Brazil offers both opportunity and complexity

By Francisco Soler Caballero, Garrigues

Brazil is the eighth largest economy in the world and currently one of the most attractive countries to invest in. GDP growth of 7.5% in 2010, a decade of low unemployment and rising capital inflows show that Brazil has successfully weathered the global financial crisis. It also looks set for continued growth in the near future with the coming of the 2014 World Cup and 2016 Olympic Games. An estimated 20 million people have risen above the poverty line since 2003, and the Brazilian workforce, thanks partly to its demographic makeup, is well suited to ensure the country’s continuous growth.

索思远 Francisco Soler Caballero Garrigues 嘉里盖思律师事务所_
Francisco Soler Caballero
Managing partner

In recent years Brazil has become a major destination for foreign investment, and China is becoming one of the main investors in the country. Chinese companies have invested significantly to secure raw materials, energy and agricultural products, but lately Chinese investments have broadened into infrastructure and consumer goods (as Chinese manufacturers intend to participate in the consumer boom that Brazil is now undergoing). Brazil is, however, a complex country that is very different from China in many respects. It is important for any potential investor fully to understand the economic and legal framework of the country.

The current government is keen to promote investments in several sectors that offer opportunities to foreign investors.


According to various studies, 15 or more of Brazil’s airports are working above nominal capacity. In an effort to promote expansion, the government has announced the partial privatization of several of the country’s busiest airports. This should improve airport infrastructure and attract local and foreign private investors who would work closely with Infraero, the government-owned airport corporation. Some studies indicate that the required investment in airports could be as much as US$4 billion. The need to update airport infrastructure may also apply to sea ports, roads and trains as well as energy.


Brazil has great potential to expand its renewable energy sector and be considered a first-tier energy world power. The abundance of its natural resources is conducive to such a development. The government has particular interest in wind energy (in northern states, such as Ceará and Rio Grande do Norte), for which ANEEL (the National Agency for Electric Energy) is holding annual public auctions. In July, ANEEL will hold auctions for 20- or 30-year power purchase agreements involving hydroelectric, thermal and wind power (agreements for wind power extend to only 20 years). The auctions are tightly regulated processes with specific guidelines for those interested, but since they began in 2009, all of them have been successfully completed.

In addition, the Ministry for Energy and Mining publishes an annual plan for energy expansion. In the latest such plan, which includes studies up to the year 2019, the ministry estimates that annual GDP growth of 5.1% would result in an increase in the annual demand for energy of 5.3%. This means adding 71.3 GW of electricity production, 36,800 kilometres of transmission lines and 76.1 GVA of substations. This will, according to the ministry, require an investment of approximately US$214 billion, of which US$175 billion relates to energy production and US$39 billion to transmission lines.

The service sector

The service sector in Brazil has seen an increasing inflow of foreign investment. Foreign players such as banks could have an increasing opportunity to compete on more equal terms in areas such as project finance and structured finance, if the Brazilian development banks (primarily the BNDES) stop lending at such low margins.

The legal environment

When making an investment, foreign investors need to understand Brazil’s complex legal and regulatory system. According to Doing Business 2011, a report published by the World Bank and International Finance Corporation, Brazil is ranked 127th out of 183 countries according to the ease of doing business. Complex tax and labour regulations, together with the different levels of government (federal, state and local), mean opening a company and making an investment may require lengthy bureaucratic processes and delays (up to 120 days according to the World Bank report).

Common investment vehicles used in Brazil are public corporations and limited liability companies. While the latter are administratively simpler, the former allow a stockholder with a simple majority tighter control of the company, and allow for the issuing of bonds. No matter which corporate form is used, Brazilian law requires that the administrators of Brazilian companies are Brazilian nationals or residents (for which any foreigner requires a visa), and that all companies have at least two shareholders.

From a tax perspective, foreign investments in Brazil must be carefully structured, due to complex regulations and possible variations that may apply depending on various parameters. All foreign investments must be registered with the central bank and even if such registration is not subject to a verification process from the authorities, it is an essential step towards permitting the future repatriation of the investment. Once the registration has been completed, any capital invested may be repatriated at any time, without a minimum period of stay. The distribution of dividends is free of tax, but interest on loans and capital gains are subject to a 15% tax retention (25% if distributed to an offshore tax haven). Regulations related to transfer pricing can penalize transactions among related parties that manipulate the prices of imports or exports of goods, services or rights. The so-called IOF – a tax on financial transactions – also applies, but the rate varies considerably depending on the type on transaction, from 0% to 25%.

Despite the above complexities, Brazil and China are building a mutually beneficial trading and investment relationship. Brazil’s political stability and expected economic growth, together with the coming World Cup and Olympic Games, could further deepen that relationship. Energy and infrastructure are only two of the sectors which are open to foreign participation, but investors must be aware of Brazil’s complex legal and administrative system if they are to be successful in their endeavours.

Francisco Soler Caballero is managing partner of the Shanghai office of Garrigues. He is a specialist in foreign investment in China, corporate law and commercial contracts. He may be contacted on +86 21 5228 1122 or by email at subscripton ad red 2022