Top Five Compliance Issues for Businesses Expanding to Brazil

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From an organizational and logistical standpoint, Brazil is one of the few countries that lacks recognition of a “place of business.” While in the majority of countries and regions around the globe businesses can enter and visit with relative freedom to research the viability of a business or market, Brazil’s strict requirements stifle the establishment of ground teams or pop-up operations.

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Top Five Compliance Issues for Businesses Expanding to Brazil

  1. 1. Top 5 Compliance Issues for Businesses Expanding to Brazil Page 1 of 6 • Home • About • Advertising ◦ Reprints • Jobs • Career Advice • Resources • Contact • Authors ◦ Guidelines • Featured Articles • News ◦ GRC ◦ People • Events Home » Compliance »FCPA »Featured Article Top Five Compliance Issues for Businesses Expanding to Brazil by Shan Nair @ 2011-08-19 ShareThis Category: Compliance, FCPA, Featured Articlehttp://www.corporatecomplianceinsights.com/2011/top-five-compliance-issues-for-busines... 9/29/2011
  2. 2. Top 5 Compliance Issues for Businesses Expanding to Brazil Page 2 of 6 Following many years of solid monetary and fiscal policies, Brazil today is proving itself able to face turbulences and global financial crisis soundly and, as a result, is gaining increased attention from international media and global investors. With a population of 178 million, Brazil represents the fifth largest market opportunity in the world — after India, China, Indonesia and the U.S.A. Recent International Monetary Fund (IMF) reports indicate that Brazil leads all other South American countries in terms of infrastructure and technological development. Combine these facts with a fairly stable economic and political landscape — corruption and hyperinflation are actually on the decline — and it is easy to see why Brazil attracted 3 percent of total global foreign direct investment in 2009. Yet within this rapidly evolving economy there still exists very real compliance challenges to doing business in Brazil — the primary culprit being heavy business regulations accompanied by numerous bureaucratic hurdles spread out among various governmental agencies. Add continued corruption, governmental inefficiency, legal complications, excessive taxation, poor infrastructure, inflation, etc. – and you have a veritable soup of great frustration for international business people seeking to expand their global enterprise into Brazil. In fact, the World Bank currently ranks Brazil as 127th out of the 175 countries it has surveyed in terms of the ease of starting a business. Entrepreneurs should expect to jump through a myriad of hoops to do business in Brazil. Case in point, while Mexican firms spend 404 hours a year paying taxes, Brazilian firms must use up 2,600 hours doing the same thing. In this article, we address the top five corporate compliance concerns facing businesses looking to expand to Brazil: Compliance Concern #1 – Brazil Lacks a “Place of Business” Concept From an organizational and logistical standpoint, Brazil is one of the few countries that lacks recognition of a “place of business.” While in the majority of countries and regions around the globe businesses can enter and visit with relative freedom to research the viability of a business or market, Brazil’s strict requirements stifle the establishment of ground teams or pop-up operations. Instead, foreign business entities must exercise a lease on premises from day one just in order to initiate business dealings within Brazil. Further, while Brazil does allow branches, the setup of a branch office requires presidential approval, with the only viable option to setup a subsidiary even if only to hire one employee. This requirement demands that businesses be very certain – and very prepared for the expense – of establishing a presence in Brazil before ever setting foot in the country.http://www.corporatecomplianceinsights.com/2011/top-five-compliance-issues-for-busines... 9/29/2011
  3. 3. Top 5 Compliance Issues for Businesses Expanding to Brazil Page 3 of 6 Compliance Concern #2: Fulfilling the Sociedade Limitada (LTDA) Requirements As mentioned above, foreign entities seeking to establish their presence in Brazil have been forced to set up a subsidiary even if just to enter the state. The most common business entity is the “Limitada.” Yet, while this is touted as the simplest office to establish in Brazil, it is by no means a simple and flexible process to create. Organizations must contend with a labyrinth of steps (17 in all) to create one, which together can take between 90 to 152 days to complete. To make things more complicated, these steps and time estimates may differ from state to state, although the process is essentially the same across Brazil. One reason the process can take so long is that the filing requirements are spread out across various governmental agencies, both federal and state. Steps involved in setting up a Limitada include (but are not limited to): locating two shareholders to sign the social contract to register equity interest or participation in the Limitada; designating power of attorney (POA) to a legal Brazilian resident to sign the social contract on your behalf (as a nonresident, your signature cannot be recognized by the state of Brazil); obtaining authorization to print invoices and official receipts known as “notas fiscals”; obtaining operating permits and registering employees with the state unemployment insurance program; and even obtaining a Fire Brigade license from the state in which you have formed your Limitada. The Limitada is so complex that – on average – it requires approximately one regulatory filing every 10 days during the existence of the business. The kicker: compliance issues surrounding the Limitada not only police the establishment of a business, but its closing as well. In Brazil the bureaucracy is so thick that it can take an average of 4 years to legally shut down a Limitada. Compliance Concern #3: Corporate Tax Filings Not too long ago, Brazil attempted to transform their tax code to better protect small companies – but the result was precisely the antithesis. Today, Brazil has different categories of indirect taxes, both federal and state thus VAT, sales and taxes meet multiple filings requirements – making expert accounting help a key consideration for any organization setting up shop in Brazil. To make matters more complex – these filings do not occur in concurrence or in consideration of corporate calendars. Instead, filings for different states have different deadlines. In addition, for companies setting up cost centers in Brazil, the regulators do not recognize the generally accepted OECD “cost plus” model for intercompany agreements. The result: Brazil is an accountant’s dream and a business owner’s nightmare – so brush up on this subject. Compliance Concern #4: Employment Law Employment represents another myriad of regulations for foreign entities in Brazil. Organizations seeking to establish a presence in Brazil are wise to closely study employment laws in the country, as they will inevitably find themselves tethered to a number of complex national-to-foreign worker ratio requirements, unemployment insurance regulations, social security taxes, termination restrictions and payroll laws. When hiring in Brazil, it pays to be very certain of the employees brought on board to a new company, as termination is very difficult. Add to this the concept of the 13th and 14th month(s) of yearly employment (a familiar concept in Spain and other European countries) where employees are compensated not on a 12-month calendar, but for two additional months every year. Compliance Issue #5: FCPA Regulations Pay attention to the Foreign Corrupt Practices Act (FCPA) and if you have a U.K. operation in your group, the U.K.’s Bribery Act. Where a U.S. corporation has a subsidiary in Brazil, this subsidiary is subject to the FCPAhttp://www.corporatecomplianceinsights.com/2011/top-five-compliance-issues-for-busines... 9/29/2011
  4. 4. Top 5 Compliance Issues for Businesses Expanding to Brazil Page 4 of 6 and needs to demonstrate it operates a global compliance program. These programs – most of which are implemented by Brazilian subsidiaries – provide more security to investors and help avoid reputational damage. Last year legislation was introduced in Brazil designed to require Brazil to comply with international agreements for combating bribery (to which Brazil is a signatory). This legislation – designed to bring Brazil directly into the international mainstream regarding legislation to prevent bribery and corruption – addresses civil and administrative liability for corporations for corrupt acts relating to Brazil’s national and foreign public administration. Conclusion Depending on the opportunity – and there are many – doing business in Brazil can be quite rewarding. And it certainly is an adventure. But while Brazil offers a wealth of opportunities to prospective investors, it is also a country beset with bureaucratic and cultural difficulties – so it is imperative to do your homework in advance. ********** About the Author Dr. Shan Nair is co-founder and CEO of Nair & Co. He is an expert in international expansion, a highly sought- after speaker on globalization and a contributing author for various publications. Since founding Nair & Co. in 1994, he has helped grow the company from a small U.K.-based professional services firm to a global enterprise with offices in U.K., India, China, U.S., Japan and Singapore. Nair & Co. currently acts for 740-plus client operations in over 50 countries, with each client operation being on average in four countries. Tags: Brazil, shan nair Comment on this Article: Name Email Websitehttp://www.corporatecomplianceinsights.com/2011/top-five-compliance-issues-for-busines... 9/29/2011
  5. 5. Top 5 Compliance Issues for Businesses Expanding to Brazil Page 5 of 6 Submit Comment Search This Site: Sponsorshttp://www.corporatecomplianceinsights.com/2011/top-five-compliance-issues-for-busines... 9/29/2011
  6. 6. Top 5 Compliance Issues for Businesses Expanding to Brazil Page 6 of 6 Subscribe and Follow • Like Us on Facebook Like 102 • Follow Us on Twitter • Follow Us on LinkedIn • Subscribe Newsletter Signup Email: Subscribe Archives Select Month Home | About | Contact | Authors | Write for CCI | Article Guildelines | Compliance News | People on the Move | Legal Notice | Privacy Policy Copyright 2011 Corporate Compliance Insights All Rights Reserved Subscribe (RSS) Site is managed by: Magic Logix Corporate Compliance Insights is a professionally designed and managed forum dedicated to online discussion and analysis of corporate compliance and governance topics. Additionally, Corporate Compliance Insights is a focused knowledge-sharing forum designed to educate and encourage informed interaction within the corporate compliance community.http://www.corporatecomplianceinsights.com/2011/top-five-compliance-issues-for-busines... 9/29/2011

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