Despite being the 7th largest recipient of foreign direct investment in the world and by far the highest in Latin America, Brazil has the most rigorous corporate compliance system in the region. In fact, Brazil ranks in the top 10 locations worldwide for complexity of doing business. To help alleviate the headache of compliance issues and mitigate the risk of corporate wrongdoing, get an entity health check for your company.
Entity health checks, otherwise known as corporate health checks, are used by both large businesses as well as startups. Their practicality is especially prudent in nations where corporate compliance regulation is difficult and convoluted, or where penalties for corporate misconduct are harsh. Unfortunately, Brazil qualifies on both of these accounts. As figures would suggest, however, Brazil’s appetizing opportunities framed by its tax incentives, growing economy, and low labor costs make it too good an opportunity to miss. With the use of corporate health checks, enter the Brazil market without the fear of non-compliance penalties.
What are entity health checks in Brazil?
Health checkers go deep into business transactions, tax payments and employee salaries in order to find issues or gaps in the filings.
An entity health check is a voluntary audit conducted by independent contractors. This independent group is made up of legal and financial experts who are employed to open up a company to inspect possible compliance issues. By delving into tax filings, social security payments, meeting minutes, and other corporate documents, these checks assess the company’s compliance status. Corporate health checks help companies to ensure that their actions are all clean and legal.
There are two types of corporate health check. One investigates the key areas of legal compliance: registry filings, meeting minutes and statutory registers. The other focuses more on fiscal and accounting compliance by examining the company’s balance sheet. Health checkers go deep into business transactions, tax payments and employee salaries in order to find issues or gaps in the filings. By doing this, companies can know for certain that they will not incur penalties from authorities.
In compliance landscapes that are dotted with traps and stumbling blocks, it is very easy for companies to overlook certain regulations. Brazil is a prime example of a country with web-like legal and fiscal regulations. Without careful deliberation, penalties and fines can quickly stack up.
An outline of Brazil’s legal and financial systems
As the inflow of foreign investment into Brazil soars to new heights, largely attributed to by the election of the pro-business president, Jair Bolsonaro, investors should be made aware of the various corporate regulations Brazil holds. Both legal and financial compliance in Brazil can appear very alien to newcomers to the region, so entity health checking services are crucial to avoid non-compliance.
Fiscal compliance for entities
Though entire books exist on fiscal regulation in Brazil, outlined below is an overview of the main features.
Taxes in Brazil are levied across three different regional levels: federal, state and municipal government taxes. The federal tax is uniform for all; state and municipal tax rates, however, vary across different areas. The city of Manaos, for example, offers a lower rate than somewhere like Sao Paulo.
On gross revenue, companies pay two types of taxes. The first is federal, set at 1.65%. The second is a mandatory social security contribution, set at 7.6%. Businesses must also withhold personal income tax which is deducted from employee’s payment.
There are also two types of value-added tax (VAT) in Brazil. The first tax is a federal payment that is levied on the production and import of domestic and foreign goods. This rate is set at 20%. The second VAT is a state payment on goods as well as services known as ICMS. Dependent on the state this tax rate is set between 7-25%. Brazil’s accounting system plays host to a number of irregularities, outlined is a list of the most profound differences:
- Unlike many countries, Brazil’s tax year is January-December with tax returns required to be filed on the last working day of April.
- It is also worth noting that tax extensions are not offered in Brazil. The deadline is strict and, if missed, fines start to be implemented.
- Companies must report payroll and VAT filings to the Brazilian government every month.
Without the use of local experts to perform an entity health check, non-compliance with any of these fiscal regulations can end up in substantial fines.
Taxes in Brazil are levied across three different regional levels: federal, state and municipal government taxes.
Entity Legal Compliance in Brazil?
Similar to fiscal compliance, legal compliance in Brazil is equally rigorous. Company incorporation in Brazil is twice as long as any other Latin American country, involving a number of federal boards, as well as municipal and state ratifications.
Private entities in Brazil must maintain a local registered address when operating and foreign companies must have a Brazilian legal representative as a power of attorney.
Every year, companies registered in Brazil must report annual returns that confirm the relevant details of their company. These details also include updates on any changes in directors and their home addresses.
Foreign companies looking to close their company in Brazil must continue employing a full-time secretary as well as an office in the country until the lengthy liquidation process is completed.
Employment law also throws up a number of compliance issues. Employers in Brazil must provide a number of additional benefits to employees such as meal allowance, life insurance, dental allowance, pensions, medical checkups as well as annual bonuses. Accurate records for these allowances must be clearly declared in employee contracts before they start work.
Any non-compliance on any of these regulations, particularly concerning employment law, can end in court hearings, expensive legal fees, and potential fines.
Why are corporate health checks important in Brazil?
Corporate health checks act as a company’s backstop, saving them from incurring penalties and expensive fines issued by authorities. Particularly in the case of Brazil, it is not an easy task ensuring compliance, even more so for new or foreign businesses not familiar with local law. Corporate health checks are also especially prudent after a set of reforms to corporate law have been made. In an era of great change for Brazil with the election of Bolsonaro, a number of reforms to corporate law are on the horizon. For smaller businesses, it can be very easy for these changes to slip past the net. With the help of an entity health checker, avoid this oversight.
Corporate health checks are useful to any business – large or small. Nevertheless, there are three instances where they are most commonly used, during mergers and acquisitions, startups and branch office oversight.
Mergers and Acquisitions
When purchasing another company, a lot of vigilance is required. It is very easy to be distracted by the reams of bureaucracy during a company buyout. What looks ok on the surface can easily be hidden by false figures. By using an independent corporate health checker during a merger, they can investigate the balance sheets in-depth and potentially uncover strings of debt or unpaid taxes. Mitigating the risk of an incorrect valuation can help purchasers save large sums of money and bring negotiations to a fairer agreement. In the case of Brazil where the web of corporate law is thick, a thorough and diligent examination of a company is wise before a purchase.
Bringing on all the support available helps to keep startups afloat until the time they can support themselves.
Startups in Brazil
In the case of startups, particularly foreign-owned startups where local law is completely alien, it can be very easy for compliance regulation to overwhelm a small office. When there are countless other tasks to complete during company incorporation, it is very easy for compliance to be put to the bottom of the pile. In the case of Brazil where there is no leeway for non-compliance, fines can bring a startup to its knees before it has even had a chance to grow. The act of an entity health checker coming in will advise on regulations the company is at risk of breaching or assure a business owner that his company is compliant. The road to company incorporation in Brazil is not an easy one. Bringing on all the support available will help keep the company afloat until it can support itself.
Branch office managment
As a large company with a number of branches around the world, it can be difficult to oversee all of their actions. Compounded by the fact that each branch is likely to have different laws, it is difficult for the corporate managers to keep track of each specific branch’s compliance. To ensure performance as well as compliance, corporate health checkers can examine the conduct of branch offices and report to head offices for more detailed rundowns of compliance and performance. Non-compliances can cost the company in fines, sanctions and/or a damaged business reputation. Employing a branch office in Brazil, as many multinational companies do, does come with its fair share of compliance headaches. The best method of avoiding this is to employ a corporate health checker.
Use local experts for your entity health check in Brazil
Investing in Brazil no doubt has enormous upside potential with its booming economy, strong infrastructure, business-friendly government, and cheap workforce; however, the price to pay for this comes in the form of compliance.
Large multinationals go through in-house compliance auditing every month. They simply cannot risk the penalties in fines nor reputation. Why should it be any different for smaller companies? Insulate yourself from corporate penalties by employing an entity health checker.
Biz Latin Hub provides a range of business services to in-coming foreign companies. Partner with our expert team of lawyers and accountants to help your company navigate local compliance law. If you’re interested in our Brazilian entity health checking services, get in touch today at [email protected] and we can ensure your fiscal and legal requirements are clear of all noncompliance.
Learn more about our team and expert authors.