Doing Business in Brazil
Manaus free trade zone (zona franca de Manaus)
The Manaus Free Trade Zone, regulated by Decree-Law No. 288/1967, is a free import and export trade area where special fiscal incentives apply. It was set up with the objective of creating in the Amazon Region an industrial, commercial and agricultural center under economic conditions that allow its development, given local factors and the great distance separating it from its markets.
Today, around fifty years after it was founded, the Manaus Free Trade Zone represents a virtuous Brazilian government development model that has managed to make a socio-economic base in the Amazon region feasible, promote the better productive and social integration of the region with the rest of Brazil, and guarantee national sovereignty over its borders.
During its historical evolution, the Manaus Free Trade Zone has enabled three economic hubs to be devel-oped: industrial, commercial and agricultural. The first of these, represented by the Manaus Industrial Sector (PIM), is considered the foundation stone that sustains the model.
The Manaus Free Trade Zone has a set of tax and other incentives available especially to attract and keep investments in its area of influence. These incentives have been made available by a joint action between the Federal and State Governments, offering:
Federal Taxes Incentives
- Import Duty Reduction (II): 88% reduction for consumables used in industrialization;
- Excise Tax Exemption (IPI);
- Corporate Income Tax Reduction (IRPJ): 75% reduction of Income Tax and Non-Refundable surcharges, exclusively for reinvestments. Common to all the Legal Amazon.
- Social Integration Program Tax (PIS) and Social Security Contribution (COFINS) Exemption/Reduction: Exempt for imported goods and internal sales between industries within Manaus Free Trade Zone, and reduction for 3.65% aliquot – rather than 9,25% – on finished goods sales to the rest of the country.
State Taxes Incentives
- State Value Added Tax Reduction (ICMS): Reduction from 55% up to 100% of the ICMS, depending on the investment project. In all cases, to use the incentives, companies must contribute with funds for financing high education, tourism, R&D, and small and micro-companies.
- As well as the tax incentives, the Superintendence of the Manaus Free Trade Zone provides land for investors for a subsidized price, with urbanized road system, water supply network, telecommunications network, sanitary sewer and rainwater drainage.
To be eligible for MFTZ’s incentives the produced goods must meet the Brazilian PPB (Basic Productive Process), which determines the level of nationalization required for each type of product, since the initiative aims to encourage the national industry. The PPB is defined by joint decree of the Ministry of Science, Technology and Information and the Ministry of Development, Industry and Trade.
North and Northeast
Before the 1930s – Brazilian development policy was based primarily on exports, but in the late 1930s, Brazil implemented a development policy based on import substitution. As a result of this action, South and Southeast Regions increased their share of the industrial provision at the expense of the other Regions (North, Northeast and Midwest), leaving those regions far behind.
In the 1960s – Brazilian government implemented policies to counterbalance the Regional development by stimulating investments, consequently, economic growth on the lagging regions. As a result of these policies, Development Agencies were established in the North (Superintendence for the Development of the Amazon - SUDAM) and Northeast (Superintendence for the Development of the Northeast) regions with the purpose of coordinating the development funds and granting tax incentives.
This tax incentive mechanism intends to benefit investments in the North and Northeast regions, in the State of Mato Grosso and in some municipalities in the northern region of Minas Gerais and Espírito Santo, in activities considered vital for Brazilian development.
Historically, the vast majority of foreign investment has been concentrated in the country's Southern and Southeastern states. However, recent data suggests that this dynamic is changing. In order to achieve a competitive edge and access markets with incredible growth potential, multinationals are beginning to look to investment opportunities outside the traditional investment centers.
The North and Northeast regions are being seen as potential destinations. These two regions have tremen-dous room for future growth and investors are starting to realize these opportunities.
Main taxes incentives offered by Sudam and Sudene
Corporate Income Tax Reduction
- 75% reduction on the CIT and non-refundable surcharges due on operating profit (Lucro da Exploração), granted for 10 (ten) years term.
- General preconditions for the incentive eligibility:
- Submit the project until December 31, 2018;
- Operate in SUDAM or SUDENE's covered region;
- Be in an economic segment that is considered priority for regional development, as defined in Decree 4.212/2002 and 4.213/2002;
- Invest to implement, expand, diversify or improve projects;
- In case of modernization or expansion of an existing project, the minimum increase of production capacity eligible is 20% for investments in infrastructure and 50% for other investments.
Corporate Income Tax Reinvestment
Corporate entities may use 30% of the CIT due for reinvestment purposes. The 30% portion must be deposited in Northeast Bank (Banco do Nordeste do Brasil S/A – BNB) or Amazon Bank (Banco da Amazônia S.A.), plus 50% of its amount from own funds. In order to have the resources reimbursed, the company must submit a technical project to the competent Development Agency attesting that the company invested in modernization projects or equipment complementation projects. As soon as the project is approved, the amount invested is returned to the company.
Incentivized Accelerated Depreciation of fixed assets depreciation and discount of PIS/PASEP and Cofins contributions
Companies enjoying the 75% reduction of income tax incentive and located in less developed micro regions areas under the supervision of SUDENE and SUDAM are entitled to incentivized accelerated depreciation of assets acquired for the purposes of income tax calculations and to a discount on credits of PIS/PASEP and Cofins contribution. The incentive consists on the full depreciation within one year in the very year of the asset acquisition or up to the fourth year. The Regional Agencies may grant this benefit after analyzing beneficiaries' requests regarding compliance with the Law 11.196/05.
Exemption of Freight Surcharge for Merchant Marine Renewal (AFRMM)
This surcharge is intended to renew, enlarge and recover the domestic merchant fleet, therefore is levied on all imports transported via maritime freight, and does not apply to imports made by land or air. The AFRMM is levied on the freight charged by Brazilian and foreign navigation companies operating in Brazilian ports. Such charge is calculated on freight price at a rate of 25%.
The AFRMM Incentive consists on exemption of the surcharge to companies:
- Located on the North and Northeastern region;
- Has its activity listed as a priority for regional development, according to the Decree 4.213/2002;
- Has imported goods directly involved in its production (fixed assets, raw materials or intermediate goods).
This benefit was ended December 31st, 2015, however there are initiatives being processed in the Brazilian National Congress for its renewal for up to 5 (five) more years, consecutively the Senate Provisional Measure No. 694/2015 and the Chamber of Deputies Bill 1241/2015.