Being one of the world’s largest nations in terms of land area, GDP, population, consumer market, and natural resources, Brazil should be seriously considered by foreign investors looking to expand their portfolios in the global market over the long term.

Here are some reasons why private and institutional investors must consider investing in Brazil through a mergers and acquisitions (M&A) process:

• Easiest and fastest way to expand a company’s operations overseas, gaining access to promising markets, and diversifying regional risks. 
• It’s an excellent way to perform sector or regional consolidation. 
• Optimization of a company’s capital structure. 
• Adding technologies and competitive advantage. 

Foreign Investments in Brazil through the M&A Process

1. Market Trends and Brazils’ Local Political Landscape

Brazil’s mergers and acquisitions landscape is going through a period of recovery after years of instability. The government has been pushing for reforms, most of which are geared towards attracting foreign investors, including start-ups and large corporations. 

Foreign direct investments in Brazils are drawn to the country’s key sectors, including agriculture, IT, manufacturing, life sciences, oil and gas, and renewable energy. There excellent opportunities for foreign investors who want to do business in Brazil due to its promising outlook in the next few years. 

2. Best Locations for Mergers and Acquisitions in Brazil

The large market size of Brazil has always been an attractive selling point among foreign investors. It has more than 220 million citizens and growing. 

The primary M&A hub is located in the country’s southeast region. This is where the capital Sao Paulo is situated. Majority of international and local companies prefer establishing their presence in the capital due to its strategic location. 

3. Applicable Laws for Brazil Mergers and Acquisitions

• Basic source of applicable laws come from the Civil Code (Law 10,406 of 2002) and the Corporations Law (Law 6,404 of 1976)
• Under civil code the M&A process for foreign investors encompasses basic rules on obligation, contractual relations, property, family and inheritance. 

4. Investment Company Structures for Foreign Direct Investments through M&A

• Most common business structures for those who wish to open a company in Brazil are limited liability company and corporations. 

Limited Liability Company

• Limited Liability Company structure is simple and easy to set-up.
• Needs two or more shareholders, one manager assuming the legal representative role. 
• May create a Board of Directors with deliberative functions. 

Corporation 

• At least 10% of required share capital must be paid upon incorporation. 
• Required to set aside at least 5% of profits under Legal Reserve, until the fund equals to 20% of its capital. 
• Must have two officers with executive powers. 
• May create a Board of Directors with deliberative functions. 
• Features a more robust structure. 
• Ideal for larger business ventures. 

Private and Public Corporations

• A Brazil corporation can be listed in the stock market or privately held.
• Listed companies have stocks traded in the market, and is such from the beginning or in pursuant to an IPO. 
• Listed companies are subject to Brazilian capital market system rules. 
• Listed companies must comply with provisions enforced by the Central Bank, National Monetary Council and the Brazilian Stock Exchange. 

Individual Company of Limited Liability 

• Individual company of limited liability was introduced in 2021. 
• Law of 12,441 created Eireli, which translates to individual company of limited liability. 
• Subject to exceptions in the Brazilian system. 
• Can only have one owner, with no requirement on residency and nationality. 
• An Eireli owner cannot have more than one company. 
• Requirement for share capital must be equivalent to 100 times the minimum wage in force at the time of incorporation. 
• Share capital must be paid in full upon subscription. 

Private Equity Investment Funds

• Common method of investment for international companies and private investors. 
• Has a set of attractive tax benefits. 
• Require independent management that must be accredited by the Brazilian Securities Commission (CVM).
• Usually established in the form of a branch or solid financial entity.
• Publicly open to investors, while they can be private, too. 
• Can be used to collect funds for a specific project without raising funds publicly. 
• Require 90% of net worth in specific asset types, including shares of limited liability companies or corporations. 

Corporate Control

Percentage of shares for foreign investors will vary based on the type of company:

• LLCs require 75% of votes for merger transactions, dissolutions, and liquidation. 
• Approval of accounts and renumeration among officers require 50% of votes. 
• Foreign investors must have at least 75% of votes to gain full control of a Brazil LLC. 
• Shareholders with less than 25% of the share request should be given prior to any changes to the bylaws. 

• General rule for corporations, 50% of majority for the company’s deliberations is applicable to common shares with voting rights. 
• This may be increased in the bylaws, if needed. 

Management and Regulatory Bodies

• Greater freedom in creating the administrative body of Brazilian companies, given minimum rules are followed. 
• LLCs need at least one administrator and does not require a Board of Directors. 
• LLCs governed by the Corporation Law if shareholders so prefer, to address issues not covered by the Civil Code. 
• Corporations must have at least two officers, and under Corporations Law, there must be a Board of Directors. 
• Board of Directors is optional for private corporations. 

Corporate Governance and Compliance

Brazilian companies are now obliged to adapt to a solid set of governance provisions to adhere to local and foreign standards. Corporate governance and compliance rules improve crucial management tools, delivering more security and transparency to company’s financial statements, minimize liabilities which could arise from mismanagement. 

• Listed companies must engage with corporate governance proceedings established by the Brazilian Stock Exchange. 
• Privately held companies and LLCs have no additional corporate governance obligations apart from those stipulated on applicable legislation under the Civil Code and Corporations Law. 
• Brazil has enforced the anti-corruption law (Federal Law 12.846) in 2013, which is crucial in mergers and acquisitions transactions. 

Brazil Anti-Corruption Law

• Upon transfer of assets, successor may inherit liabilities related to illicit acts against its administration. 
• All penalties and damages may be charged from the successor, but limited to the amount of transferred assets. 
• Additional sanctions will be assessed to the successor in the case of fraud. 
• Sister companies and affiliates may be jointly liable with a company involved in unlawful practices. 
• Companies that engaged in unlawful practices can have penalties reduced if they start adopting internal compliance rules. These can be in the form of auditing, encouraging the reporting of wrongdoings, and applying ethical work principles. 

Due Diligence

• M&A must start with due diligence on a target company belonging to a seller. 
• Due diligence is crucial due to the complex set of rules regarding succession of liability. 
• Due diligence can be implemented with the use of virtual data room systems and comprehensive remote analyses of documentations. 
• Physical visit and interview with the seller is a must before M&A can start.
• While some company information are publicly available, a company seller and its advisors must be able to provide all pertinent information to the potential buyer. 
• Foreign investors must check documentations pertaining to administrative proceedings, as well as civil, criminal, tax, and labor lawsuits.
• It is recommended to verify compliance with tax authorities. 
• When the business of a seller is involved in the transactions that may cause harm or danger to the environment, due diligence shall cover this as well. 

Brazil M&A Taxation Regime

Foreign investors must be aware of the existing taxation regime should they wish to invest in Brazil through the M&A process:

Goodwill Amortization 

Federal Law no. 12.973 of 2014 introduced new regulations for entities that plan to seize the tax benefit of Goodwill Amortization in company acquisitions. 

Tax treatment of the goodwill after pushdown depends on the characterization related to fair value of assets, future profitability, and other economic reasons. 

Goodwill generates from transactions with related parties and involving shares exchanges are not longer allowed. 

As per Law 12,973/2015, goodwill tax deductions are allowed, provided certain criteria are met. 

Payment of Dividends and Interest on Net Equity

• Dividend distributions are tax-exempt from shareholders. 
• No withholding tax and taxation for corporate tax purposes. 
• Interest on net equity is tax deductible for the Brazilian payer and taxable for recipients. 
• Withholding tax is applied at 18%. 

Purchase of Assets 

• Under successor liability rules developed by the Brazilian legislation, private corporations that acquire goodwill, commercial, industrial, commercial, or professional establishments from an unrelated entity will be held liability for historical taxes on intangibles and acquired establishments. 
• When a seller ceases business operation, buyer becomes liability for historical tax liabilities. 
• Seller of an asset is subject to income tax and social contribution tax.
• There are no preferential treatments applicable to capital gains. Both operational and non-operational gains will be taxed the same. 

Purchase Price

• Purchase agreement must identify the allocation, which is acceptable for tax purposes provided it is commercial justifiable. 

Goodwill

• Recorded as a permanent asset and cannot be amortized for tax reasons, although it may be amortized for accounting reasons. 

Depreciation 

• Acquisition cost of fixed assets is subject to future depreciation as deductible expense based on economic useful life. 

Tax Attributes

• Value Added Tax credits may be transferred where an establishment is acquired as a growing concern. 
• Tax losses and other attributed will remain with the seller. 

Value Added Tax

• Social Integration Program and Social Security Contributions may be applicable depending on the type of asset sold. These taxes are applicable on the sale of most assets other than real estate, plant, and equipment, more collectively known as fixed assets.
• Taxes on operations related to the circulation of goods and interstate transport services will be applicable to the transfer of inventory.  
• Sale of fixed assets is not subject to taxes on operations related to the circulation of goods and interstate transport services.

Excise Tax

• Taxes over industrialized products may be creditable by the buyer where the product is to be used on the manufacturing of other products.
• Taxes over industrialized products are applicable on the sale of fixed assets. 

Transfer Taxes

• Municipal real estate transfer tax may be applicable to the transfer of real estate. 
• Stamp duties are not applicable. 

Tax on Financial Operations

• All loans granted to a Brazilian company are subject to Financial Transactions Tax. 
• Rates may vary between 0.38% and 6%, depending on the nature of the debt. 

Purchase of Shares

• Sale and purchase of shares in Brazil are more common than an asset deal due to lower documentation requirements and indirect taxation benefits. 
• A Brazilian corporate seller is assessed with income tax and social contribution tax on the net gain from the sale of shares. 
• Whether a seller is a Brazilian resident or non-resident, the gain will be assessed with progressive withholding tax rates between 15% and 22.5% depending on the quantum of the capital gain. 

Pre-Sale Dividend

• Seller may realize a portion of the value of their investment as income through a pre-sale dividend. 
• Dividends are exempt from taxation in Brazil, but still reduces the proceeds of the sale, and thus gain on sale, which may be subject to taxation. 

Tax Clearance

• Concepts of tax clearance does not exist in Brazil. 
• Tax and labor liabilities are extinguished on expiration of statute of limitations. 
• Statute of limitations in Brazil is five years, from the first day of the period following a taxable event. 

Officers’ Liability 

• Regardless of business structure, officers are responsible for the legal representation of the company, either alone or in conjunction with others. 
• Officers may be held liable for debts and obligations of the company.

Regulatory Concerns

• When engaging in certain M&A process in Brazil, there are fields of activity that will need thorough regulatory assessment and examination. 
• Examples of these include health and sanitation, security and surveillance, financial services, aviation, telecommunications, and energy among others. 
• Investors are required to follow certain rules on minimum capital requirements, licensing, and approvals. 

Anti-Trust Rules

• Investors may need to secure an anti-trust clearance from Brazilian authorities (CADE). This is applicable in certain cases that could originate economic concentration, where determinants are based on revenue thresholds of companies involved. 

Based on Federal Law 12,529 of 2011, Article 88, which was later modified by the Ministers of Justice and Finance, the current rules are as follows:

• At least one of the groups involved in a transaction must have a gross revenue equal or higher than R$750,000,000. 
• At least one other group involved in the transaction has a gross revenue from its Brazil activities to be equal or more than R$75,000,000.

These anti-trust conditions are cumulative, so it does not suffice that one group exceeds the threshold. Both conditions must be met and verified simultaneously. 

As mergers and acquisitions (M&A) in Brazil involve many legal and regulatory aspects, it is crucial to seek the advice of experts. Damalion is a premier business consulting firm that specializes in assisting private and institutional investors complete a successful mergers and acquisitions (M&A)  process in Brazil. Our global service network consisting of consultants, lawyers, accountants, and other professional service providers are familiar with the complex M&A process as well as the complexity of the legislation structure in Brazil. Our Damalion consultants will help you meet the requirements for a Brazil M&A, as well as support you should you need education and recommendations on the legal aspects involved in acquiring a company in Brazil. To learn more about how you can invest in Brazil using tailored strategies, 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.