Opening of branch in Brazil - Official guide

The Brazilian government has published a manual  explaining how a foreign corporation can set up a branch in Brazil. 

Unfortunately, it is terrible. 

The problem is that the investment via branches was designed for a different era. The two basic acts that regulate it are respectively from 1916 and 1962. 

It was the time of huge factories shipped in blocks to poor countries, but totally controlled and administered from headquarters back in the UK or Germany. 

Nowadays, any big business will have a local board in Brazil which is trained in Brazilian taxation and that understands the Brazilian market. 

Moreover, under the old rules the branches were forced to publish the balance sheets of the worldwid eoperations in Brazilian newspapwers. Nobody is going to spend money on this kind of bureacracy nowadays. 

I`m saying this because I think the guide should have focused on the few exceptional cases in which using a branch is still fine. For example, if you are a trading company operating between Brazil and Uruguai. 

Without this context, the guide is actually boring and intimidating. 

The documetn missed the opportunity to display how incorporating a new company in Brazil has become a much quickers and smarter investment route than opening a branch. 

On the plus side, the guide brings some templates that can be very useful. The image on this post is an example. 

There is a Spanish version too. 

If you want to read the guides, you may download the English one here and the Spanish one here. 

For a more positive view on how to incorporate in Brazil you may check any of the links below: 

• Guide to Company Incorporation in Brazil
• Incorporating a Brazilian company, step by step
• How to incorporate a Brazilian company through foreign direct investment
• List of documents for setting up a company in Brazil

Branch or subsidiary in Brazil?

Here is part of an email exchange with a potential client. 

We were discussing the differences between having a branch in Brazil or incorporation a new company, owned and controlled by a foreign entity. 

• What is the procedure to create a branch. What has changed lately?

​The branch (filial) requires express approval by the Federal Government. This is not a new procedure. The approval has been required for decades. 

The changes in procedure are regarding the new model of power of attorney that must be used. But this is a relatively small change.  

• How much time does the special approval take (on top of the usual time for incorporation of a new company)?

​Between 40 to 60 days. ​

 

• How could a new company be controlled by a foreign investor?

​The procedures for incorporation of a new company with foreign partners are, broadly speaking, the same procedures required to open a regular Brazilian company, with Brazilian owners. Therefore, we will avoid the need for Federal approval, which is part of the process of creating a branch.

The new company would be owned and controlled by the Swiss company. It would also need another partner, which can be another Swiss company, a Swiss investors or a Brazilian investor. 

Please notice that the new company may be 100% owned by Swiss investors. There is no need for a Brazilian partner.

• Is there any down side of using a subsidiary (new company) instead of a branch?

​Basically, no. ​

 

​The Brazilian entities would work just the same. Actually, a new company is subject to less government control and scrutiny than a branch. ​

• Would it be legal for the investing company abroad and the new company in Brazil to conduct transactions and have financial ties?

​Yes. They would be subject to the exact same rules (transfer pricing rules, tax rules, etc.) that would apply over a transaction between an investing company and its branch in Brazil.

• How long does it take to open a new company? 

​About 60 to 90 days, depending on the amount of documents to be translated. ​

Basic transfer pricing rules in Brazil

Pursuant to Art. 18 of Statute 9.430/96, the Transfer Pricing regime applies to the import and export operations of goods and services between related legal entities.

Under Art. 23 of Statute 9.430/96, the following should be considered connected or related to a Brazilian entity:

a)      their headquartes located abroad;

b)      their branch, if located abroad;

c)      the individual or legal entity, resident or domiciled abroad, whose ownership interest in its capital stock characterizes it as its parent or affiliate company, as defined in paragraphs 1 and 2 of art. 243 of Statute 6.404/1976;

d)      a legal entity domiciled abroad that is characterized as its subsidiary or affiliated, as defined in §§ 1 and 2 of art. 243 of Statute 6.404/1976;

 e)      a legal entity domiciled abroad, when it and the company domiciled in Brazil are under common corporate or administrative control or when at least ten percent of the capital stock of each one belongs to the same individual or legal entity;

f)       a natural or juridical person, resident or domiciled abroad, who, jointly with the legal entity domiciled in Brazil, holds a shareholding in the capital of a third legal entity, the sum of which is characterized as controlling companies or affiliates thereof, in the form Defined in §§ 1 and 2 of art. 243 of Law 6404 of December 15, 1976;

g)      the individual or legal entity, resident or domiciled abroad, that is its associate, in the form of a consortium or condominium, as defined in Brazilian law, in any enterprise;

h)      a natural person residing abroad who is related to or related to the third degree, spouse or companion of any of its directors or of its partner or controlling shareholder in direct or indirect participation;

i)       the individual or legal entity, resident or domiciled abroad, that enjoys exclusivity, as its agent, distributor or concessionaire, for the purchase and sale of goods, services or rights;

j)       an individual or legal entity, resident or domiciled abroad, in which the legal entity domiciled in Brazil enjoys exclusivity, as agent, distributor or concessionaire, for the purchase and sale of goods, services or rights

With the measure, the legislator intends to ensure, in particular, that transactions between legal entities belonging to the same economic group are similar to those practiced in the domestic market, avoiding irregular remittances abroad or irregular collection or deduction of income tax.

Representatives of foreign investors in Brazil - Ultimate Beneficial Owner and management powers

All foreigners who own companies in Brazil or that invest in the Brazilian Stock Market, or even that own real estate in Brazil, must have a local representative.

Starting July, 2017, this representative will be more subject to government scrutiny and, at the same time, will be required to have more managerial power over the investor`s assets.  On the other hand, it is expected that the representative will be at a higher risk of being liable for tax fraud or labour debts.


This comes along with a rule that requires that the ultimate beneficial owners of any company investing in Brazil be revealed to the Federal Government.

The result of these rules, I think, is that the cost of keeping local representatives will increase. Instead of using young professionals or junior accountants as representatives, the investors will have to select lawyers or executives. Costs with D&O insurance should also go up.

On the plus side, it looks like the new president is taking steps to speed up the registration of foreign investment. Let`s see if the policies even out one another. I sure hope so. 

Practical guide - incorporating in Brazil

This guide has been compiled by the Chilean firm Harris Gomez, with whom I work often, usually advising international investments involving Australia, Chile and Brazil.

They have based it on several reports drafted by me over the last couple years.  The final result is excellent.