes on financial transactions (credit operations, exchange and insurance and on operations involving bonds and securities IOF ); Territorial tax on rural property ( ITR ). State Taxes: Tax on circulation of goods and on services ( ICMS ); Estate and donation tax ( ITCMD ); Vehicle tax ( IPVA ). Municipal Taxes: Tax on services ( ISS ); Urban land tax ( IPTU ); Inter-vivos transfer tax (a tax on the transference of goods and property between living persons and relative rights ITBI ). Special Contributions: Social security contributions ( PIS/PASEP, COFINS, CSL ); Federal energy contribution ( CIDE ); Taxes on specific professional or economic activities 2.3. Individual income tax All private residents in Brazil, who have received revenues of any kind, are subject to Personal Income Tax IRPF. For this reason, special attention should be paid to the concept of residence, since this will determine how the tax in question will affect the taxpayer The concept of residence Resident status is a decisive factor in determining who is eligible for personal income tax. In fact, any individual entity who fits into this category will be taxed in the same way as any Brazilian, on his/her general earnings, and would be obliged to present an annual declaration of his/her earnings. As a rule, fiscal residence must be attributed to individual entities who have resided in Brazil for a period exceeding 183 days consecutively, or otherwise, over a twelvemonth period. For those entering in the country, with a permanent visa, to take up a post which might fit the description of employment or even those returning to the country permanently, the status of resident is given on arrival in Brazil. On the other hand, it is important to observe that while Brazil has adopted the principle of an universal tax income, the earnings obtained by the person resident abroad will be taxed in accordance with the rule which applies to those residing in Brazil. In this way, 28