“O Brasil não é para amadores” (Brazil isn´t for amateurs) is an oft-heard phrase in the country when talking about the difficulties and sometimes nonsensical situations people confront when conducting business in Brazil. It conveys a mix of tempered expectations, acceptance and humour, but essentially flags up the quotidian challenges companies and investors can face in the Latin American giant: from an overtly-complex tax system, stringent labour laws and acute bureaucracy. Not to mention the famous “Brazil cost”: the increased operational costs associated with local business activity compared to developed markets. That helps explain why Brazil was ranked 124th out of 190 countries in the World Bank´s most recent Ease of Doing Business report across a basket of indicators.
To paraphrase Churchill, Brazil can be a riddle wrapped in a tropical enigma. Even sometimes for your author, who has been in the country for over a decade working in financial markets, simple things are often not simple. And yet that is only part of the story. As always, risks should be evaluated together with returns. Afterall, there are famously “jeitos” (ways) to work-around issues.
Before we talk about “how” to navigate this business landscape then we should mention what that landscape is and the “why” to do business. The juice can be worth the squeeze. The economic opportunities, like the country itself, are huge.
Opportunities in Brazil
Compared to other emerging countries people seem to know less about Brazil, apart from worn stereotypes of football, samba and images of Rio de Janeiro (as far from the author´s base in Curitiba as London is from Lyon, and even more culturally distinct). That wasn´t always the case, the UK was Brazil´s largest trade partner up until the 1930´s. The country of 212 million people, is a top-ten global economy, just behind Italy and ahead of Canada and a veritable agribusiness and commodity powerhouse, ranked as the second-largest global supplier of food and agricultural products. The country also has a large industrial sector and emerging unicorn farm, ten new tech giants in 2021. There is a strong domestic market, rich natural assets and a largely clean energy matrix and sound banking system. Annual nominal GDP growth is expected at 8% to 2026.
Brazil was the world’s fourth-largest destination for FDI in 2019, with inflows of $75billion. A similar amount is expected this year, boosted in part by one of the world’s largest portfolio of infrastructure auctions and concessions. Investor confidence is increasing, and country risk is down.
According to XP Investimentos, global investors account for 53% of YTD stock exchange trades. Moreover, in last year’s record $110billion M&A haul, over a quarter of total investment between Q1 and Q3 was international, with the UK being the second-largest investor, just behind the US. The offshore investment route also provides opportunities for exposure to Brazilian equities through ADRs, Mutual Funds and ETFs.
Rules of the game
Nonetheless, as with other emerging economies, Brazil presents issues and challenges that businesses must consider prior to establishing operations here. Unfamiliarity with local regulations, business culture and the country generally can be obstacles.
Brazil is a federative republic, consisting of a union of states, municipalities, and the federal district, with each public sphere having its own laws and local taxes. The legal system is based on civil law where judicial precedents play a subsidiary role unlike in common-law jurisdictions.
Overall, Brazil is very receptive to foreign investment. Visitor visas are easily granted for tourism and business. The primary rule applicable to foreign investments is Federal Law 4.131/62 (“Foreign Capital Statute”) regarding the remittance of dividends, interest, securities repatriation of principal. Business law is set out in many different statutes, including the Civil-Code-Introductory-Law and the Brazilian Civil Code of 2002.
The most common corporate entities are the limited liability company (sociedade limitada) and the joint-stock corporation (sociedade anônima or commonly “S.A”). The tax system is complex, with different types of taxes at the three executive levels (federal, state, and municipal). Careful analysis is required.
A major proportion of tax is based on company revenue, and not only profit. There are three main corporate tax regimes: “Simple” for smaller companies with annual revenue below $1million, where tax rates vary between 4% and a huge 33% of revenue; “Presumed-Profit”, where profit margins are pre-determined based on sectors, regardless of actual bottom lines; and “Actual-Profit” profit (companies with revenue above $15million) where certain adjustments, add- backs and deductions, can be made to booked income. For larger companies there are income taxes and “social contributions” on profit, which equate to standard corporate tax rates of 34%, against a nominal 19% in the UK.
It´s no wonder the World Bank places Brazil in 184th position (out of 190) for tax ease. Taxes are not only high but intricate – leading to many accounting games. Indeed, since the Federal Constitution of 1988, almost 420K tributary rules have been created in the country, an average of around two per hour!
There are also federal social taxes (PIS and COFINS), state charged VAT (ICMS) on revenue and additional charges on financial transactions (“IOF”) and import taxes (“II”). Capital gains are subject to income tax at regressive rates that may vary from 15% to 22.5%. These are only the main taxes, it’s an exhaustive list of more than 90 different taxes in total. Brazil is not a signatory to the OECD Multilateral Instrument, preferring bilateral agreements.
Brazilian labour legislation (“CLT”) is also not for the faint-hearted, with mandated annual salary increases, Christmas bonuses (the famous 13th salary) and additional benefits for food and transport costs. Payroll taxes usually add around 70% to base salaries. However, Brazil has implemented meaningful changes to its labour laws recently, such as the right to corporate outsourcing, which allows employees to be paid as contractors and reduces tax burdens for companies and staff.
On the plus side, Brazil offers a wide variety of federal and local incentives to investors including cheaper funding from public banks, tax exemptions and deduction in certain sectors, “Tax Free Areas” and Export Processing Zones. There is lower taxation on capital market investment by non-residents and – currently – no taxation on the distribution of dividends.
Besides the finance side, a foreigner, or “gringo”, looking to do business with Brazil should also gain some insight about its business customs, starting with the language. Many people in financial markets speak English but a decent grasp of Portuguese can do wonders, especially dealing with bureaucracy.
Brazilians are generally more informal than Anglo‑Saxons. Meetings usually begin after small talk and “cafezinho”, usually with a delay. It’s no wonder that the expression “British punctuality” means arriving on time. Deadlines are often dynamic. If time is money, be prepared to be in the red occasionally. Business can also be hierarchical, don’t expect a junior salesperson to close out deals with the target company’s president.
Brazilians can call each other “amigos” very shortly after meeting. Follow-up meetings are often more relaxed than the first. International networks are valued. Relationships – and recommendations – are everything (put it down partially to institutional mistrust). The line between personal and professional relations can be opaque. It is said Brazilians do business with people not companies.
And even with a certain surface level of closeness, hurdles may still have to be met before deals are closed. Final decisions can take time. Therefore, developing durable relationships can bear fruit. Brazil is generally a long-term play.
But there is no one-size-fits all formula, the country is by definition very diverse, and each sector/region/company is different, but expect more European-style business culture in the industrial – and richer – south. Background checks on companies and opportunities are essential. According to João Caetano, Managing Director at Redirection International, a cross-border M&A firm: “Always seek professional, local, advice, be it financial, legal or tax. A robust contract, a well-defined investment process and due diligence can save you multiple headaches down the road”. M&A – with the right partner, price and deal structure – can provide an off-the-shelf way to enter the market.
Brazil can be a roller-coaster, with multiple operational, economic, and political risks to be considered, but risks are often rewarded: growth rates and margins can be high. Business ease has improved over the last few years. For Aldo Macri, British Chamber of Commerce Director in Curitiba “despite the complexity, Brazil exposure can be a key part of global expansion, providing multiple business and M&A opportunities in many sectors. The exchange rate is especially favourable”. Brazil may not be for amateurs, but with good preparation and strategic planning, businesses can better understand the market.