Brazil payroll and tax overview.

Brazil is the largest country in Latin America and the region’s largest economy. With the Atlantic Ocean on its eastern coast and numerous neighbours along its western border, including Uruguay, Paraguay, Argentina, Bolivia, and Peru, Brazil is a significant presence on the Latin American and international economic landscapes. The Brazilian economy has historically been supported by a strong agricultural sector and an abundance of natural resources including iron ore and a range of precious metals. While agriculture remains important, Brazil has been industrialising since the mid-20th century: major exports include soybeans, coffee, sugar, tobacco, poultry, and beef, while recent discoveries of fossil fuel deposits have also made it one of the world’s top oil and gas exporters. Important domestic sectors include manufacturing (petrochemicals, automobiles, cement, and paper), high-tech industries, service industries, transport, and communications. In the 21st century, government reforms made Brazil one of the world’s fastest-growing economies: in 2019 it was the 9th-largest economy in the world by GDP with a growth rate of 1.14%. Brazil is a founding member of the UN, a member of the G20, and the Organization of Ibero-American states. The World Bank ranked Brazil 124 on its Ease of Doing Business Survey 2019.

Why Invest in Brazil?

Interested financiers will find a number of reasons to explore an investment venture in Brazil:

• Investment environment: Brazil’s economy is diverse and leads the region in terms of opportunities across a spectrum of sectors, including agriculture, industry and manufacturing. A range of special tax incentives are available to stimulate investment in certain market sectors, and areas of the country.
• International gateway: On the west coast of the Atlantic Ocean, Brazil represents an international gateway to South America - and beyond. Bordering numerous countries, Brazil offers access to a market of over 900 million potential consumers - taking in the rest of Latin America and North America.
• Transport & communication: Businesses in Brazil are served by a highly developed transport infrastructure, with 67 airports, 46 ports, over 29,000 railways, and 1.6 million km of roads. Brazil’s telecommunication network takes in over 125 million mobile lines, and 42 million fixed lines.
• Skilled workforce: Brazilian businesses can draw from a large pool of skilled and semi-skilled employees. School-level education and apprenticeship programmes are government subsidised, and over 16 million Brazilians have a higher education qualification in a STEM field.
• Innovation and research: Brazil’s science and technology landscape is benefiting from long-term investments - and promoting a range of commercial sectors, in particular energy, agriculture, IT, and biotechnology.

Foreign Direct Investment in Brazil

The Constitution states that foreign investment should be of national interest for the citizens of Brazil. Subsequently, federal and state governments are open towards foreign investment that provides economic development, for example, providing wealth and job opportunities. Foreign and local investors are treated equally, and are both eligible for investment incentives.

There is additional incentive for industrial exporting companies. The Recof-Sped is aimed at industrial exporting companies and allows the suspension of taxes in the importation or the domestic acquisition of goods to be used in manufacturing products, parts or components intended for exportation or the local market.

Previously, only assembling companies had the right to apply for the Recof. However, Recof-Sped expanded its benefits also to the industries of transformation, processing, packaging and repackaging. Thus, for instance, companies in the food, chemical or pharma segments may now benefit from Recof-Sped. The special regime provides for suspension of Import Tax (II), Excise Tax (IPI) and the Contributions to PIS / PASEP and COFINS in the acquisition of goods/inputs in domestic and foreign markets.

Company Registrations and Establishing an Entity in Brazil

The company is required to have an established legal entity in order to process a payroll.

There are several types of corporate entities contemplated by Brazilian law, but the most used are the Limited Liability Company (sociedade limitada or “limitada”) and the Joint-stock Corporation (sociedade anônima or “S.A.”).

The Limited Liability may be formed by one or more individuals and/or companies. In the case of a foreign shareholder, the company is required to grant a power of attorney to a Brazilian resident to represent it in the country, with powers also to receive a summons. This power of attorney has to be legalized at the Brazilian Consulate. Non-resident quota holder must obtain a tax identification number from the Brazilian Internal Revenue Services (called CNPJ or CPF). No minimum capital requirements are imposed on Ltdas, but compliance with the thin capitalization rules is advisable to prevent potential challenge of interest deduction. Capital must be denominated in Brazilian currency.

The timescale for completion of this process varies a lot depending on the city of incorporation, but it would be fair to consider a period between 45-90 days.

Business Banking in Brazil

It is mandatory to make payments to both employees and the authorities from an in-country bank account owned by the customer. Generally, banks are open to the public from 10:00AM to 4:00PM, and closed on Saturdays. The Supreme Court has decided that the Brazilian IRS has the right to access confidential bank information of both legal entities and individuals independently of justice authorisation. The RFB can extend control over financial transactions. The RFB will receive information on monthly transactions that exceed R$6,000.00 for legal entities and R$2,000.00 for individuals.

What are the Working Days in Brazil

Normal working hours should not exceed 8 hours per day and 44 hours per week. The 44-hour workweek applies to any employee, with exceptions such as bank clerks, telephone operators and so forth, who are subject to different workweeks pursuant to specific regulations. Time worked in excess of the above shall be considered as overtime.

If the normal working hours do not exceed 6 hours per day, but exceed 4 hours per day, employees have the right to a 15-minute break. Otherwise, if the standard working hours exceed 6 hours per day, they are entitled to a minimum of 1 hour for lunch and rest. The length of time between two working periods should be at least 11 hours.

The working day for commercial offices is usually eight hours, typically from 8:30AM or 9:00AM to 5:50PM or 6:00PM. Lunch breaks range from one hour to one and a half hours.

Basic Facts about Brazil

General Information

Brazil is South America's largest and most populous country, situated on the western coast of the Atlantic and sharing an extensive land border with all but two of its continental neighbours. Home to a variety of prehistoric and indigenous civilisations, Brazil was first colonised by Europeans in the 1500s. After a turbulent history, and a variety of governing powers, including the United Kingdom and Portugal, Brazil eventually emerged in the late 19th century as an independent republic. In the modern era, Brazil became a significant economic and political presence on the world stage, joining the UN, the G20, and the Organisation of American States - amongst many other international organisations. Brazil’s climate is varied, ranging from equatorial to temperate while seasonal patterns include sweltering, hot summer and torrential rainy seasons. Covered by vast swathes of Amazon rainforest, Brazil’s biodiversity is high, while the country itself hosts a variety of natural landscapes, including mountains, forests, dense urban centres, and long stretches of beach coastline.

Population: 212.6 million (World Bank, 2020)

Capital: Brasilia

Largest City: Sao Paulo

GDP: USD 1.445 trillion (World Bank, 2020)

Main Exports: Iron ore, crude petroleum, soybeans, coffee, cars, poultry meat and gold

Main Language: Portuguese

Monetary Unit: 1 Real = 100 Centavos

Internet Domain: .br

International Dialling Code: +55

Employers in Brazil are responsible for withholding and paying income taxes for employees, and contributing to social taxes on behalf of workers. Other taxes to fund unemployment programs and labor unions apply. In addition, Brazil’s labour law requires employers to uphold certain minimum wage, wage payment, and benefits regulations.

The federal government enacts all laws relating to payroll tax. Payroll related taxes include the following:

• Income Taxes
• Social Security Taxes
• Guaranteed Fund for Length of Service (FGTS)
• Union Dues Taxes

The tax year runs from 1st January to 31st December.

All companies are required to register with tax/social security authorities and obtain CPNJ (federal tax ID number). The incorporation process takes from three to four months to be completed.

There is no requirement for a third party to be licensed in order to make any tax and/or social security filings on the behalf of a client.

Income Tax in Brazil

Coverage

Resident individuals, whether of Brazilian or foreign nationality, are subject to income tax on their worldwide income. An individual transferring his or her residence to Brazil on a permanent basis or entering the country with an employment relationship with a Brazilian entity is subject to tax as of the date of their arrival. Similarly, when leaving the country, such an individual must file a final tax return and pay the applicable taxes due up to the date of the individual’s departure.

Returns and Remittances

Residents who reside in Brazil or who are abroad but are a dependent of someone who must submit an Individual Tax Return (DIRPF) must apply for a reference number from the age of 14 years old.

The Brazilian IRS published the Normative Instruction No 1924 approving the multiplatform program to be used for filing the Individual Income Tax Return, Final Declaration of Inheritance and Departure Income Tax Returns, related to fiscal year 2020, calendar year 2019 (IRPF 2020).

The tax returns generated by IRPF 2020 must be submitted between 1 March and 30 April, 2020, via internet, through Receitanet Java transmission program, available for download at RFB website.

According to Normative Instruction No 1924, individuals must submit the Annual Income Tax Return, if they were a resident in Brazil during the 2019 calendar year and:

1. had a taxable income of more than R$ 28,559.70;

2. had received exempt income, non-taxable or withheld at source, a sum which was higher than R$ 40,000;

3. had capital gain upon the sale of rights or assets, subject to taxation, or performed transactions at stock exchanges or commodities & futures exchange markets;

4. regarding rural activity;

a) had gross income higher than R$ 142,798.50;

b) intend to compensate, in calendar year 2019 or following, losses from previous calendar years or from calendar year 2019;

5. had, on December 31st, the possession or property of rights or assets, including bare land valued at more than R$ 300,000.00;

6. became a tax resident in Brazil during 2018 and remained a resident on December 31st; or

7. had applied to the exemption of income tax upon the capital gain earned upon the sale of real estate, which the sales product will be invested on the acquisition of another residential real estate in the country, within 180 (one hundred and eighty) days counting from the date of purchase contract.

All employers must remit taxes withheld monthly and submit an annual return. Monthly income tax payments are paid on the 20th of the following month.

Annual income tax returns should be filed by June 30th of the following year.

The penalty for late payment is 0.33% of the outstanding/due amount per day of delay, limited to 20%.

Taxpayers whose DIRF contains omissions or errors will be charged 20 reals for each group of ten errors or omitted fields.

Income Tax (Employee Discount)

For the individuals who have a local labor contract in Brazil, the company is responsible for the calculation and payment of the related income tax (withholding), which is due on a monthly basis and based on a progressive tax table (rates vary from 0% to 27.5%, as shown below). For the foreign payments, the related income tax (named “carnê-leão”), which is due on a monthly basis and based on a progressive tax table (rates vary from 0% to 27.5%).

Social Security in Brazil

Brazil has a comprehensive Social Security system run by the National Institute of Social Security (INSS) under the Ministry of Social Welfare. The system contributes to workers’ pensions, education funds, workers’ compensation, unemployment insurance, and other welfare initiatives. Both employees and employers must make social security contributions, which vary based on industry and workplace risk.

Employers must file and submit withheld social security amounts and employer payments on a monthly and quarterly basis. Monthly social security contributions are paid on the 20th of the following month. The penalty for late payment is 0.33% of the outstanding/due amount per day of delay, limited to 20%.

Other Taxes in Brazil

Other employment-related taxes employers must consider in Brazil include the Guaranteed Fund for Length of Service – an unemployment insurance fund – and a labor union dues tax.

Guaranteed Fund for Length of Service (FGTS)

All employers are required to enroll in and contribute to a FGTS fund for each employee hired. The fund consists of an employee account located in the federal savings bank and owned by the employee. Withdrawals from the account are restricted to cases of termination without justifiable cause, purchase of house by the employee, and other situations stated in current legislation.

Employers must contribute an equivalent of 8% of employees’ salaries to FGTS accounts. (FGTS payments are calculated based on all amounts paid to employees, including overtime, hazardous pay, night work, 13th month bonus, vacation pay, and other payments.)

Labor Union Dues Tax

The Brazilian Consolidation of Labor Laws legislation requires all employees to pay a union dues tax. The tax is regulated by the Ministry of Labor and payable to the individual unions. Every professional category in Brazil has a legally mandated union to which employers must remit the tax. Although employees are not required to become union members, they are still obligated to contribute.

For employees, it corresponds to a working day and must be discounted in March and collected in April.

In November 2017, a new labor legislation called Labor Reform was launched, changing this provision. According to the new legislation, employees’ contributions are no longer compulsory, meaning that the employee can decided whether they want to contribute with the union.

The penalty for late payments is 10% on principle for the first 30 days after they were due. The fine is increased by 2% for every succeeding 30 days.

Monthly

• eSocial (Social Security 20th of the month; Severance Fund 7th of the month)

Yearly

• DIRF (February 28th)

All of the above-mentioned documents do not require the client signature; they do, however, require a digital certificate (electronic signature). All filing is performed by the service provider unless the client has not allowed for a power of attorney of the digital certificate.

eSocial: It is a long awaited and important innovation by the Brazilian Revenue Service in terms of the amount of information consolidated in it and expectations for the extinction, in the long term, of accessory obligations today submitted by companies, such as GFIP, Dirf, Rais, Caged, etc.

If on one hand the consolidation of various accessory obligations into a single environment tends to reduce Brazilian tax bureaucracy, on the other hand it will provide the revenue services with a clear view of the rules of business used by companies that operate in Brazil, in areas such as hiring, management, payment and/or termination of labor contracts.

New Employees in Brazil

When an employee is hired, the Labour Ministry must be informed following the specific procedure (CAGED) in the following month. This procedure requires registering with the authorities until the 7th working day of the next month and within the 24 hours of contracting.

Expat new starts are required to provide the following documentation:

• CPF
• Work Visa
• Copy of Passport
• Contract
• Local Bank Account

Leavers in Brazil

Payment for leavers must be made within 10 consecutive days of the employee’s last day. If it is a pre-determined contract, payment must be made by the next working day after the last day worked.

The employer may terminate the employment relationship without just cause. An employee discharged without just cause must be given advanced notice. If the employee is paid weekly or at shorter interims, 8 days’ notice is required. If the employee is paid less often than weekly or has been with the employer for longer than one year, a minimum of 30 days’ notice is required, with 3 more days added for each additional year of service at the company up to a 90-day prior notice.

During the period of notice, employees may take leave for up to two hours a day with pay.

If the employer fails to give the required notice, the employee is entitled to be paid his or her regular salary for the period of required notice.

Discharge for a just cause does not require an advanced notice.

Notification of leaver to authorities must be made i.e. CAGED, FGTS.

Payroll in Brazil

Brazilian payroll involves withholding obligations on the part of employers, during each pay cycle - principally income tax and social security which are deducted at source and paid to authorities.

It is legally acceptable in Brazil to provide employees with online payslips and payroll reports must be kept for at least five years.