Brazil is the sixth biggest economy globally with over 217 million population, providing an excellent opportunity for a large consumer market. The country is strategically located in southeastern South America, providing easy trade accessibility and interconnectivity.
The Brazilian government provides businesses with all types of tax benefits and reliefs, including regional, federal, municipal, and state incentives and long-term funding programs. The country boasts a vast domestic market, a low cost of living, and a well-diversified economy. All these aspects attract a foreign company to invest in Brazil.
Opening a subsidiary is one of Brazil’s most straightforward and effective business entities. A subsidiary is a business entity partly or wholly owned by another entity. Completing the necessary paper requirements and complying with local rules and regulations assist a foreign company in establishing a subsidiary in the country.
Let’s get started with all the essential information you must know before setting up a subsidiary in Brazil.
What are the Types of Subsidiaries in Brazil?
Before setting up a subsidiary system in Brazil, you should be aware of different types of subsidiaries which are as follows:
1. Limited Liability Company (LLC):
- A limited liability company needs a minimum of one administrator who has a position as that of a director and must be a resident. This company type can also be formed using at least two shareholders of any nationality.
- Locals commonly know it by the name “Limitada”.
- LLCs can limit each shareholder’s responsibilities. So, each shareholder only manages their allocated share capital.
- Notwithstanding different degrees of capital ownership, each shareholder is liable for the compensation of the initial corporate capital.
- A local representative must represent non-resident shareholders. Moreover, at least one resident director must be appointed.
- The shareholder with over 75% of the company’s quota owns control of executive decisions.
- No requirement is defined for paid-up share capital.
- A member can’t sell their shares without the approval of other shareholders.
2. Limited Liability Corporation
- Also known as Sociedade Anônima/S.A., the Limited Liability Corporation is administered by corporation acts.
- Corporations created under this type of subsidiary are permitted to issue voting and non-voting shares.
- Each shareholder’s liability is limited to the number of shares to which they have subscribed.
- The legal representatives must be appointed for foreign shareholders who don’t reside in Brazil.
- At least two shareholders ( individuals and/or legal entities (irrespective of nationality) are required to set up this type of subsidiary.
3. General Partnership
- Recognized as the most fundamental type of subsidiary, it considers ownership and equal partnership.
- The entire liability and managerial task are equally divided among the partners.
4. Limited Partnership
- In this type of subsidiary business in Brazil, one or multiple general partners handle the business.
- They are personally responsible for partnership debts.
- There can be one or multiple limited partners competent to contribute share and capital in profits; however, they don’t run the business. They are not responsible for the partnership obligations further than contribution.
5. Joint Venture
It is a time-based partnership wherein two or more individuals work collectively for a specific project or a time extension. It ends with project completion.
If the individuals prefer to continue working together after that, they can register as general partners.
How to Set Up a Subsidiary in Brazil?
Establishing a subsidiary in Brazil can differ based on the company’s intended business activities. However, the described steps will guide setting up a subsidiary company in Brazil.
Step-1: Prepare Articles of Association
- The Brazilian Articles of Association (acknowledged as Contrato Social in Portuguese) is the formal document to authenticate a business partnership in Brazil.
- It should include details about the company to be established, the partners, the amount each partner owns, and the company’s business activity.
Step-2: Register with the Board of Trade
- After registering with the Board of Trade, you will obtain a Company Registration Identification Number called NIRE.
- The NIRE is the base for further applications. Usually, the NIRE registration process completes within a few days.
Step-3: Register for the company taxpayer number
- The subsequent step is registering with the National Registry of Legal Entities (Cadastro Nacional da Pessoa Jurídica).
- The following documents are obligatory to register with the National Registry of Legal Entities:
- Registration Form of Legal Entity (also called FCPJ)
- Basic Entry Form for the CNPJ (known as DBE)
Step-4: Register for a business license
- The Business License (Alvará de Funcionamento) permits the company to conduct activity within a municipality.
- A newly established company can be legally ready to start its business operation if it is exempt from Inscrição Estadual.
Step-5: Register with Inscrição Estadual
- The newly established business must pay federal taxes.
- The Inscrição Estadual permits it to pay state taxes in the state the company is functioning.
Step-6: Authorization for issuing Notas Fiscais
- The company requires authorization for issuing Notas Fiscais (fiscal invoices).
- This authorization is called AIDF (Autorização de Impressão de Documentos Fiscais), and it approves the printing of taxable documents
Step-7: Registration with social security
- Registering with the Brazilian Social Security Institution (known as INSS) is obligatory within 30 days from the date the company begins operations.
- The company administrator must contact a Social Security Agency to request the company’s registration, and then it can operate its subsidiary business in Brazil.
Benefits of Setting Up a Brazil Subsidiary
Establishing a subsidiary in Brazil is a straightforward process owing no capital requirement and less paperwork. There are several advantages of setting up a subsidiary company in Brazil, which include:
Subsidiaries help to divide the activities based on common groups into smaller companies. Hence, they become easily manageable.
Improves a company’s financial profit
With the help of subsidiaries, a company can maintain its distinct brand identities. Consequently, it allows each company brand to establish goodwill with vendors and customers. Decent relationships with customers can retain them and boost the company’s financial profit.
Prevents financial losses
It is one of the most incredible benefits of a subsidiary company in Brazil. The subsidiaries’ assets can be a liability shield against financial losses.
1- The RADAR (Registro e Rastreamento da Atuação dos Intervenientes Aduaneiros) is the License issued by the Receita Federal. A company with this license can import and export goods in Brazil.
2- Any subsidiary business in Brazil allows international companies to administer its import directly. It eliminates the need for passing through a distributor or an intermediate importer of record (IOR).
3 – In the case of a subsidiary in Brazil, you should pass through a third party with the power to make amendments to import and distribution.
Attracts local government incentives
A subsidiary in Brazil allows international companies to apply for government programs and incentives to support their local businesses. Some examples include
1 – BNDES or the National Bank for Economic and Social Development supports financing
2 – PADIS –A support program for the Technological Development of the Semiconductor Industry
3 – REPES –A special taxation regime for the information technology services export platform
4 – PATVD –A support program for the Development of the Equipment Industry for Digital TV
5 – São Paulo Inova –Support for companies (in the state of São Paulo) that are technology-centric and state-of-the-art either in their primary stage or in the opening process.
6 – Soft landing: The program allows exchanging companies in technology parks
Dividend returns are exempt from tax
Currently, dividends are not taxed in Brazil. Hence, a subsidiary can return its profit to its head office without taxing the transfer.
Documents to Prepare When Opening a Subsidiary in Brazil
Companies should prepare the following documents while applying for subsidiary incorporation:
- Articles of Association
- The company name’ consultation certificate
- Registration Certificate from the Board of Trade
- Authorization of Documento de Arrecadação Avulso (DAR) for paying the registration fee for the Business License application
- Formal request for registration (Capa de Processo)
- Company registration form (Ficha de Cadastro Nacional)
- Notarized copy of Identification Document and all the partners’ CPF
- Proof of residence for the Company Administrator/partners
- Statement disclosing that the partners are not prohibited by law or by conviction to establish a company
- A real estate clearance certificate
- A formal request for Business License registration
- Authorization of the CNPJ registration
- Notarized copy of the Identification Document for the Company Administrator
- Registration application acknowledged as Documento Único de Cadastro
- Registration application acknowledged as Documento Complementar de Cadastro
- Notarized copy of either the property deed or lease of the property verifying the right of use of the property where the company is situated
- Autorização de Impressão de Documentos Fiscais (AIDF)
Note: The authorities can ask for further documents if needed.
What Business Forms can Brazil Subsidiaries Take?
Subsidiaries can adopt one among the various legal business structures. Two of the most common subsidiary forms are:
- Public Limited Company (PLC)
- LLC (Limited Liability Company)
The company can determine the most suitable subsidiary form according to the business plan and its requirements.
Brazil Subsidiary Laws
Brazilian law offers two options for legal representation:
- The company’s director should possess a permanent resident visa.
- Shareholders should be mentioned in the legal status by an individual having a permanent resident visa.
The minimum investment requirements must be fulfilled if the subsidiary established in Brazil is to be used to apply for a permanent Brazilian investor visa. There is no specified capital requirement.
The established subsidiary can get a visa with a reduced direct investment if a proposal for creating jobs in Brazil is submitted and accepted by the Brazilian National Immigration Council.
The compliance checklist for incorporation of foreign subsidiaries in Brazil also entails the following:
- After setting up the Brazilian subsidiary, you are accountable for dealing with payroll withholdings, local tax laws, banking regulations, and employment requirements.
- Employ an auditor for the company.
- Acquire the incorporation certificate as issued by the Registrar of companies.
- Acquire the unique company number.
- Provide all the required details of the shareholders to the Registrar.
- Submit the share certificates to all the shareholders (provided the subsidiary is a public company) after acquiring the subscription sum from the subscribers.
Taxes on Subsidiaries in Brazil
A subsidiary in Brazil is subject to the following taxes:
Corporate income tax (IRPJ)
15% to 25% on annual taxable income; subject to taxation on the presumed profits or profits with an income tax.
10% on the annual taxable income above 240,000 BRL (applicable for corporate taxpayers.)
Social Contribution on Net Income (CSLL)
9% for legal entities
20% for private insurance companies, financial institutions, and capitalization companies
Effective tax rate
Capital Gains Taxation
The below progressive rates apply to capital gains that non-residents acquire on an investment recorded with the central bank:
15%: Up to BRL 5 million
17.5%: BRL 5 million to BRL 10 million
20%: BRL 10 million to BRL 30 million
22.5% More than BRL 30 million
25%: If the capital gains are acquired by a resident of a tax haven
ICMS (Tax on the circulation of goods and services): 0% to 35% (vary across states i.e., the standard rate is 20% in Rio de Janeiro and 18% in Sao Paulo.
IPI (Tax on industrialized products): 0% for the most basic and 300% for luxury items.
ISS (Tax on services): 2% to 5% (varies across municipalities)
PIS-PASEP (Employees’ Profit Participation Program): 0.65% (for taxpayers under the cumulative system); 1.65% (for taxpayers under the non-cumulative system).
Capital Tax Rate
7.5% to 14% (for employees) (with up to BRL 828.38 per month)
5% to 20% of the ceiling contribution salary (for self-employed individuals based on personal and sectorial parameters)
17%: Standard state-level VAT or ICMS ranges from 17% to 25% based on the state and the type of services and goods
Tax Incentives for Businesses Establishing a Subsidiary in Brazil
Tax incentives are vital components for the incorporation of a foreign subsidiary in Brazil. Irrespective of the sector, your subsidiary in Brazil can benefit from the following tax incentives:
RECAP – Federal Incentive
1 – It is the Special Regime for the Acquisition of Capital Goods for Exporting Companies (RECAP).
2 – It refrains from the obligation to compensate PIS/COFINS on acquisitions or imports of new equipment and machinery.
Prodepe – State Incentive
1 – It is the Pernambuco State Economic Development Program to attract investments in wholesale trade and industrial activity.
Technological Innovation Law – Sectorial Tax Incentive
1 – It is the legal framework for technology, science, and innovation.
2 – It focuses on reinforcing the relationship between the public sector, private sector, and universities.
How can you apply for tax incentives in Brazil?
After the incorporation of a foreign subsidiary in Brazil, the government will assess each application by considering the following parameters:
- Compliance with legislation
- Technical capability of the company manager/entrepreneur
- Public interest
- Cost compatibility
Note: The company can’t have debts with the Federal Revenue to apply for the tax incentive.
Other Important Considerations
In addition to the compliance checklist for incorporation of foreign subsidiaries in Brazil, you must consider a few other important considerations, as discussed below.
- If a company intends to establish a subsidiary system in Brazil, it should focus on insurance, residence permits, applying for any licenses (if required), and registration with the federal tax administration.
- You should pay application fees at each step in the subsidiary establishment process. The government may ask for high investment capital for your subsidiary, depending on the circumstances of the particular sector.
- Before beginning the process of subsidiary company formation in Brazil, you must be familiar with your business activity and the goal of registering.
- It is costly to set up a subsidiary in Brazil. You will require capital ranging from $3,000 to $10,000 to set up a subsidiary as a foreigner. Moreover, you must pay approximately BRL 800 per month to keep your subsidiary functioning.
How Multiplier’s Employer of Record Can Help You Hire & Expand in Brazil?
To expand your business in a foreign country, you must dedicate significant time and investment. It also demands time and effort to adhere to a country’s labor rules and industry standards. You can make the most of the services from a third-party service company like Multiplier to set up a subsidiary system in Brazil.
Multiplier administers all the regulations, including payroll processing, onboarding skilled employees, etc., while expanding the business in a new market. It eliminates the need for setting up a subsidiary and helps onboard local and global talent while promising adherence to Brazil’s regulations and labor laws.