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Legal Aspects of Doing Business in Brazil

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  • When you considerhow to enter Brazil, what do you think about? What questions jump into your mind. I generally begin with asking why? Why should you enter Brazil?Is it because your competitor entered? Is it because an article in the WSJ said Brazil is the largest economy in Latin America and the 6th largest in the world. Did your largest customer enter Brazil? Is it because the middle class is growing at an explosive rate? Is it because your organization’s core competencies can be leveraged to do xyz? All of those could be great reasons, but the way you approach the information we are about to discuss, and the decisions you make will vary greatly based on the answer to that question.
  • -First elections under the new constitution were not held until 1989-several parties (over a dozen) are represented in Congress-Police in Bahia on strike – military in Salvador-Executive Decree authority-The Brazil Senate has 81 Seats (3 from each state), majority election, 8 year term-Lower House, Chamber of Deputies, 513 seats (proportional) 4 year term
  • -Executive Decree authority-Argentina Kirchner, import changes - Brazil changes while on boat
  • -New Zealand was 1st (2011)-Denmark was tied for 1st with New Zealand & Singapore (2010)-Scale is 10 – 1 , 10 is best-Somalia is worst, tied with North Korea
  • Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
  • Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
  • -SELIC rate is set by the COPOM, Monetary Policy Committee (link to current SELIC rate http://www.bcb.gov.br/?INTEREST) 2011 SELIC was 12.5%, began to cut, dropped to 7.25%, then raised 25bps April 2013-VIES, Brazilian Central Bank’s president right to set higher or lower rate than the current rate
  • -SELIC rate is set by the COPOM, Monetary Policy Committee (link to current SELIC rate http://www.bcb.gov.br/?INTEREST) 2011 SELIC was 12.5%, began to cut, dropped to 7.25%, then raised 25bps April 2013-VIES, Brazilian Central Bank’s president right to set higher or lower rate than the current rate
  • Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation
  • Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation http://www.google.com/finance?q=USDBRL&ei=-qaHUeiMKNCdqwGRWQ
  • -OECD, organization for economic co-operation & development (primarily wealthy countries, or the countries we traditionally think of as wealthy, with current EU crisis, as I’m sure Angela Merkel would argue, that is debatable-in 2000 these countries decided to quantify what children were learning in school (Program for International Student Assessment)-at the time of the initial studyonly ½ Brazilian children completed grade school and 3 out of 4 adults were functionally illiterate. -since enrolled in the study have shown solid gains-Brazil has set a goal to reach the OECD standard over the next decade -Dilma 75,000 scholarships-roughly 80 countries in current tests and Brazil ranks in the low 50s above the bottom 3rd (but not too far, 35 percentile)
  • Power Distance expresses the degree to which the less powerful members of a society accept and expect that power is distributed unequally. The fundamental issue here is how a society handles inequalities among people. People in societies exhibiting a large degree of power distance accept a hierarchical order in which everybody has a place and which needs no further justification. In societies with low power distance, people strive to equalize the distribution of power and demand justification for inequalities of power.Individualism v. Collectivism The high side of this dimension, called Individualism, can be defined as a preference for a loosely-knit social framework in which individuals are expected to take care of themselves and their immediate families only. Its opposite, Collectivism, represents a preference for a tightly-knit framework in society in which individuals can expect their relatives or members of a particular in-group to look after them in exchange for unquestioning loyalty. A society's position on this dimension is reflected in whether people’s self-image is defined in terms of “I” or “we.”Masculinity v. Femininity The masculinity side of this dimension represents a preference in society for achievement, heroism, assertiveness and material reward for success. Society at large is more competitive. Its opposite, femininity, stands for a preference for cooperation, modesty, caring for the weak and quality of life. Society at large is more consensus-oriented.Uncertainty Avoidance The uncertainty avoidance dimension expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity. The fundamental issue here is how a society deals with the fact that the future can never be known: should we try to control the future or just let it happen? Countries exhibiting strong UAI maintain rigid codes of belief and behavior and are intolerant of unorthodox behavior and ideas. Weak UAI societies maintain a more relaxed attitude in which practice counts more than principles.Long Term v. Short Term Orientation The long-term orientation dimension can be interpreted as dealing with society’s search for virtue. Societies with a short-term orientation generally have a strong concern with establishing the absolute Truth. They are normative in their thinking. They exhibit great respect for traditions, a relatively small propensity to save for the future, and a focus on achieving quick results. In societies with a long-term orientation, people believe that truth depends very much on situation, context and time. They show an ability to adapt traditions to changed conditions, a strong propensity to save and invest, thriftiness, and perseverance in achieving results.
  • -Mention World Bank EODB ranking for Brazil taxes. -Overall 2012 to 2013 ranking dropped from 128th to 130th-Paying taxes dropped from 154th to 156th. According to the 2013 WB study a medium sized business will need to devote 2,600 hours to the administrative burden of paying taxes (the average in Latin America is 367 hours, in OECD countries 176 hours, and in the US 175 hours) (these numbers come from a Price Waterhouse study – wholly domestic limited liability company with 60 employs that manufacturers and sells ceramic flower pots, no special tax regimes, no import / export.)http://www.doingbusiness.org/data/exploreeconomies/brazil/When you considerhow to enter Brazil, what do you think about? What questions jump into your mind. I generally begin with asking why? Why should you enter Brazil?Is it because your competitor entered? Is it because an article in the WSJ said Brazil is the largest economy in Latin America and the 6th largest in the world. Did your largest customer enter Brazil? Is it because the middle class is growing at an explosive rate? Is it because your organizations’ core competencies can be leveraged to do xyz? All of those could be great reasons, but the way you approach the information we are about to discuss, and the decisions you make will vary greatly based on the answer to that question.
  • -list of several available organizational structures, take a moment on this slide to discuss the importance of research, culture and selecting the right local partner. Mention that we will likely hear several stories related to this topic during the panel discussion later today. Provide a list of some research tools. Should you vertically integrate?Acquire or develop capabilities rather than enter a joint venture?Integrate some or all of the value chain?Transaction CostsIs the exchange subject to high threats of opportunism due to high transaction specific investments?Is the exchange subject to high threats of opportunism due to uncertainty and complexity?CapabilitiesDo you have valuable, rare and costly to imitate resources? Real OptionsTo retain flexibility: exchanges characterized by high levels of uncertainty should not be vertically integrated
  • -Mention World Bank EODB ranking for Brazil taxes. -Overall 2012 to 2013 ranking dropped from 128th to 130th-Paying taxes dropped from 154th to 156th. According to the 2013 WB study a medium sized business will need to devote 2,600 hours to the administrative burden of paying taxes (the average in Latin America is 367 hours, in OECD countries 176 hours, and in the US 175 hours) (these numbers come from a Price Waterhouse study – wholly domestic limited liability company with 60 employs that manufacturers and sells ceramic flower pots, no special tax regimes, no import / export.)http://www.doingbusiness.org/data/exploreeconomies/brazil/
  • -EIRELI is fairly new (January 2012), A Lei nº 12.441, de 201 and thelawsurrounding it, isnotyetclear.-Capital invesment must beequal to atleast100xminumumwage (apx US $31k)-must use EIRELIattheendofthename-The partnermayhaveonly 1 Eireli.
  • -you may decide that you need an actual legal presence in Brazil to execute your desired entry method. These are the most common structures employed by foreigners when creating a subsidiary for the purpose of importation. And, the LTDA is quite often the preferred tool.
  • -Judicial treatment must be granted to foreign & domestic capital under the same terms*Foreign Investment is prohibited in Nuclear energyHealth ServicesRural land, abutting international bordersPost office & telegraph servicesAirlines (except domestic routes)Foreign Investment is limited inFinancial ServicesMediaRural land in certain districts % threshold
  • A special LTDA now exists, that can be used with only one partner
  • -Tax impact of conversion should be considered.
  • A special LTDA now exists, that can be used with only one partner
  • *Foreign Investment is prohibited in Nuclear energyHealth ServicesRural land, abutting international bordersPost office & telegraph servicesAirlines (except domestic routes)Foreign Investment is limited inFinancial ServicesMediaRural land in certain districts % threshold
  • This is a very generic process, the way that you import will vary greatly based on your individual circumstances. If you decide it is best to register as an importer, then you will need to allocate time to navigate the that process. In Brazil: Siscomex registration, RADAR registration (ordinary or simple), licensing with various ministries (by product)Colombia: Chamber of Commerce registration, obtain tax registration, locate tariff sub-regimeTell Argentina Kirchner story
  • Some non-automatic, Brazilian environmental agency, used materials, restricted & tax benefits, RadarSimplified 150,000 import / 300,000 export from brazil every 6 monthsOrdinary real location, employees, volume of operation depends on investment
  • Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and services + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
  • Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and services + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
  • Also touch on specialty taxes Tax on donations (ITCD) – state tax, usually 3%, some apply a progressive rate from 3-8%Tax on Services (ISS)Contribuição de Intervenção no Domínio Econômico (CIDE)Tax on the transfer of technology – generally 10%Law n 10.168, 2000 Transfer Price considerations – Brazilian entity and affiliated foreign company OR Brazilian entity and unaffiliated foreign company in a Tax Haven (Article 24 of Law 9.340/96 country that does not tax income @ at least 20%3 MethodsCost Plus Method (CPL)Profit Margin is fixed, average production cost for identical or similar goods and services + 20% marginMethod of Comparative Independent Price (PIC) – OECD modelResale Price Method (PRL)Average resell price minus, taxes, commissions and profit margin used to be 60%, recent change to 20% (30% for chemical products, glass and glass products . . . )
  • -Venezuela signed membership agreement in 2006, not yet ratified
  • http://brazilportal.wordpress.com/2011/12/20/brazil-may-take-steps-to-prevent-excessive-gains-in-real-mantega-says/ http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11279http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11265
  • http://brazilportal.wordpress.com/2011/12/20/brazil-may-take-steps-to-prevent-excessive-gains-in-real-mantega-says/ http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11279http://www.desenvolvimento.gov.br/sitio/interna/noticia.php?area=2&noticia=11265What did Brazil adopt?On March 4, 2013 Brazil joined the United States by adopting the United Nations Convention on Contracts for the International Sale of Goods (“CISG”). The CISG is an international treaty designed to reduce the uncertainty that often exists when doing business in a foreign country. The treaty’s stated purpose is to promote the development of international trade through a system of uniform rules which govern contracts for the international sale of goods. In general, the CISG applies when the parties to the contract are located in different countries, and those countries have adopted the CISG. As of this writing, 79 countries including the United States and now Brazil have adopted the CISG.  Pros:Rather than juggling the domestic laws of both Brazil and the United States, with the CISG companies will now have a single uniform set of rules and regulations. This may enable your company to increase certainty, improve risk management and reduce transaction costs. Cons:In some transactions, your company may not want the CISG to apply. The CISG replaces a large portion of the Uniform Commercial Code (the foundation of U.S. law related to the sale of goods). The CISG incorporates concepts of traditional common law, but also civil law and socialist law. This unique combination leads to concepts that differ significantly from the UCC.  The CISG will automatically apply, unless your company takes specific actions.When Brazil’s adoption of the treaty enters into force on April 1, 2014, the CISG will automatically apply to govern international trade between U.S. and Brazilian companies. Companies (and lawyers) should understand that unless the companies include specific contractual language, the CISG will be the governing law for all commercial contracts for the sale of goods between the companies.  What 2 things should my company do today?Review all existing Agreements (contracts & purchase orders). If the other party’s place of business is in Brazil, then the CISG rules may soon apply to that agreement. Your company should evaluate each agreement, and determine whether it should opt-out of the CISG.  Incorporate CISG analysis in all future contracts. Create a process to evaluate future contracts to determine whether it is in your interest to opt-out of the CISG. Your company should include applicable contractual provisions in each agreement, to ensure the CISG is a resource, and not a lurking disaster.
  • -payroll tax break may be extended-payroll tax breaks will be partially offset by additional 1.5% tax companies will pay on sales
  • http://online.wsj.com/article/SB10001424052970204369404577207701246033194.html Roads/Railwayhttp://brazilportal.wordpress.com/2012/08/15/brazil-will-sell-licenses-for-66-billion-of-roads-and-rail/
  • Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
  • Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
  • Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz)
  • However, if the representative agreement contains clauses that restrict trade or competition then it must be registered with the Conselho Administrativo de Defesa Econômica (“CADE”).
  • Law No. 6,729/1979 amended by Law No. 8,132/1990Addresses the relationship between auto dealers and auto manufacturesLaw No. 7,646/1987Addresses the distribution of software products
  • http://riotimesonline.com/brazil-news/rio-politics/brazil-to-increase-2013-minimum-wage/#http://www.ft.com/cms/s/0/7c5b23d8-4392-11e1-adda-00144feab49a.html#axzz2QjO7WJWS January 2012 Overtime cellphone lawFemale employees are entitled to 120 – day paid maternity leave8 hours per day, 44 hours per week
  • Invest at least R$150,000, or An exception may be made if the investment is less than R$150,000.  1.      The old rules (from 2004) stated that the applicant must submit a plan for a business that creates at least 10 Brazilian jobs within 5 years.  Even with a plan the issuance of a visa was at the discretion of the National Immigration Council (NIC).  2.      The guidance under the new 2009 resolution simply states that the NIC may consider factors such as; the number of jobs created, the type of industry, the geographic location, and the type of production or technology contribution that the investment will provide (which is even more vague).
  • Invest at least R$150,000, or An exception may be made if the investment is less than R$150,000.  1.      The old rules (from 2004) stated that the applicant must submit a plan for a business that creates at least 10 Brazilian jobs within 5 years.  Even with a plan the issuance of a visa was at the discretion of the National Immigration Council (NIC).  2.      The guidance under the new 2009 resolution simply states that the NIC may consider factors such as; the number of jobs created, the type of industry, the geographic location, and the type of production or technology contribution that the investment will provide (which is even more vague).

Legal Aspects of Doing Business in Brazil Legal Aspects of Doing Business in Brazil Presentation Transcript

  • Entry Method Investment & Operations Agents, Distrib utors & Labor LEGAL ASPECTS OF DOING BUSINESS IN BRAZIL dwilsonjdmba dwilson@keglerbrown.com David M. Wilson, Esq.
  • Legal Aspects of Doing Business in Brazil Entry Method & Organizational Structure • Strategic considerations • Available structures and features Investment & Operations • Import process, tariffs, taxes & incentives • Regulatory changes and trends Agents, Distributor s and Labor • Agents & distributors • Labor considerations Entry Method Investment & Operations Agents, Distri butors and Labor
  • Entry Method & Organizational Structure  Strategic Considerations  Available Organizational & Entity Structures Entry Method Investment & Operations Agents, Distributors and Labor
  • Strategic Considerations Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk       P E S T The unit of measurement for political risk is STABILITY Stable Republic Since 1985 Multiple Peaceful Elections Democratic Constitution Functioning Executive, Legislative and Judicial Branches Multiple Party System Increasingly developed services: Fire, Police, EMS Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  Article 62 of 1988 Constitution grants the president    Under situations of extreme urgency The power to issue “provisional measures” medidas provisorias Force of law for 30 days  Then, made law by Congress or Invalid Oversight After Delegation   The unit of measurement for political risk is STABILITY Executive Decree Authority   P E S T Brazilian legislatures historically endow presidents with broad authority, then monitor case-by-case through amendments Reality   All Brazilian presidents have used for routine legislation – not simply extraordinary circumstances If Congress fails to consider within 30 days, presidents often reissue expired decrees Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  P E S T The unit of measurement for political risk is STABILITY Appropriation concerns  Brazil   Long history of privatization & recent commitments  1980s operating 250 institutions  1991 Federal Privatization Program (NPD) – 186 firms within 2 years Recent LatAm   Argentina  Nationalization of YPF – Spanish oil firm Repsol – April 2012  President Cristina Fernandez de Kirchner, the expropriation was aimed at “recovering sovereignty” over natural resources Bolivia  Nationalization of Transportadora de Electricidad, Spanish – May 2012 Entry Method Investment & Operations Agents, Distributors and Labor
  • Strategic Considerations P E S T The unit of measurement for political risk is STABILITY Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  Level of Corruption  Transparency International 2012 CPI index    The abuse of entrusted power for private gain Perception of corruption in public sector 2012  USA 19th of 176   Brazil 69rd of 176   89th percentile 60th percentile 1995 (year 1 of CPI)  USA: 15 of 41   Denmark 1st USA 19th Chile 20th Brazil 69th China Colombia 80th 94th India 94th Russia 133rd North Korea, So malia 174th 63rd percentile Brazil: 36 of 41  13th percentile Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations  P E S T Foreign Corrupt Practices Act 1977 (FCPA)  Two key provisions:  Prevention of bribery of (foreign) governmental officials  Anything of value to a foreign official  Duty to keep accurate financial books and records and have adequate internal controls to accurately reflect the transactions of the business  Does it apply to me?   Applies to US companies, citizens, foreign subsidiary, officer, director, employee, or agent of a US company or its foreign subsidiary, any stockholder acting on behalf of the company, foreign companies with US registered securities Scope and operation of FCPA not restricted to USA territorial boundaries Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations  P E S T Foreign Corrupt Practices Act 1977 (FCPA)  US has pursued 3.5 formal foreign bribery enforcement actions for every one action pursued by ALL other countries  Companies settle, pay fines and forfeit profits  2011 – Johnson & Johnson $70M, JGC $219M  Recent – Wal-Mart, Morgan Stanley, Avon  US Justice Dept. continues to focus on individuals  Guilty employees go to jail, pay fines and must make restitution  Average jail term is two years in federal prison, but range is very broad with one sentence up to 15 years Entry Method Investment & Operations Agents, Distributors and Labor
  • Strategic Considerations  P E S T Best practices  Financial controls  Monitoring process, legitimate vendor transactions, employee advances, petty cash, training  Contract review  Analyze all current and future contracts to ensure scope of services does not violate FCPA  Outsourcing bribery  Compliance program & culture  UK Bribery Act, compliance defense – NOT under FCPA  Broad definition of bribery, includes commercial bribery Entry Method Investment & Operations Agents, Distributors and Labor
  • Strategic Considerations  Increasing domestic demand  Growing Middle Class   Macro Trends Over 35 million Brazilians entered the middle class from 2003 to 2009  estimates predict an additional 20 million will climb the ladder by 2014 Per Capita GDP larger than China or India    Brazil China India $12,079 $6,076 $1,492 Brazil Chin a Source: IMF 2012    Rich Commodities Base – energy, mining, agribusiness  Largest Latin American economy 6th largest in the World  Developed financial markets Young workforce    P E S T    Brazil United States China 39.3% 30.5% 29.4% Competes with Australia as worlds largest exporter of iron ore Fertile Land: 1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef, poultry, soybeans and corn Recent oil field discovery 15bn to 70-100bn barrels   NPV of this discovery is apx $500bn, apx 20% of GDP Rainforest, hydro Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations P E S T 96% of Brazilian households have a television Population Millions 1U.S. 2Japan 3China 4Brazil 5India 6Russia 7Mexico 8Indonesia 9Philippines 10Pakistan 313 126 1348 197 1241 143 115 242 95 177 Source: UN World Population Prospects, IMF, 2011 Private Consumption US$ Trillions 10.7 3.6 2.6 1.3 0.9 0.9 0.7 0.4 0.2 0.2 Consumption Per Capita US' 000 34.2 28.1 1.9 6.8 0.8 6 5.8 1.8 1.7 1 Macro Trends 99% of Brazilian households have electric lighting Source: World Development Indicators, Haver, 2010 Mortgage debt 4.8% of GDP 9.7% in Mexico 89.4% in U.S. Source: Insights Global Macro Trends, KKR May 2012 Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations Meeting Date 174th 4/17/2013 173rd 3/6/2013 172nd 1/16/2013 171st 11/28/2012 170th 10/10/2012 169th 8/29/2012 168th 7/11/2012 167th 5/30/2012 166th 4/18/2012 Macro Trends SELIC Rate 7.50% 7.25% 7.25% 7.25% 7.25% 7.50% 8.00% 8.50% 9.00% P E S T Target SELIC Rate % 10 9 8 7 6 5 4 3 2 1 0 Source: Banco Central Do Brasil Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations 5/30/2012 166th 4/18/2012 Jun-12 167th Jun-11 7/11/2012 Jun-10 168th Jun-09 8/29/2012 Jun-08 169th Jun-07 10/10/2012 Jun-06 170th 50 45 40 35 30 25 20 15 10 5 0 Jun-05 11/28/2012 Jun-04 171st Target SELIC Rate % Jun-03 1/16/2013 Jun-02 172nd Jun-01 3/6/2013 Jun-00 173rd 7.50% 7.25% 7.25% 7.25% 7.25% 7.50% 8.00% 8.50% 9.00% Jun-99 4/17/2013 Jun-98 174th Macro Trends SELIC Rate Jun-97 Date Jun-96 Meeting P E S T Source: Banco Central Do Brasil Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations Entry Method P E S T Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations  P E S T Currency Risk  Transaction exposure – commitment to make payment at future date  Solutions:     Translation exposure – accounting based changes in consolidated FS   Taking the value on 1 day and reporting on your statements Solutions:   Forward Contracts Risk Sharing Agreements Foreign Currency Options Swap (assets, debts, and/or liabilities with someone else, e.g., a bank or another company) Economic exposure – non zero changes in expected cash flows due to changes in currency (real not just nominal)  Solutions:  Diversification Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations  P E S T Education  Past (2000) - ½ Brazilian students graduated grade school - 3 out of 4 adults were functionally illiterate  Present -Goal to reach OECD standard over next decade -Science Without Borders - 75,000 scholarships to attend world’s top universities (only 9,000 a few months ago) -SENAI, SENAC -Bolsa Escola/Bolsa Familia OECD Programme for International Student Assessment (PISA) Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations P E S T “Culture eats strategy for breakfast” – Oded Shenkar Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations P E S T 90 80 70 60 50 Brazil 40 Latin America 30 20 10 0 100 90 80 70 60 50 40 30 20 10 0 PDI IDV MAS UAI  Geert Hofstede’s Cultural Dimensions  US  Brazil  Latin America    PDI IDV MAS Power Distance Individualism Masculinity Uncertainty Avoidance Long-Term Orientation www.geert-hofstede.com UAI Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior  How substantive is the stakeholder? How intense is the threat? Stakeholders   P E S T Shareholders, NGOs, Interest Groups, Consumers, Local Communities. . . Factors     Cultural Norms, Languages Demographics GINI index (inequality of income) Ethnic Conflict Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior  P E S T How substantive is the stakeholder? How intense is the threat? Solutions  Decouple your brands / products   Partner with NGOs   Charge premium on specific brands for CSR projects, not all consumers Reputational benefit, they understand the industry and may help keep you up to date with shifts in pressure Admit Wrongs  People are more likely to believe your CSR reports when you tell them what you are doing wrong (and how you are addressing it) Entry Method Investment & Operations Agents, Distri butors and Labor
  • Strategic Considerations  P E S T Technological  Infrastructure  Government Incentives  Intellectual Property Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features May require a subsidiary holding company presence Direct Sale from U.S. -Freight Forwarder -Trading Company Non-Equity Alliance -License -Agent -Distributor -Franchise -Joint venture Equity Alliance -Joint venture -Joint company Entry Method Wholly Owned Subsidiary -M&A -Greenfield -Brownfield Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features  Joint Venture May be created with or without a full joint company  Low cost entry and exit to new markets, industries and industry segments  Opportunity for learning  Provides a “contractual” framework for operations without generating many issues associated with an agency relationship  Enables each party to take full responsibility for its contribution to the venture while minimizing the issues associated with exclusivity  Enables low cost entry and exit   May later evolve into full equity alliance Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features  Issues to consider  Restrictions on foreign ownership?  Requirement of foreign partner?  Minimum or maximum capital requirements?  Partner liability limited to capital contributions?  Maintenance costs?  Product liability?  Intellectual property protection? Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Empresa Individual de Responsabilidade Limitada (EIRELI)*  Sociedade Limitada (LTDA)  Sociedade Anônima (SA)  Sociedade Simples  Sociedade em Nome Coletivo  Sociedade em Comandita Simples  Sociedade em Comandita por ações  Sociedade em Comum  Sociedade em conta de Participação  Associações  Fundações  Cooperativas  Consórcio  Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Sociedade Limitada (LTDA) Similar to U.S. LLC Sociedade Anônima (SA) Similar to U.S. corporation Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Sociedade Limitada (LTDA) & Sociedade Anônima (SA) Common Features -Normally, no restrictions on foreign ownership* -Normally, no minimum or maximum capital requirements* -Partner and parent company liability generally limited to capital contributions -Corporate veil may be pierced (Article 50, Brazilian Civil Code 2002 Requires a deviation of purpose or commingling of assets, not mere insolvency - intent is also considered ) Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Sociedade Limitada (LTDA) -Formal requirements -Must have 2 partners (person or entity) -Partners are not required to be Brazilian -Each partner receives quotas representing their interest in the LTDA -Must be managed by an individual residing in Brazil (may be a Brazilian citizen, or a foreign citizen with the proper documentation) Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Sociedade Limitada (LTDA) -Simple to form and operate -Liability limited to partner’s quotas -Quotas may be freely transferred in accordance with the articles of association -Quotas may NOT be traded publically -No obligation to publish annual financial statements -Lower maintenance costs -May be converted into a corporation (SA)* Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Sociedade Limitada (LTDA) -Pursuant to C.F.R. §301.7701-3(b)(2)(B) U.S. tax law treats a Limitada as an association -The Limitada may elect to be taxed under U.S. law as a partnership or a corporation which will determine how the U.S. owner(s) will be taxed on any income derived from the Limitada -The tax consequences of a change in classification, need to be studied Entry Method Investment & Operations Agents, Distri butors and Labor
  • Available Structures & Features Sociedade Anônima (SA) -May issue securities, debentures and may be publically held -Higher maintenance costs -More formal requirements -Generally preferred for ventures comprised of a large number of different shareholder groups Entry Method Investment & Operations Agents, Distri butors and Labor
  • Investment and Operations in Brazil  Import Process, Tariffs, Taxes & Incentives  Regulatory Changes & Trends “If you’re honest and want to comply with the tax code, you need an accountant and a tax lawyer for life” -The Economist, September 24, 2011 quoting a São Paulo based economist Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives General Import Process & Timeline Importing a container of goods to Brazil requires 8 documents, takes 17 days and costs $2,275 Baseline: -medium size business -ship to economy’s largest business city -private, LLC -non hazardous goods -dry cargo, 20-foot full container -Document Preparation (8 days) -Customs clearance and technical control (4 days) -Ports and terminal handling (3 days) -Inland transportation and handling (2 days) Importing a container of goods to India requires 11 documents, takes 20 days and costs $1,200 24 Days 17 Days Importing a container of goods to China requires 5 documents, takes 24 days and costs $615 20 Days -Document Preparation (15 days) -Customs clearance and technical control (4 days) -Ports and terminal handling (3 days) -Inland transportation and handling (2 days) -Document Preparation (8 days) -Customs clearance and technical control (4 days) -Ports and terminal handling (5 days) -Inland transportation and handling (3 days) * All US exports are also subject to US export controls * Source: World Bank, Doing Business 2013 Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives  Import Export Process  Register with the governmental registration system    Obtain import license, if required    Secretary of Foreign Trade SECEX, SISCOMEX system Subject to significant variability Automatic Non-Automatic (process may take several months)  ANVISA, IBAMA, MAPA, DECEX, CNEN, ANP, ANEEL, DPF, COMEX, MCT . . . Radar   Simplified Ordinary Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives II-Import Duty 0-35% varies based on product & Country of origin (NCM, HS) Associated Taxes & Duties IPI-Industrial Product Tax Import Duty 20% avg VAT 0-35% 12% avg Import Duty 6% 16% 0-5% raw materials, 20% finished consumer goods, 35% autos and luxury items VAT 19% Varies based on product (CNM) up to 300% tobacco PIS-Social Integration Program Contribution 1.65% COFINS-Social Security Financing Contribution 7.6% ICMS-State Tax 7-25%* SP 18% *Current legislation & recent Supreme Court decisions may impact the applicable ICMS rate. Entry Method Investment & Operations Agents, Distributors and Labor
  • Import Process, Tariffs, Taxes & Incentives Brazil: 2,600 LatAm: 367 OECD: 176 Additional Tax Considerations Baseline: -medium size business -taxes & mandatory contributions are measured at all levels of government -a range of standard deductions & exemptions is also factored On average, firms make 9 tax payments per year and spend 2600 hours per year filing, preparing and paying taxes Corporate Tax On average, firms make 9 tax payments per year and spend 203 hours per year filing, preparing and paying taxes On average, firms make 9 tax payments per year and spend 291 hours per year filing, preparing and paying taxes 15% Corporate Tax 33% Corporate Tax 20% Yes Transfer Price Considerations Yes Transfer Price Considerations Yes Plus 10% on taxable income over R$240,000 -may choose deemed profit system if under threshold Transfer Price Considerations Source: World Bank, Doing Business 2012 Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives Recent Tax Changes General April 2012 – Brazilian government granted a series of important benefits to enhance economic activity -Payroll tax exemption in certain sectors: IT, pharmaceutical, hotels, chemicals, plastics, textiles, automotiv e, metallurgy, electronics, consumer goods -Automotive industry companies that invest in technological innovation may now use a presumed credit of the excise tax -Deductions from Corporate Income Tax IRPJ for donations to institutions that fight cancer Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives Recent Tax Changes Transfer Price April 2012 – Brazilian government granted a series of important benefits to enhance economic activity Three Methods 1. Cost Plus Method (CPL) 2. Method of Comparative Independent Price (PIC) 3. Resale Price Minus Profit Method (PRL) Margin DECREASE 60% to 20% CHANGES: 1. PRL Margin decreased from 60% to 20% 30% for chemical products, glass products, cellulose, paper, metallurgy 40% for petroleum, specific machinery & equipment 2. Standardization of calculation rules, regardless of whether value is added in Brazil freight & Ins now excluded from calculation Entry Method Investment & Operations Agents, Distributors and Labor
  • Import Process, Tariffs, Taxes & Incentives Ex-tarifário Program If no similar good is produced domestically, an importer may qualify for reduced or eliminated tariffs  Tariff reductions generally reduce the applicable tariff from 16% to 0-2%, II and may also reduce IPI  Resolução CAMEX 35/2006 The importer must file for the Ex-tarifário  A certificate or statement from the appropriate body, technical reports, public consultation among other things may be considered to determine the existence of a similar domestic good  Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives Ex-tarifário Program Even if a domestic good performs a similar function, an importer may qualify for the program if:    Higher quality product or service Higher productivity of equipment (may consider part of an integrated system that increases overall productivity) Increased efficiency     Supplies required Consumption of energy or raw materials Reduced delivery time Other specific performance factors may be considered depending on product Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives  Free Trade     Manaus Free Trade Zone - ZFM Western Amazon - AO Free Trade Areas - ALC General Process      Cert of importer eligibility on the SISCOMEX Classification of imported goods HS / NCM Submit Invoice Register Transaction on SISCOMEX Import Licenses IRPJ reduced 75% until 2013 ICMS credit to importer II/IPI 0% or 88% reduction PIS/COFINS reduced Entry Method Investment & Operations Agents, Distributors and Labor
  • Import Process, Tariffs, Taxes & Incentives  Growth Acceleration Program (PAC)     Launched by govt in 2007 to promote large scale projects R$ 604B planned expenditures   Key PAC Projects     Infrastructure R$ 504B Science & Tech R$ 35B Security R$ 6.7B Health Care R$ 4B Espírito Santo (primary port Vitória)  law # 2508 FUNDAP program, State bank provides 0% financing for ICMS payments Regions  Northeast     Bahia, Ceará and Pernambuco ICMS reduction IRPJ reduction 25-75% Industries, Ports, Infrastructure   Porto Maravilha, Rio, Porto do Açu, Rio Belo Monte dam Entry Method Investment & Operations Agents, Distri butors and Labor
  • Import Process, Tariffs, Taxes & Incentives  MERCOSUL Member Countries Brazil Argentina Uruguay Paraguay   Bolivia Chile Columbia Ecuador Peru Observer of Agreement Applied Venezuela Not yet ratified by Paraguay Free from import duty with certificate of origin Exceptions to Common External Tariff (CET)  Brazil is permitted 93 exceptions to the CET  June, 2009 the trade minister raised several import duty rates:  August, 2009 MERCOSUL members approved tariff increases on hundreds of products within the CET  Primarily dairy, textiles, bags, backpacks, suitcases up to the bound level, apx 31.4% Associate Member Mexico southern common market  Mexico / Brazil revised auto tariff structure  Decision No. 39/11 of the Mercosul Common Market Council permits and outlines procedures for the countries to negotiate these topics Entry Method Investment & Operations Agents, Distri butors and Labor
  • Getting Paid  Collection  Civil law system generally favors the debtor – NOT creditor   in Brazil Dual registration system for statutory lien (Alienação Fiduciária)  Registry of Deeds and Documents  Real State Registry Best Practices  Collateral  Pledge equipment being sold & statutory lien Entry Method Investment & Operations Agents, Distributors and Labor
  • Regulatory Changes & Trends  Recent Regulatory Changes  July, 2011   August, 2011   1% tax on foreign derivatives, Real reached 12 year high of 1.529 per dollar Three prong plan to continue to spur economic growth – Payroll tax exemptions, Subsidized loans, Govt preference of 25% September, 2011  30% Increase in industrial product tax on cars (37-55%) – Decree No. 7.567/2011  Exempt if 65% domestic parts (Brazil, Mexico or Mercosul country)  Oct 6, 2011 Renault SA announced plans to increase its Brazilian production capacity by 100,000 vehicles  Brazil will be the companies 2nd largest market after France  Expects sales of 3 million vehicles annually by 2013 with 25% from Brazil October 10, 2011 Chinese auto maker JAC announced it would build a factory in Brazil – output set to begin in 2014 January, 2012  Ministry of Development, Industry & Foreign Trade (MDIC) reduced IPI on 18 automakers by 30% until December 2012 The IPI, industrial products tax, is levied on passenger cars, light commercial vehicles and trucks produced in Brazil, Mercosul and Mexico   Entry Method Investment & Operations Agents, Distributors and Labor
  • Regulatory Changes & Trends  Recent Regulatory Changes  January, 2012   February, 2012   Multi-prong tax package, reduced IRPJ, IPI, PIS/COFINS, payroll tax, change to transfer price rules May, 2012   6% IOF tax (financial transactions tax) on foreign loans with maturities of up to five years April, 2012   Trade ministry team to publish list of products the govt may levy higher import taxes, list will be valid until December 2014 March, 2012   95% reduction on IPI for iPads manufactured in Brazil Pension Reform Bill – limits government payments to retired public workers March 2013  Brazil adopted the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) Entry Method Investment & Operations Agents, Distri butors and Labor
  • Regulatory Changes & Trends  A Bigger Brazil:  US$ 16 Billion in tax breaks (over 2 years)  Eliminate  Buy 3 prong plan to continue to spur economic growth payroll taxes for labor intensive industries Brazil Initiative  Allows government agencies to pay up to 25% more for locally produced products than similar foreign goods  Particularly when purchasing for defense, health, or high tech communications equipment  Subsidized Loan Programs Entry Method Investment & Operations Agents, Distributors and Labor
  • Regulatory Changes & Trends  Privatization  Airport operating rights - Auction method, public private partnership  2011   São Gonçalo do Amarante Airport, Natal – R$ 170 million (3x reserve) 2012    São Paulo Guarulhos – R$16.2 B (12.9B expected) Brasilia – R$4.5B Campinas – R$3.8B  Oilfield Rights  Roads and Railways   2012 (announced in August) R$133B investment over 30 years to boost growth Government will sell licenses for private companies to operate 4,660 miles (7,500km) of roads and 10,000 km of railways The Brazilian President’s office emphasized, “[t]he government does not intend to get involved in these investments. These investments are going to be a long-term, private sector affair. The private sector must play a key role.” Entry Method Investment & Operations Agents, Distri butors and Labor
  • Regulatory Changes & Trends Intellectual Property Protection  Protected by Article 5 of the Brazilian Constitution & codified IP law  Provides for contracts involving technology transfer, technical and scientific services, franchising and protection against unfair competition  Instituto Nacional da Propriedade Industrial (INPI)   Federal agency in charge of regulating and registering patents, trademarks, industrial designs, approving licensing and other agreements Copyright Law, Law No. 9610, as amended (Feb 20, 1998)(Braz).  Regulates Brazilian Copyrights and some Software Law Entry Method Investment & Operations Agents, Distri butors and Labor
  • Regulatory Changes & Trends Brazilian Patent law Brazilian patentLaw  Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5 §§29 of the Brazilian Constitution  How to obtain Brazilian patent protection      First to File Absolute novelty Average time for granting patents is 5-7 years 20 year term, from date of filing (15 for utility model) How can a Brazilian patent help?   Right to prevent third parties from manufacturing, using, and offering to sell Patent infringement is both a tort and criminal offense    Damages, destruction of products, fines, imprisonment Remedies generally only available AFTER a patent grant Prior to grant, an applicant may send a cease-and-desist letter   A few rare cases have resulted in a cease-and-desist order during application (prior to grant) Patent infringement trials average 3-6 years Entry Method Investment & Operations Agents, Distri butors and Labor
  • Regulatory Changes & Trends Brazilian trademark law Industrial Property Industrial Property Law, Law No. 9279/96, as amended (May 15, 1996)(Braz); article 5 §§29 of the Brazilian Constitution, and international treaties  How to obtain trademark protection?     Register trademark at the National Institute of Industrial Property (INPI) “any visually perceptive distinctive sign, when not prohibited under law, is susceptible of registration as a trademark.” 10 year term, from date of issuance How can a trademark help?   Owner is guaranteed exclusive use throughout Brazil Trademark applicants may now enforce their rights against infringers, even before the registration is granted  Brazilian Superior Court of Justice (STJ), Special Appeal No. 1.032.104-RS, published decision on August 24, 2011 Entry Method Investment & Operations Agents, Distri butors and Labor
  • Regulatory Changes & Trends Brazilian trade secret law Industrial Property Law, Law No. 195, and international agreements  The Basics   Protected under unfair competition law It is a crime to disclose, exploit, or use confidential knowledge, data, or information, without consent  Exceptions are provided for public information Entry Method Investment & Operations Agents, Distributors and Labor
  • Agents, Distributors and Labor  Agents & Distributors  Labor Considerations Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors Agent Distributor Activities subject to some control by supplier Activities subject to only minimal control by supplier Does NOT take title to goods Takes title to goods, buys and sells for own account May handle products of other suppliers; but, is less likely to do so than distributor May handle products of other suppliers Generally compensated on a commission basis Earnings based on resale profit margin Usually does not warehouse goods Usually warehouses and physically delivers goods Usually does not use own capital Uses own capital Bears no risk of failure of payment Bears economic risk of failure of payment by customer May have power to contract on behalf of the supplier Has no power to bind the supplier contractually Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Agent Under Brazilian law 4.886/65, amended by Law 8.420/92, a commercial representative is:  one that acts as an intermediary promoting a product or service, looking for customers, negotiating proposals and orders and forwarding them to the seller with whom it has a contractual relationship. The Civil Code (Law 10406 of 10/01/2002) refers to Commercial Representation as "Agency". Entry Method Investment & Operations Agents, Distributors and Labor
  • Agents & Distributors Agent  Often the commercial representative facilitates the process of importing the products into Brazil as well as domestic deliveries to buyers by working with freight forwarders and transportation companies.  Commercial representatives may also work with customers to facilitate product installations, product training, warranty coverage, service, repairs and the sale of replacement parts.  The compensation of a commercial representative is generally structured on a commission basis. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Commercial Representative Agreement  Mandatory Provisions         Agent Term of the agency Obligations of the parties Description of the products or goods that are the object of the agency Description of the territory Exclusivity Payment structure (commission and time of payment) Termination Commercial Representative must register with the Regional Council of Commercial Representatives. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Agent The agreement with the representative need not be registered with the government.* This allows for confidentiality of compensation and other commercially important information.  This is an important distinction when compared to license and royalty agreements, which may require registration with the Brazilian Central Bank.  Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Agent Termination  Brazilian law requires that all disputes between a foreign company and its commercial representative be venued in Brazil and judged in accordance with Brazilian law.  Article 35 of the Brazilian Civil Code provides a list of “just cause” reasons for the termination of a commercial representative agreement.  If the relationship is terminated for cause, no indemnification is owed to the commercial representative. However, if the relationship is terminated for reasons other than those listed in Article 35, Brazilian law may require an indemnification payment to the commercial representative. Entry Method Investment & Operations Agents, Distributors and Labor
  • Agents & Distributors  Agent Termination - FOR CAUSE  Art. 35 provides a list of just reasons for termination of an agency agreement, these include:     neglect of the agent in the accomplishment of his obligation(s) under the contract, engaging in acts which result in loss of commercial credit of the represented, conviction for a crime considered injurious to the represented. The represented may retain the commissions due to the agent if there is just cause for the termination of the agreement, so long as retaining the funds is made with the purpose of recovering damages caused by the agent. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Agent Termination - WITHOUT CAUSE    Generally, an agent is entitled to no less than 1/12th of the total amount received during the time of agency. If the agency is for a specific term, the agent is generally entitled to an amount equal to the monthly average compensation received multiplied by the remaining months left in the agency contract term. Plus, investments made to open the market. Entry Method Investment & Operations Agents, Distributors and Labor
  • Agents & Distributors   Distributor Unlike an agent, a distributor buys products from the foreign company; takes title to them, then sells the products on its own account. The distributor’s earnings come from its resale profit margin. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Distributor Distributorship relationships are primarily regulated by Brazilian contract law; and, unlike commercial representative relationships, there are very few statutory provisions governing distributorships. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors Distributor  Brazilian contract law is primarily derived from the Civil Code.  As long as the parties comply with the provisions of the Civil Code respecting commercial contracts, they are free to define their business relationship as they see fit.  This includes agreement as to sales prices, territory, trademarks, service and maintenance of products, inventory requirements and termination. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors  Distributor Termination  Distributorship relationships allow greater flexibility in defining "just cause" for termination.  Disputes over distributorship terminations can be made subject to arbitration procedures which Brazilian courts may be more likely to enforce than clauses calling for the application of foreign law or a foreign venue. Entry Method Investment & Operations Agents, Distributors and Labor
  • Agents & Distributors Agent Distributor Creation Statutory requirements Contract law Compensation Commission Sells on own account Termination Enumerated “just cause” reasons Contract law Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors      Best Practices If properly structured commercial representative and distributorship agreements require less up-front investment than a more direct presence in the Brazilian market. The tradeoff for this can be less control over how the product is promoted, sold and serviced in the market. Regardless, using commercial representatives or distributors may make sense as a means to first enter the market or even as a permanent business model. However, if the proper safeguards are not in place, mismanagement of the product by the commercial representative or distributor can permanently damage a brand. Foreign companies should structure commercial representative and distribution agreements with a long term strategy that preserves maximum flexibility and may include a future more direct presence in the Brazilian market. For this strategy to work a well-crafted written agreement is imperative. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Agents & Distributors Best Practices  Care must be exercised to not blur the difference between a commercial representative and a distributor.  Long term exclusive contracts should be avoided.  Short term contracts once renewed may be considered contracts for "indefinite terms" after the first renewal, by Brazilian courts.  Foreign companies should fully understand the facts and Brazilian law before terminating a commercial representative or distributorship relationship.  Minimum sales requirements should be established in the contract.  Standards for product service and maintenance should be set out.  Regular and adequate reporting should be required.  Other key points to address are termination and causes for termination, distribution points and control over distribution in case of termination. Entry Method Investment & Operations Agents, Distributors and Labor
  • Labor Labor: It’s more than just the 13th salary Labor rights are outlined in the Brazilian Constitution, as well as laws, decrees, provisional measures, ordinances and regulations, international conventions and treaties (ratified by the Brazilian government), company policies, Supreme Court decisions, Superior Labor Court decisions and customs Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor  The worker is considered the weaker party in the relationship  In labor-related conflicts, whenever there is a doubt regarding evidence, the court’s decision will generally favor the worker      The law most favorable to the worker will be applied The conditions most favorable to the worker will be presumed Actual facts prevail over written documents Protected salary (generally cannot lower an employee’s salary) Nondiscriminatory practices Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor  Contractual agreements with employees to resolve conflicts are not enforceable. The Brazilian constitution provides the right to sue as an individual guarantee.  There are settlement methods.  Arbitration, union conciliation commissions . . .  But settlement does NOT extinguish the right of the individual’s claim!  Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor Considerations  13th Salary   R$674.96 per month Vacation   Mandatory “Christmas bonus” equal to 1/12 the salary for each month of that year Min wage currently Every 12 months employees are entitled to 30 calendar days paid vacation, in addition to the 13th salary Overtime Reading email on your cell phone, may qualify as overtime! Daily and weekly calculation  Base rate + 50%   100% for work on Sunday or a public holiday Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor  Termination       Employment is NOT “at will” (must have cause) Advanced notice (generally, 30 day min) Payment of salary owed Vacation 13th Salary FGTS  Every month the employer must deposit amount equal to 8% of employee’s salary into an individual social security fund (FGTS).  Upon termination, the employee may withdraw the amount.  If termination is not “for cause”, employer must pay a penalty equal to 40% of the amount and an additional 10% penalty to the government. Entry Method Investment & Operations Agents, Distributors and Labor
  • Labor  Not at will   30 days prior notice (some agreements may require longer period of time) Notice shall specify whether the 30 days must be worked or not worked   If worked may be absent for 7 consecutive days or may leave 2 hours early every day For cause if:       A dishonest act Improper conduct Regularly doing business on behalf of himself or for a third party Criminal conviction Inadequate discharge of duty Habitual drunkenness       Currently debate on this cause; many courts consider it a social problem and not a just cause Violation of trade secrets Act of disobedience or insubordination Abandonment of employment Injurious act to the honor of any person during working hours (except in self defense) Persistent gambling Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor  Brazilian v. Non-Brazilian  Staff of companies with three or more employees must be 2/3rd Brazilian at least 2/3rd of the payroll must be paid to Brazilians  And,  Salaries paid to employees in Brazil cannot be based on foreign currency Entry Method Investment & Operations Agents, Distributors and Labor
  • Labor  Ok, but they aren’t employees; they are . . .   It does not matter what the parties call the relationship, regardless of whether there is a written contract Courts will weigh factors, including:    The regular payment of salary Required personal rendering of service Subordination (direct control by employer, hours worked, benchmarks) Entry Method Investment & Operations Agents, Distributors and Labor
  • Labor  To avoid the inadvertent creation of an employment relationship, foreign companies must be mindful of how they interact with their commercial representatives and distributors.  Regardless of how the relationship is described by the parties, Brazilian courts will look to the actual behavior of the parties.  Brazilian courts consistently hold that subordination is a key factor in the existence of an employment relationship.  If the court determines that the parties' relationship is an employment relationship, the foreign company will be subject to Brazilian labor laws including liability for social and welfare contributions and possibly other taxes.  As such, while it is permissible to contract with an individual to act as a commercial representative, to avoid employment issues the better practice is to contract with an entity having at least two partners. Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor  What is the relationship?     Taxes, benefits Reimbursement for investments made to promote the company? Exclusivity? Termination   Compensation, territory, products, time of payment? Rights and duties?   Review and Best Practices Is a written agreement required?   Agent, distributor, . . . employee? For cause? Permanent Establishment?   Treaties Effectively Connected Income (ECI) Entry Method Investment & Operations Agents, Distributors and Labor
  • Labor (the other side)   Business Visa Permanent Visa  Legal Entity Administrator  Private Investor  Foreign Bank Representative  Temporary Visa Permanent Visa Establishment Issues  Technical Visa 1 year / 90 Days  Apprenticeship / Professional Training  Touring Vessel  Labor Entry Method Investment & Operations Agents, Distri butors and Labor
  • Labor (the other side)  Business Visa  To attend meetings, make commercial contacts   Permanent Visa  Legal Entity Administrator   90 days, may be extended additional 90 days in 12 month period 5 years, R$ 600k registered with Central Bank of Brazil, or R$150k & plan to generate at least 10 new Brazilian jobs within 2 years* Temporary Visa  Technical Visa 1 year / 90 Days       3 years experience in the functional field Permanent Specific for customer, or training plan Establishment Issues Resume Criminal background check File with Ministry of Labor in Brasilia When enter Brazil, register with Federal Police to obtain RNE  If d/n register, then daily fine Entry Method Investment & Operations Agents, Distri butors and Labor
  • Business in Brazil: Regulatory and Legal Considerations  The content of this presentation is for educational purposes only. Each legal issue is fact dependent, and this presentation should not be used or viewed as legal advice; your legal counsel should be consulted on the application of your particular factual situation to the current law. Entry Method Investment & Operations Agents, Distributors and Labor
  • Entry Method Investment & Operations Agents, Distrib utors & Labor LEGAL ASPECTS OF DOING BUSINESS IN BRAZIL dwilsonjdmba dwilson@keglerbrown.com David M. Wilson, Esq.