Typical due diligence issues

In Brazil, it is customary to finalize the due diligence before the execution of the acquisition agreement. Nevertheless, in some cases, the parties may agree that further confirmatory due diligence regarding certain aspects of the target company will be a condition precedent to closing (e.g., completion of phase two environmental due diligence).

The main areas of concern in the due diligence process vary from project to project and by the industry of the target company. Compliance, environmental, regulatory, labor and tax issues are always in the spotlight of any legal due diligence work. In Brazil, due diligence does not trigger obligations to report any issues found to regulators, except for certain environmental aspects.

Based on the due diligence findings, the parties may negotiate special closing conditions. An escrow account to deposit part of the purchase price to guarantee the seller's indemnification obligations may be opened, or the purchase price may be otherwise partially retained or reduced. Other less common forms of guarantee may also be offered, such as real property or bank guarantees.

Pricing and payment

In a share deal, it is not legally required to have an independent appraisal report to support the valuation of the target company. However, if the buyer intends to benefit from the tax amortization of the goodwill paid in the transaction, the buyer will need to retain a third party to prepare a purchase price allocation study to support the purchase price, and certain other conditions must be observed. In this context, goodwill means the difference between the acquisition price and the fair value of the assets acquired and liabilities assumed of  the target company. As an example, to benefit from the tax amortization of the goodwill paid in the transaction, the acquisition must be made through a company with substance that is organized in Brazil, and a subsequent reorganization of the acquisition vehicle/buyer and the target company must occur via a downstream or upstream merger.

In the case of an asset deal, there is no need to have an independent appraisal to support the valuation of the assets.

If the seller is Brazilian, the purchase price payment must be made in Brazil, even if the buyer is not Brazilian. The purchase price can be remitted in foreign currency to the seller's bank account in Brazil, and the seller will be responsible for converting it into Brazilian currency. A financial tax (Imposto sobre Operações Financeiras - IOF) at the rate of 0.38% will be due upon the conversion. Every time there is a foreign party involved in a share deal as either the buyer or seller and the transaction involves an amount equal to USD 100,000 or more (or the equivalent in other currencies), the Brazilian target will need to register the transaction with the Central Bank of Brazil (BACEN), as described in detail below.

Signing/closing

Share sale

Apart from a merger control filing (as described below) and for approvals related to specific regulated industries (e.g., energy or telecom companies, financial institutions and insurance companies), government approval is not required as a condition to closing, and a simultaneous signing and closing is possible.

Closing conditions will also depend on the issues raised during the due diligence exercise and on the commercial conditions agreed between the parties to complete the transaction (e.g., repayment of intercompany loans, and obtaining approval from suppliers or creditors).

Asset sale

Unless the foreign buyer already has an existing entity with the requisite business scope and licenses in Brazil to acquire and operate the assets, there will normally be a gap between signing and closing.

If an existing Brazilian subsidiary of the foreign buyer acts as the asset buyer, it is necessary to ensure that its corporate purpose is broad enough to cover the acquired business post-closing and that it has the required licenses and registrations for operation of the acquired business. An amendment to the corporate purpose may be implemented through an amendment to the articles of association or by a shareholders' meeting approving an amendment to the bylaws. Both the amendment to the articles and the bylaws must be registered with the competent state commercial registry. The buyer may also need to establish additional branches to operate the business if the acquired business is in a different location from where the subsidiary is registered.

If the foreign buyer does not have an existing subsidiary or affiliate located in Brazil, the buyer will need to take all the measures required to organize a company in Brazil by obtaining the licenses and registrations needed to receive the business/assets to be acquired and, afterward, transfer the assets under the asset sale. Establishing an entity may take approximately one month to complete. This timeline may be extended to several months where specific licenses are required, as is the case for manufacturing.

In multijurisdictional transactions, a local asset sale/transfer agreement is needed to comply with local requirements, especially to allocate the purchase price among the assets being transferred in Brazil.

Foreign investment restrictions

There is no national foreign investment review (FIR) law in place in Brazil.

However, there are sectoral foreign investment licensing regimes that apply to certain investments relating to nuclear power, the aerospace industry, telecommunications, financial institutions, healthcare, insurance, media, mail and telegraph services, mineral resource prospecting and mining in border areas, the acquisition or rental of rural property, and the exploitation of Brazil's border areas.

In addition, Brazilian entities receiving foreign direct investments may be required to carry out the registration, present information on certain financial transactions and/or funds transfer and/or present periodic declarations with regard to such foreign direct investments within the Central Bank of Brazil.

Antitrust/merger control

Brazil has a mandatory pre-merger and suspensory merger control regime, which means that transactions that meet the relevant turnover thresholds are met need to be notified to the competition authority and cleared before they can be completed. A change of control is not a requirement for a transaction to be considered subject to the mandatory merger control process. The thresholds for mandatory filing are: (i) the transaction must generate at least potential effects in Brazil; and (ii) the parties' economic group must meet the revenue criteria. Nonetheless, the Brazilian Administrative Council for Economic Defense (CADE) can request the notification of any transaction that does not meet the thresholds for up to one year after closing, with powers to order divestitures. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

Foreign exchange controls

Since the unification of the free rate and the floating rate exchange markets in March 2005, the Brazilian government, through the Brazilian Monetary Council (CMN) and BACEN, has introduced rules to make the currency exchange market simpler and the controls over the market more flexible. Notwithstanding that simplification, Brazilian foreign exchange control rules require that foreign investments in Brazilian companies are registered with BACEN to enable the following:

• The remittance of profits and/or interest on equity (juros sobre capital próprio) to foreign investors
• The repatriation of foreign capital invested in Brazil
• The reinvestment of profit and/or interest on equity. For this purpose, both the foreign investor and the Brazilian company are required to register with BACEN.

On 31 December 2022, the BACEN issued a new regulation (Resolution 278) establishing a minimum amount for transactions to be registered, establishing that investments equal to USD 100,000 or more (or its equivalent in other currencies) are required to be registered with the BACEN. It is no longer mandatory to register foreign investments below that threshold. However, it is still advisable to voluntarily register investments below USD 100,000 for corporate tracking records.

It is the responsibility of the Brazilian company in which the foreign investment is made (the target company) to register the foreign investment with the declaratory system of BACEN within 30 days from the date that the investment is made. The target company may be subject to fines for late registration, or failing to register.

There is no stamp duty in Brazil.

For Brazilian corporate sellers, capital gains form part of their taxable income. They will be subject to corporate income taxes (CIT) — Imposto de Renda sobre Pessoa Jurídica (IRPJ) and Contribuição Social sobre o Lucro Líquido (CSLL) at a combined rate of 34%. Higher combined rates apply to financial institutions.

For Brazilian individuals, capital gains will be subject to income tax at progressive rates ranging from 15% to 22.5%, depending on the amount of the gains.

For foreign sellers of shares (both individuals and entities), capital gains will also be subject to income tax at the progressive 15% to 22.5% rates, unless the foreign seller is domiciled in a jurisdiction defined by Brazilian tax rules as a low-tax jurisdiction, in which case a 25% flat rate will apply.

For cross-border remittances of the purchase price, a 0.38% financial tax (Imposto sobre Operações Financeiras — “IOF") will apply on the exchange transaction performed to receive the purchase price from abroad. By contrast, for the remittance of the purchase price abroad, there are good arguments to support that the IOF rate is currently reduced to zero (although there might be an interpretation that a 3.5% IOF would be due).

OECD's Two Pillar Solution

On December 27, 2024, the Brazilian government enacted Law No. 15,079, implementing the OECD's Pillar Two global minimum tax framework.

Law No. 15,079/2024, further regulated by Normative Ruling No. 2,228/2024, aligns the Brazilian tax framework with the OECD's Global Anti-Base Erosion (GloBE) Rules.

In essence, the new legislation introduces a 15% global minimum tax on the profits of multinational enterprise groups with consolidated annual revenues exceeding EUR 750 million in at least two of the four fiscal years immediately preceding the year under analysis. This is enforced through the “Adicional da Contribuição Social sobre o Lucro Líquido — CSLL”.

Broadly speaking, the Brazilian rules mirror the OECD standard by requiring companies to assess their effective taxation based on: (i) income taxes (with adjustments for temporary differences) recorded in financial statements; (ii) net profit adjusted for specific items such as net tax expense, excluded dividends, and excluded capital gains/losses, referred to as GloBE income; (iii) the effective domestic tax rate, calculated as the ratio of (i) to (ii). Thus, if the effective tax rate (ETR) of a qualified Brazilian entity falls below the 15% threshold, the Adicional da CSLL will apply on its "Excess Profit."

In this context, one point of attention concerns transactions involving goodwill payment and its amortization for Brazilian tax purposes, as they may give rise to Pillar Two implications.

As a result, Pillar Two considerations should become an integral part of group-level tax modelling, governance, and acquisition planning.

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.