By Renan Raffo and Layon Lopes*
Any entrepreneur who aims to set up a business in Brazil must, firstly, understand the country’s reality and, then, begin to develop a business plan which fits into the tax system in Brazil. Although Brazil is a huge country with an enormous and varied market to be explored, its tax legislation, if misunderstood, may be a strong barrier for obtaining profits. Since the Brazilian constitutional federative system grants a large portion of legislative autonomy to all the federated entities, the result is that the tax system in Brazil is very diffused, distributed in three spheres: federal, state, and municipal and, moreover, a high tax burden for the companies – especially if not advised by an expert on taxation.
In the federal sphere, companies must pay up to six different taxes: most of them are calculated based on the company’s income or profit, but they have different destinations, usually in order to finance social policies by the executive power. Still, according to the company’s operating area, it may also be obliged to pay other taxes, such as Import Taxes – if the company needs to import inputs for its activities – or Taxes Over Industrialized Products, if the company works on the industrialization of goods.
Besides that, the companies must pay social security fees for the government, which are calculated based on each one of their employees’ salaries, to supply the cost of their future retiring salaries. It is important to mention that Brazil has very protective labor laws, which reflects on high tax costs for companies.
Notwithstanding, apart from the federal taxes, a company is also taxed in other spheres according to its economic activity: if it sells products or operates the transporting of goods, the company must pay a state tax which rate is levied on the sale of each product or on each transportation of goods, and varies according to the products’ nature as well as to each state. On the other hand, if the company provides services to other companies or to consumers, it is highly likely that it is taxed based on a municipal tax, which rate and rules also vary according to each city’s legislation.
In a nutshell, the tax panorama for a company might be arduous at first. However, despite all these general predictions, there are several situations in the law that may be used towards reducing the tax burden. However, each case must be analyzed specifically, because we are talking about an overly complex and large legislation and that is why it is so important to design a good tax plan and count on qualified advisors when planning to set up a business in Brazil. If you are not properly advised, there might be huge chances that you will choose the wrong activity or location to install your company. Consequently, it may be obliged to pay much more taxes and, therefore, may be destined to financial unsuccess.
*Layon Lopes is the CEO of Silva | Lopes and Renan Raffo is a member of the Silva | Lopes team.