10 things to know about M&A in Brazil

Businesses are generally established as a limited company (limitada) or as a corporation (S.A.). Liability of partners is limited in both, but partners in a limited company may be liable for the unpaid corporate capital of the company, even the amount subscribed for by other partners.

One or more administrators may conduct management. Administrators do not need to reside in Brazil but must appoint a resident of Brazil as their representative.

Limited companies can be incorporated with a sole partner. Corporations require at least two partners. Partners may be Brazilian or foreign individuals or legal entities. Foreign partners must obtain a Brazilian tax registration (CNPJ for entities / CPF for individuals) and appoint a Brazilian resident as representative.

No general minimum corporate capital requirement (except in specific sectors) but corporations must pay in at least 10% of their subscribed corporate capital before incorporation.

Interest on partner loans are taxable as income and subject to withholding income tax when paid to foreign partners (at a general rate of 15%, or 25% if the beneficiary is located in a low-tax jurisdiction). In addition, such payments are subject to thin capitalization and transfer pricing rules. The deductibility of interest by the Brazilian company also depends on compliance with general rules regarding the necessity of the expense, thin capitalization, and transfer pricing.

Dividends are currently exempt from withholding income tax on distributions, but proposed tax reforms are discussing the potential taxation of these payments. The remittance of dividends abroad is subject to the IOF-Exchange tax at a zero percent rate.

Regarding the IOF-Exchange on external loans, a zero percent rate applies both on the inflow and outflow of funds when the repayment term of the loan exceeds 364 days.

For short-term loans (with a repayment term of 364 days or less), the IOF-Exchange is levied at a 3.5% rate on the amount inflowed into Brazil as loan. The repayment of the principal and interest is currently subject to a zero percent rate regardless of the repayment term of the loan. In case the IOF rate is increased up before the repayment date, the new rate may apply to the remittance for the repayment of the loan and corresponding interest.

It is important to note that IOF rates may change at any time, depending on the fiscal and monetary policy of the Federal Government.

Foreign loans granted to Brazilian companies above USD 1,000,000.00 must be registered with the Central Bank of Brazil.

Direct investments in Brazilian companies do not require immediate registration, as corporate capital is updated periodically via reports.

The conversion of foreign loans, dividends, or interest into corporate capital must be registered with the Central Bank of Brazil when the amount exceeds USD 100,000.00

Legal, tax, labour and financial due diligence are crucial. Labour and tax exposures are common. Risk mitigation tools include contractual protections, escrows, holdback provisions, and/or W&I insurance.

The share/quota transfer mechanism depends on the company´s legal structure. Share transfers in S.A.s are registered in the share register book ledgers; quota transfers in limitadas require filing an amended articles of association with the commercial registry.

The Brazilian Competition Authority (CADE)´s approval for a transaction is required if one party’s economic group has Brazilian revenues of at least R$750 million and the other’s R$75 million.

Depending on the business sector of the target company, other specific approvals from their regulatory agencies may be required (e.g., in telecommunications, energy, ports, and financial services).

Share purchase agreements may be governed by foreign law and subject to international arbitration. Arbitration in Brazil is an alternative for resolving disputes. Foreign arbitral awards require recognition by the Brazilian Superior Court of Justice (STJ) before their enforcement in Brazil.

An emerging trend in the Brazilian M&A market is the use of Warranty & Indemnity Insurance (W&I), particularly in larger or cross-border deals.