According to a report from OCDE (Organisation for Economic Co-operation and Development), Brazil has reached 4th place at the foreign investments ranking in 2022. The country is just behind China (1st), USA (2nd) and Australia (3rd) and has received US$28 billion of foreign investments from January to March 2022.
There are lots of benefits for foreign companies that want to open a subsidiary in Brazil, but also some challenges for those who want to establish a local presence. In this article, we have enumerated them for a better comprehension of the market and all of its possibilities.
BENEFITS OF SETTING UP A SUBSIDIARY IN BRAZIL
Opening a subsidiary in Brazil is often a key success factor for all international companies wishing to enter this market with a medium- and long-term vision.
Indeed, Brazil is a protectionist country which apply tariff and non-tariff barriers to foreign companies to encourage them to open a subsidiary.
Let’s see how a local entity may allow international companies to overcome these barriers and what are the possible optimizations.
- A Brazilian subsidiary make possible to directly manage its imports
In Brazil, only a local company with an import permit called RADAR can import and clear good. A foreign company is prohibited to deal with the clearance of the products.
Therefore, having a Brazilian company enable international companies to directly manage its import and do not have to pass through an intermediate importer of record (IOR) or a distributor.
2. Keep control on your marketing mix and brand image
By making possible to maintain the import and distribution internally, a Brazilian company allows international companies to keep control on their marketing mix and brand image in the country.
Without this control on import and distribution, it would be mandatory to pass through a third party that would have power to make changes to their communication and positioning.
3. Benefit from local government incentives
A Brazilian subsidiary will allow international companies to apply for government programs to support local businesses.
There are several types of incentives for foreign companies interested in investing in Brazil, providing tax benefits, such as tax exemptions and facilities for obtaining investor visas, when fitted into rules established by the government.
Here are some examples:
- BNDES (National Bank for Economic and Social Development) financing
- PADIS – Support Program for the Technological Development of the Semiconductor Industry
- PATVD – Support Program for the Development of the Equipment Industry for Digital TV
- REPES – Special taxation regime for the information technology services export platform
- São Paulo Inova: Support for companies in the state of São Paulo, technology-based and innovative in their initial stage or in the process of opening
- Soft landing: possibility of exchanging companies in technology parks, through a program called soft landing.
4. Gain competitivity with optmized transfer price
One of the main barriers to entry into Brazil is import duties.
Having a subsidiary in Brazil makes it possible to apply a transfer price as low as possible – respecting the rules in force – to reduce this tax burden.
In Brazil, the Transfer Price calculation methods for imports are:
- Resale PRL (resale price minus profit method);
- PIC (independent compared price method);
- PRL production (production cost minus profit method);
- CPL (production cost plus profit method);
- PCI (Price under Import Quotation).
5. Dividend returns are not taxed
Dividends are currently not taxed in Brazil.
A subsidiary will therefore be able to return its profits to its head office without tax on the transfer.
One of the best optimization schemes for development in Brazil is therefore a transfer price policy that is as competitive as possible with a local resale margin placement, the profits of which can be returned tax-free to the headquarters.
However, be aware that a reform has been proposed with the suggestion of 20% WHT. The rate could go to 30% if the beneficiary is in a tax haven jurisdiction or enjoys a “privileged tax regime”.
CHALLENGES OF SETTING UP A BRAZIL SUBSIDIARY
The interests of opening a subsidiary in Brazil are great but there are also risks if you are not yet sure of your market and/or your positioning. This is not a step to be taken lightly.
Indeed, opening a subsidiary in Brazil requires a lot of time and money; and maintaining it is hard work.
- Opening a subsidiary in Brazil takes time and money
Let’s start with the opening. This takes time, especially for a company that will have to be able to import later, because of the many bureaucratic processes at different court level (Federal, States, Municipal) that must be gone through and that cannot be done in parallel, each step depends on the previous one.
On the other hand, some administrative tasks, usually simple, may be as long as opening a bank account.
Opening a subsidiary will take about three to five months. However, if you need it to be able to import, you will have to add about three additional months to it. Therefore, stablishing a fully operational import subsidiary in Brazil can take 6 to 8 months.
And this time is considered without counting situations where we must obtain health licenses such as ANVISA for cosmetics, food supplements and pharmaceutical and medical products, or MAPA for food and agriculture-related products. In this case, the necessary licenses will take at least a year to obtain.
Below are the main steps and deadlines for opening an import subsidiary:
It is important to be aware that during the entire time of opening and before being operational, you will have to assume the costs of accountants, legal representative, lawyer and rent for commercial premises (a simple address at an accountant or lawyer will not be sufficient to obtain your import permit, a real local must be in your name).
In consequence, beside the cost of opening itself that range from USD 3,000 to USD 10,000, an international company will have to bear a monthly fee reaching up to USD 2,000 – if not more; before even being able to import and sales products.
2. Maintaining a Brazil Subsidiary is complex, costly, and time-consuming
The main difficulty in maintaining and managing your subsidiary in Brazil is the high bureaucracy and the incredible complexity of the tax system.
Some telling figures that will sum up the situation very well:
Brazilian firms spend on average 2,600 hours per year for paperwork and taxes – the highest rate in the world-, compared to 317 hours in Latin American countries or 159 hours in OECD countries.
This additional workload translates into more manpower and the organization must be extremely precise on its activities in order to not waste time and money.
On the other hand, maintaining a subsidiary also means having to maintain a full team, which directly generates high operational costs that will surely not be covered by the country activity at the start of development.
3. Closing a Brazilian subsidiary is complex
Before launching your business, It is important to bear in mind that a subsidiary in Brazil will be as complex to close as it was to open. Which makes sense in such a bureaucratic country. This can generate discredit by investors.
This implies that from the decision to close, it will be necessary to wait several months before being able to carry out this process completely. At the same time, the monthly costs of maintaining the structure will continue to weigh on finances.
This article is not written to discourage your company opening a subsidiary in Brazil, but mainly to warn about the complexity that may be overlooked and can quickly lead to substantial losses.
Opening a subsidiary in Brazil makes sense when you are certain that your market will cover your costs and will allow you to establish your brand and company in the long term.
However, a company wishing to test the market in a lighter and less risky way will first find a local partner to start its operations.
If you want to understand better about this subject and how to find the ideal local partner to work with, we can help you all along the way, focusing on less time and costs for your operation.