Brazil is becoming increasingly interesting for international investors. After a few years of crisis, the local economy is on the rise again, also due to a change of government. A lawyer in his own law firm for companies in Germany and a special consultant in Brazil for foreign companies, Parvis Papoli-Barawati describes what should be taken into account when making investments in Brazil.
Mr Papoli-Barawati, many international companies are now looking to Brazil with greater interest. How should one enter the local market?
Papoli-Barawati: That always depends on the objectives. If you want something bigger, having your own presence in Brazil is indispensable. Pure commercial agents or distributions can only be a temporary solution since many Brazilian customers expect a local branch with a local phone number and a personal contact person there. In particular, the sale of technology products requires a local presence so that the buyer can turn to the Brazilian company directly if it comes to technical problems later. This proximity to the customer creates trust which is essential for successful business.
However, many investors are still likely to remain cautious in light of the severe economic crisis over the last years. What about legal certainty for investments in Brazil?
Papoli-Barawati: Especially during the economic and political crisis, Brazil has shown that the institutions work. Properly introduced and properly registered investments can basically be repatriated without any problems.
What should foreign investors know if they want to start a subsidiary in Brazil?
Papoli-Barawati: From a commercial perspective, it is first of all necessary to have a solid business plan that also contains realistic ideas on the form and amount of initial investments and the funding. Secondly, a detailed legal and tax planning including the optimal location is required. In terms of staffing, the managing director and the local representative of the foreign shareholders based in Brazil are of special importance and should ideally not be the same persons. On the back of this, the articles of association, employment contracts, powers of attorney, mandate agreement with the authorized representative and further paperwork needs to be done.
Particularly in the initial phase, it is common that foreign shareholders provide capital – how can they make sure that they get their money back?
Papoli-Barawati: Indeed, fresh money typically comes from foreign shareholders especially in the initial phase due to high interest rates in Brazil. Direct investments, for instance capital contributions, and foreign currency loans from parent companies must be registered with the Brazilian Central Bank. In case of proper registrations, repayments to Germany can easily be done – no matter if this is stemming from a capital reduction, profit distribution or loan.
So far, foreign companies have been concernced about Brazilian labor law. Is it really that risky?
Papoli-Barawati: No – by contrast, a Brazilian employer can cancel labor contracts at any time since there’s no need for a social selection. However, it should be ensured that all employees‘ rights such as wages and salaries, payment of overtime or holidays or any collective bargaining rights are observed during employment. This should ideally be recorded in writing. In this case, the employee is unlikely to enforce claims against the former employer.
To what extent has the Brazilian labor law reform made things easier since 2017?
Papoli-Barawati: The reform has made labor law more flexible and gave employees more responsibility. Under certain circumstances, out-of-court termination agreements are now possible that can neither be challenged by a trade union nor be recorded by courts. In addition, it is possible to validly insert an arbitration clause in the employment agreement of employees with higher qualifications and higher remuneration so that the labor courts are no longer responsible. Furthermore, the reform has lead to the new rule that employees have to bear legal fees if they lose court proceedings and have therefore become more reluctant to sue large amounts. Moreover, in order to minimize risks, the company can accept an annual confirmation from the employee and let the union confirm that all labor law obligations were fulfilled in the last year.
You have been a lawyer between Europe and Brazil for decades – what do you see as the biggest challenges for foreign investors?
Papoli-Barawati: Particularly in joint ventures or cooperations, intercultural aspects are of great importance and mostly an underestimated challenge. I often experience it as a shortcoming that no intercultural preparation has taken place. All of the foreign investor’s staff involved in the Brazil project should receive basic training to prepare them for the specificities of Brazilian business culture. Then the challenges that arise in the business meetings and negotiations with the Brazilian partner can be mastered with confidence.
What is different, for instance?
Papoli-Barawati: It starts with scheduling. You should always provide enough buffer because meetings in Brazil often begin late and take longer than expected as small talk is extremely important and in Brazil just belongs to it. In addition, the emotional level is important: Brazilians typically only do business with partners who are sympathetic to them. This can be demonstrated, for example, by an appreciative pat on the back – which people in some cultures perceive as disrespectful. If you want to be successful in Brazil, you should be prepared for it. I have already experienced that larger projects have failed on such things.
