New Brazilian law affects limited liability companies

5 February 2020
spotlight_insights_11.jpg

As part of a push to make the country more efficient and business-friendly, Brazil has made changes to a law governing limitadas, or limited liability companies. For the first time, Brazil is allowing limitadas (Ltdas or LLCs) to be organized with a single member or shareholder, also known as a quotaholder. Given the new flexibility, multinationals considering doing business in Brazil may want to register a sole shareholder limitada instead of a traditional two-shareholder limitada. Those entities already operating under the traditional limitada may wish to revise their documentation.

The change is part of a comprehensive set of reforms under the administration of President Jair Bolsonaro, who was swept into office a year ago amid voter anger following years of a weak economy, double-digit unemployment, corruption scandals and ingrained bureaucracy. Brazil currently ranks 124th of 190 countries for ease of doing business, according to the World Bank’s 2019 ease of doing business report.

Since taking office, Bolsonaro has privatized large, money-losing state-owned enterprises, including railroads, ports and the postal service.

In September 2019, the country passed a “Law of Economic Freedom” designed to reduce bureaucracy and encourage economic development. The law waives many permit and fee requirements for opening a business, promotes the use of digital documents, restricts price controls, and bears down on government agencies that process new-business applications, stating that failure to meet review deadlines constitutes tacit approval.

The new law and limitadas

In its provision concerning limitadas, the new law stipulates that an LLC may now be created with just one shareholder instead of two, as previously required. Owners of existing limitadas who want to switch to a sole shareholder structure will need to update their articles of association, eliminating the requirement for shareholder meetings and making certain other necessary changes. The sole shareholder LLC will be able to keep its existing business registration (CNPJ) number. Moreover, changing the corporate documents will not trigger a Brazil federal tax event.

Limitadas are the most popular option for foreign companies to organize in Brazil, where heavy bureaucracy makes setting up a branch office a slow and difficult process. Most critically, a limitada has fewer requirements.

Another advantage is that businesses generally do not have to disclose financial information, such as operating expenses or annual profits (other than for tax purposes). Limitadas have some elements of a general partnership, but are taxed as corporations. And as the name implies, the shareholder will have limited liability.

Alternatively, foreigners may form a sociedade anonima (SA), or corporation. The SA entity option is generally sought by larger multinationals. The SA can be publically traded or closed. Though more complex to set up, the SA provides shareholders with more protection than a limitada. It also has more corporate governance requirements, such as those related to boards of directors and financial disclosures, some of which are public.

An individual entrepreneur may set up as an eireli (empresa individual de responsabilidade limitada), not be confused with the sole shareholder limitada. An eireli must have minimum paid capital of 100 times Brazil’s minimum monthly wage. An eireli also limits the number of companies that can be held.

Limitadas are simpler than SAs or eirelis. A limitada does not require a foreign company to have a Brazilian shareholder. However, a limitada must have a Brazilian resident (or a citizen of certain Mercosur states) serve as a legal representative who can represent the company to banks, the central bank and tax authorities.

How limited is your liability?

The new law says it will provide expanded shareholder liability protections to limitadas, but doesn’t it doesn’t provide specifics. Previously, limitada members could to some degree be held personally responsible for matters involving employment, competition, environmental and consumer protection, and tax obligations.

Answers to questions about current liability protection will likely emerge in court cases over the next few years. Though courts everywhere determine how laws are interpreted, some foreign business owners believe this is true to a much greater extent in Brazil than elsewhere.

Potential tax planning opportunity for U.S. companies

The new rules present a potential tax planning opportunity for U.S. companies that hold share(s) in a Brazilian limitada. Now that only one shareholder is required for a limitada, the U.S. shareholder may have the opportunity to treat its Brazilian subsidiary as a disregarded entity for U.S. tax purposes.

A new era in Brazil

Though the efficacy of Brazil’s Law of Economic Freedom remains to be seen, one thing has become clear over the past year: The switch to a business-friendly stance is more than mere rhetoric. Brazil is moving swiftly to open doors for commerce and reduce bureaucracy. Multinationals previously held back by concerns about inefficiency and red tape may want to give the country a second look.

Susan Osborn, Director of Advisory Services, contributed to this article. 

 

 

 

×