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Franchising in Brazil
Due to its growing economy and large population, Brazil has proven to be an attractive market for international franchisors. According to the Brazilian Franchising Association, over the last 10 years, the Brazilian franchise industry has grown between 10% and 20% annually. This growth is expected to continue as Brazil welcomes the FIFA World Cup this summer and the Olympic Games in 2016.
Unlike most other South American countries, Brazil regulates the sale of franchises and requires pre-sale disclosure. The applicable Brazilian statute—Law No. 8955 of 1995 (Franchise Law)—establishes the basic provisions that must be included in the Franchise Disclosure Document (Circular de Oferta de Franquia—COF). While the Franchise Law does not require pre-sale approval of the Franchise Disclosure Document by any government agency, Brazilian law imposes detailed execution requirements and post-sale registration requirements on international franchisors, as well as several taxes on the remittance of royalties.
Brazil's Franchise Law requires that the Franchise Disclosure Document be delivered to the prospective franchisee at least 10 days prior to the execution of the agreement or payment of any fees related to the franchise, whichever occurs first. If the franchisor fails to timely provide the franchisee with the Franchise Disclosure Document, the franchisee may void the agreement, request reimbursement of all amounts already paid to the franchisor or to third parties and recover damages.
The Franchise Disclosure Document must be in writing and must provide basic information about the franchise, including:
- A detailed description of the franchise and a general description of the business and the activities which will be performed by the franchisee;
- Balance sheets and financial statements of the franchisor for the past two fiscal years;
- A profile of the “ideal franchisee”;
- Information regarding whether the franchisee must be directly involved in the operation and administration of the business;
- An estimate of the initial investment to be made by the franchisee;
- Detailed information regarding the periodic fees and other amounts to be paid by the franchisee to the franchisor or to third parties (e.g., rent, publicity/marketing fees, minimum insurance);
- A complete list of all franchisees, subfranchisees, and subfranchisors;
- Information regarding any exclusivity granted to the franchisee;
- Detailed information concerning any obligation on the part of the franchisee to acquire any real estate, services, or manufacturing components;
- Detailed information regarding the obligations of the franchisor, including information regarding the training provided, franchise manuals, and other assistance provided by franchisor;
- Information regarding the required layout and architectural standards of the franchisee's units; and
- The status of the franchisor's trademark or patent registrations related to the franchise.
In contrast to the U.S., in Brazil, there is no need to provide pre-sale disclosure each time a franchisee signs a new agreement. Pre-sale disclosure only needs to be provided one time. Accordingly, there is no need to provide the Franchise Disclosure Document to a franchisee before he signs the second or subsequent franchise agreement.
Franchise Agreement Execution Details
According to the Franchise Law, the franchise agreement must be in writing and must be executed in the presence of two witnesses. In addition, if the franchise agreement is executed outside of Brazil, the agreement must be notarized and legalized before the local Brazilian Consulate.
Registration of the Franchise Agreement
Franchise agreements must be registered with the Brazilian Trademark Office (Instituto Nacional da Propriedade Industrial - INPI) when the franchisor is domiciled abroad and the agreement requires payment of any fees to the franchisor. Notarization and legalization are required to register the agreement with the Brazilian Trademark Office. While the failure to register the franchise agreement does not affect the validity of the agreement, as noted below, it will impact the ability to remit royalties abroad. The Franchise Disclosure Document also must be registered with the Brazilian Trademark Office. Both the franchise agreement and the Franchise Disclosure Document must be translated into Portuguese prior to submission to the Brazilian Trademark Office.
Registration allows the parties to enforce the agreement against third parties. In addition, registration is a prerequisite for Central Bank clearance to send royalties out of the country and to permit the franchisee to take certain tax deductions.
Once the documents have been submitted to the Brazilian Trademark Office, the examiner has 30 days to analyze the documents, during which time the examiner may ask for additional clarifications or amendments. Thereafter, a final decision is issued either approving or rejecting the registration, typically within 60 to 90 days of filing. Because payments may not be remitted abroad prior to registration, there will be a 90-day (or longer) delay before the franchisor receives any fees.
Taxes on Remittance of Royalties Abroad
According to Brazilian tax laws, a 15% withholding tax and a 10% contribution for intervention on the economic domain (CIDE) are levied on royalties paid by a Brazilian franchisee to a foreign franchisor. While the franchisor technically owes the withholding tax, typically the parties shift the burden to pay the taxes to the franchisee in the franchise agreement. This structure is permitted, provided that the Brazilian Trademark Office is informed of this arrangement when the franchise agreement is submitted for registration.
Finally, although the statutes and regulations are not entirely clear, the following taxes may also apply to foreign franchisors:
Service Tax (ISS), which varies from 2% to 5%, depending on the city where the franchising operates; and
Contributions for social integration program and for financing the social security system (PIS/COFINS-Import) calculated on royalties paid to the franchisor before the withholding tax. The applicable rates are 1.65% for PIS-Import and 7.6% for COFINS-Import.
Brazil's large population and growing middle class make the country attractive to U.S. franchisors. The regulatory requirements, however, increase the cost of entry into the Brazilian market.
Carolina Cavalcante Schefer is a partner with the Sao Paolo office of David Aniceto. Carolina acts for many Brazilian franchise systems, as well as many international franchisors and regularly advises about international expansion to Brazil. Robert A. Smith is a Partner and Chair of the Franchise Group at Wiley Rein LLP. P. Nicholas Peterson is an Associate at Wiley Rein LLP.
You may also be interested in the other articles in Wiley Rein's International Franchise Development Series: