This post is intended to provide some key information about the business environment in Brazil (especially in the city of São Paulo) for foreign individuals or companies looking to set up an entity in Brazil.
The most common type of entity in Brazil is a limited liability company (called “Limitada“) which can be set up with a single shareholder or multiple shareholders.
The shareholders may be foreign individuals or foreign entities, however these individuals or entities must be represented by a Brazilian resident. Also, the signatory of the Brazilian entity (called “Administrador“) should also be a Brazilian resident. So, it is quite common to have the same person (Brazilian resident) acting in a dual capacity as both the legal representative of the shareholders and also the “Administrador” of the Brazilian entity.
The basic steps to set up a “Limitada” in Brazil are:
- The shareholders should provide some documents, such as the passport (if individuals) or its bylaws (if entities);
- The shareholders should grant a Power of Attorney to their legal representative in Brazil;
- The documents above must be Apostilled in the country of issuance and then sent to Brazil in order to be sworn translated and registered in the public notary;
- The Articles of Association of the Brazilian entity should be drafted with all important aspects of the company, such as the company’s name, address, object and purpose, share capital, shareholders’ rights and obligations, appointment of the “Administrador“, etc.;
- The Articles of Association should be signed by the legal representative and then registered at the Public Registry of Mercantile Companies (JUCESP);
- The Brazilian entity should be registered in several other bodies, such as the Federal Revenue (CNPJ), Brazilian Central Bank (Bacen), Municipality of São Paulo (CCM), etc.
Once the company is formed it starts to incur several tax obligations, so it is very important to hire an accountancy firm to take care of all tax, accounting and payroll obligations in order to avoid penalties.
The next steps are usually to open a corporate bank account and call up the share capital, which should be paid up by the shareholders by way of an international wire transfer registered at the Brazilian Central Bank.
In Brazil, there are 3 different tax regimes on a federal level:
- Simplified Tax Basis (“Simples Nacional”);
- Presumed Tax Basis (“Lucro Presumido”);
- Real Tax Basis (“Lucro Real”).
The “Simplified Tax Basis” is not available for entities with foreign shareholders, so we will not cover this topic in this post.
We will explain the main differences between the other 2 tax basis, which can be freely chosen by the entity at the beginning of each year.
Presumed Tax Basis
The Presumed Tax Basis, as its name suggests, is a tax regime by which the Corporate Income Tax (“IRPJ”) is charged on a presumed profit equivalent to 32% of the company’s Gross Revenues (for the provision of services) or 8% of the company’s Gross Revenues (for the sale of goods). The tax rate of the IRPJ is 25%, which is applied on the presumed profit. In other words, the IRPJ is calculated as follows: Gross Revenues x [32% or 8%] x 25%.
There is another tax, similar to the Corporate Income Tax, called Social Contribution on Net Profit (“CSLL”) but in this case the presumed profit is 32% for services and 12% for the sale of goods; and the tax rate is 9%. Therefore, the CSLL is calculated as follows: Gross Revenues x [32% or 12%] x 9%.
There are 2 other Federal Taxes in Brazil called PIS and COFINS which are charged on the Gross Revenues of the company (similar to a VAT). The combined tax rate is 3.65%. Therefore, the PIS and COFINS (combined) are calculated as follows: Gross Revenues x 3.65%.
Usually, the company will also be charged a Municipal Tax (called “ISS”) on the provision of services or a State Tax (called “ICMS”) on the sale of goods. These taxes vary a lot depending on the type of service or goods sold (but usually range from 5% to 18%). However, these Municipal and State Taxes will not depend on the chosen Tax Basis (“Presumido” or “Real“) – these taxes will be exactly the same regardless of the chosen tax regime.
Real Tax Basis
Under the Real Tax Basis, instead of presuming the net profit of the company, the taxes IRPJ and CSLL are calculated on the actual profit of the company. The tax rates are exactly the same as in the Presumed Tax Basis – the difference is on the taxable base only.
The IRPJ is calculated as follows: Profit Before Tax x 25%
The CSLL is calculated as follows: Profit Before Tax x 9%
As for the PIS and COFINS there are also some changes. The combined tax rate is 9.25% (almost 3 times the rate of the other regime) but the company may take tax credits on certain costs and expenses. Therefore, the calculation is as follows: [Gross Revenues – Certain Costs and Expenses] x 9.25%.
As said before, the Municipal Tax (“ISS”) and the State Tax (“ICMS”) are the same under “Presumido” and “Real” and they vary a lot depending on the type of service or goods sold.
Presumed vs. Real Tax Basis
The following table summarizes the differences between these 2 tax regimes:
|Taxes||Presumed Tax Basis||Real Tax Basis|
|IRPJ||Gross Revenues x [32% or 8%] x 25%||Profit Before Tax x 25%|
|CSLL||Gross Revenues x [32% or 12%] x 9%||Profit Before Tax x 9%|
|PIS/COFINS||Gross Revenues x 3.65%||[Gross Revenues – Costs and Expenses] x 9.25%|
|ISS/ICMS||Vary according to the type of service or goods sold (usually range from 5% to 18%)|
Therefore, a good rule of thumb is: if the net profit of the company is greater than 30% (for services providers) or 10% (for sellers of goods) the preferable tax regime would usually be the Presumed Tax Basis. On the other hand, if the profit of the company is significantly less than those percentages, the Real Tax Basis is usually preferable. Lastly, when the net profit is close to those percentages, the 2 tax regimes will be more or less the same.
Please note that we are simplifying the explanation of the Brazilian tax system because otherwise this post would have hundreds of pages. There are several nuances and other tax rules related to, for example, transfer pricing, capital gains, property tax, excise tax, importation taxes, withholding taxes, financial transaction taxes, etc.
Main Tax Obligations
It is important to hire a local accountant to prepare and file all tax obligations in due time. The following is a summary of the main tax obligations on a Federal level:
|Declaration of federal taxes due, such as IRPJ, CSLL, PIS and COFINS||15th working day of the 2nd month following the taxable events|
|Declaration of payroll taxes due, such as social security and FGTS||15th day of the month after the payroll events|
|Withholding income tax return||Last working day of February of the following year|
|Digital accounting bookkepping||Last working day of May of the following year|
|Corporate income tax return||Last working day of July of the following year|
|Digital tax assessment for the PIS and COFINS||10th working day of the 2nd month after the taxable events|
|Digital tax assessment for the withholding taxes||15th day of the month after the taxable events|
|Digital payroll and social securities||15th day of the month after the payroll events|
|Digital assessment of payroll taxes due, such as social security and FGTS||7th day of the month after the payroll events|
Hiring an employee in Brazil requires a lot of attention due to the complexity of the Brazilian labor laws and the risk of labor suits. On top of the labor laws, there are Collective Bargaining Agreements signed by the Labor and Trade Unions which create additional burdens for the companies.
The basic labor rights are:
- Salary shall never be reduced;
- Limit of 44 work hours per week;
- Overtime payment with an addition of 50% to 100%;
- Thirteenth salary (i.e. one additional monthly salary per year);
- Paid holidays of 30 days per year with an addition of 33.33%;
- Severance fund called “FGTS” (i.e., the company deposits 8% on top of the monthly salary into a special fund under the employee’s name);
- Public transportation borne by the company;
- Other mandatory benefits on the Collective Bargaining Agreements, such as an annual mandatory salary increase to allow for the inflation, meal vouchers, life insurance, etc.
The payroll taxes are as follows:
- Personal Income Tax (IRRF) withheld from the employee, which ranges from 0% to 27.5%;
- National Insurance (INSS) withheld from the employee, which ranges from 7.5% to 14%;
- National Insurance (INSS) charged on the employer, which ranges from 26.3% to 28.8%.
Therefore, due to the several labor rights and taxes involved, it is difficult to say exactly what the total hiring costs will be. But a good rule of thumb would be twice the base salary of the employee. For example, if the base salary of an employee is BRL 10,000.00/month, the total cost to the company could be something around BRL 20,000.00/month. At the same time, the employee will receive a net payment of around BRL 7,500.00 + benefits.
Unfortunately, the business environment in Brazil is not one of the easiest ones in the world. According to the last ranking issued by the World Bank, Brazil is ranking #124 in terms of “Ease of Doing Business” out of 190 countries.
This, however, should not be a reason not to invest in Brazil, which is considered to be the 12th largest economy in the world in terms of GDP and the 1st in Latin America.
It is important to be diligent when operating in Brazil, relying on good accountants and lawyers, especially in the first stages of the Brazilian entity.