How to Set up a Franchise Business in Brazil
The most efficient structure for implementing a franchise business in Brazil will depend on the particulars of the case.
By Luiz Henrique O. do Amaral
The Brazilian franchise market has achieved an advanced level of maturity and reliability on a global scale. This maturity, along with the strengthening of Brazilian social, political and economic environment, resulted in strong interest by foreign brands to the internal market and also incentivized local brands toward the expansion into international markets.
Brazilian Franchise Law
Brazilian Law No. 8.955/94 (the “Franchise Law”) governs all franchise relationships including, “franchise agreements” and relationships that are “established and operated in the Brazilian territory.” The law defines a commercial franchise as a system whereby a franchisor licenses to the franchisee the right to use a trademark or patent, along with the right to distribute products or services on an exclusive or semi-exclusive basis and, possibly, also the right to use technology related to the establishment and management of a business or operating system developed or used by the franchisor, in exchange for direct or indirect compensation, without however, being characterized as an employment relationship. There are no relationship laws regarding franchising in Brazil.
The Brazilian Franchise Law is not intended to govern the private franchisor-franchisee relationship, but rather to make this relationship more transparent by requiring the franchisor to provide clear and detailed information to prospective franchisees in a written disclosure document, known as a franchise disclosure document.
The FDD allows the franchisor to align expectations and prevent misunderstandings and false assumptions of the prospective franchisee. With the FDD, the prospective franchisee may actually evaluate the risks involved in opening a franchise by carefully reviewing the relevant information made available in the FDD.
In view of the above, the FDD must be in clear and accessible terms and must be delivered to the prospective franchisee at least 10 days prior to the execution of any binding document related to the franchise and receipt of any payment whatsoever. (binding, probably but check to be sure)
Even when international franchise agreements are governed by foreign law and elect foreign jurisdiction, the delivery of the FDD to a prospective franchisee is mandatory since the franchise will be operated in Brazil. As Portuguese is the official language in Brazil, it is possible to assume that the FDD should be in this language. However, we believe that the parties in international franchising may decide to adopt the English language for the disclosure document as long as, to avoid translation of such document, the Brazilian party knows English fluently and expressly acknowledges that fact.
Failure by the franchisor to supply such FDD within the terms established by the Brazilian Franchise Law entitles the franchisee to argue the nullity of the agreement and the return of all amounts paid to the franchisor or to third parties indicated by same, as initial fee and royalties, plus the recovery of damages.
15 Items of the FDD
The Brazilian Franchise Law requires that the franchisor provides 15 items in the FDD, including:
- a summary of the franchisor’s background and of the franchise system;
- financial statements for the two preceding years;
- clear description of the pending lawsuits;
- description of the activities;
- profile of the prospective franchisee;
- requirement of the direct involvement of franchisee;
- 7. Specifications regarding: A. Initial investment; B. Value of the initial franchise fee; and C. Cost of the facilities and payment conditions
- Information regarding periodic fees and amounts to be paid by the franchisee;
- List of all franchisees;
- If the franchisee is guaranteed exclusivity or a right of first refusal in any territory or activity;
- Information regarding the obligation of the franchisee to acquire goods, services or materials from the suppliers designated by franchisor, if applicable;
- Description of services and products offered to the franchisee by the franchisor, if applicable;
- Status of the trademarks before the National Institute of Industrial Property (“INPI”); and
- Franchisee’s rights and obligations upon expiration of the contract;
- Draft of the franchise agreement.
Brazilian law does not impose any specific restrictions for foreign franchisors to grant franchises in Brazil. The only requirement is that the franchise trademarks are at least filed at the INPI.
The Recordation of the Franchise Agreements
Although Brazilian Franchise Law prescribes that franchise agreements are valid and enforceable irrespective of whether they are registered, the recordation of franchise agreements at the INPI is indispensable. The purpose is threefold, to:
- make the agreement effective against third parties;
- permit the remittance of payments to the foreign party; and
- qualify licensee for tax deductions.
In addition to the recordation of the franchise agreement at the INPI, for the purposes of remuneration remittances, the registration of the agreement at the Brazilian Central Bank – BACEN is also required.
Although the FDD remains a private document between the parties, for the purposes of the recordation of franchise agreements at the INPI, it is also required that the parties present to the INPI evidence of the receipt of the FDD by the franchisee.
As mentioned above, Brazilian Franchise Law is not a relationship law. The INPI tends to focus the analysis of the recordation of franchise agreements on the assessment of the validity of the trademarks in Brazil, the specification of their serial number at the INPI in the agreement and, in case of agreements involving parent-subsidiary companies, on the approval of the applicable rate for tax deductibility and remittances.
Therefore, the parties should stipulate in the agreement all the terms and conditions of the franchise relationship, including, without limitation, territory, term, payment terms, licensed trademarks, authorized products, conditions for opening an outlet, marketing related obligations, IP protection clauses, events of termination, consequences of termination, law and jurisdiction, etc.
The parties may freely set out the percentage of royalties insofar as it stays within the price commonly practiced in the involved field and in the national and international market. Payments may be established as a percentage of the net sales or by means of a fixed amount based on each unit produced.
Nevertheless, royalties involving related companies, such as parent and subsidiary, are limited by the corresponding ceiling of fiscal deductibility specified by Regulation no. 436/58, which varies between 1 percent to 5 percent of the net sales price depending on the field of industry involved.
Although the Brazilian Civil Code does not expressly mention franchising, which is subject to a specific law, it prescribes general rules and principles, which also have to be observed in franchising legal documents.
Brazilian law recognizes franchisees as independent parties, who shall respond for their own actions and omissions. In this sense, as a general rule, the franchisee is responsible for the investments in the implementation and operation of its business, having management autonomy and being fully liable for its operation, including the risks and obligations inherent to any business.
The setting up of a franchise business in Brazil should also consider the tax, labor and consumer aspects, as well as any other aspect, such as import, environmental or sanitary, depending upon the field of the franchise business.
Therefore, the most efficient structure for implementing a franchise business in Brazil will depend on the particulars of the case, as the above mentioned aspects vary on a case-by-case basis and should be examined from Brazilian and foreign jurisdictions’ point of view.