BRAZIL when specifically authorised by the Brazilian President.
• Foreign participation in voting shares is limited to 20% in Brazilian airline companies and depends on prior approval from the Civil Aviation Agency (although the constitutionality of this limitation is subject to debate).
• Acquisition of rural properties within the border strip (150km alongside inland borders) depends on prior approval from the National Security Council.
• Acquisition of other rural properties is subject to certain conditions and limitations.
Regardless of whether foreign investors are involved or not, activities in various regulated sectors will be subject to specific rules and conditions, including approvals and supervision by the relevant regulatory agency (for example, insurance, telecommunications, energy, oil and gas, water and sanitation).
3.3 Which authority oversees competition clearance, when is notification mandatory, and briefly explain the merger clearance process. The authority responsible for overseeing competition clearance is the Administrative Council for Economic Defence (CADE) which analyses material M&A cases that may jeopardise competition. The submission of an operation to CADE’s analysis, whose approval is treated as a condition precedent in M&A operations, is mandatory in the event that one of the companies involved has achieved revenues of at least R$750 million in the previous year, and the other company has achieved at least R$75 million. Upon the submission, CADE will render its decision in 240 days, extendable for 90 additional days.
4. Tax and grants
4.1 Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for FDI into the country? Brazil exempts dividend income, even if earned by foreign investors. Therefore, it is uncommon to find tax structures that are more favourable for FDI into Brazil than a simple contribution to capital.
Some double taxation treaties provide for a tax-sparing credit in connection with dividends, interest and royalties, particularly the treaties with European countries, such as the Netherlands, Belgium, Luxembourg and Spain. Thus, depending on the investment structure, such treaties may be favourable.
As to debt financing, interest expenses are deductible for corporate income tax (IRPJ/CSLL) purposes, commonly at a 34% rate, as detailed below. Interest income is subject to a 15% withholding tax (IRRF) and to transfer pricing (usually Libor [London Interbank Offered Rate] plus 3.5% spread). Payments to blacklisted jurisdictions are subject to IRRF at a 25% rate. Thin capitalisation limitations also apply at a 2:1 ratio (0.33:1 ratio if the beneficiary is located in a blacklisted jurisdiction).
Short-term foreign loans are also subject to IOF/FX, at a six percent rate. If the term of the loan is superior to 360 days, principal and interest payments are subject to zero percent rate IOF/FX.
There are 30 double taxation treaties in force. Brazil has not ratified any bilateral investment treaties to date.
4.2 What are the applicable corporate tax rates? The corporate tax rates vary according to the profit calculation regime elected by companies incorporated in Brazil. If the companies are obliged to report their income under the Actual Profits regime (with an annual revenue of more than R$78 million or with any foreign income earned throughout the year), the applicable corporate income tax (IRPJ) rate is 15%, plus 10% on any amount of the profits exceeding R$20,000, multiplied for the months of the taxable period. Also, the profits are subject to the social contribution on net profits (CSLL) at a rate of nine percent (except for financial institutions, which
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are subject to a CSLL of 15%). In addition, Brazilian companies under the Actual Profits regime are subject to the non-cumulative social contributions on total revenues (PIS and COFINS), which total a creditable rate of 9.25% on the corporate gross revenue for the taxable period.
If the Brazilian company chooses to be under the Presumed Profits regime (with an annual revenue of R$78 million or less), its profit margins are statutory, and they range from 8% to 32% depending on the category of earned income. On this statutory basis, the applicable IRPJ rate is 15%, plus 10% on any amount of the profits exceeding R$20,000 multiplied for the months of the taxable period. Also, a statutory basis of 12% or 32% applies on the income earned by the company for purposes of CSLL, which is imposed at a rate of 9%. Brazilian companies under the Presumed Profits regime are also subject to the cumulative PIS and COFINS, which total a non-creditable rate of 3.65% on the corporate gross revenue for the taxable period.
If, however, the Brazilian company is qualified as a small enterprise, it may be eligible for reporting its profits under the Simplified Regime (Simples). The IRPJ, CSLL, PIS and COFINS rates for this regime vary between zero and 1.6%.
Brazilian companies in the Actual and Presumed regimes are subject to a tax for severance indemnity fund (FGTS) of 8% and to a payroll tax (INSS) of 20%. In Simples, while the FGTS rate remains at 8%, the INSS rate is reduced to 4.6%.
4.3 Does the government have any FDI tax incentive schemes in place? There are several tax incentives in Brazil, depending on the industry and location of the investment, such as the Manaus Free Trade Zone, infrastructure projects, oil and gas industry, and the automotive industry.
Aside from such incentives, states and municipalities will usually provide value- added tax (ICMS) and services tax (ISSQN) incentives for FDI in the fields of energy, logistics and transportation. These incentives have become more widespread due to the preparation of Brazil for the World Cup in 2014 and the Olympic Games in 2016.
4.4 Other than through the tax system, does the government provide any other financial support to FDI investors? The Brazilian Development Bank (BNDES) provides some benefits to Brazilian companies, but most of such benefits are directed to Brazilian-owned investments. States may also provide financial incentives, especially if the investment is relevant for the public interest and generates local jobs and income. Municipalities also provide such incentives. Please note that they are limited by their budgetary constraints.
5. Operating locally
5.1 What is the most common governing law of contracts and local business language? Brazilian law is used in agreements between Brazilian parties (even if they are controlled by foreigners). In international agreements, the type of agreement and location of the parties usually determines the selection of governing law (for example New York law, English law). Negotiations involving foreign parties are normally carried out in English.
5.2 Explain any local content or local participation requirements relevant to foreign investors. As a general rule, no local content or local participation requirements apply, except in specific cases and industries when provided by law (for instance, local content rules in certain oil and gas activities and local participation in airport management).
IFLR REPORT | FOREIGN DIRECT INVESTMENT 2014
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