As many successful multinational companies take the step of expanding to Latin America, they must consider their options for if things don’t quite go to plan. It’s important to understand and map out a clear exit strategy, just in case the market doesn’t perform as expected.
Liquidation is often a necessary step in business, either as a requirement to redirect focus in a different direction, or cutting losses before they become unmanageable.
Liquidation of assets occurs when a business becomes insolvent, meaning it cannot pay its debts to its creditors. The procedure involves converting the assets of a business into cash to pay debts owed, and then officially close the company.
Brazil has the largest economy in Latin America with the largest population, making it one of Latin America’s prime attractions when it comes to foreign investment. The country has a complex bureaucratic system. It’s important for those companies reevaluating their options to understand the correct procedures for exiting the Brazil market.
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Business Eligibility for liquidation in Brazil
To be eligible for liquidation in Brazil, entities or individuals must be considered ‘entrepreneurs’, legally defined as ‘someone who runs a business professionally’.
There are two types of liquidation: voluntary liquidation (instructed by the shareholders) or compulsory liquidation (by court order). Voluntary liquidation occurs after the dissolution of the company and it starts when a liquidator is appointed.
Involuntary liquidation is initiated when a creditor who has not received payment contacts the court. Judges usually take more deliberation in these types of cases. It is worth noting that, creditors often use this method to collect payments quickly from companies as payment collection proceedings can be a very long process in Brazil.
Voluntary liquidation procedure
As previously mentioned, Brazil is not unfamiliar with bureaucracy. Company formation in Brazil involves a long and rigorous procedure, and liquidation in Brazil requires the same lengthy process and multitude of authorities.
After the dissolution of the company, the following procedures are implemented.
- All of the shareholders sign the ‘closure minute’, which summarizes that the company has been dissolved. This document also declares how much each shareholder receives and names the person responsible for the rest of the liquidation process. If partners disagree on each of their shares of the liquidation (if any), the case is taken to court. The assigned liquidator will be in charge of eliminating debts and dividing the assets which remain.
- Even if the company does not employ staff, the next step in the process is engaging with the Brazilian social security organization, Instituto Nacional de Seguro Social (INSS). If the company has unpaid social security contributions and still have assets to their name, then these payments must be made. Once the INSS is satisfied with the company’s contributions, it issues a Certidao Negativa de Débito which is a certificate acting as proof of adequate debts paid to the INSS.
- The Fundo de Garantia do Tempo e Serviço (FGTS) is a system which ensures the company is officially compliant with
worker regulations, that the working environment is suitable as well as ensuring all employees are covered in case of unfair dismissal. When liquidating, a company must get certification of this compliance from the Caixa Economica Federal.
- Certidão Conjunta Negativa de Débitos and Certidão Negativa de Débito – Certificate proving up-to-date social security payments.
- Certidão de Quitação de Tributos e Contribuições Federais – certificate proving all federal taxes have been paid
- Certificado de Regularidade do FGTS – certificate of regularization compliance issued by the Caiza Economica Federal.
- Once these steps have been followed, the final step is to cancel the company’s official tax ID number (Cadastro Nacional da Pessoa Jurídica – CNPJ). This is done through the Receita Federal do Brasil website and via a public notary. The final document to formalize is the Documento Básico de Entrada (DBE) and must be signed at a notary office. Once this has been checked through, the CNPJ will cancel the company’s tax ID shortly afterward.
Shareholders, creditors, and employees
The three distinct groups of people involved in a process of liquidation are the shareholders, the creditors, and the employees. There is an established pecking order as to who receives payments for their claims when company assets have been liquidated.
Typically, the first group to get paid after liquidation is the ‘secured creditors’ along with any legal fees that come with their battle to collect their money. Second in line are the unsecured creditors which include employees who are owed money. If no money is available to be paid, employees are protected somewhat by the FGTS who payout at least some salary and contribute to social security payments whilst staff remain unemployed. Partners and shareholders are last in line to be paid.
Common FAQs for Liquidation in Brazil
Based on our extensive experience these are the common questions and doubts of our clients when liquidating a local entity
The liquidation process involves the following principal activities:
Shareholders’ Meeting: The company’s shareholders convene a meeting and resolve to dissolve the company and start the liquidation process.
Appointment of Liquidator: A liquidator is appointed, who may be a third party or the company’s legal representative. The liquidator oversees the liquidation process.
Notice to Authorities: Formal notice of the company’s decision to dissolve and liquidate is sent to the Commercial Board, Federal Revenue Service, and state and municipal tax authorities.
Publication of Notice: A notice of the company’s dissolution and liquidation is published in the Official Gazette and a local newspaper to inform creditors and other interested parties.
Asset Liquidation and Debt Settlement: The company proceeds to liquidate its assets and settle its debts, ensuring proper distribution of funds to creditors.
Employee Settlement: Settlement of employee obligations, including payment of wages, severance, and other entitlements in accordance with labor laws.
Account Closure and Tax Compliance: Closure of the company’s accounts and fulfillment of tax obligations, including the submission of final tax returns.
The liquidation process will normally take between (9) and (16) months, assuming the entity is in good standing and no rectification work is required.
Looking to liquidate and need a partner?
Liquidation in Brazil is too often looked at in a negative manner. Liquidations offer clean slates, learned lessons, and fresh starts. Entrepreneurs may not always succeed the first-time round, especially in new business environments.
In the circumstances of liquidating your company in Brazil, make sure to have a local partner to coordinate the complex procedure. Biz Latin Hub are on the ground in Brazil to provide specialist legal and accounting services to manage your exit strategy.
Get in touch today for your first step in the direction of a new beginning.
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The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.