Virtual Open House Webinar Series – Brazil
Legal Entity Setup:
Branch Setup – the branch has the exposure that the parent company is liable for if any unresolved. Subsidiary Setup – of the foreign company. Subsidiary is called a Ltda or limitada which is Portuguese for limited. Having a subsidiary will limit your risk.
In contrast to countries like the UK, you cannot stop people from working. They have the ‘right to work’ concept, you cannot put them on a garden leave and you cannot restrict them from going to work for a competitor. This is because they have the right to get meaningful employment.
Company Law Compliance:
This is a very serious issue in Brazil that has a lot of requirements. From a Resident Director perspective, they need a Resident Director for the parent company of the subsidiary and one for the subsidiary. They also need what is called, resilience society administrators, one for the parent and one for the subsidiary. Therefore, you will need four roles filled.
These roles can be filled by the same individual, but that individual has to be a resident of Brazil and currently living in Brazil. You will need to think about: 1. How are you going to fill those roles? 2. Do you have senior enough level people to fill those roles? 3. Do you need to hire somebody from the outside; a professional director?
Accounting in Brazil is another complicated requirement, just like any country there are record keeping requirements, but Brazil requires that record keeping is done locally. Everything has to be done in a Brazilian system because the system has to communicate with the government’s system for processing invoices from vendors and issuing invoices to customers. This is due to bribery and tax evasion issues that the government is trying to manage. Everything must go through the central system, this allows the government to reconcile it with the returns and information that you have to provide on a monthly, quarterly, or annual basis. There is a lot of compliance around reporting down to the transaction level.
Compliance and Tax:
Brazil is a country with as many as 90 different types of taxes that are subject to federal, provincial, county, and city levels and depending on where the goods are manufactured, produced, shipped through, and stored at warehouse, you can be subject to taxes. In some cases, that can double the cost of your product just by taxation. It is important to understand those and make sure that you are doing the proper filing on a regular basis to stay in compliance.
One employment option is to hire someone as a contractor. We don’t recommend doing this, other than if it is for a very finite scope of work, for a very limited time period. If for example you need special expertise for only a few weeks then it is ok to hire a contractor, otherwise the rules are very similar to most of the countries where you have a 20-point checklist. Does this person look more like an employee or a contractor?
If you have a small presence the Professional Employer Organization (PEO) or Employer of Record (EOR) is an option. This is becoming very popular in Brazil because compliance requirements and the cost of doing business. Also, forming your own subsidiary is always an option but can take more time to setup.
Employment in Brazil is “at will”, just like in the US. They have to sign an employment contract which needs to be bi-lingual and remember in Brazil, they speak Portuguese not Spanish. As an example, the termination for cause is governed by general employment law, it specifies why and how you can terminate somebody for cause. A lot of terms and conditions are governed by the employment contract. These employment contracts provide termination protection for both the employee and the employer and the consequences of breach.
There are statutory requirements for many benefits. There are supplementary benefits that if needed you may provide. There are customary benefits depending on what industry and geography you are working in. In some of the smaller geographies you may have less benefits than in the major metropolitan area of Rio or Sao Paulo. Your customary benefits might be a little bit more. For example, commuter benefits might come in to play.
There are typical payroll issues in terms of computation, taxes, payroll reporting, etc. In addition, there are payroll complexities unique to Brazil. For example, you cannot hire anyone without a medical exam and once they get hired they must have a medical exam again. Whether you think about payroll or the hire to retire cycles, those are issues that you need to worry about when recruiting and hiring in Brazil.
Here are a few things that you will need to consider 1. How do you find the right workforce? 2. How do you find the right talent? 3. How do you then bring them on payroll in terms of the recruiting cycles, hiring, and onboarding cycles? 4. How do you maintain the global workforce visibility irrespective of the head count?
All of these have other requirements in terms of recordkeeping. If you want to terminate somebody or do a layoff, you will need to go to the labor court and present them with hard copy evidence of every relationship that you had with that employee to date and build you an argument on that. So, there are major requirements in terms of not just accounting but also HR recordkeeping and stuff from a local perspective.
QUESTIONS AND ANSWERS:
How to use a PEO in Brazil?
A professional employment organization (PEO) acts as the employer of record (EOR) on your behalf. They will have a legal entity that is compliant from a corporate and employment law standpoint. The limitation of employing people on your behalf is that the legal entity has to be subject to a collective bargaining agreement (CBA). The CBA is chosen based upon the specific industry that the company belongs to. This can create problems in terms of hiring people on your behalf because it is a situation where their skill sets and classification might not fit into it and they may object to being classified under that. However, from the perspective that the PEO can employ that person, the PEO can pay payroll, payroll taxes, statutory benefits and perform the hire to retire functions.
What are the key laws/regulations, the material differences in Brazil vs. US?
The government is trying to concentrate effort on tracking money laundering and tax evasion. They are tracking everything in terms of the amount of tax collected and the tax paid. From a foreign company standpoint acting in that jurisdiction, it is very onerous to be able to maintain records and do reporting on a timely basis. There are penalties and interests to bear in mind if you do not meet their requirements or report on a regular basis. Also, from the perspective of the personal records there are tedious requirements.
Brazil is an at-will country in terms of employment. However, it is recommended to have employment agreements in place. If there is termination without cause it is very specific in terms of the compensation entitlement. There are rules that differ for employees employed before 1988. After 1988, there is a fund that you have to pay into to make sure that termination without cause is funded correctly. An individual termination differs from a workforce reduction if you are referring to a mass layoff. The courts will defer to the union in terms of negotiating the arrangements and compensation that is due in a large-scale layoff as it relates to your company.
In addition, medical exams are required, there is a 13th month of payroll paid out at the end of the year and there is a one-month vacation after one year of employment has been completed.
Can you address the requirements to pay for employees commute and lunches?
To understand if a company is compiling with requirements for commute and lunches they must understand their collective bargaining agreement (CBA). Once a company signs the CBA, the CBA will stipulate what items the employer must procure for the employees.
What is the process for dismissal?
There are 12 specific examples of termination for cause in the government regulations that you have to fit in to to be able to qualify. It is a government regulation and therefore it is open to interpretation. Even though you may have the documentation to support a for cause dismissal, the employee can interpret differently and take you to court. This can be a long dispute process with the potential of losing, as in the case of any case that goes through the courts.
In terms of termination without cause the 2017 labor changes did allow the concept of a mutual agreement to end employment. This allows you to negotiate in terms of the overall provisions that have been terminated. Otherwise, there is a government fund that you pay into and if you do terminate without cause you are required to make additional contributions.
A workforce reductions is a completely different situation that is subject to union negotiations.
What severance is due in case of dismissal not for cause?
The guarantee fund which is determined by the length of service. You are paying into this fund as a part of the normal payroll process and contributions. If you terminate without cause you are required to pay 40% of the total funds accumulated as it relates to the employee and you have to pay a fine equal to another 10% to make sure all severance payments are covered. Workers employed prior to 1988 are governed by a different set of rules. They accumulate on the basis of length of service and payments associated with that. Also, be sure you are sending a notice to the union and check into the CBA to see if there are additional elements that must be included in the severance pay.
What is involved when closing a business?
In any country closing a business is extremely hard because you first have to settle all your liabilities. You cannot have any liabilities, whether you negotiate and pay them, or have the vendor forgive them, you have to settle all your liabilities and convert all your assets into cash. All you will have is a bank account with money in it. Then you must file all your tax returns, complete all your audits, and get clearance certificates from the taxation authorities that you don’t owe any tax to anyone.
Once that is complete you have a process of publishing in the local gazette or the local paper to let the public know at large that you are shutting this company down to ensure that everyone has claimed any liabilities you may owe them.
Once you apply the court will review a lot of your documents to make sure that you have the proper documentation, the right clearances and that you did advertise properly based on the requirements. This will allow you to close your business.
That process can take much longer than the set up process and can go on for as long as two years. Sometimes this process can take even longer depending on your businesses complexities.
What are the unique items to consider when thinking about setting up an operation?
There are the resident director requirements, the registered office requirements. How are you setting up? How do you want to limit your liabilities? Do you have the right contracts drafted? Do you have the right legal advice in terms of employment contracts?
In Brazil there are a lot of licensing requirements around your industry. Just because you incorporate, set up a subsidiary, doesn’t mean you can be in business. You have to get specific licenses from the government and they have a hearing process that can take 9 to 12 months to get your license going.
Even if you are just a retailer, or your goods are sold at the retail level, you have to think about if you are going to manufacture your goods elsewhere, outside of Brazil. If you are going to import your goods who is the importer of record? How do you buy and sell from the importer of record. There is a lot of complexity in setting up an operation in Brazil and I would recommend consulting with somebody, whether it’s Global Upside or someone like us.
Are options taxed at exercise or issuance?
The options are subject to taxation in a case by case analysis. Your option plan can be under a commercial contract, or directly part of a participant compensation. If your option got part of the participant compensation, then the most recent case laws in the Brazilian courts. If the plan is deemed to be part of participant compensation, then yes, tax and social implications may arise at the exercise of the option.
Can we have someone work in Brazil for 2 to 3 weeks?
You can come into the country on a tourist visa for a short period of time or to attend a meeting and the government would not frown upon it. If it’s an extended period of time, you will have to make other arrangements.
What are the benefits or dangerous considerations in this country?
Brazil is a country with political turmoil. Even at the highest levels there are allegations of corruption. The Prime Minister and President can go to prison for that possibly. So, when that happens you know that compliance with FCPA can be a problem. And FCPA doesn’t just apply to US companies in the US, it applies to global operations. So you have to be very careful about bribery. And there are UK type bribery laws.
You have to be very careful about dealings in Brazil. There’s a lot of compliance requirements, which means that there is a probability of tripping something because you forgot to file one particular return or report some statistical information that was required. And there is a lot of information that is required, some on a monthly basis, some that you have provided on a monthly basis you have to re-provide on a quarterly or an annual basis. So, for example your taxes (income taxes) are filed on a monthly basis but you also have an annual requirement to file a tax return.
Dangers can come to you in many respects, from thefts and kidnapping, and you know if you end up in the wrong neighborhood in some of the large metropolises, there are unsafe areas. Some of the benefits are that it’s the largest country in South America, it has a huge economy, it’s growing rapidly and it’s continuing to do well.
Can you please provide highlights of the 2017 labor law changes as it relates to common issues in HR and payroll?
At the end of 2017, there were significant changes with employment laws. For example, you have the freedom of contract, which gives greater autonomy to the parties. There are also changes in regards to shift in rest, which includes commuting time from the worker’s place of residence to work, and also returning to the employee’s residence, will no longer considered part of the shift.
Additionally, the resting period can be reduced by 30 minutes if it is included in the collective bargaining agreement. There are also reforms in regards to salaries and benefits, that bonuses granted by the mere readiness of the employer when related to the employee will not be incorporated in employee’s compensation. This is important from payroll taxation standpoint. In addition, mill allowance, daily travel allowance, housing care will no longer be included in compensation. There are also changes in the collective bargaining agreement arena.
How are employers handling the change in labor laws?
The way to address these change in labor laws – you have to continue to comply with your pre-existing employees under the original CBAs, under the original laws they were hired. But if you are having somebody under the new regime, the new labor laws, then what you want to do is, first of all, figure out your strategy of doing business in Brazil, which will then drive how much flexibility you want to have, whether it is for termination, benefits or other things that you have discussed. You can then properly address them contractually and take advantage of the changes in the law. That’s how we are helping our clients to deal with changes to make their lives a little bit easier in case of a termination or changes in the business environment locally.
What are general work permit requirements?
Generally, every country requires you to get a work permit if you want to stay there for more than a 90 day stretch, and if you want to stay for more than 183 days, or more than 6 months, on a rolling 12-month basis. So similarly, Brazil requires work permits.
It is not hard to get a work permit, but there is a process. You have to do a lot of paperwork, apply, and receive approval before you can come in to work on a long term basis. Yes, if you are going to a country for a short term, such as a business meeting, you can get a tourist visa, you can even get a business visa to attend meetings based on just very simple proof that you are going there for some meeting.
As a contracted US company, what are the employment laws that foreign employees need to abide with when working on a project in Brazil?
When you hire employees in Brazil, you have to worry about the Brazilian law vs. the US law, because US law stops at our borders. It doesn’t carry over to foreign countries. And the laws: we talked about employment at-will, employment by contract, changes in the labor laws. Statutory benefits as compared to US, where there are very nominal amounts of statutory benefits that you are required to provide the employees.
So, it is a very different environment. You have to think about what is required in that country vs. what is required here. This is where even good HR people that have lots of experience in the US need to consult with outside firms that can help guide them through the requirements. How do you stage that? How do you make sure that you are hiring the right talent? The right level of talent by providing them the right benefits so that they are attracted to come work for you vs. some other company with a better understanding of the Brazilian laws.
*PLEASE NOTE – These questions and answers are intended to be used for informational and guidance purposes only, not as legal advice. Set up a consultation today with a Global Upside team-member for advice and strategy specific to the unique needs of your business and geographic area.
Co-Founder and CEO
Ragu Bhargava is an experienced financial executive, entrepreneur and leader. He is the Co-Founder and CEO of Global Upside, and its three sister companies: Global PEO Services, Mihi, and Gava Talent Solutions.
VP, Strategic Accounts
Andrew helps some of the world’s leading companies tackle complex global HR and Payroll challenges. Prior to Global Upside, Andrew worked at Price Waterhouse Coopers, Oracle and also consulted for companies like Nestle, P&G, Pepsi-Cola and Colgate Palmolive.
Director, Global Payroll
Nathan North is Director of Global Payroll and manages all aspects of payroll for Global Upside clients. Currently, he oversees payroll processing for 5000+ client employees across 45 countries.