By Globalization Partners
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When doing business in Brazil, it is crucial to have detailed knowledge of the local environment. Although the country has the largest economy in Latin America, a massive consumer base, and has been a haven for tech startups over the past few years, it is one of the world’s most challenging countries for U.S.-based businesses to enter via entity establishment. The country has an incredibly complex and constantly changing tax regime, statutory severance, and a 13th-month pay. Employment in Brazil is usually governed by Collective Bargaining Agreements, and employees have access to significant employment-related benefits.
All these factors can make it easy for companies expanding to Brazil for the first time to get tripped up on the level of benefits and protections required for employees and other important aspects.
Here is a list of key considerations to keep in mind when doing business in Brazil.
1. Brazil is a developing country
Brazil is still considered a developing country because of its decreasing GDP per capita, high mortality and birth rates, and limited access to healthcare. And, while it is often interpreted as a harbinger of “high growth,” it also means that several aspects of the economy are not yet developed. The regulatory environment and the investment sphere are not as mature as in developed countries.
2. Low ease of doing business
The reform of laws and regulations for starting and managing a business in Brazil have not kept pace with the growth of the economy, presenting several obstacles for international companies. Brazil ranks 124th in the World Bank’s global report, which evaluates the ease of starting a business, processing permits, registering property, and paying taxes. On average, it takes 11 procedures and 119 working days to start a business in Brazil.
3. Renewed focus on eliminating high levels of corruption
It is no secret that Brazil has notorious levels of corruption among its politicians and high-ranking business owners, which is something the government is working hard to eradicate. With this renewed focus on eliminating the high levels of corruption, initiatives such as the Clean Company Act are being implemented. This act makes companies vulnerable to liability for their employees’ “corrupt” acts and provides strict penalties for their employers, regardless of management’s awareness of those acts. There is also a criminal code that establishes criminal offences.
4. Cost of starting a business
Obtaining all necessary permits and licenses, and completing all the inscriptions, verifications, and notifications with local, state, and federal authorities to start business operations is costly.
There is no minimum capital required to start a business in Brazil. However, the largest determinants of total cost are taxes, annual registry charges, municipal licenses, and registration fees — all determined at the state or municipal level. They range from 4.9 percent to 13 percent of income per capita.
Registration with the board of trade is required in all states, but fees are determined locally. Also, registering property in many states is difficult — a company spends an average of 3.5 percent of the property value to register. The procedure with the second highest cost is filing a sales deed with the Real Estate Registry — companies pay between 0.5 and 1.0 percent of the property value, as well as a 2 percent real estate transfer tax.
Although these fees sound high, in return, companies are rewarded with an original certificate of incorporation, original share certificates, and an original government receipt as evidence of payment of annual company registration and license fees.
5. Complex tax system
Brazil’s tax system is among the most complex and burdensome in the world. There are four types of value-added tax (VAT) in effect at federal, state, and municipal levels. The Brazilian tax system currently has five main taxes on the production and consumption of goods and services: the Municipal Service Tax (ISS); the municipal VAT; the Tax on Commerce and Services (ICMS), or the state VAT; the Program of Social Integration (PIS) and the Contribution for Social Security Financing (COFINS); and the tax on industrialized products (IPI). The proposals under discussion suggest the unification of these five into one: the tax on goods and services (IBS), comparable to a VAT.
Several changes to the tax system are currently being discussed: a reform in consumption taxation, with the merger of all the previously mentioned taxes, and the reduction of the employer’s contribution on payroll. Another possible change could include a more equitable system that reduces privileges by increasing the progressivity of the income tax and even taxing the distribution of profits and dividends.
6. Low-quality infrastructure
Compared to other countries in the economic bloc consisting of Brazil, Russia, India, China, and South Africa (BRICS countries), Brazil has the greatest infrastructure lags. According to the World Economic Forum, Brazil ranks 108 out of 137 economies for the quality of its infrastructure, which also reflects on the country’s high logistics costs.
However, with the Investments Partnership Program (Programa de Parcerias de Investimento), the federal government is supporting public-private partnerships and the participation of international investors. The sectors that will benefit from these programs include renewable energy generation, port infrastructure, urban mobility, and sanitation.
7. Skills shortage
According to Korn Ferry Institute’s “Future of Work” report, Brazil’s worker deficit across all skill levels is expected to reach 15.8 million by 2030. However, there are several initiatives that have been launched to fill the skills gap and boost the country’s growth potential. These initiatives promote the reskilling and upskilling of the Brazilian labor force by matching the more demanded capabilities.
Brazil is an undeniably attractive market due to its size and growth potential but doing business there can be challenging. Globalization Partner’s AI-driven, global Employer of Record (EOR) platform is powered by our worldwide experts and allows you to expand your business to Brazil without the risk of setting up an entity. We take care of complex HR and tax management and ensure law compliance so you can focus on growing your business.
Learn more about our solution.