Basic principles for successful entry into the Brazilian market

February 2014 | EXPERT BRIEFING | FOREIGN INVESTMENT

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Brazil, with its nearly 200 million inhabitants, a large number of cities, international events and increasing domestic investments in the oil, gas and construction industries, is now a favoured destination for foreign investment.

Although many foreign companies desire to enter Brazil, that intention alone is not enough and companies need to be adequately prepared for the risks, both expected and unexpected. They also need to have clearly defined objectives.

Three types of attitudes towards entering the market were identified: (i) aggressive firms with a focus on immediate return, mainly concerned with potential businesses that can be leveraged by entering as fast as possible; (ii) conservative firms that care about the rules and risks, with a focus on profits over the long term; and (iii) firms with moderate aggression, seeking profitability in the medium term by striking a fine balance between their costs, risks and profits.

The first category usually already exports their products or services directly to Brazilian customers or local distributors, and are thus able to analyse the market share they can possibly obtain. They accept the risks of entering the Brazilian market, even without having all the required information on hand.

For a service company, the model often yields positive results because profit margins are usually high and, even with a reduction of profits due to initial difficulties and surprises, the company can stabilise itself quickly. However, for a commercial or industrial company, an early misstep can lead to loss of competitiveness and the potential end of activities in Brazil due to many bureaucratic hurdles and complexities being overlooked.

On the other hand, the most conservative companies think long-term. They seek to reduce risks and costs to a minimum. After a long period of market research, evaluating risks and potential earnings, they begin the search for legal services and an outsourcing provider to assist them in finally entering the Brazilian market.

This gradual preparation and excessive caution can take years and may thus eradicate a huge chunk of the company’s potential earnings. If the company’s product or service is unique, this process is viable to the extent that the company will not necessarily lose market share due to delay; however, it relinquishes the opportunity to generate a profitable return sooner rather than later.

The category third on the list is a mixture of the two previously mentioned: a fine balance between conservatism and aggressiveness. This is normally the most successful approach when entering the Brazilian market.

After studying or observing its potential market and potential customers, these companies are agile in initiating their plans together with good legal and outsourcing providers and thus obtaining crucial information to avoid future frustration and surprises.

The main risks that foreign companies encounter when entering Brazil include the time it takes to open the company, tax complexities, scarcity of skilled labour in some locations, high logistics costs, high wages, and social charges. That said, with good assistance and proper planning, these risks can be used to the advantage of the company.

After deciding upon the target market for successful internationalisation, the first step is the find a good law firm to provide the necessary legal guidelines and a good accountant with outsourcing and tax knowledge that can provide the best tax and operational guidance. Brazilian law changes almost on a daily basis, creating many new risks for the operations of the company that is not well advised by experienced and up to date professionals.

Foreign companies often have a competitive advantage over Brazilian companies due to their high level of organisation and the quality of their products and services. Consequently, with the assistance of local advisory firms, the company will gain a firm understanding of the risks, timescales and costs required to maintain company operations in Brazil. This knowledge constitutes a major competitive edge and can help the company to obtain profits more quickly and send dividends, which are not taxable in Brazil, back to the country of origin sooner.

After these steps and once a real opportunity to enter the market competitively is identified, it is necessary to analyse the way that the company will be formed in Brazil. The most common way to establish is opening up a new business in the form of limited liability company (LLC).

Sometimes it may appear more advantageous to enter via the formation of a joint venture, given that the Brazilian partner will already have all the necessary licences; however, in Brazil, the liability previously acquired by the Brazilian company is shared by the new foreign partner. This generates higher labour and tax risks for the foreign firm – the two biggest risks of running a business in Brazil.

There is no minimum capital requirement for the formation of an LLC in Brazil, but there are some prerequisites, as follows. First, the company (with a few exceptions) should be established with at least two partners, who will have their liability limited to their respective percentages in the share capital of company. The company may be comprised entirely of foreign non-resident partners, except for a few situations that require only Brazilians or Brazilian majority shareholders. Partners may be individuals, legal entities or legally resident foreign individuals.

Conversely, the law stipulates that foreign non-resident partners must have an ‘attorney in fact’ who is resident and legally domiciled in Brazil and who can respond in relation to their actions in Brazil. Companies with only foreign partners must also have a physical person, resident and legally domiciled in Brazil as their ‘legal representative’ before local authorities. Both these services, attorney in fact and legal representative, require extreme responsibility and may be outsourced in Brazil.

As described above, the company can start its operations by outsourcing all these essential services and thus drastically reduce its labour costs and risks. Also, most importantly, this leaves the company free to focus on its core business.

In a conservative scenario, following the relevant studies and definitions, establishing the company may take between 30 and 90 days, at a cost of US$3000 to US$8000. The timeframe and costs may increase depending on the bureaucratic complexities of the location chosen and the complexity of the company’s product or service.

The above analysis is very brief when taking into consideration all the complexities and variables of entering the market, and an in-depth study is recommended for each area mentioned. That said, the Brazilian market offers many opportunities for those that are prepared to do their research and have the necessary local professional guidance. It may not be the easiest market to enter, but Brazil has been the most profitable for many a multinationals over the past couple of years.

Eric Waidergorn is a BPO and international consulting director and Werner Trieloff is an international desk manager at UHY Moreira. Mr Waidergorn can be contacted on +55 41 3323 4115 or by email: eric.w@auditoria.srv.br. Mr Trieloff can be contacted on +55 51 3210 8000 or by email: werner.t@auditoria.srv.br.

Eric Waidergorn and Werner Trieloff

UHY Moreira