Foreign Direct Investment in Brazil
Over the last two years, the stock of Foreign Direct Investment in Brazil has been constant, reaching USD 608 billion by the end of 2020. In terms of FDI inflows, Brazil is the 11th largest recipient in the world (6th the previous year), and the largest in Latin America and the Caribbean. The Netherlands, the United States, Germany, Spain, the Bahamas, and Luxembourg are the most significant investors in Brazil. Oil and gas extraction, the automotive industry, financial services, commerce, electricity, and the chemical industry are the primary targets of investment.
Brazil was ranked 124th out of 190 nations in the World Bank’s most recent Doing Business report, released in 2020, down from 109th the previous year. On the contrary, the country is one of the world’s top FDI receivers. Brazil caters to international investors due to a large domestic market of over 210 million people, the availability of easily exploitable raw materials, a diversified economy that is less vulnerable to international crises, and a strategic geographic location that allows easy access to other South American countries.
But, due to several unfavourable characteristics such as cumbersome and complex taxation, bureaucratic delays, and heavy and rigid labour legislation, investing in Brazil remains risky. Brazil launched electronic certificates of origin as part of its continued attempt to improve its business environment, which lowered the time required for import documentary compliance, streamlining and simplifying the entire process. In addition, the country made a number of infrastructural concessions that have aided in the growth of investment. The current president has ambitions to improve the country’s economic environment by enacting measures such as reducing the time it takes to establish a company in Brazil from 79.5 days to the regional average of 30 days. Easing of regulation in some areas, as well as future tax amendments, should aid.
What to consider if you invest in Brazil
Strong points: Advantages for FDI in Brazil:
- Natural resources in abundance
- There is a large middle class and a large domestic market (5th largest population in the world)
- A geographically advantageous position
- A well-diversified economy that is well-connected to international markets (FDI inflows and foreign exchanges reserves are important, low external debt)
- Because of the real exchange rate’s weakness, export industries, particularly in industry, represent investment opportunities.
Weak points:
Despite its openness to international trade, Brazil has a number of impediments to FDI:
- Labor rules are onerous, resulting in high expenses for foreign companies and maintaining a large portion of the local business in the informal sector.
- Production costs are really high (wages, credit, energy and logistics)
- Infrastructure that has not been sufficiently developed
- Regulatory risk is very high (high taxation and heavy fiscal system)
- Changes in commodity prices on international markets expose you to a lot of risk.
- There is a labour shortage.
Government Measures to Motivate or Restrict FDI:
FDI is encouraged and promoted by the Brazilian government. Foreign investment is promoted by the National Investment Bank (BNDES), one of the world’s major development banks. The majority of the impediments to foreign investment, particularly in the stock market, have been lifted. Over the previous fifteen years, a huge number of public companies have been privatised, and several sectors have been deregulated.
Among the benefits offered by Brazil to attract investment are the following:
Renai, which provides information to potential investors on business opportunities in Brazil; Inovar-Auto Programa, which aims to improve technological development and energy efficiency; Consulta Publica Ex-Tarifário, which enables increased innovation by companies through a temporary reduction in the rate of tax on the import of capital goods. Additionally, the Brazilian federal government provides investment support in the form of funds and tax agreements that restrict double taxation.
Brazil’s national investment promotion agency is the Brazilian Trade and Investment Promotion Agency (Apex-Brasil). The Apex-Brasil website provides information on the Brazilian tax system, industrial property protection, labour and environmental legislation, credit support, and foreign investor incentives.
Investment Opportunities in Brazil
The Key Sectors of the National Economy:
Beef, poultry, tobacco leaves; agriculture (sugar cane, coffee, oranges, soya, bananas, walnuts, cashew nuts, corn, pineapples, and peppers); mineral ores, iron, and aluminium. In the fields of aeronautics, pharmaceuticals, automobiles, iron and steel, and chemicals, the country is increasingly asserting itself. The petrogas sector has a lot of potential, and Brazil is the largest renewable energy market in Latin America.
Also, the Brazilian government has initiated an infrastructure development investment programme. Opportunities abound, particularly in airport development and, more broadly, in public-private partnerships aimed at infrastructure development, such as the Projeto Crescer. The franchising sector is flourishing in Brazil, thanks to the rise of the middle class.
High Potential Sectors:
Agricultural biotechnology, agricultural commodities, crop and livestock, digital technologies, aerospace, chemical products, petrochemicals and clean energy, oil and gas extraction, metal extraction, electricity and gas, commerce, transportation, basic metallurgy, motor vehicles, trailers, semi-trailers, and real estate activities are just a few of the sectors in Brazil that offer excellent short-term opportunities.
Privatization Programmes:
In July2019, Brazil’s economically liberal government announced a privatisation programme, the world’s largest in terms of the number of companies to be privatised, which promises to reduce the number of state-owned companies from 134 to just12, and by far the largest in terms of asset value, estimated by the investment bank Bradesco BBI at R$ 470 billion ($117 billion). TAG, Petrobras’ pipeline subsidiary, was sold for $8.7 billion to a partnership led by Engie SA of France and Caisse De Depot Et Placement Du Quebec (CDPQ) of Canada.
Sectors Where Investment Opportunities Are Fewer
Monopolistic Sectors:
Nuclear power, mail and telegraph services, and the aerospace industry are all forbidden from using foreign capital. The Federal Government is legally liable for the operation of nuclear services and facilities of any kind, as well as the exercise of the state monopoly on research, extraction, enrichment, and reprocessing, industrialization, and trade in nuclear ores and derivatives, under the provisions of the Constitution (Art.21, XXIII).
Sectors in Decline:
Textiles, in particular, are among the industries most affected by Asian competition.
Damalion provides expert consulting solutions to help foreign investors maximize their investments in Brazil. Our extensive global service network allows us to extend our expertise to initiators worldwide. Our qualified professionals and connections offer legal entities and private investors the best strategies in company formation, fund establishment, investment optimization, and advice on tax matters. To learn more, reach out to a Damalion expert today.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
