Draft for Discussion Sujbject to changes

HENARES
ADVOGADOS ASSOCIADOS

Corporate Structure for the Brazilian Operation

So Paulo - SP

September 2011

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Summary

Corporate Structure for the Brazilian Operation

1. Company Types 1.1 1.2 1.3 2. 2.2 2.2 2.3 2.4 3. 3.1 3.2 Limited Liability Company Limitada Corporation Sociedade Annima (S.A.) Usual Structures Documents From the Shareholders Brazilian Elements Registries Management and Permanent Visa Income Tax Indirect Taxes
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Requirements

General Taxation

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1. Company Types
1.1.1 1.1.2 1.1.3 1.1.4 1.1.5 1.1.6 1.1.7 Capital Stock divided in Quotas, instead of Shares; A minimum value is not required At least 2 Quotaholders, which can be individuals or legal entities, from any nationality Corporate Document: Articles of Association Liabilities are limited to the amount of the Capital Stock paid in Control of the company: holder of 75% of the Quotas Publication of Minutes and Financial Statements is not required, unless the company has revenues over R$300 million or Net Equity over R$240 million

1.1 Limited Liability Company Limitada

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1. Company Types
1.2.1 1.2.2 Capital Stock divided in Shares A minimum value is not required; before registration at the Commercial Registry, at least 10% of the Capital Stock must be deposited into a bank account At least 2 Shareholders, which can be individuals or legal entities, from any nationality Corporate Document: By-laws Liabilities are limited to the amount of the Capital Stock paid in Deliberations taken by majority (50% + 1 shares) Publication of Minutes and Financial Statements is required

1.2 Corporation Sociedade Annima (S.A.)

1.2.3 1.2.4 1.2.5 1.2.6 1.2.7

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1. Company Types

1.3 Usual Structure:

PARENT COMPANY 1

PARENT COMPANY 2 Headquarters Brazil BRAZILIAN HOLDING

BRAZILIAN BUSINESS 1

BRAZILIAN BUSINESS 2

BRAZILIAN BUSINESS 3

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2.
2.1.1 2.1.2 2.1.3

Requirements
Copy of the Articles of Association/By-laws Copy of the Minutes nominating the representatives of the legal entity Evidence of existence, place of incorporation, business address, business purpose in general, the certificate of good standing or certificate issued by the Commercial Registry shall be accepted; Name, nationality, marital status, profession, passport number (if foreigner)

2.1 Documents From the Shareholders

2.1.4

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2. Requirements

2.1 Documents From the Shareholders 2.1.5 Copy of the Identity Card and/or the Valid Passport (if Brazilian resident: copy of the Brazilian Individual Taxpayers number and Identity Card Number) Power of Attorney granting powers to a Brazilian resident to represent the foreign entity or individual, with special powers to receive service of justice or summons on behalf of grantor.

2.1.6

Very important note: All copies shall be notarized and legalized before the nearest Brazilian Consulate and, once received in Brazil, shall also be translated to Portuguese by a sworn translator.

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2. Requirements

2.2 Brazilian Elements In order to incorporate the Brazilian Subsidiaries, some definitions are required: 2.2.1 2.2.2 2.2.3 Local Company Business Name Business Address Business Purpose: must be very specific and precise; the inclusion of objectives which the company does not intend to engage in is also not advisable because this usually results in unfavorable tax consequences and/or paperwork Initial capital stock investment amount and shareholding participation (in reais) of each quotaholder Form (cash or assets) and date of capitalization;
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2.2.4 2.2.5

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2. Requirements

2.3 Registries 2.3.1 Brazilian National Corporate Taxpayers Number (CNPJ): The main registry for the company, to enable other registries, opening the bank account, registration of the foreign investment before Brazilian Central Bank 2.3.2 2.3.3 State Tax Authority necessary for selling goods Brazilian Central Bank (BACEN): Mandatory to allow the remittance of money as initial capital stock from the Shareholders and for the repatriation of the capital back to the headquarters.

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2. Requirements

2.4 Management and Permanent Visa 2.4.1 The management of the Brazilian Subsidary shall be done by a Brazilian citizen or a Foreign Individual holder of a Permanent Visa In order to obtain the Permanent Visa, the Parent Company should make an investment of the equivalent to US$200,000. Another possibility is to make an investment of US$50,000 with the commitment to create 10 new jobs within a period of two years

2.4.2

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3.
3.1.1 3.1.2

Taxation
Individuals: 15% or 27,5% assessed on revenues; 15% on capital gains Corporations there are 2 different taxation methods: 3.1.2.1 Lucro Real (Net Profit Method): After the deductions and addictions, the Net Profit shall be taxed at a variable rate up to 34%, plus the Social Contribution on the Net Profit (CSLL) at a rate of 9% 3.1.2.2 Lucro Presumido (Presumed Profit Method): A presumed profit margin is calculated over the revenues of the company 32% and the Income Tax is assessed over such margin. The rate is variable, from 15% to 40%, plus the CSLL at a rate of 9% over the presumed profit margin

3.1 Income Tax

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3.
3.1.3

Taxation
Withholding tax: is due on income paid, credited, remitted, or delivered to non-residents, at the rate of 15% or 25% depending on the beneficiarys country of residence and the nature of the income. As of January 1, 2001, a Contribution on the Economic Domain Intervention (CIDE) is due, at the rate of 10%, over remittances of royalties or compensation deriving from technology transfers, in cases where the withheld income tax rate is 15%. This does not apply to profits and dividends, which are exempt from withholding income tax Transfer Pricing: Regulation on the transfer pricing in business transactions by resident individuals or corporations with non-resident parties for import and export, and interest payments abroad up to a basic 20% rate. These rules apply (i) when a corporation domiciled in Brazil conducts business with non-domiciled related parties; (ii) when a domiciled individual or corporation carries out business with a party domiciled in a tax heaven.
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3.1.4

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3.
3.2

Taxation
Indirect Taxes: a brief description of the taxes assessed directly in relation to production and commercialization of goods: ICMS Tax on circulation of goods, interstate and inter-municipal transport, and communications: similar to VAT, this is the main State tax, and is due on operations involving circulation of goods (including manufacturing, marketing, and imports) and on interstate and intermunicipal transport and communications services. ICMS is noncumulative and it may be set-off by credits arising from such tax from the purchase of raw materials, intermediary products and packaging materials. Tax credits for goods destined to become fixed assets may be accepted, subject to certain restrictions. Intrastate rates normally vary from 7% to 25% (the average rate is 18%). Export goods are exempted from ICMS.
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3.2.1

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3.
3.2 3.2.2

Taxation
Indirect Taxes COFINS Social contribution for funding Social Security: such tax is levied monthly on the gross income. Current rates are 3% (presumed profit) and 7.6% (net profit, but non-cumulative) over the invoiced amount. Export goods are exempted from COFINS. PIS Social Integration Program: such tax is levied monthly on the gross income of corporate entities. Current rates are 0.65% (in the case of presumed profit) and 1.65% (net profit, but non-cumulative) over the invoiced amount. Export goods are exempted from PIS.

3.2.3

Both COFINS and PIS are also assessed over the import of goods.

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3.
3.2 3.2.4

Taxation
Indirect Taxes IPI: The tax on industrialized goods is levied on output and on the import of industrialized goods. IPI is a non-cumulative tax and thus it may be setoff by credits arising from the purchase of raw materials, intermediary products and packaging materials. However, no credits are granted for goods that become fixed assets. The IPI is charged on the value of industrialized goods, as they are cleared from customs or from the producer premises. Rates varies according to the nature of the goods and also is applicable as extra-fiscal function. The average rate is 10%. Export goods are exempted from IPI. ISS: Services Tax is levied on services listed in a federal law, overt the value of the services invoiced and the average rate is 5%. Some Municipalities has a lower rate (2%).

3.2.5

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3.
3.2 3.2.4 3.2.5

Taxation
Indirect Taxes Social Security Contribution: 11% withheld from the employees earnings and 20% paid by the employer. FGTS: due to the Unemployment Guarantee Fund, 8% of the employees earnings are withheld to a special account; the deposited amounts may be used by employee to buy his own house.

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3. Taxation

Important Note: The assessment of several taxes in a single operation is not an uncommon situation. For example, IPI, ICMS, PIS and COFINS may be levied over the sale of industrialized goods all together. In the remittance of royalties, Withholding Tax and CIDE are both assessed, as well.

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Contact and Confidentiality
This technical legal material is an intellectual property of Henares Advogados Associados. Its misuse or the unauthorized utilization shall be subject to legal penalties. So Paulo Office Rua Des. Eliseu Guilherme n. 200 9. Andar Paraso CEP. 04004-030 So Paulo - SP - Fone/Fax: (11) 3074-2544 Site: www.henares.com.br - Email: henares@henares.com.br Branch: Ribeiro Preto SP. Rua Costbile Romano, 1677 Ribeirnia CEP. 14096-380 - Ribeiro Preto SP. Ribeiro Preto SP. - Fone/Fax: (16) 3967-8179

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