The Top 5 Corporate Compliance Issues Facing Brazil

compliance in brazilWith its strong economy, the Brazilian market today is one of the world’s most appealing destinations for international businesses and investors. Companies from North America, Europe, the Middle East and Asia are starting or expanding their operations there. In 2010 Brazil received $48.5 billion USD in foreign direct investment (FDI) – the third highest in the world. Notwithstanding the vast potential of this lucrative market, foreign companies entering Brazil must be ready to confront a multitude of unfamiliar corporate compliance challenges.

Foreign investors and companies alike must learn to navigate Brazil’s maze of laws and regulations, while understanding its bureaucracy. This article identifies and analyzes five of the major corporate compliance issues facing the modern foreign investor looking to succeed in Brazil.

1. Applicable Contract Law

The first issue involves applicable contract law. It is not unusual for international transactional attorneys to assume that Brazilian contract laws are similar to those of more familiar jurisdictions. This dangerous assumption can lead to unenforceable, or worse, unlawful contractual provisions under Brazilian law. Foreign attorneys must carefully consider the important differences between Brazilian contract law and that of their home countries to ensure that all contractual provisions are legally enforceable in Brazil.

For example, the United States allows parties leeway to contract for whatever the respective parties deem important. In Brazil, however, the right to contract is much more narrow in scope because Brazilian laws pre-determine much of the parties’ rights and contractual obligations prior to contract formation. Furthermore, the general partnership provisions of the Brazilian Civil Code expressly prohibit a manager from unilaterally replacing himself in a partnership, even if the partnership agreement expressly permits a manager to do so. On the other hand, under U.S. partnership law, doing so would be lawful if agreed to under contract.

To navigate the myriad of risks involved in divergent contract laws, an experienced international attorney familiar with both Brazilian contract law and the laws of a respective corporation’s home jurisdiction should be retained to carefully draft and revise all contracts being used in Brazil.

2. Appropriate Company Formation

The second issue concerns the type of company (sociedade) to be established in Brazil. The Brazilian Civil Code and other applicable local laws provide for more than nine different types of corporate entities that can be used in Brazil. Before choosing the form of partnership or the type of company to be created, a foreign company should carefully consider its long-term plans for operating in Brazil.

Most businesses choose to become a limited liability partnership or a corporation. Such entities, however, are not always the best choice for incorporation under Brazilian law. For example, the Brazilian Civil Code bars limited liability partnerships, common in the United States and other jurisdictions, where one partner provides only services while the other partners contribute the capital necessary to sustain those services.

When the draft of the partnership or corporation agreement is not in compliance with the law, the government will enforce the partnership or register the certificate of incorporation. This will delay the company formation or, worse, bar the corporation from transacting business in Brazil.

3. Filing Papers with the Correct Authorities

After drafting the partnership or corporate registration documents and selecting the appropriate corporate entity, the third issue involves filing the appropriate incorporation documents with the correct government authorities. Here, bureaucracy often overrides efficiency. Foreign companies must learn to overcome hurdles that do not apply to domestic Brazilian businesses.

For example, a certified Portuguese translator must translate every document currently in a foreign language. Moreover, notarized documents must be given legal effect by the Brazilian consulate or a cartório in Brazil. This process can be costly and time consuming.

After fulfilling all the legal requirements and gathering all the documents, the filing must be prepared for three or four different governmental departments. In some cases, it is necessary to file the documents in one department first, in order to be approved by another department. Navigating this bureaucratic maze requires guidance from professionals who not only know the law but know how to properly interact with local government officials and effectively respond to unforeseen procedural hurdles.

4. Visa Application Issues

The fourth issue relates to the visa application for foreign investors. Unlike other countries, including the United States, two distinct government departments – the Department of Justice and the Department of Labor – handle Brazilian immigration services. Not surprisingly, the visa application process contains many hidden traps. An experienced local attorney can advise corporate clients on issues such as selecting the most appropriate type of visa, the correct duration and ensuring that the correct application form is used in order to obtain proper and timely approval.

Moreover, in recent years, the Brazilian Department of Labor has been denying many petitions for permanent residency visas. A foreign investor who wants to invest the required amount of money to gain permanent residency must first be approved by the Department of Labor and then file with the Department of Justice. This two-step process often proves to be time consuming.

5. Tax Law Complications

The fifth major compliance issue relates to taxation. Brazil has one of the highest tax rates in the world, making it essential for newly established companies to choose the correct tax structure to protect against excessive taxation.

In some cases, companies are bound by the law to choose a specific tax bracket. For instance, companies that generate gross income over R $48,000,000 (approx. $30,000,000 USD) a year, are required by law to be placed in a very high tax bracket. Depending on the nature of the business, the attorneys and accountants involved must be able to distinguish in intricate detail the confusing myriad of tax laws and regulations to ensure compliance and minimize obligations.

Starting a business is never an easy task, especially in Brazil. Companies and investors alike must tread carefully in order to prevent unpleasant surprises. Lately, the Brazilian government has been proposing new laws and regulations to accelerate the process of company formation and reduce bureaucratic hurdles. This indicates that the government is sensitive to investors’ vocal concerns about the inefficiencies of the current system.

Brazilian laws are evolving at a rapid pace, and so must the attorneys who practice in this jurisdiction. In order to provide the best legal service possible, international attorneys must be constantly informed of new developments and emerging legal and business trends. International law firms with a deep localized understanding of the dynamic Brazilian market can navigate clients through what can potentially be a legal minefield, helping them achieve success.

About the Author

Michael Diaz Jr.

Michael Diaz Jr - Brazil compliance columnist About the Author Michael Diaz Jr. is founder and managing partner of Diaz, Reus & Targ LLP (http://www.diazreus.com/) and an international business litigation and transactions lawyer who represents international clients on cross border investments, project finance and corporate transactions on behalf of foreign and multinational companies, multinational financial institutions, foreign governments and state-owned entities. He is Cuban born, bilingual, and also a highly accomplished and noted litigator focused on helping corporate and individual victims of international financial fraud recoup assets—Class Action, Ponzi schemes (including Madoff and Stanford), pyramid schemes, white collar crimes and money laundering, and RICO litigation. (See BusinessWeek’sBig Game Asset Hunters,” July 6, 2009.) Mr. Diaz is also a former assistant state attorney for Janet Reno, who successfully investigated and prosecuted highly publicized corruption, economic, drug, homicide and other high profile cases. He has more than 21 years in private practice defending and investigating noted Latin American money-laundering and public corruption cases: Montesinos, Aleman/Jerez, Casablanca, Rosemont, Michael Kenwood/ Illarramendi and more. He is a highly honored and a frequent guest lecturer and commentator on international legal and banking issues. For the latest news and commentary on breaking cases, you can follow Mr. Diaz on Twitter @michaeldiazjr, Facebook, LinkedIn, JDSupra or visit his blog, International Asset Hunter. Mr. Diaz’s Practice Areas:

Diaz, Reus & Targ LLP is an international law firm with offices in Miami and Orlando, Florida; Shanghai, China; Frankfurt, Germany; Caracas, Venezuela; Dubai, United Arab Emirates; Mexico City, Mexico; Bogota, Colombia; Buenos Aires, Argentina; and Sao Paulo and Belo Horizonte, Brazil. Mr. Diaz writes a regular column, Compliance in Brazil, for CCI.