The Brazilian legal system is divided according to the nature of the legal relationship being discussed in the matter at hand: (i) common; (ii) labour; (iii) electoral; and (iv) military. This division contributes to faster and more consistent decisions. Each subdivision has their own degree of jurisdiction, with first instance, second instance and superior courts. 

The Brazilian superior courts settle disputes coming from lower courts and work to standardise the jurisprudence. All superior courts are all located in Brasilia, Brazil’s capital, and have national jurisdiction. As there are four subdivisions, there are four superior courts, which provide the final interpretation of the matters they are responsible for. 

Above the Judicial Branch is the Supreme Federal Court (STF), responsible for ruling on any matters involving the Brazilian Federal Constitution, this being its ultimate guardian. The National Council of Justice (CNJ) is responsible for overseeing the magistrates՚ work, as well as the administrative and financial performance of the courts.

Even though Brazil has a system based on “civil law”, the Brazilian legal system is evolving into a mixed system in which features from both common and civil law are considered and hold the same level of relevance, due mainly to judicial precedents implemented by the Civil Procedure Code in 2015. A precedent is the decision made by the court regarding a specific case, the normative element of which will serve not just as a guideline for the subsequent judgment of specific cases, but as a rule to be followed in future litigation. 

Foreign Direct Investment in Brazil

In accordance with the guidelines provided by the Central Bank of Brazil (BACEN), foreign direct investment (FDI) is defined as the acquisition of ownership interest in the capital stock of a Brazilian company by an investor, whether an individual or a legal entity, who is not a resident of Brazil or whose headquarters are located abroad. Any capital incorporation from foreign sources directed towards the domestic productive structure, whether in the form of equity participation in existing companies or in the establishment of new companies, qualifies as FDI. This encompasses various activities, such as M&A, the construction of new facilities, reinvestment of profits, and intercompany loans.

The regulatory oversight of all foreign capital is contingent on its intended purpose and certain sectors are subjected to specific regulations and heightened scrutiny, as detailed in 8.1 Other Regimes. Brazil has laws that provide for transparency, requiring the foreign investor to provide information to government agencies, as mentioned below.

Registration of Foreign Investment

To initiate the investment procedure, foreign investors are required to secure a taxpayer ID and then register the investment before the BACEN online system (IED) if the investment exceeds USD100,000 or the equivalent in other currencies.

Brazilian entities that receive FDI are generally required to periodically provide financial and economic information to BACEN.

Registration occurs by the following two mechanisms. 

• Declaratory: when the Brazilian entity receiving the investment (eg, through the subscription of shares by the foreign investor) has the responsibility for the registration process.
• Automatic: applicable in instances of inflows of foreign currency, transfers between FDI registration modalities, stock incorporation, remittances of dividends, interest on net equity, and divestiture.

Brazilian entities that receive FDI must always keep their financial and economic information updated with BACEN, the frequency of the declaration depends on the assets’ amount of the Brazilian entity.

Ultimate Beneficiary Owner (UBO)

Corporations headquartered abroad with assets in Brazil, as well as foreign banking institutions engaging in purchase and sale transactions of foreign currency with Brazilian banks, are obligated to declare to the Federal Revenue of Brazil (RFB), within 90 days from the date of registration with the National Register of Legal Entities (CNPJ), its ultimate beneficiary owner (UBO). The UBO is the entity or individual who directly or indirectly possesses more than 25% of the company’s capital and/or wields significant influence in corporate deliberations, including the authority to elect the majority of the company’s officers/directors.

International Sustainability Standards Board

In 2023, Brazil participated in the 27th Conference of the Parties to the United Nations Convention on Climate Change (COP27). At this event, the Brazilian Ministry of Finance and the Securities Commission of Brazil (CVM) announced that the International Sustainability Standards Board (ISSB) ‒ a set of guidelines that prescribe how an entity prepares and reports its sustainable-related financial disclosures ‒ would be incorporated into the Brazilian regulatory framework, setting out a roadmap to move from voluntary use starting in 2024 to mandatory use by 2026. This decision signifies a major stride toward enhancing transparency in Brazilian capital markets concerning ESG risks and opportunities, thereby improving the resilience and competitiveness of the financial sector in Brazil. 

Bill No 2,925/23

Bill No 2,925/23 (the “Bill”) aims to enhance legal certainty for participants in the capital market. The proposed text is based on a study conducted by the OECD and is regarded as part of a series of microeconomic reforms aimed at invigorating the Brazilian capital market, aligning it with international standards. Additionally, it seeks to improve mechanisms protecting the rights of securities market investors.

The proposed changes highlighted by the Bill include the following.

• CVM jurisdiction: amendments aiming to provide greater institutional robustness and strengthen its supervisory capacity. This includes expanding the authority of the regulatory body to request search and seizure warrants, request access to and copies of investigations and proceedings initiated by other entities, as well as sharing confidential information with monetary and fiscal authorities.
• Liability claim: establishment of more transparent parameters for bringing liability actions, along with an expansion, in relation to publicly traded companies, of the list of legitimate parties authorised to file such claims. 
• Premium: the premium, based on the total amount of compensation owed, payable by the guilty officer or controlling shareholder to the plaintiff is increased to 20%.
• Arbitration: the possibility of resolving disputes through arbitration will now also encompass the company’s officers. Moreover, all arbitration procedures related to publicly traded companies must be public.
• General meeting competencies: expansion of the items constituting the exclusive competence of the general meeting, including authorisation to enter into agreements aimed at settling liability actions stipulated by law, with veto rights granted to shareholders representing 10% of the voting share capital. 
• Approval of financial statements: the mere approval of the financial statements, which must occur annually, will no longer release officers of responsibility without an express decision to that effect in the meeting.

As dividends are not subject to taxation in Brazil, it is common for a foreign investor to use a Brazilian holding company to hold its investments in Brazil. This way, the holding company can be used to receive profits from the first investments and make new investments in Brazil avoiding further taxation. The holding company can also provide a liability buffer between the foreign investor and its investment in Brazil. Moreover, it can also be cautiously used as a tax strategy to maximise savings using goodwill arising from acquisitions.

Also, the prevalent practice in M&A transactions is to opt for equity purchase rather than asset acquisition due to the possibility of goodwill tax amortisation in equity deals and liability transfer in significant asset deals. 

In Brazil, should a company sell a significant part of its assets and know-how, it can be considered an acquisition of a commercial establishment, which means that the buyer shall have joint liability if the seller ceases to exploit the trade, industry or activity and subsidiary liability, or if the seller continues to operate or starts, within six months from the date of the transaction, a new activity in the same or another branch of commerce, industry or profession.

Acquisitions of isolated assets, in general, do not attract liability if the documentation and reality support consist of an isolated and irrelevant transaction. Separate acquisitions of various assets, which amount to the acquisition of a significant part of the company, may give rise to liability for the seller’s debts.

In this sense, should an investor wish to acquire a significant part of a company, it is recommended that such part is spun-off, creating a new company, and the new company is then acquired by the investor. It should be noted that the new company will be jointly liable for the original company’s prior liabilities. However, for the acquiring entity or the investor to become the legal successor of all obligations of the original company, the RFB would have to show evidence of fraud to be able to disregard the transaction. Furthermore, with disregard to the law, in practice, the burden of proof of innocence currently lies with the acquiring entity.

Regardless of the structure and contractual terms, liabilities, particularly labour and tax liabilities, will most likely reach the acquiring entity if it uses, after the purchase, the same location and trademarks, and has similar corporate purpose, the same officers, managers, employees, clients and services providers.

In this manner, it is highly recommended that a due diligence review be conducted. Through this procedure, the target company will be thoroughly examined from both legal and financial perspectives. This often determines the decision to proceed or not with the transaction, potential adjustments to the acquisition price, and the optimal structure for the M&A.

It is important to emphasise that the choice of structure will have significant tax implications. Therefore, a thorough analysis from a tax perspective is necessary before undertaking any operation. Additionally, in the case of public companies, approval from the CVM will be required.

M&A transactions may need to obtain approval in advance from the Antitrust Enforcement Agency (CADE), as detailed in 6. Antitrust/Competition.

In the Brazilian business context, foreign investors have two primary choices for corporate entities: a limited liability company (sociedade limitada) or a joint-stock company (sociedade por ações). The selection between the two depends on the specific objectives and the needs of the investor in the Brazilian territory. In both, shareholders are, generally, liable up to the limit of the held share capital.

Sociedade Limitada 

A sociedade limitada can have one or more quotaholders.

Votes are based on the amount of corporate capital invested by each partner. 

Profits can be distributed unevenly among quotaholders, should the articles of association allow it. 

Any partner may unilaterally exit the company at any time (and receive the corresponding reimbursement for its quotas) by means of a prior written notice to the other partners if the company is incorporated for an indefinite term.

The management is carried out by one or more directors/officers, elected for a fixed or indefinite term.

This type of entity allows for more corporate privacy as it does not require the publication of balance sheets.

Sociedade por Ações

Sociedade por ações (S.A.) needs to have multiple shareholders, unless it is held by a single Brazilian company and follows specific rules.

Is more flexible as it allows nonpar shares and decisions are made by the number of shares held by each partner, regardless of the amount paid for them. 

An S.A. may publicly trade its shares and issue other securities (bonds, debentures), which means more access to funding alternatives.

Only in specific situations may shareholders unilaterally leave the company (and receive the corresponding reimbursement for their shares).

In an S.A., it is necessary to have a minimum mandatory dividend and some mandatory reserves.

The management is carried out by one or more officers, Brazilian or foreign, for a maximum term of three years.

Investors may also choose to invest in investment funds. The Brazilian investment funds need to be registered with the CVM and require the services of licensed providers for the administration, custody and portfolio management. Just like any foreign investment, investment funds are subject to regulatory scrutiny by local authorities as outlined in 5.2 Securities Regulation.

Minority Investors 

Legally, the minority shareholder is recognised as a more vulnerable party in the corporate relationship, receiving legal protection. Brazilian corporate law does not provide a precise definition of a minority investor but interprets it as the opposite of a majority investor.

Brazilian law provides the following fundamental rights to all shareholders:

• the right to participate in the company’s profit sharing; 
• the right to receive the company’s assets in case of its liquidation; 
• the right to supervise the company’s administrative bodies, with the board or officers having to annually present the financial statements for shareholders’ approval; 
• the pre-emptive right to the subscription of new shares, convertible participation certificates, convertible debentures and subscription bonds; and 
• the right to withdrawal from the company in the cases provided for by law. 

Apart from these rights, the LSA also offers additional effective mechanisms that can be used safeguard the interests of minority shareholders, including:

• protection in the case of delisting of shares;
• participation in the composition of the board of directors and the board of auditors;
• provision for arbitration in conflict resolution; and
• the shareholders’ agreement.

The obligations related to the disclosure of FDI are addressed in 7. Foreign Investment/National Security.

The capital market in Brazil is regulated by the CVM, and private entities such as the Brazilian Stock Exchange (B3) and the Brazilian Financial and Capital Markets Association (ANBIMA) also engage as regulatory bodies in certain aspects of the market.

The B3 is the primary Brazilian institution for overseeing operations in the capital market and ranks among the world’s largest exchanges by market capitalisation, holding a leading position in Latin America.

Since 2000, the Brazilian capital market has seen significant legal progress, primarily through CVM regulations. These have enhanced mechanisms and rules for investor protection and ensuring competitive market conditions, including a recent discussion about exempting foreign investors from the CVM registration procedure. 

In the stock market, new listing segments have been established based on best corporate governance practices or the size of each corporation. In the debt market, besides progress in the organised over-the-counter market, regulations have been put in place for closed companies to access this market as well as financing vehicles like Certificates of Real Estate Receivables (CRIs), Certificates of Agribusiness Receivable (CRAs), Investing Funds in Credit Rights (FIDCs) and Investing Funds in Participations (FIPs). 

Law No 14,430 establishes the legal framework for securitisation in Brazil. This Law introduces a clear legal definition of securitisation, delineating it as a process involving the acquisition of credit rights to support the issuance of Certificates of Receivables or other securities to investors. The payment of these securities is primarily contingent upon the receipt of resources from the credit rights and other assets, rights, and guarantees supporting them.

Furthermore, in addition to the previously allowed CRAs and CRIs, Law No 14,430 extends the possibility of securitisation to encompass any type of credit rights. This legislative development is a significant milestone for securitisation in the country, broadening the scope of financing possibilities across various sectors of the economy.

The primary laws and regulations governing capital markets are: 

• the LSA;
• Law No 6,385/1976, which regulates the local capital markets and establishes the CVM (this legislation may also undergo changes as a result of the Bill); and
• CVM Resolution 160, which regulates public offerings of distribution of securities and the trading of the offered securities on regulated markets.

As noted in 1.2 Regulatory Framework for FDI, all foreign capital sent to Brazil must be registered with BACEN. For indirect investments, foreign investors are required to register with the CVM, hire a financial institution as a legal representative, designate a fiscal representative, and sign a custody agreement with a local entity. 

Foreign investors structured as investment funds have to abide by the same rules mentioned in 1.2 Regulatory Framework for FDI. If it is publicly traded, the foreign investment fund might be released from the obligation to provide a UBO declaration.

Overview 

CADE, associated with the Ministry of Justice, is a federal organisation with the primary objective of guaranteeing open competition in the market. It serves as the authoritative body for investigating, making final decisions on competition-related matters and promoting the awareness and diffusion of a competitive culture. Consequently, CADE is entrusted with three primary functions as set out below.

• Preventive: examining and making determinations regarding any form of economic consolidation that could put free competition at risk.
• Repressive and punitive: investigating and judging anti-competitive activities, such as cartels, that have the potential to undermine free competition.
• Educative: disseminating information to the public about behaviours that can adversely impact competition and promoting and fostering studies and academic research.

Merger Control Regime 

Law No 12,529/2001 (the “Brazilian Antitrust Law”) does not explicitly address FDI. Nevertheless, CADE’s prior review may be applicable to the following transactions:

• mergers and consolidations;
• acquisitions involving direct or indirect control or portions of a company;
• share incorporations; and
• associative contracts, consortia or joint ventures.

Framing 

The Brazilian Antitrust Law operates on a pre-merger control system, requiring CADE approval for transactions before they become fully effective through a filed notification. 

The responsibility for submitting a notification rests on all parties engaged in the transaction; as per CADE’s guidelines, the notification should be jointly filed by:

• the buyer and the target in transactions involving the acquisition of control or equity;
• the merging companies in merger transactions; and
• the contracting party in other cases.

The notification to CADE will be necessary if: 

• at least one economic group participating in the transaction has reported a turnover of at least BRL750 million; and
• the other economic group has reported a turnover of at least BRL75 million.

It is important to consider all companies forming the economic group. According to CADE, an economic group comprises entities under common control and all entities in which any company under common control holds, directly or indirectly, at least 20% of the shares or voting capital.

The notification must be submitted before the transaction is finalised. Failure to comply with this requirement could be considered a violation, being consistent with the practice of the crime of gun-jumping.

Judgment 

The notification needs to include comprehensive transaction details along with supporting documents. The CADE’s General Superintendence will conduct an initial review, and upon confirming adequate information for an antitrust analysis, the process will officially begin through a notification in the Official Journal. 

Fast-track processes, meant for cases with lower risk of anti-competitive impact, will undergo examination within a 30-day limit. For ordinary proceedings, considered more intricate, the timeframe is 240 days (with a possible extension to 330 days). 

The transaction can be unconditionally approved, conditional approved, or rejected.

According to the Guide for Horizontal Merger Review, CADE typically follows a structured process of four or five steps: 

• defining the relevant market involved in the transaction;
• examining horizontal concentration levels to determine potential market power of the new company (a more detailed analysis may occur if horizontal concentration exceeds 20% or 30% in cases of vertical integration);
• assessing if the resulting firm might abuse this power due to increased concentration, considering facts that include the potential for new entry and the level of competition in the market post-transaction;
• examining the buying capability already present or generated by the transaction in an input market; and
• analysing the potential economic improvements linked to the transaction.

For complex cross-border transactions undergoing concurrent evaluations in various jurisdictions, it is probable that the involved parties will need to authorise a confidentiality waiver. This waiver allows the sharing of confidential information among regulatory agencies in those different jurisdictions.

It is important to emphasise that providing inaccurate or false information, documents or statements carries penalties, including monetary fines from BRL5,000 to BRL5 million. Additionally, submitting such misleading data can significantly endanger the approval request for the transaction to CADE, potentially resulting in rejection.

Depending on the transaction’s complexity, CADE might ask for extra details and procedures. Nevertheless, for most cases involving horizontal concentration, the outlined steps typically cover what is necessary in order to reach a final decision.

When making a decision, CADE has the authority to fully approve, partially approve with specific conditions or reject the concentration act. In instances of partial approval, CADE defines specific restrictions that must be adhered to for the operation to be considered valid and effective.

If limitations are enforced, they can be implemented unilaterally or by mutual agreement among the involved parties. This is substantiated by proof that imposing these limitations will reinstate consumer welfare and economic efficiency. However, if the damage resulting from the removal of competition cannot be resolved by any form of restriction or remedy, CADE will opt to reject the transaction.

The Brazilian Antitrust Law allows for remedies, whether structural or behavioural, based on the specific situation, such as:

• the sale of assets or a set of assets that constitute a business activity;
• the spin-off of a company;
• the disposal of corporate control;
• the accounting or legal separation of activities;
• the compulsory licensing of intellectual property rights; and
• any other necessary action to eradicate detrimental impacts on the economic order.

The antitrust policy outlined in Brazilian law operates preventively concerning transactions. In other words, obtaining CADE’s approval is a pre-requisite for executing the transaction.

Engaging in “gun jumping,” defined as finalising concentration acts prior to CADE’s approval, is prohibited under the Brazilian Antitrust Law. Such actions could lead to the nullification of the transaction and a fine ranging from BRL60,000 to BRL60 million. The amount of the fine will depend on various factors, including the economic standing of the involved groups, their intent, and the competitive harm in the market. Additionally, CADE may initiate an administrative process imposing further penalties. For foreign companies, adherence to the Antitrust Law is mandatory when they operate or have any presence in Brazil, without specific limitations for FDI. 

It should be noted that CADE is very active in investigating transactions and enforcing its prerogatives. 

Currently, there is no national security review system in Brazilian laws. However, it is noteworthy, as mentioned in 1.2 Regulatory Framework for FDI, that the registration of foreign investment must be carried out with BACEN.

Even without a national security review system, all foreign investments must comply with the Brazilian law.

As Brazil does not employ a national security review system, refer to 1.2 Regulatory Framework for FDI for information on remedies and commitments..

For details on restrictions in certain sectors related to FDI, see 8.1 Other Regimes.

Certain economic sectors remain subject to government regulation, imposing restrictions on FDI. For example, industries such as nuclear energy, mail and telegraph services and the aerospace sector are explicitly prohibited from FDI. 

Furthermore, certain economic sectors of utmost importance to the domestic market have specific restrictions on foreign capital, including those mentioned below.

• Mining: the exploration and utilisation of mineral resources in Brazil necessitate specific federal authorisation or concession. The exploration and use of mineral resources in Brazil are restricted to Brazilian citizens or entities established under Brazilian laws which have their headquarters and an administrative body situated in the country.
• Telecommunications: companies licensed to offer telecommunications services must adhere to Brazilian legal organisation requirements, establishing their primary place of business and administration within Brazil. Also, the majority of capital must be owned by an entity domiciled in Brazil.
• Broadcasting (radio and free-access television): foreign investors can hold up to 30% ownership in broadcasting stations.
• Rural and frontier lands: the acquisition and leasing of rural property by foreigners in Brazil are subject to various restrictions. Currently, there is still a Bill in progress that aims to completely repeal the law currently regulating the acquisition of rural property by foreigners. If approved, the new legislation will streamline the purchase, although it will maintain certain limitations.

Direct Taxes – Corporate Income 

Brazilian entities are subject to taxes over income and taxes over their sales and revenue. The income taxation of these entities is made up of an income tax (Imposto de Renda da Pessoa Jurídica; or IRPJ) and a social contribution (Contribuição Social sobre o Lucro Líquido; or CSLL), both federal taxes are levied over the companies’ profit. The tax rates are as follows: 

• IRPJ – 15%, with a surcharge of 10% on monthly profits that exceed BRL20,000;
• CSLL – the general rate of 9% (some financial institutions are subject to a tax rate of 15% or more); and
• total effective rate – approximately 34%.

Although the last income tax reform was not approved, the current governmental body has already proposed a new income tax reform in 2024, which will result in changes to the taxation mentioned above. The new rules are expected to provide a reduction in the corporate income taxation and the return of the taxation over dividends, which are currently not subject to income tax (see 9.2 Withholding Taxes on Dividends, Interest, Etc), but non-proportional, resulting in an increase in the total tax burden.

There are two main ways of calculating the taxable income: (i) the actual profits method (APM) and (ii) the presumed profits method (PPM). The APM applies a nominal taxation rate over tax adjusted accounting income and makes it possible to carry forward net operating losses (NOLs) to offset taxable income in future years, but subject to a 30% limit of the annual income.

Alternatively, the PPM, an optional regime for companies whose gross revenue in the previous year was less than BRL78 million, corresponds to an estimated profit margin applied over the gross revenue rather than the actual one. This is generally: 

• 8% (for the IRPJ), 12% (for the CSLL) for industrial and commerce activities; and
• 32% for services.

Indirect Taxes – Revenue and Sales

On this matter, it is important to point out that the Brazilian National Congress is debating a Constitutional Amendment Proposal (PEC No 45/2019) which seeks to unify the indirect tax system in the country. The Bill was approved at the end of 2023.

The current Brazilian indirect tax system spreads the taxing power between federal, state and municipal governments, resulting in a highly complex system with legislation at different levels of the federation.

For instance, Brazil currently imposes two similar federal social contributions, the Social Integration Program (PIS) and the Contribution to Social Security Financing (COFINS). They can be calculated, depending on certain conditions, according to a non-cumulative or a cumulative regime, with combined rates of 3.65% for the cumulative regime and 9.25% for the non-cumulative regime; the non-cumulative system allows the appropriation of tax credits on some costs and expenses as determined by law. 

Further to the above, there are three other taxes imposed on sales.

• State Value-Add Tax (ICMS), which is a non-cumulative state tax levied at an average rate of 18% over the sale of goods, communication services and intercity or interstate transportation.
• Services Tax (ISSQN), a cumulative local/municipal tax applied over gross service revenues, at rates varying from 2% to 5%, depending on local legislation and type of service.
• Excise Tax (IPI), a non-cumulative federal tax levied over sales of industrialised products and goods sold by importers. The rate varies depending on the nature of the product. In this scenario, the Constitutional Amendment Proposal No 45/2019 unifies these five taxes into a Dual VAT system, plus a selective tax levy on goods and services harmful to health and the environment. 

The Dual VAT will be composed of a social contribution (federal) and a tax (municipalities and states) levied on goods and services in a general manner and, due to the same rules being applied to both of them, they should be perceived by the taxpayers as one single tax.

Some of the key features of this Dual VAT are as follows. 

• Uniformity: a single tax rate for all goods and services, except for specified reductions.
• Broad base: the tax will uniformly affect operations involving goods, services, as well as transactions involving intangible assets and the exploitation of rights.
• Destination-based: taxes will be due based on the location of consumption rather than production.
• Non-cumulative taxation: credit for all acquisitions, except for personal consumption as defined by law.
• Non-cascading calculation: CBS and IBS not included in their own tax base.

Under the current version, the full transition to the new indirect tax system is eight years away. The rules comprehend some partial changes from 2026 onwards, extinguishing PIS/COFINS in 2027 and the IPI, ICMS and ISS at the end of 2032.

There are also special tax rules for imports and exports. Exports are exempt of indirect taxation, however, imported goods are subject to Import Tax (II), which tax rate varies depending on the nature of the product. The import of services is subject to taxation that can reach up to 40%, namely:

• withholding income tax at 15% to 25%; 
• a special contribution (CIDE) at 10%; 
• PIS/COFINS at 9.25%; and
• ISSQN from 2% to 5%. 

Also, for international transactions involving foreign exchange transactions, there is usually a financial transaction tax (IOF/FX) levied at 0.38% over the foreign exchange contract value.

Double Tax Treaties 

For international remittance, it is important to take a special look into Brazil’s International Double Tax Treaties (DTT) list. Brazil currently has a total of 38 DTTs in force and, despite the restricted number, there are some important countries among them. In 2023, the Tax Treaty between Brazil and Uruguay finally came into force.

Despite the problematic position of the RFB regarding DTT applicability over national law, it is possible to gain important tax savings from the texts of many of these treaties, considering that some include matching credit provisions.

Under these clauses, which can be found in DTTs with Canada, France, Italy, Luxembourg and the Netherlands for example, a tax credit is granted on a fixed tax rate for the income beneficiary, usually at a higher rate than it was held in Brazil.

Another provision that can bring tax efficiency is indirect tax credit, which allows the beneficiary to offset over the income tax due abroad the income tax paid by the Brazilian entity over its own profit. That is to say, it allows the beneficiary to offset the IRPJ and CSLL (approximately 34%) collected by the Brazilian entity instead of withholding income tax. 

Dividends 

Dividends are not subject to taxation, regardless of whether the beneficiary is a local shareholder or a foreign one. Dividends are exempt from the income tax and the Tax on Foreign Exchange Transactions (IOF/FX) rate is currently zero.

Changes relating to the above are to be expected during 2024, due to an almost certain new income tax reform being proposed by the current government (see 9.1 Taxation of Business Activities). However, it is important to highlight that if there is a new law bringing about the return of dividends taxation in 2024, its effects would only be produced from 2025 onwards.

Interest

Interest remitted abroad is subject to WHT at a general tax rate of 15%. If the beneficiary has its residence or is domiciled in a jurisdiction considered as a tax haven, the applicable rate is 25%. 

The interest is liable to a deduction for the Brazilian entity source of the payment, if it adopts the APM), respects thin-capitalisation rules and, if the investor is a related party, observes transfer pricing limits (see 9.5 Anti-evasion Regimes). 

Interest on Net Equity 

In Brazil, entities adopting the APM have the option to deduct a deemed interest on shareholder’s invested capital. This income is called juros sobre capital próprio, loosely translated to interest on net equity, being deductible for IRPJ and CSLL and taxed at source when paid to foreign investors at a rate of 15%. This system generates a possible tax benefit of around 19% (a 34% IRPJ/CSLL deduction less 15% withholding at source).

By the DTTs, the nature of such income is qualified as dividends or interest, depending on each DTT. For old DTTs, the interest on net equity is usually understood as dividends, but this nature is changed on newer DTTs.

Under the aforementioned income tax reform that is expected to be implemented in 2024, the interest on net equity has serious risks of being revoked from Brazilian legislation. The current government tried to extinguish it in 2023, but did not succeed.

Royalty 

For royalty remittance abroad, the taxation in Brazil is in general: 

• WHT at 15%, 25% for tax havens; 
• special contribution (CIDE) at 10%; 
• PIS/COFINS, 9.25% can be charged by RFB, but there are arguments to defend its non-incidence; 
• ISSQN from 2% to 5%, but also with the possibility to defend its non-incidence; and
• IOF/FX over foreign exchange at 0.38%.

For a brand royalty, it can be harder to defend the inapplicability of ISSQN, considering that, although it may sound absurd, the remuneration from the licence of a brand can be considered as a service fee for the licensor. In this same sense, the risk of a PIS/COFINS charge is also higher than compared to a royalty paid based on other reasons, eg, other rights, patents or properties.

Due to new transfer pricing rules, which are more aligned with OECD guidelines, royalties will be subjected to transfer pricing under Brazilian legislation (see 9.5 Anti-evasion Regimes)

Deals – Acquisition of Structures 

In a share deal, the buyer can achieve two important tax mitigations, the step-up in basis for depreciable assets and the goodwill amortisation. For the first one, the tax benefit will be utilised during the depreciation period. 

For the amortisation of goodwill, namely the difference between the purchase price and the net equity plus the fair market value of assets and liabilities, this amount can be amortised from IRPJ and CSLL over a minimum of five years (1/60 per month). 

However, to benefit from it, some legal requirements must be observed; eg, a PPA report must be filed before the RFB or a public notary, and the acquiring and target companies must be merged. 

The business carried out between related parties is not accepted for goodwill amortisation and the RFB has a restrictive approach when the business involves the use of a vehicle entity. 

In an asset deal, although uncommon, the tax benefits from the step-up in basis for depreciable assets can also be achieved. 

ICMS Incentives/Reductions 

As the ICMS is a value-add tax regulated by states (see 9.1 Taxation of Business Activities), there are states that grant incentives and others that do not. Current legislation provides that government grants are valid until 2032.

In the other hand, due to the reduction of the ICMS tax rate during the transition from the current indirect tax system to the new Dual VAT one, the aforementioned indirect tax reform (see 9.1 Taxation of Business Activities) indirectly provides for the reduction of the benefits from these states’ grants, on a rate of 1/10 per year, from 2029 to 2032.

However, although the extinction of states՚ government grants from 2032 onwards, analysing the possibility of ICMS incentives for the state of interest or for those that surround it can still bring an important competitive advantage on the current market for the next ten years.

Earnings Stripping

The payment of interest is liable to deduction if the Brazilian entity adopts the APM, respects thin-capitalisation rules and, if the investor is a related party, observes transfer pricing limits (see 9.5 Anti-evasion Regimes for more information about thin-capitalisation and TP rules). 

The payment of royalty to shareholders, due to the new Brazilian transfer pricing legislation, can be considered deductible expenses, as it observes new TP rules (see 9.5 Anti-evasion Regimes). 

Net Operating Losses 

See 9.1 Taxation of Business Activities. 

Restructuring of Economic Activity 

Brazil does not allow tax consolidation by companies and their controlled subsidiaries. However, reorganising the economic activity executed by one entity into two or more entities can provide tax efficiency by allowing the new entity to adopt the PPM or allowing one of the entities to adopt the PPM and generate tax credits between intragroup transactions.

To follow the strategy above and be successful, the RFB will demand that the restructuring involves, at least:

• business purposes in addition to the tax saving; 
• both companies having economic substance; and
• intragroup transactions complying with margin requirements. 

Offshore Structure

In order to avoid the Brazilian WHT on the sale of FDI (see 9.5 Anti-evasion Regimes), it is possible to use an offshore company as an intermediary between the foreign investor and the target Brazilian company.

In this case, the indirect disposition of Brazilian assets is not covered by domestic legislation, although tax authorities can disregard the structure if there is a lack of substance or when tax saving is the only driver for the structure.

It is also important to mention that the rules regarding offshore structures are also facing changes in Brazil. However, the structure outlined above is not yet impacted by the current version of Bill No 4,173/2023, which is being reviewed by the Congress.

Judicial Claims for the Refund of Unduly Paid Taxes and Cash Flow Improvements

In previous years, the Brazilian Supreme Court (STF) and Superior Court (STJ) reviewed several tax-related claims, some with a favourable outcome for taxpayers.

Such legal discussions aim to recover unduly paid taxes in the five years prior to the filing of the lawsuit plus interest, as well as to improve a company’s competitiveness and cash flow. 

It is important to emphasise that such discussions may be addressed through a writ of mandamus to prevent any risks of payment of succumbence fees.

Capital gains derived by a foreign investor from the sale of FDI are subject to taxation according to the same rules applicable to tax residents. Thus, the capital gains are levied at a progressive tax rate ranging from 15% to 22.5% in a WHT system. 

Some exceptions to the above are:

• capital gains related to transactions carried out on the Brazilian stock exchange, which are exempt; and
• income distributed by private equity funds (FIPs) or capital gains in connection with the sale/amortisation of their quotas are levied on a 0% WHT rate.

Anti-avoidance Rules 

Brazil does not have special anti-avoidance rules for certain types of FDI or anti-hybrid mismatch rules. The National Tax Code does contain a general anti-avoidance rule, which authorises the RFB to disregard transactions carried on by tax payers with the intention to change or disguise the true nature of the transaction. 

As this provision demands further regulation to be valid, which has not been implemented yet, there is a lot of discussion around whether it is possible or not for the RFB to rely on this rule to effectively disregard tax planning (and, for example, postulate the necessity of the characteristics exposed in 9.3 Tax Mitigation Strategies when analysing companies’ restructuring).

On this subject, the Supreme Court has previously decided on a lawsuit in which it was being argued that the illegality of the general anti-avoidance rule was legal. However, on the vote of the rapporteur minister, it was highlighted that it still depends on further regulation to take effect, which is favourable to taxpayers.

Thin Capitalisation 

Brazilian thin capitalisation rules impose the debt limit on which deductible interest payments are allowed, based on the following criteria. 

• When the foreign related party is a shareholder, the deductibility of interests paid abroad will be allowed if the debt does not twice exceed the equity participation by such foreign related party in the net equity of the Brazilian entity.
• When the foreign related party is not a shareholder, the deductibility of interests paid abroad will be allowed if the debt does not twice exceed the net equity of the Brazilian legal entity.
• When the foreign party is resident or domiciled in a tax haven and/or subjected to a privileged tax regime, the deductibility of interests paid abroad will be allowed if the debt does not exceed more than 30% of the net equity of the Brazilian legal entity. 

Ttransfer Pricing (TP) Rules

In 2023, Brazil established new TP rules, changing the previous system to one that is aligned with the OECD model.

The incorporation of the new rules was discretionary for 2023 and mandatory from 2024 onwards.

Due to substantial changes brought by the new model, it is important for companies that already operate in Brazil to revisit their TP policies to identify risks and opportunities brought about by the new regulation. For those companies starting to invest in the Brazilian market, the new model should be easier to comprehend, as it implements OECD’s arm’s length principle in the place of Brazil’s unique fixed margin. 

As part of overcoming the previous fixed margin system, functional and comparability analysis have been incorporated into the rules. In addition, all OECD transactional methods and profit transactional methods have been provided. 

It is important to also highlight the following changes.

• Intercompany services: there is a broader approach and specific rules introduced for Cost Contribution Agreements (CCA). There are new rules for business restructuring with transfer of functions, assets and risks that could in any way affect the potential profit. The expansion of the concept of financial transactions and revision of the interest deductibility rule to include guarantees, insurance, loans, and cash pooling have also been introduced.
• Intangibles: all transactions involving intangibles will be analysed under TP rules, including intangibles hard-to-value (HTV). The limitation for deductibility of royalties and technical scientific, scientific and administrative or similar assistance were extinct except if in a tax haven or resulting in double non-taxation.

Brazil has undergone some significant changes in 2023, which will be the focus of great attention in 2024, eg, the concern with the latent gender inequality in the labour market.

Thus, the implementation of the “Employ + Women Program” (Law No 14,457/2022) took place, with the creation of support measures for parenthood in early childhood, aiming to encourage and facilitate womens’ access to and maintenance in the workforce. Additionally, there are measures to prevent and combat sexual and moral harassment in the workplace.

The Salary Equality Law (Law No 14,611/2023) has also emerged to reinforce and create incentives to strengthen equal rights between men and women. It significantly increases the value of administrative fines in cases of gender-based wage inequality resulting from discrimination and establishes mandatory measures for companies.

Also, at the end of 2023, the eSocial for labour lawsuits was implemented, whereby companies will be obligated to keep the system updated, especially with information regarding settlement payments and executions, under penalty of fines and the provision and contingency of labour lawsuits.

The year 2024 is also expected to bring changes regarding the discussion on the obligation and constitutionality of union assistance contributions, even for non-unionised employees, due to a recent decision by the Supreme Federal Court. 

Additionally, there may also be changes in the law for drivers (Law No 13,103/2015), considering that a decision by the Supreme Federal Court declared some aspects of the law unconstitutional and altered provisions related to rest periods and the time available to the employer. This could impact the Brazilian economy overall, given freight costs and the fact that road transport is the leading paradigm in Brazil.

Employee compensation is created especially for cash salaries through bank transactions. For employees, there is also the payment of part of the social security contributions and guarantee funds, as well as the possibility of including commissions and premiums. Payment through pensions is not very common. 

In the event of a change-of-control or other investment transaction in the company or even in the Brazilian jurisdiction, it is essential that employees do not suffer a reduction in their salaries and that buyers continue the respective payments as consideration for the work performed. 

In the event of an acquisition, change-of-control of the company or other investment transaction in Brazil, it is essential that employers respect the base salary received by the employees before the corporate change and there must be prior communication about the changes and/or maintenance of the granted benefits. 

However, it is important to clarify that in such event, rights and duties remain and the employment relationship is maintained with the company, regardless of split, acquisition, merger or any other corporate transaction, and the company assumes all the obligations previously provided for, so that the rights of employees cannot be reduced. 

The employment contract is maintained, including in relation to the functions performed, salary and working hours, so that any change will only be allowed if there is no harm to the employee. 

If the new employer chooses to terminate the employment contract, it must notify the employee in advance or pay the indemnified prior notice, with all severance payments due for the years of service provided. 

Also, in the event of an investment acquisition or transaction, the union’s involvement is important to ensure respect for employees’ rights through collective bargaining.

Intellectual property is not an important aspect in screening FDI in Brazil. From 1 January 2024, the annotation or registration of contracts before the Brazilian National Institute of Intellectual Property (INPI) shall not be necessary for tax deductibility purposes. Additionally, as of 30 December 2022, the annotation or registration before the INPI is no longer a requirement to justify royalty transfers abroad.

In recent years, there has been a distinct positive trajectory in the data concerning the prevalence of intangible assets. The INPI, entrusted with the issuance and maintenance of industrial property registrations, has undergone substantive modernisation under its most recent management. It has actively emphasised the paramount significance of protecting trademarks, patents and industrial designs across diverse sectors of economic activity. 

The INPI is committed to concluding the evaluation of patent applications within a maximum of two years from the submission of the examination request. This initiative aims to speed up and simplify the patent protection procedure in Brazil, by introducing new criteria for patent invalidation and eliminating the requirement for antecedent consent from the Brazilian National Health Surveillance Agency (ANVISA). 

As of July 2023, it is also possible to register know-how (for technologies which cannot be subject to patent protection).

The Brazilian General Data Protection Law (LGPD) has been in full force in Brazil since 2020. It establishes the requirements for processing personal data, imposes obligations on organisations that handle this data, defines the rights of data subjects, and provides for the penalties applicable in the event of non-compliance with its rules.

The LGPD has extraterritorial scope, since it applies to any processing activity:

• whose personal data has been collected in Brazil;
• whose processing operation is carried out in the Brazilian territory; and
• which aims to offer or supply goods or services to people located within the Brazilian territory, regardless of the nationality, origin or headquarters of the data subject and the parties involved in the processing (controllers and operators).

In that sense, foreigners who process data collected in Brazil or who process personal data for the purpose of operating in the Brazilian market must comply with the regulations brought in by the LGPD.

The LGPD provides fines of up to 2% of the revenue of the company, group, or conglomerate in Brazil in its last financial year, limited to BRL50 million per violation, and other sanctions such as warnings and public disclosure of infraction in the event of non-compliance with its provisions. However, only seven administrative processes are in place so far, affecting big techs and governmental bodies, with the first penalty of BRL14,400 being applied in July 2023, a figure considered low by experts.

The authority overseeing compliance with the LGPD has been adopting a reactive regulatory approach. This mainly involves offering guidance and preventative measures to enforce the law. Sanctioning mechanisms, such as fines and warnings, are only used when preventative measures prove insufficient or ineffective in achieving compliance from data processors.