A Guide To Brazilian Oil & Gas Taxation - 2011 Edition

Author:Mr Manuel Fernandes, Roberto Haddad, Júlio Chamarelli De Cepêda, Pieter Van Dijk and Augusto Sales
Profession:KPMG Brazil

Welcome Introduction

As one of the world's leading commodity and natural resources producers, Brazil has been a player on the world stage.

The new Oil & Gas discoveries have increased the optimism and investments in this sector. It is within this context that Brazil is consolidating its image as one of the preferred destinations for foreign investments, increasing the participation of major players and interest of newcomers, capable of participating in important alliances with international petroleum exporters and capable of alleviating pressure on price highs as a result of the length of its coastline and the potential for its reserves, which total around 14,000 million barrels in 2010, according to the Brazilian Agency for Petroleum, Natural Gas and Biofuels (ANP).

Such new discoveries, specially in the pre-salt area located off the coast, are considered as the largest discoveries in the world since the year 2000 and the largest discoveries in the West since 1976. Market analyses made by KPMG Oil & Gas Center of Excellence have revealed that the present capacity of the Brazilian Oil & Gas industry represents only 3% of what it will be in 25 years. The projections show that the sector in Brazil should double its size on every five or six years.

Based on the National Petroleum, Natural Gas and Biofuel Agency (ANP), the Oil & Gas industry has grown by more than 300% since 1997, which means that the sector's contribution to the GDP has grown from 2.75% to around 10% in 2006. For the period from 2006 to 2010 the investments that have been reported to ANP by the current concessionaires total US$ 33.8 billion, a figure that may grow considerably as a result of the discoveries.

Within this scenario, Brazil has become one of the most attractive countries for investments in the Oil & Gas sector and a number of much larger investments have been already announced by major players. Due to that, it has been noticed an increasing volume of M&A activity, as well as an unprecedent presence of newcomers starting operating in different levels of the supply chain.

Oil & Gas industry in Brazil

Oil & Gas industry in Brazil is regulated by Law 9,478/97 and ANP, which is responsible for regulating, contracting and supervising the activities of exploration, development, production, refining, distribution and retail.

According to the mentioned legislation, activities related to the Oil & Gas industry in Brazil should be, in principle, performed exclusively by the Federal Government. It is also stated in the law that private entities may develop such activities by way of concession agreements, authorizations or production share regime contract.

As a general rule, O&G contracts in Brazil are usually based on concession agreements, which require industry players to incorporate a local entity to carry out activities in Brazil. Periodically, ANP promotes bidding rounds - also known as Brazil Rounds - for companies intending to participate in public concessions for the exploration, development and production of Oil and Natural Gas. In general, the public bidding stipulates eligibility requirements, usually involving tax clearing certificates and local content policy, for instance.

It is important to outline that companies involved in O&G contracts are subject to Governmental takes, a compensation due by companies for the exploration of the O&G. Currently, there are four types of Governmental takes foreseen in Law 9,478/97: (i) Signature Bonus; (ii) Royalties; (iii) Special Participation; and (iv) Area Retention Tax. In addition, it is also important to note that concession agreements have been stipulating an obligation to invest 1% of the gross revenues in Research & Development. This issue is also found in the "Tax overview" section.

Local Content

O&G industry is an extremely competitive sector with an increasing demand of goods and services to support the development of its projects, a characteristic that pushes O&G players to search for prices and resources in the international market. In order to foster the development of the local industry and mitigate an excessive use of resources from international suppliers, governments may impose a local content policy, in which O&G players are required to acquire goods and contract services from local suppliers and service providers.

Local content requirement in Brazil is currently regulated by Resolution 36/07 of the Ministry of Mines and Energy.

In practical terms, the public bidding rounds stipulate a minimum percentage of local content. The percentage of local content utilized by each bidder may be an aspect to be considered by the government authority to rank the bidding companies in the round.

After each bidding round, the percentage of local content utilized by the winner of the bidding process is included in the concession contract. The non-compliance with the agreed local content shall give cause to fines established in the concession agreements.

In general terms, local content may be measured by the proportion between the sum of values of the goods and services acquired, direct or indirectly, by the concessionaire from a Brazilian source and the total amount of goods and services acquired related to the whole operation.

The minimum percentage for local content was firstly required in the 5th and 6th rounds with different percentages according to where the blocks were located: ground, shallow waters or deep waters. As from the 7th rounds, the minimum requirements were expanded for a list of itens for exploration and development phase.

It is important to note that the local content policy is relatively new in Brazil and has suffered several modifications in the last years. Due to that, investors shall take proper attention to the compliance of local content policy which is one of the key drivers when doing business in the O&G industry in Brazil.


In the year of 2007, Brazilian Government announced the discovery of a deep-sea field of large oil and gas reserves. This area has been named Pre-Salt, considering its location about 7 Km below the sea bed, under a series of layers of rock and salt.

This announcement has been very commented in the global community, emphasizing the impact of this new resource for the Brazilian economy.

Because of the significance of these reserves, the Brazilian government has been studying a potential change in the exploration and production (E&P) model adopted up to now. Several discussions have arisen regarding the current contracting practices and royalties distribution in this industry and it is still uncertain what should be the extent of the changes that may come up in the next years.

Based on a change in the Law 9,478 made in 2010, the exploration, development and production of oil and gas shall be carried out through concession agreements or through the production share regime in the pre-salt and strategic areas.

How to invest in Brazil

Brazil's rapidly growing economy, in addition to the Brazilian tax law, which is considered firm, create an attractive environment for investors, and with careful planning, companies and funds can take advantage of several benefits of choosing Brazil for its investments.

Setting up the business

Foreign investors may enter the Brazilian market directly through a branch or a subsidiary or through third parties by means of distribution and sales representation activities. Exploration and production activities usually require the incorporation of a local company, because, for example, of the concession bidding rounds rules. On the other hand, the decision on whether to establish a local company for the suppliers of the O&G chain would depend on a variety of factors, such as, comparison between the costs associated with import of goods and services versus the local operation, as well as, local content requirements.

In most cases, distribution and sales representation save costs when compared to the incorporation of a local company. However, these alternatives may be accompanied by a lack of control of the foreign investors over the way third parties distribute or sell their products in Brazil and deal with their trademarks.


In general, foreign investors tend to incorporate a subsidiary rather than set up a branch in Brazilian territory due to the following: (i) the shareholders are not responsible for the Brazilian subsidiary's debts, except for specific provisions set forth by corporate, tax, labor and bankruptcy rules, and (ii) the process of establishing a subsidiary in Brazil is fairly simple and much less time consuming when compared to establishing a branch.

Laws regulating the formation of legal entities in Brazil are applicable to foreign and Brazilian entities or individuals in substantially the same manner.

Nonresident individuals or legal entities may adopt any type of legal entity recognized by Brazilian legislation, being the more common strutures, the Limitadas (Limited Liability Companies) or SAs (Corporations).

Limitadas (Limited Liability Companies)

The articles of incorporation of a Limitada follow the form of a partnership contract, requiring at least two investors. Nevertheless, it is considered an entity that is separate from its quotaholders. Nonresident quota holders must grant a power of...

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