After the incorporation process, Brazilian subsidiaries of multinational companies are normally treated a center of costs and need working capital to develop their activities. Investors normally seek for the most common funding alternatives in Brazil, which are the capital investments and the foreign currency loans.
Equity (capital) investments are not subject to any prior approval of the Brazilian Central Bank, but subject to registration. The registration itself enables the Brazilian subsidiary to purchase foreign currency to remit dividends, to pay interest on capital, as well as to repatriate capital That is, foreign non-registered investments are not subject to repatriation.
Dividend payments to foreign investors do not require prior approvals and are not subject to any withholding tax or limitation. Reinvestments of such profits are also free of any withholding. Foreign investors may repatriate their investments regardless of any prior approval and free of tax, if the funds to be repatriated do not exceed the amount of the capital registered with the Brazilian Central Bank.
After receiving the funds in Brazil, the local company must exchange them into Brazilian currency and capitalize the proceeds thereof. The registration of the foreign investment with the Central Bank is carried out as a matter of course and requires a pre-enrollment with Brazilian Central Bank (as well as other enrollments with the commercial bank used for the receipt of funds). For such purpose, the local company must register itself at the Brazilian Central Bank’s electronic system (SISBACEN) and record all equity investments it receives within 30 days of the date of the relevant remittance.
Foreign investment is nowadays declaratory and related changes are mandatary to be informed in the SISBACEN. Brazilian Central Bank does not require any presentation of documents to approve / validate transactions, but may request corporate (or other) documents that support any transaction, within a 5-year period of its occurrence.
Foreign Currency Loans
Foreign currency loans for more than a decade do no longer require Brazilian Central Bank’s prior approval. Foreign currency loans are though still subject to registration with the Brazilian Central Bank and this registration is a requirement for the Brazilian company to remit both principal and interest to the relevant lender in foreign currency and must be made prior to the remittance of funds. Brazilian Central Bank requires that the interest rate must be set at international market levels and that the payment terms must be registered setting forth specific payment dates.
There is no minimum term or grace period for the payment of principal or interest. However, loans with an average repayment term of less than 180 days are subject to a financial transaction tax (IOF) at a rate of 6% over the total amount. Principal payments are free of taxes. Interest payments are generally subject to a 15% withholding tax.
There are other few alternatives for funding Brazilian subsidiaries of foreign companies in Brazil and other debt instruments, such as local currency loans and services agreements. Upon request we may review what are the best alternatives for each case, which will depend on the amount involved, cash flow, type of business and others.
André Garbuglio was an associate at Pacheco Neto Sanden Teisseire Law Firm.