CHAPTER 2

CHAPTER 2

Business Creation And Legal Obligations

BUSINESS CREATION

Breaking into the Brazilian market is hampered by lengthy legal procedures, especially for industrial companies. Brazil remains in the latter half of the annual rankings on the ease of business locations. In 2016, the World Bank ranked Brazil in 116th position out of 189 countries assessed on the sole criteria of “Starting a Business”:

Among the criteria used to assess the Ease of Doing Business, one is related to “Paying Taxes”. With respect to this sole criteria, Brazil ranks 178th!

A comparison between Brazil, Latin Americ & Caribbean, and OECD shows how big the gap is with respect managing the tax issues :

Nevertheless, the authorities – the Federation and Federal States – have already achieved some initial progress. Today, starting a (micro) business in Brazil requires – with the assistance of a lawyer and an experienced accountant – about 15 days at a relatively low cost.

Time and budget are very different for international companies moving into Brazil. In practice, for the Brazilian subsidiary of a foreign group, preparation of necessary documents will take several weeks and can take up to several months.

The main necessary documents are:

  • Registration of the Articles of Association at the Commercial Register (Junta Comercial),
  • Registration with the Public Treasury (Receita Federal) to obtain the National Number of Legal Entities (CNPJ),
  • Register with the Sefaz State Authorities (for a commercial or industrial company),
  • Registration with the Municipality of establishment,
  • Declaration of the employees with the Social Security (INSS), and with the CEF Bank (which manages the FGTS – Service Time Guarantee Fund).

Once the company is created (with the CNPJ number issued) it is necessary to open a bank account. For the Brazilian subsidiary of an International company, opening a bank account can be a very time-consuming process. Banks will have to identify who are the individual’s shareholders of the legal entity investing into Brazil.

The compliance departments of banks in Brazil are picky and slow, and one should expect another 3 months (or more) to get the bank account opened (of course, for PLCs, this wont be necessary, and others requirement will apply).

Ease of Doing Business Ranking

Scroll vertically to see Brazil’s rank. Scroll horizontally to see more columns.
Source: The World Bank (www.doingbusiness.org/rankings/)

About the Name of your Company
Normative Instruction N°116 (IN 116)

A first necessary step is related to the name.

The Normative Instruction N°116, 29th November 2011 states all regulations about the name of the company. Depending on the legal form of your company, you may have to include:

  • the name of the partner,
  • a statement describing the activity of the company,
  • the information about the legal form of the company,

Article 6 of the IN 116 states that in the same Federal State, two companies cannot have the same name; or a similar name.

When opening a branch (with the same name) in another federal state, the name is automatically registered and protected (Art 10).

According to Article 14, Micro and Small Companies must specify ME (Micro Empresa) or EPP (Empresa de Pequeno Porte).

To verify that a name is available and to register a name, it is necessary to go to the website of the Junta Comercial of the State where your company will be registered. Select REGIN (Registro Integrado) and follow the process. A 21 pages’ document explains (in Portuguese) in details the steps to fill out the form online.

It is first required to create an account in order to receive login and password. Then, some information is required, among other things the exact name and the social object (using the CNAE codification).

At the end of the process, a 13 digits protocol number is given. This will allow the applicant to consult and follow the process of approval through consulting the website.

Evidence that the process has been followed and the name approved must be included in the file to be sent to the Registry of Commerce (Junta Comercial).

The main procedural requirements are as follows:

  • Recording of the Articles of Association to the Board of Trade (Junta Comercial),
  • Registration with the Public Treasury (Receita Federal) to obtain the Legal Person National Registration number (NIRE &CNPJ),
  • Registering with the Authorities of the State where the company resides,
  • Registering with the Authorities of the City Hall where the company resides,
  • Declaration of employees at the INSS (Social Security) and CEF Bank (Caixa Economica e Federal, in charge of the Fund of Guarantee for Time of Service, ‘FGTS’).

The table below shows clearly that some steps are very much impacted by the political and administrative organization of Brazil; they must be done at each level: Municipal (Prefeitura), State (Estado) and Federal.

Process of setting up a new company

The NIRE number (Número de Identificação do Registro de Empresas) is the identification number at the Register of Commerce. It’s a unique number that gives evidence that your company officially exists.

To operate in Brazil, all companies must be registered to:

  • The Municipality,
  • The State,
  • The Federation,
  • The Social Security (Previdência Social).

Each Federal State has its own Register of Commerce (Junta Comercial); for example: JUCESP (São Paulo), JUCEMG (Minas Gerais), JUCERJA (Rio de Janeiro), etc.

Prices, delays and conditions for opening up a new company depend on each state.

Process of setting up a new company

NIRE and IE must be done with state authorities, CNPJ with the Federation, and Alvara with local authorities.

General Process

  • Since all documentation provided to the authorities need to be authenticated, you need to register your signature at a Notary office (“cartório”),
  • Name your company (rules apply depending on the form of your company). Register the name of your company. To make sure the name of your company is acceptable; go through the REGIN process (on the Junta Comercial website).
  • Write the social contract; and make sure the content is fully compliant with Federal and State laws. Sign the contract and authenticate the signature. Two partners are necessary; both with CPF or CNPJ.
  • Edit the DBE (Documento Básico de Entrada). For this go to the receita federal website, download the CNPJ application (be aware that there are regular updates). Print 2 copies and have them authenticated by the notary.
  • Pay the relevant taxes: on the Junta Comercial website, issue the document for paying taxes relevant to setting up the company (boleto on the Junta Comercial website + DARF with receita federal). Pay the taxes and keep a receipt to add into the file.
  • Provide the file to the Junta Comercial, and keep the file number received. With this number you will be able to follow the status of your file online.
  • After approval from the Junta Comercial, you can edit the CNPJ online. CNPJ will show the birth date of your company, but you still cannot issue invoice (Nota Fiscal).
  • In order to issue NF, you need a special Municipal license (called Alvará), and a special electronic device (Certificado Digital).
  • For some specific sectors (mainly Industries and Commerce, a State License (Inscrição Estadual) must be obtained (at the Secretaria Estadual da Fazenda).
  • All companies must be registered with Social Security (Previdência Social) and CEF Bank.

On January 29, 2016, the Brazilian Government issued Decree 8,660, which ratifies the Hague Convention of 1961. The Hague Convention came into force in Brazil on August 14, 2016.

The Hague Convention provides that all public documents from the Contracting States (countries that have signed it – including the United States, Japan and the European Union countries) are recognized as valid and effective in other Contracting States.

However, a certified translation of these documents must still be made before they can be submitted to Brazilian courts or government agencies.

  • EI (Individual Entrepreneur),
  • EIRELI (Individual company with limited responsibility),
  • “Sociedade Limitada” (Ltd.),
  • “Sociedade Anônima”(Plc),
  • “Sociedade em Comandita Simples” or “Sociedade em
    Comandita por Ações”,
  • “Sociedade em Nome Coletivo”(General Partnership),
  • “Sociedade em Conta de Participação”,
  • Cooperative,
  • “Consórcio”,
  • Branch.

The table below shows that Ltd. is the most common legal form in Brazil (“Empresario” is a one-man company).

Statistics on Legal Form (Example of State of Bahia, 2014)

The four most popular forms (EI, EIRELI, Ltd and Plc) are described below.

THE INDIVIDUAL COMPANY (“EI”)

The Empreendedor Individual (“EI”) (or Empresário; or Micro Empresa Individual “MEI”) should allow the legalization of most of the 12 million “informal” businesses operating in Brazil.

Not all professionals can apply for EI regime; those entitled to be EI are usually small scale producers, traders or sellers. ‘Intellectual’ professions are not entitled to select the EI option. Instead of EI, these professionals are considered ‘autonomous’ (ex: engineer, architect, accountant…). It’s necessary to contact the Municipality to obtain the list of services and activities that can apply for the EI.

The process of incorporation of an Individual Company is described in article 966 of the Civil Code and has been simplified by the “Complementar Law” nº 128, 19/12/2008.

For foreigners, it is just necessary to have a permanent visa, a certified copy of his identity, and an application for incorporation. Documents from abroad must be translated into Portuguese by a professional registered with a Chamber of Commerce and certified by a notary.

To fight against parallel economy, the government gives incentive for individuals turning into a legal entity. Some key limitations:

  • Yearly turnover cannot exceed 60,000 R$,
  • The entrepreneur cannot hire more than 1 employee,
  • The entrepreneur cannot be partner or administrator of another entity,

The EI provides the following benefits:

  • Social Security financial benefits,
  • Maternity leave,
  • Retirement,

Be aware that the EI is not a legal entity, i.e. personal assets of the entrepreneur are at risk.

CONSTITUTION

The process of constitution does not cost anything. Besides, all accounting offices using the Simples method, must offer for free and for the first year, the services of filling out all required information (see description below) and of editing the first annual tax declaration. The MEI gets an Identification Number (CNPJ) and can also have access to banking services.

Additionally, there is no need to edit a monthly P&L, therefore no need to pay accounting services. There is just a monthly plain-vanilla report on turnover.

Application for MEI is done through an internet website: http://www.portaldoempreendedor.gov.br. Information to be input is: CPF, birth date, income tax personal identification number, or Voter’s number (for foreigners, or Brazilian exempt of paying income tax or voting, it’s necessary to contact the Sebrae 0800 570 0800). Then, much information is required, on the type of activity, and way of providing services (in office, at client’s, door to door, internet, telephone selling…). The commercial address can be a residential address.

At the end of the document, it is necessary to opt for the Simples and for the Simei (DASN SIMEI – Declaração Anual do Simples Nacional – MEI).

You then obtain an Identification number for your company (CNPJ), and a registration number before the Chamber of Commerce (Junta Comercial). You receive a MEI certificate (Certificado da Condição) that is also a tempory Licence (“Alvará de licença e funcionamento provisório“).

TAXATION

These are the following monthly taxes:

  • 5 R$ of ISS payable to the Municipality,
  • 1 R$ ICMS to the State,
  • INSS is reduced to 5% of the minimum salary, i.e. 39.40 R$.

There is no tax payable to the Federation.

An MEI must issue invoice (Nota Fiscal) only when it sells to legal entities. Such formal documentation is not required when the MEI sells to individuals.

OBLIGATION

The same website provides the required document used to pay taxes (DAS – Documento de Arrecadação Simples); the deadline is the 20th of each month.

Likewise, it is necessary to edit monthly (deadline 20th) the turnover report (“Relatório mensal das receitas brutas“). Turnover must be disclosed in this document, with details between services, commerce and industry:

  • Commerce with edition of necessary tax documentation,
  • Commerce with no obligation to edit tax documentation (final client is an individual),
  • Industry with edition of necessary tax documentation,
  • Industry with no obligation to edit tax documentation (final client is an individual),
  • Services with edition of necessary tax documentation,
  • Services with no obligation to edit tax documentation (final client is an individual).

After editing the document, it’s necessary to sign it, annex the tax documentation issued, and tax documentation related to purchases of goods and services. The entrepreneur cannot buy anything without tax documentation.

This report must be archived and made available to tax inspectors. It’s used to make the tax declaration (DASN SIMEI). This disclosure must be sent every year on the last day of May, and done through the following website: www8.receita.fazenda.gov.br/SimplesNacional/

The function of “Manager” is not an obligation, while the one of “Accountant” is obligation. The accountant must be qualified and is responsible for the bookkeeping. He can be an employee of the MEI or a service provider.

STAFFING

An EI can hire a maximum of 1 employee; and through the CLT laws, he/she may be an employee or an autonomous professional.  The employer must pay FGTS and send information to Social Security (GFIP: Guia do FGTS e Informaçao à Providencia Social) on the 7th of each month, through the system of the CEF Bank (this application must be downloaded at www.receita.fazenda.gov.br).

SEBRAE

Sebrae is The Brazilian Service of Support for Micro and Small Enterprises and serve as a hub for people interested in entrepreneurship in Brazil. It was founded in 1972 and counts on a network of 4,433 employees and 9,223 external consultants.

Sebrae is the main source for reliable information about entrepreneurship in Brazil; from working visas for foreigners to schedules of entrepreneurial gatherings. Sebrae has all the official answers foreign investors need. It may be slower than a Google search but it is definitely more accurate.

More information is available on this site (in Portuguese) : http://www.sebrae.com.br/sites/PortalSebrae/sebraeaz/tire-suas-duvidas-sobre-o-mei-microempreendedor-individual,e31c13074c0a3410VgnVCM1000003b74010aRCRD

INDIVIDUAL COMPANY WITH LIMITED RESPONSIBILITY (“EIRELI”)

The law nº 12.441 of 2011, created the Limited Individual Company. It came into force in 2012 and immediately proved very popular.

With the Empresa Individual de Responsabilidade Limitada (“EIRELI”), it is now possible to set up a company without the need to have a partner.

For many companies created, the founder had to look for a partner, most likely a member of his family, or a friend in order to comply with the minimum number of partners. In most cases, the second partner had just a tiny or symbolic share of the capital and had no participation in the management of the company, neither in the daily operations, nor in the long term strategy. The EIRELI makes it possible to avoid looking for this loophole; it makes official what already existed.

The EIRELI is a profit oriented legal entity, set up by a unique associate. This is different from the Individual Company (‘Empresário’), which is not a legal entity.

With EIRELI, the associate can create his own company independently, without putting at risk his own assets. The responsibility of the EIRELI is limited to the company’s own assets.

On the other hand, one key constraint is that a minimum capital is required and must be at least 100 times the current minimum federal salary, i.e. 72400RS in 2014 (following increase in the minimum salary does not affect the minimum required capital). Capital can contain fixed assets. 

The separation between assets of the company and assets of the lone associate must be clearly maintained. Failing to do so might result in the extension of the financial responsibility of the company to the associate’s own assets; for example, if the company fails to pay its debts.

It is advised for the associate to limit the powers of the administrator to the objects, and to forbid any major operation such as providing guarantee, committing the entity.

EIRELI – Necessary information in the Articles of Association (“AA”)

The AA must be approved by a lawyer and must contain his name and his Brazilian lawyer registration number (OAB). The AA must be registered at the RCPJ (Registro Civil de Pessos Juridicas).

There is a new “National network for streamlining registration of new companies” named REDESIM (Rede Nacional para a Simplificação do Registro e da Legalização de Empresas e Negócios). The RCPJ is connected to this Network and will allow through their website the following:

  • Searching and booking a name,
  • A link to fill the DBE,
  • Obtaining the CNPJ,
  • Automatic transfer to City Hall for obtaining the local registration (“Cadastro municipal“) and license (“Alvará“),
  • State registration (‘Inscrição Estadual’).

Necessary Clause:

The name must terminate with “EIRELI”. It also must indicate the activity or the main activity if more than one is performed. It can contain the name of the associate. 

It is possible at the time of the constitution to select Micro Company (MEI) or Small Company (Empresa de Pequeno Porte – EPP), and specify in the AA to be provided to the RCPJ: 

  • The complete address,
  • The clear and exact description of the object,
  • The life period,
  • The social capital.

It’s also necessary to include a declaration in which the associate states that he is not associated in another EIRELI.

THE LTD COMPANY (“LTDA”)

Prior to the formation of Ltda, the non-resident individual partner should obtain a CPF at the Public Treasury (Receita Federal), and the non-resident foreign corporation a CNPJ.

If the foreign partner is the administrator of the company, he must first claim a permanent resident visa. Then, the required documents should be submitted to the Board of Trade (Junta Comercial), and the capital released through a computerized registration with the Central Bank of Brazil (SISBACEN).

The social contract must be referred by a lawyer with mention of his/her name and registration number at the Bar. It should be accompanied by a certified copy of the identity of the directors and of the signee of the application (the shareholders). For foreigners, all documents must be translated by a certified professional.

The main features that distinguish Ltda are:

  • Limited liability for partners,
  • Simplified set up and management,
  • No minimum capital,
  • No requirement to build reserves,
  • No requirement to publish annual financial statements,
  • Can be easily converted into a Public Limited Company.

Ltda companies must have at least two partners, but neither of them needs to be Brazilian, or resident in Brazil. A partner may be a physical or a legal person.

A Ltda. must be managed by a physical person resident in Brazil, a Brazilian, or a foreigner but with a ‘permanent’ visa. In the case of a foreign director who would be transferred to Brazil to take on this responsibility, it is necessary – and at first until he can get the ‘permanent’ visa – to appoint an interim Brazilian administrator (or a foreigner with a visa). Indeed, the ‘permanent’ visa can be issued only after incorporation of the new company.

THE SOCIAL CONTRACT

The social contract is essential to the constitution of the company. It must state:

  • The name of the company – which is always followed by Limitada, or Ltda – the activity, the address of the head office and the life time of the company,
  • The names, nationalities, civil statuses, occupations and places of residence of the individuals involved (and names, nationalities and addresses of the head-office of associated corporations),
  • The capital, expressed in local currency, if necessary with information on physical assets brought in as capital,
  • The share of each partner,
  • The share of each partner in expected gains and losses.

THE MANAGER

The manager (“Administrador“) can be a stakeholder or not, but must be an individual. It cannot be a legal entity. He is nominated in the contract, or by a separate document. If there is no formal appointment of a manager, then all stakeholders are managers.

In case of the appointment of several managers, and in case of disagreement between them on a major decision, the stakeholders’ meeting shall convene and conduct a simple majority vote.

If the manager is not an associate, the appointment of the manager needs the unanimity of the votes if the capital has not been released, or two-thirds if the capital has been paid.

The scope of responsibilities of the manager in a Ltda must be analyzed from several aspects: civil, fiscal, administrative, social and criminal justice. The company will be required to take up responsibilities before third parties for acts committed by the manager; it can later pursue the manager to obtain compensation for damages (Article 931 of the Codigo Civil Novo).

The liability of the manager may be engaged in the following cases:

  • to compensate the company for losses caused by carrying out an illegal act,
  • by the non-fulfillment of decisions taken at the annual assembly,
  • breach of contract, mainly due to lack of diligence, integrity, conflict of interest, or personal use of company assets.

Bankruptcy law provides for the possibility of extending the responsibility of the manager to his personal property (Art. 6 Decree-Law n º 7661/45). It is the same for tax law, if the company has not settled its taxes, even though it had the financial means, and if it appears that the manager had acted in bad faith, or had committed an offense under the law (Art. 135 of the Código Tributário Nacional III).

Article 75 of the Consumer Defense Code (Código de Defesa do Consumidor, or “CDC”) establishes criminal responsibility on the manager who accepts the offer of products or services under circumstances prohibited by the CDC.

The dismissal of the manager can intervene at any time. But, if he is partner and is so designated in the social contract, then it requires a vote of two thirds of the capital.

PARTNERS AND THE ASSEMBLY OF PARTNERS

The responsibility of each member is limited to the amount of his contribution, but all are jointly and individually liable up to the whole capital.

Moreover, in case of abuse of rights, abuse of power, misuse of corporate assets, breach of the law, violation of the statutes or of the social contract to the detriment of consumers, the judge extend responsibility to the personal assets of convicted partners.

The partners’ meeting deliberates on the following points:

  • The approval of Financial Statements,
  • The appointment of managers, if this has not already been done in the social contract,
  • The dismissal of the manager,
  • The determination of his remuneration, if it has not been already done in the social contract,
  • Amendments to the social contract,
  • The merger or dissolution of the company.

Decisions are taken during the meetings in accordance with the provisions of the social contract. The need for convening a meeting is provided in the law; the social contract may provide further reasons.

The partners’ meeting is required if the number of partners exceeds 10.

The formalities for convening a meeting do not apply if all members are present, or state in writing to be informed of the date, venue and agenda of the meeting. 

The convening of a meeting may also be called upon by:

  • A partner, if, despite the statutory and legal provisions, more than 60 days have elapsed since the deadline, or by a partner with at least a 20% stake share.
  • The Supervisory Board, without justification.

A partner may be represented by another partner, or a lawyer. No partner may participate in the proceedings when his vote would present a conflict of interest. At the meeting, a chairperson and secretary are appointed from among the partners.

Regarding voting rules, decisions are taken:

  • At 3/4 of capital for the modification of the social contract, a merger or dissolution.
  • At half the capital for the appointment or dismissal of a manager (2/3 if appointed in the social contract), or the method for his remuneration,
  • A majority vote of members present, for all other decisions.

In the case of change in the social contract, of merger, or acquisition of another Ltda, any partner opposed to this event can choose to withdraw from the company.

The partners shall meet at least once a year, within four months after the end of the financial year, with the aims of:

  • Discussing over and approving the income statement, the balance sheet, and the management of the company,
  • Appointing the manager, if necessary,
  • Treating any other subject on the agenda.

Once the financial statements are approved without reserve during this Assembly of Partners, managers and members of the Supervisory Board (if any) are exempted from any liability.

SUPERVISORY BOARD

The social contract may provide for the creation of a Supervisory Board (“Conselho Fiscal“) of at least three members, who may or may not be partners, but residents in Brazil, and appointed by the partners meeting. A minority partner representing a stake of at least 20% has the right to appoint a member of the Supervisory Board.

The responsibilities of the Conselho Fiscal are:

  • Reviewing, at least quarterly, the books and accounts of the company, cash and credit portfolio,
  • Presenting at the annual meeting of partners a report on the management of the company,
  • Reporting errors, fraud and offenses uncovered,
  • Convening the meeting of partners.

Members of the Supervisory Board may see their responsibilities involved, as well as the manager. They may delegate their function. Their remuneration is decided upon during the meeting of partners.

TRANSFER OF STAKES

Unless forbidden by the social contract, a partner may transfer his stakes, in whole or in part, to any other partner without informing the other partners.

DISSOLUTION OF THE COMPANY

The law provides for two cases of dissolution of the Ltda:

  • When the act of incorporation is cancelled,
  • Other scenarios are those arising from the finding of an error, theft, a simulation or fraud upon incorporation.

The contract may provide for other scenarios for the dissolution of the company.

THE PUBLIC LIMITED COMPANY (“SA”)

A joint stock company (Sociedade Anônima, or “S.A.”), as described in article 1.088 of Brazilian Civil Code and Law 6,404 of 15 December, 1976, is fundamentally a legally constituted business corporation, with capital stock represented by shares.

This is a more complex form than Ltda but provides however much more flexibility regarding the funding arrangements.

The main features that distinguish S.A. are:

  • Limited liability for shareholders,
  • Detailed regulatory framework,
  • Obligation to publish annual financial statements,
  • Duty to provide reserves equal to 10% of capital,
  • Requirement for a Board of Directors (minimum 2 Brazilian),
  • Obligation of an Audit Committee.

An S.A. is identified by a name, followed by the words “Sociedade Anônima“, in full or abridged to S.A.. There are two kinds of S.A.s: publicly traded companies which obtain funds through public offerings and subscriptions which are supervised by the Brazilian Securities Commission (CVM); and closed capital companies, in which case the accounting and administration is simpler.

Depending on the nature of the rights or advantages that they conferred upon their holders, shares may be common, preferred or fruition shares. Aside from essential rights, common shares confer upon their bearers voting rights; whereas preferential shares, though they entitle their bearer to special rights, may grant or suppress voting rights. Fruition shares confer the bearer the right to continue participating in the corporate profits of ordinary or preferential shares, even upon their amortization, without reduction in capital.

By means of a Shareholder’s Agreement, the shareholders may decide issues relating to the purchase and sale of their shares, establish preferential acquisition rights, or exercise voting rights. All obligations set forth in Shareholders Agreement are binding, and must be respected by the Company.

MANAGEMENT

Public stock companies are required to have a two-tiered management structure, composed of a Board of Officers and a Board of Directors. In closed companies, the latter body is optional.

The Board of Directors is a deliberative body, with powers to supervise the company’s business and to establish its internal structure. The Board must have at least three directors, all elected at the general annual meeting of the shareholders of the company. Directors may be non-residents, but must be shareholders of the company. Under Brazilian corporate legislation, non-resident directors must appoint a representative who is resident in Brazil, to receive service of process in legal proceedings.

The Board of Officers is an executive body. With powers to conduct the company’s day-to-day business, the Board of Officers has exclusive authority to represent the company before third parties. The Board of Officers is composed of at least two members, elected by the Board of Directors, if the Company has one, or by the general meeting of shareholders. All Officers must be resident in Brazil, though they need not be shareholders. They may comprise up to one third of the Board of Directors.

In order to have their securities traded in stock exchanges or over-the-counter markets, public companies must have, in addition to a Board of Directors, an investor relations officer, responsible for providing information to members of the public who have invested in the company, to the CVM and, if the company is registered with stock exchanges or organized over-the-counter markets, to those entities, in addition to ensuring that the company’s registration is up to date, in accordance with CVM Instruction 202/93.

SHAREHOLDERS

Brazilian Corporations Law entitles holders of no less than 15% of the voting shares in a public stock company to elect and/or remove one member (and his substitute) of the Board of Directors, by separate vote at the annual general meeting of shareholders.

The shareholders supervise corporate management by means of the Fiscal Council. The principal purpose of the Fiscal Council is to oversee the company’s accounts and management. Such supervision may be permanent or periodic.

Installation of a Fiscal Council reflects the desire of the shareholders to ensure more stringent control over corporate management. It should comprise no less than three and no more than five members, each with a substitute, who may or may not be shareholders, elected by the General Meeting. In certain cases, members of a Fiscal Council represent specific categories of shareholders.

Prior to establishing an S.A., it is strongly recommended to solicit expert advice.

COMPARISON OF “LTDA” AND “SA”

Apart from exceptions, the two legal forms chosen by foreign companies are: the LTD (“Ltda”) and the PLC (“S.A.”).

This choice should not be too difficult. LTD is in most cases the form chosen by foreign companies; it is very common in Brazil and meets the expectations of both small and large businesses. It has the benefits of a PLC, but with more flexibility.

Lists of key differences between Ltda and S.A.

JOINT VENTURES

Joint ventures are common-place in Brazil. They are particularly used by foreign companies to participate in tenders or access regulated sectors such as telecommunication and energy.

Ltda. and S.A. are two possible types of companies to achieve a joint venture between a foreign company and a Brazilian company.

MAIN ACCOUNTING DOCUMENTS REQUIRED

JOURNAL

Corporations must maintain a “Journal”, with numbered pages.

The Journal must be authenticated by the Register of Commerce (“Junta Comercial“) for trading entities, or by the office of civil registry of legal entities (“Registro Civil Cartorio of Pessoas Jurídicas“) for service companies.

The deadline for filing and authentication of the Journal is 60 days from the date of the closure of the tax year.By way of introduction, the paper must disclose the following information:

  • Name of the company,
  • Presentation of the objectives of the Journal,
  • The number of pages,
  • Address of the head office,
  • Number and date of the Acts of Incorporation filed in the Commercial Register,
  • National Registry Number of Legal Persons.

The Journal must also be signed by the chief accountant and a legal representative of the company.

LEDGER

Entries in the Ledger must be individualized and maintained in a chronological order.

ASSET REGISTER

At the end of the fiscal year, companies must conduct a physical inventory of finished goods and goods for sale, raw materials, production intermediates, packing, etc…

The physical inventory should allow for the correction of any discrepancies with the Asset Register. This record must be authenticated by the Register of Commerce.

THE LALUR

The LALUR (“Livro de Apuraçao do Lucro Real”) is the primary tax document. It shows the differences – resulting from inclusions and exclusions provided for by law – between the net accounting income and the taxable income.

It should be bound and the pages numbered. The accounting manager and legal representative of the company must sign it.

The LALUR is mandatory only for entities opting for the ‘Real’ method of calculating Corporate tax (see Chapter on Corporate tax).

Example of a LALUR - Part A

FINANCIAL STATEMENTS TO BE PRODUCED

For the purposes of calculating the taxable income, it is required at the end of each tax year, to issue the following:

  • Balance sheet,
  • Income statement of the year,
  • Change in equity.

These three documents are required only for companies with total equities over 2,000,000 R$.

In addition, the Law No. 11638 of 28th December 2007 made it mandatory for all companies listed on the stock markets, to issue a Cash Flow statement.

Similarly, Ltd companies which have investments in controlled companies must issue the Consolidated Financial Statements, in accordance with Article 249 of Law No. 6.404/76.

To meet the minimum required disclosure of information, companies can publish a financial summary. At a minimum, the following information must appear in the summary statements:

Assets and liabilities:

  • Current assets,
  • Fixed assets (with details of financial, physical, and deferred assets),
  • Current liabilities,
  • Accumulated results from previous years,
  • Equity (with capital, capital reserves, retained earnings, reserves of revaluation and retained earnings).

Income statement:

  • Net sales,
  • Gross result,
  • Overheads,
  • Change in the value of investments based on the equity method,
  • Operating income,
  • Non-operational results (if significant),
  • Provision for corporation tax,
  • Net income for the year.

Explanatory Notes:

  • Change in accounting methods,
  • Investments in other companies, value based on equity method, amount paid for goodwill,
  • Interest rates, maturity of long-term debt,
  • Number of shares comprising the share capital,
  • Amount of previous losses to be carried forward for tax purposes,
  • Proposed allocation and distribution of the result,
  • Communication of possible comments of the report of the auditors,
  • Any other information meaningful and relevant.

The annual accounts and tax returns must be signed by a chartered accountant employed by the company, or by a chartered accountant registered with the Institute of Chartered Accountants of Brazil (CRC).

LEGAL PUBLICATIONS

Corporations must develop and publish all the following documents:

  • Report of the Board,
  • Financial statements (balance sheet, income statement, change in equity, and for listed companies cash flow statement),
  • Convocation to the meeting of Shareholders,
  • Minutes of Meetings. Publications must be made in the Official Gazette of the Federal Republic of Brazil, or in the Official Gazette of the Federal State where the company head office is located. If the region where the head office of the company does not have an Official Publication, it will be necessary to choose a publication of general circulation. Before any change in the choice of the publication, it is necessary to inform shareholders during the Annual General Meeting.

The financial statements should allow comparison with figures from the previous year, and must be accompanied by the “Explanatory Notes” necessary to a full understanding of the figures.

ANNUAL GENERAL MEETING

Invitation to the General Annual Meeting (“AGM”): after the end of the tax year, the corporation must hold an AGM within 120 days to approve the accounts.

At least one month prior to the AGM, the company must publicly inform its shareholders about the location where the report of the Board of Directors, the financial statements and the opinion of the auditors have been made available.

Shareholders must be notified at least eight days before the date of the AGM.

The financial statements must be published at least five days prior to the date of the AGM.

The AGM will discuss and deliberate on:

  • The work of administrators,
  • The review and approval of financial statements,
  • The allocation of net result for the year and the distribution of dividends,
  • The election of directors and members of the Fiscal Council,
  • The approval of any capital increases.

Companies with a limited number of shareholders can easily avoid the usual formalism of convening an AGM, provided that all shareholders (or partners) are present and express their intention to deliberate on the same subject reported in the agenda.

It is possible to vote in writing as long as the statutes do not forbid it.

METHODS OF VALUATION OF ASSETS AND LIABILITIES

The methods used for the valuation and recording of assets are:

Assets are classified in a decreasing order of liquidity. Liabilities due are sorted in descending order.

AUDITORS AND IASB

Since the 1st January 2008, Brazilian companies of large size (total assets exceeding 240 M R$, or annual gross sales over 300 M R$) must appoint an auditor.

These thresholds are very high compared to most of Western thresholds. Indeed, in Western Europe, there is no threshold for SA: all are subject to the obligation to appoint an External Auditor. And thresholds are of 3.1 M Euros for the turnover, and 1.55 M Euros for the total balance sheet for other corporate forms.

This new legal environment has driven Brazilian standards toward international accounting standards of the IASB, mandatory in Brazil since the 1st January 2010.

INVOICE FORMATS 1 AND 1A

The issuance of a formal invoice is required; it must accompany the goods to enable them to circulate in the national territory. This must be issued in duplicate and be numbered.

There is a standard invoice type, called A Format (see example of invoice with amounts of IPI and ICMS) and 1-A Format. The only difference between these two formats is the presentation: the A format is a ‘portrait’, the 1-A is a ‘landscape’ format.

These formats are paper-printed and contain substantially the same information as invoices issued in Western countries.

As indicated in the following chapters on the IPI and ICMS, these two taxes are on consumption and are recoverable in the same way as the internationally well-known VAT. However, to qualify for a credit of IPI or ICMS, it is necessary that the amounts of IPI and ICMS paid are clearly mentioned on the invoice.

For services, the amount of ISS (Tax on Services) will appear in the field “Dados do produto“.

ELECTRONIC INVOICE

Since October 2005, the Federal government undertook a vast project of digitization of all invoices issued on Brazilian territory (the “e-bills” are called Nota Fiscal Electronica).

SCOPE OF APPLICATION

Since April 1st, 2008, e-invoices are required for a certain number of business taxpayers:

  • Manufacturers and distributors of cigarettes,
  • Companies in the fuel sector,
  • Carriers and wholesalers.

Other economic sectors have been included in the scope of application of the e-bill, in September 2008, in April 2009 and finally in September 2009. Today most business transactions are concerned.

The company size is not a factor to deviate from this new requirement; all must comply.

OBJECTIVES

The main objectives of the establishment of electronic invoices are:

  • For the seller: reduced costs (paper, printing, archiving); reduced loss of time of carriers at the borders between the Federal States.
  • For the buyer: no more need for manual entries in the accounting systems (subject to software development), reduced data entry errors (they are still possible because of the sender), better logistical anticipation thanks to the early receipt of information contained on the e-bill.
  • For the tax authorities: increased reliability of invoices, reduced cost of tax controls, possibility of performing double-checking for controls, and especially a strong improvement in the fight against tax evasion.

OPERATING MODE

The vendor must be previously registered in the tax system in order to issue e-invoices.

The issuer of an e-bill generates an electronic file containing information relating to accounting and business transactions. This file must be digitally signed to ensure data integrity and the identity of the issuer.

This e-invoice is then transmitted over the Internet to the tax authorities of the Federal State of the issuer (Secretaria da Fazenda) who will create a pre-validation file, and grant permission for use, without which the shipment of goods cannot occur. This pre-validation is normally achieved in less than a minute. Then, the tax authorities put this e-bill at the buyer’s disposal (and other interested parties in the transaction) on the Internet. The local tax authorities then forward the e-bill to the federal authorities (Receita Federal), which will centralize and retain the e-bills. In case of a transaction between two Federal States, the e-bill is also sent to the tax authorities of the State of destination of the goods.

A printed copy (called “DANFE”, Documento Auxiliar da Nota Fiscal Electronica) of this e-bill must accompany the goods. This document, in a single A4 format, contains the access key to view the e-bill on the Internet and a barcode that will accelerate the control of goods at the borders between the Federal States. This DANFE contains a field that allows the recipient to formalize the correct receipt of goods.

It is the responsibility of the buyer to check systematically the existence of the e-bill, its integrity and its data. For that, thanks to the access key of the e-bill, he can access the electronic management system of the tax administration. It is stated that it is not necessary to print the e-invoice to prove that the control has been achieved.

Controls by the tax authorities before pre-validation relate to the electronic signature of the issuer, the format of the field, the serial number of the invoice and the right to issue an e-bill. All refusals are accompanied by an error code.

An e-bill can contain a maximum of 990 lines. Each e-bill must be signed electronically by its author. A file can contain up to 50 e-bills. However, to be loaded into the tax system for managing e-bills, this file must not exceed 500Kbytes.

These e-bills are also issued in case of export and import.

A company with several production sites in different Federal states of the Brazilian territory will have to register at the sites of each Federal State in order to issue e-bills for each production site.

Upon discovery of an error, it is possible to either cancel the e-bill (within 7 days after original issue), or to issue a complementary e-bill if the goods had already been shipped.

The preservation and archiving of e-bills remain the responsibility of the company. However, it is not necessary to retain the DANFE.

Smart idea to fight against tax evasion!

When booking a room in a hotel, you may see a sign behind the cash desk saying “Ask for a receipt/invoice”. This is being done throughout Brazil to avoid businesses selling without issuing and registering sales in the accounts. But is this enough to fight tax evasion? Of course not.

This is why most of the 26 Brazilian States have decided to implement a system in order to entice clients to ask for an invoice (Nota Fiscal) as much as possible. Today, by demanding a receipt, clients can make money!

How? Clients inform their CPF to the seller who then inputs the number in the system of the municipal tax authorities. Then:

  • They will receive a few ‘centavos’ or ‘reais’ for each declared sale.
  • They will also enter into a draw (the amount for each draw is 20,000 R$ in the State of São Paulo). For the state of SP, the results are made available on www.fazenda.sp.gov.br).

Everything is done via internet applications.