Brazil’s Investment Incentives: Opportunities in 2023
Fiscal incentives, a favored tool of development and industrial policies, have benefited specific regions or industries in Brazil. However, recent austerity measures led to significant cutbacks in government programs. The administration of President Jair Bolsonaro, who took office in 2019, indicated it might further reduce incentives, especially through future tax regime reforms. The COVID-19 outbreak in 2020, however, forced the government to introduce wide-ranging support measures to aid companies during the economic crisis. To mitigate these impacts, policymakers implemented a large fiscal stimulus for the year, amounting to about 8% of GDP.
As of the end of June 2023, businesses could still access ongoing investment incentives. Brazil’s state development bank (Banco Nacional de Desenvolvimento Econômico e Social—BNDES) supplies financing and other support to promote investment. The Brazilian Innovation Agency promotes innovation, providing financing for the entire innovation cycle from basic science to product and services development. The form of financing can be either subsidies or loans, depending on the characteristics of the borrower. Some states also offer financing.
The government uses procurement regulations to promote the purchase of local goods. The “Buy Brazil” policy allows for the purchase of domestically produced goods and services that contain technology developed in Brazil, even when they cost up to 25% more than the cheapest imported products. In 2017, the government launched an interactive tool that allows managers to research, analyze, and compare prices paid by the government for goods and services. The platform aims to increase transparency.
Federal, state, and municipal governments have traditionally offered tax incentives for investors. Many Brazilian states and municipalities sought to compensate for decreasing federal incentives with their own generous fiscal incentives during the latter part of the 1990s. They continue to offer companies some attractive advantages, such as land donation in industrial districts, exemption from municipal taxes, and subsidies for rent expenses.
Research & Developments
Research and Development (R&D) incentives are offered to companies under Law 11,196/2005. The law provides several tax benefits for firms involved in R&D activities, especially in the information technology (IT) domain. Companies eligible under this law can import goods for software or IT development without being subject to certain levies, namely the social contribution on billings (contribuição para financiamento da seguridade social) and the employee participation program contribution (contribuição para o programa para a integração social).
Furthermore, Law 11,196/2005 permits the importation of goods not produced domestically (as specified in Decree 5,713/2006) without the imposition of the federal value-added tax on manufactured goods (imposto sobre produtos industrializados—IPI). The law also includes additional benefits like expedited depreciation of expenses and exemption from income tax on specific remittances.
In the IT sector, companies can benefit from a 50% reduction on the IPI tax on the acquisition of equipment, machinery, and materials associated with technological research. The government ensures stringent monitoring of companies that avail IT tax incentives to prevent IT components smuggling and tax fraud, while simultaneously promoting the growth of the IT industry through these tax incentives.
BNDES, through its industrial financing subsidiary Finame, provides financing options for the acquisition of new locally manufactured machinery and equipment. In 2017, BNDES underwent a restructuring process, reshaping its offerings into three distinct programs aimed at the acquisition, production, and modernization of capital goods. This restructuring also involved a reduction in the financing amount from up to 100% to a maximum of 80% of the value of machinery and equipment, with a shift in focus from industries to specific projects.
Priority projects like innovation, export, health, education, and environmental impact receive subsidized interest rates from BNDES. Other projects are provided with lesser incentives. To qualify for these benefits, BNDES has set gross revenue thresholds for micro, small, and medium-sized enterprises at R360,000, R480m, and R300m, respectively. Such enterprises are then able to enjoy benefits like lower interest rates and extended payment periods.
Moreover, all new BNDES contracts calculate finance charges using the long-term interest rate (taxa de longo prazo), which is subject to monthly adjustments by the Banco Central do Brasil, the central bank of Brazil.
In 2016, the Brazilian government introduced More Productive Brazil (Brasil Mais Produtivo), an initiative aimed at increasing the productivity of up to 3,600 participating small and medium-sized enterprises by at least 20%. The program applies lean manufacturing principles. Over 90,000 companies had been served by late 2020, with an average improvement in productivity of 24–42%.
In conclusion, while fiscal incentives have faced cutbacks, the government has introduced measures to support businesses during the economic downturn caused by the COVID-19 pandemic. Despite indications from the Bolsonaro administration that incentives might be further reduced, many ongoing investment incentives were available to businesses as of the end of June, 2022.
Incentives by Industry
In the aeronautics sector, the Law 12,249/2010 plays a key role by offering exemptions equalling the amounts of social contribution on billings (contribuição para financiamento da seguridade social) and the employee participation program contribution (contribuição para o programa para a integração social) that are imposed on the importation and the revenues procured from the sales of machinery, parts, systems, components, and tools, as well as the provision of services that apply to the aeronautics industry. This benefit might also be applicable to the federal value-added tax on manufactured goods (imposto sobre produtos industrializados—IPI). In 2014, a notable venture capital fund for the aerospace industry, known as Aeroespacial Fundo de Investimento em Participações, was initiated by several key entities: the state development bank (Banco Nacional de Desenvolvimento Econômico e Social), the Brazilian Innovation Agency (Financiadora de Estudos e Projetos), the São Paulo Development Agency (Agência de Desenvolvimento Paulista), and Embraer, the renowned airplane manufacturer. The primary objective of this fund, which was initially capitalized at R131.3m, is to bolster the supply chain within the industry.
In the automotive industry, the Rota 2030 initiative holds prominence. Established in 2018, it replaced the Inovar-Auto program which was deemed illegal by the World Trade Organization (WTO) in 2016. This initiative, consolidated into law as Law 13,775/2018, stipulates compulsory requirements for vehicle sales in Brazil and offers exemptions from the IPI (federal value-added tax on manufactured goods) on imported auto parts if there are no domestic equivalents. Furthermore, it reduces the IPI rates for hybrid and electric vehicles from 25% to 7%. From 2023 onward, the IPI rates on other vehicles could be decreased by an additional 1–2% if they exceed the efficiency and safety goals set by the program. The Rota 2030 also permits companies to deduct 10.2–12% of their investments in research and development from income tax and the social contribution on net profit (contribuição social sobre o lucro líquido). Additionally, the program establishes an annual fiscal incentive of R1.5bn for the industry, provided that companies collectively invest a total of R5bn per year. These credits can be extended for up to 15 years. As reported by the Federal Revenue Service (Receita Federal do Brasil), the program is projected to have a fiscal impact of R12.8bn over a five-year period.
In the realm of Information Technology (IT), the law 8,248 of 2019, enacted in 2020, presents significant changes. This law amends the earlier IT Law of 1991 (Laws 8,248/1991) and the Semiconductor Law of 2007 (11,484/2007), thus introducing a fresh incentive model for IT companies that commit to investment in research, development, and innovation within the sector. The law of 1991 initially provided partial IPI exemptions to qualifying companies intending to start production of computer-related goods or expand their existing operations in Brazil, a move that the WTO deemed illegal. With the new law, those incentives are replaced by an option for companies to earn financial credits every quarter based on their investments in research, development, and innovation. Furthermore, this law standardizes benefits that used to vary according to the product and the production region. The initiative is projected to remain effective until December 2029.
Infrastructure Development Sector
In relation to infrastructure projects, the Infrastructure Ministry (Ministério da Infraestrutura) of Brazil has four primary incentive programs. The first one, the Merchant Marine Fund (Fundo da Marinha Mercante), is a resource provider for the growth of the merchant marine and naval construction and maintenance. The second initiative, known as the special incentive regime for infrastructure development (Reide), aims to decrease the tax burden on various projects including transport, ports, sanitation, and irrigation. The third program is an incentivized debenture initiative which decreases the income tax payable on earnings from these instruments to zero for individuals and foreign investors, and to 15% for corporations. These debentures are utilized for logistics and transportation. The fourth initiative, a bill to extend the special tax regime called Reporto, aimed to encourage the modernization and expansion of ports. Reporto offered fiscal incentives for the support of imported and domestically produced equipment, machines, parts, and other necessary goods. However, this was vetoed by President Jair Bolsonaro’s administration in January 2022, leading to its expiration at the end of 2021.
In the oil & gas sector, Normative Instruction 1,781/2017 initiated Repetro-SPED, a program designed to replace the previous Repetro special customs regime. The primary aim was to foster the modernization of oil and gas exploration activities within Brazil. As part of the Public Digital Booking System (Sistema Público de Escrituração Digital—SPED), the program has several provisions: it allows for the duty-free import of goods that will be kept permanently within the country, it offers suspension of federal taxes on the temporary import of goods during their usage period, and it permits temporary imports with applicable existing taxes during the usage period.
In this program, various equipment like ships, pipelines, oil rigs, and other goods can reap the benefits of the incentives provided. It is crucial to note that Repetro-SPED will remain in operation until 2040. Additionally, Decree 9,537/2018 gave birth to a Repetro program specifically for manufacturing. This program provides incentives to companies that either import or purchase locally-produced raw materials, intermediary products, and other inputs required for the production of finished goods within the Repetro framework.
Incentives By Regions
Tax incentives and concessional financing for investors are provided at federal, state, and municipal government levels. These federal programs have been around for a while and generally offer stability, whereas state-level programs are newer and often subject to regular changes influenced by local politics. There exists fierce competition among states, with some adopting strategies that advantage themselves at the expense of others.
The presence of incentives from different government levels has prompted foreign companies to seek detailed advice from consultants or the commercial services of their home-country consulates. The investment-promotion agency of each state can provide information to businesses once they’ve chosen their future operation locations.
In the Amazon and north-east region, tax incentives are used to attract businesses and encourage the development of these underdeveloped regions. The Superintendency for the Development of the North-east and the Superintendency for the Development of the Amazon oversee the development in their respective regions and provide various benefits for projects registered through end-2023. The principal benefit for companies in these regions is a 12.5% reduction of total income tax due, provided they gain approval from the development agencies.
In addition to this, approved projects that receive priority status could benefit from a 75% reduction in income tax due for ten years, provided the project meets the operational-phase production levels as deemed by the agencies. For companies operating in specific micro-regions, benefits include accelerated depreciation for new equipment and accelerated tax credits on social contributions on billings and the employee participation program contribution. Moreover, through the end of 2023, companies can reinvest 30% of income tax due, plus 50% of their own resources. They can also be exempted from the additional freight for renewal of the merchant marine fee on imports of equipment and raw materials.
Information-technology (IT) investments in these regions also come with special incentives. As per Law 13,023/2014, IT goods and services enjoy a preferential 95% reduction in the federal value-added tax on manufactured goods through 2024; 90% in 2025 and 2026; and 85% through 2029.
Special free-trade zones exist in less developed areas as per legislation. As of now, the only successful free-trade zone is in Manaus, administered by the Superintendency of the Manaus Free-Trade Zone. Incentives typically include tax exemptions and subsidised, low-cost financial assistance. Exemptions from sales, import, and production taxes are available for manufacturing companies in the Manaus free-trade zone, offering a comprehensive incentives package that combines various types of federal, state, and municipal exemptions.
Companies that qualify under regional incentive programs can receive medium- or long-term loans from regional development banks. These banks include Banco do Nordeste do Brasil (BNB), Banco da Amazônia, both majority owned by the federal government, and Banco Regional de Desenvolvimento do Extremo Sul, established by the state governments of Rio Grande do Sul, Paraná, and Santa Catarina. BNB provides medium- and long-term funding to industrial, agricultural, and infrastructure projects that qualify, with borrowers expected to pay a 2% “analysis and inspection” fee, which is contributed to the government-administered north-east region’s Natural Resources Research Fund.
State and municipal governments primarily offer fiscal incentives in the form of temporary reductions in or exemptions from the state value-added tax, the municipal service tax, and a real-property tax. To encourage companies to establish offices and production facilities, these governments may offer low-cost or even free land for plant sites. Local government may also provide infrastructure, such as roads and sewage systems, for the direct benefit of the plant.
States traditionally define the ICMS tax, with interstate rates of 7–12% (and up to 18% in some cases). A flat 4% rate applies among all states for transactions with imported products, aimed at curbing interstate competition for foreign investment. However, states can still provide an incentive to firms located within their boundaries by suspending this tax, as is the case of São Paulo.
Export Incentives & Zones
None-Zoning Incentives are listed below and are still available by the end of June, 2023:
- Drawback Program: This scheme, available across Brazil including in the Manaus free-trade zone and export-processing zones, offers exporters the advantage of suspension, exemption or reimbursement of tariffs on imports used in the production of exports. With the drawback program, the duty-free import of raw materials or intermediate goods intended for re-export is allowed. Prior approval for duty suspension can be sought by importers, which becomes permanent once the final goods are exported. This also enables importers to evade the value-added sales tax on imported goods and services. Additionally, this program offers options that allow producers to import goods, pay the appropriate duty and then seek reimbursement after some of the final products are exported. The Foreign Trade Chamber, housed by the Ministry of the Economy, has brought modernization to the duty-drawback system. The system, automated and integrated with Siscomex, simplifies procedures and reduces costs for exporters.
- Refund of COFINS and PIS Taxes: This tax-refund scheme permits exporters to utilize credit from the tax on industrial products on manufactured goods to counterbalance the social contribution on billings and the employee participation program contribution. It allows companies to potentially recover a portion of taxes paid.
- Official Export Financing: Proex, a popular export-finance program managed by the state-owned Banco do Brasil, offers both conventional export assistance and a distinct program to level interest rates between Brazil and international markets. The program is designed to support companies with revenues up to R600m. BNDES Exim extends pre- and post-export financing, both independently and in collaboration with other entities. To encourage exporters, the federal government introduced incentives in 2010 that included a reduction of financing costs for the export of consumer goods, a refund of 50% of exporters’ tax credits within a 30-day term, and the creation of a Guarantor Fund for External Trade.
- Reintegra: The Reintegra program, first introduced in 2011 and reinstated permanently by Law 13,043/2014, offers export incentives. The program initially granted exporters a 3% subsidy on the value of exports across 8,620 tariff codes. The subsidy is now expected to fluctuate between 0.1% and 3% of export values, with an additional 2% credit available under certain conditions. However, due to the government’s budget-cutting efforts, the maximum subsidy was temporarily reduced from 3% to 1% in 2015. Later reforms set the subsidy at 2% in 2017 and 3% in 2018. In 2018, the benefit was again reduced to 0.1%. To be eligible, exports should contain no more than 40% imported content, with exceptions applying to certain high-tech goods.
- National Export Culture Plan: In 2019, the government announced a fresh methodology for the National Export Culture Plan (PNCE), initially introduced in 2017 under the National Export Plan. The PNCE’s goal is to nurture and support exporters, including small and micro-companies, at the state level under the oversight of the economy ministry. It unites several private and government entities promoting exports with the objective of enhancing their effectiveness. The innovative methodology includes profiling companies across four dimensions: strategy, management, market, and operations. It also comprises the development of custom action plans to align companies with the overarching strategy.
Other than those listed incentives, Brazil also actively promote export through it export zoning strategy:
Manaus free-trade zone
The Manaus free-trade zone, established in 1967 within the Amazon basin, is Brazil’s only operational free-trade zone and also the largest of its kind in South America. This special economic zone is constitutionally recognized, ensuring certain import and fiscal incentives. Foreign imports and goods from other parts of Brazil entering the Manaus zone are eligible for exemptions from customs duties, state sales tax, and industrial-products tax if they are for local consumption or employed in agriculture, fishing, and industry. Similarly, these exemptions apply to goods, excluding domestic appliances, that are stored in the zone for processing, re-export, or transshipment to other regions in Brazil. Nevertheless, goods entering the zone are required to have import licenses.
The administration of projects within the region falls under the purview of the Superintendency of the Manaus Free-Trade Zone. To avail the incentives, companies must ensure that the phrase “Produzido na Zona Franca de Manaus” (Produced in the Manaus Free Zone) is printed on all their products as well as in promotional and advertising materials for the products produced there. These manufacturers are exempted from the industrial-products tax and also receive tariff reductions of up to 88% on dutiable imported goods. The tariff exemption extends to capital goods, information-technology products, and components used in the manufacturing of final industrial goods.
Despite its unique advantages, setting up operations in Manaus presents certain challenges due to its significant geographical distance from Brazil’s southern markets and major sources of raw materials and components. Air transport plays a crucial role in importing materials and components and exporting finished products, complemented by ocean-going ships that navigate the 1,000 km stretch of the Amazon River between Manaus and the Atlantic Ocean. As a result, it is common for companies to relocate managerial and technical employees from southern Brazil to Manaus.
Export-processing zones (EPZs)
Brazil has sought to invigorate export production and modernise its industrial base by establishing export-processing zones (EPZs), which are regulated by specific legislation focusing on fiscal, administrative, and exchange operations. As per the special tax regime delineated by Law 12,508/2007, companies approved to establish export-production facilities within these designated EPZs are given a 20-year legal assurance, renewable for another 20 years, protecting them from any structural changes that could impact the EPZ. In 2019, Decree 9,995 simplified customs procedures within EPZs and lowered the minimum investment required for setting up or expanding such zones. A significant change was brought by Law 14,184 in September 2021, which declared EPZs as free-trade zones for both goods and services, removed export requirements, and extended the right of establishment to state and local governments. As of August 2022, there were 24 authorised EPZs in various stages of implementation, including 13 in development and one fully operational zone in Pecém, Ceará state.
Operating within an EPZ offers companies the liberty of exchange, foreign trade, and production. The fiscal incentives associated with an EPZ include exemptions from import duties, tax on manufactured goods, social contributions assessments, and the financial operations tax. These companies are permitted to freely import products necessary for their plant operations and production processes, eliminating the need for an import license.
Despite these benefits, companies located within these zones are prohibited from seeking any form of domestic financing. However, this restriction does not apply to their shareholders if they reside outside the zone. While these zones offer numerous incentives, it should be noted that all sales to the domestic market are still subject to regular taxes.