ICLG Franchise 2017

1 RELEVANT LEGISLATION AND RULES GOVERNING FRANCHISE TRANSACTIONS

1.1 What is the legal definition of a franchise?

Franchise is defined as the system by which a franchisor grants to a franchisee the right of trademark or patent use, associated with the right to exclusive or semi-exclusive distribution of products or services and, optionally, also the right of use of technology of implantation and administration of a business or operational system developed or owned by a franchisor against direct or indirect remuneration, however without being characterised as an employment relationship.

1.2 What laws regulate the offer and sale of franchises?

The main Brazilian regulation applicable to offer and sale of franchises is Law n. 8,955 of December 15, 1994 ("Brazilian Franchise Law"). The Brazilian Franchise Law governs all franchise chains established and operated in the Brazilian territory. Additionally, Normative Act 16/2013 issued by the Brazilian Patent and Trademark Office ("BPTO") demands the recordation of international franchise agreements for the effectiveness of specific provisions.

1.3 If a franchisor is proposing to appoint only one franchisee/licensee in your jurisdiction, will this person be treated as a "franchisee" for purposes of any franchise disclosure or registration laws?

The Brazilian Franchise Law is not a relationship law and, consequently, the legal environment for franchise is quite liberal. The parties may freely stipulate in the franchise agreement all terms and conditions of the franchise relationship, including territory exclusiveness. Therefore, although the concept of "business format franchising" usually involves the establishment of multiple units operated by multiple franchisees, if a brand owner decides to appoint only one franchisee in Brazil, said relationship should follow all applicable rules that normally apply to a franchise relationship, irrespective of the number of franchise units initially envisaged by the brand owner.

1.4 Are there any registration requirements relating to the franchise system?

The local disclosure document does not require registration with any regulator. The franchise agreement, however, must be recorded at the BPTO. The record is indispensable for the following purposes: (i) to make the agreement effective against third parties; (ii) to permit the remittance of payments to the foreign party; and (iii) to qualify the licensee for tax deductions. In addition to the recordation of the franchise agreement at the BPTO, for the purposes of remuneration remittances, the registration of the agreement at the Brazilian Central Bank ("BACEN") is also required.

1.5 Are there mandatory pre-sale disclosure obligations?

Yes. The main purpose of the Brazilian Franchise Law is to introduce transparency to the future franchise relationship, introducing an obligation to franchisor to provide a franchise disclosure document ("FDD") to prospective franchisees 10 days before the execution of any agreement or payment of any amount to the franchisor or other designated recipients.

1.6 Do pre-sale disclosure obligations apply to sales to sub-franchisees? Who is required to make the necessary disclosures?

Yes. Sub-franchisees must also be provided with an FDD 10 days before the execution of any agreement or the payment of any amount to the franchisor, master franchisee or other designated recipients. Although the Brazilian Franchise Law does not specify who is required to make the necessary disclosures to a sub-franchisee, it is common practice that the party that directly relates to the sub-franchisee (normally a master franchisee) performs such obligation.

1.7 Is the format of disclosures prescribed by law or other regulation, and how often must disclosures be updated? Is there an obligation to make continuing disclosure to existing franchisees?

The FDD must be provided to the prospective franchisee in written form, drafted in clear and accessible terms. Although not mandatory, we recommend that the FDD be updated annually. There are no legal statutes requiring continuing disclosure to existing franchisees.

1.8 Are there any other requirements that must be met before a franchise may be offered or sold?

It is important to highlight that the franchised trademarks must be, at least, filed at the BPTO before a franchise may be offered and/or sold in Brazil. Therefore, in addition to the filing of the franchised trademarks at the BPTO, the disclosure of a written FDD 10 days before the execution of any agreement or payment of any amount by the prospective franchisee is the exclusive requirement determined by law.

1.9 Is membership of any national franchise association mandatory or commercially advisable?

Although not mandatory, franchisors and franchisees may join the Brazilian Franchise Association ("ABF"). The ABF is a non-profit entity which has been establishing itself as the most representative entity for the franchising sector at the Federal Government, other administrative spheres, and official national and international entities.

1.10 Does membership of a national franchise association impose any additional obligations on franchisors?

The payment of a membership fee is the most relevant obligation imposed on franchisors. For more information, please go to www.portaldofranchising.com.br.

1.11 Is there a requirement for franchise documents or disclosure documents to be translated into the local language?

The Brazilian Franchise Law sets forth that the disclosure document should be in language which is precise and clear to the prospective franchisee. Since Portuguese is the official language in Brazil, it is possible to assume that it should be in Portuguese. However, we believe that the parties in international franchising may decide to adopt the English language for the disclosure document as long as, in order to avoid translation of such document, the Brazilian party knows English fluently and expressly acknowledges that fact.

2 BUSINESS ORGANISATIONS THROUGH WICH A FRANCHISED BUSINESS CAN BE CARRIED ON

2.1 Are there any foreign investment laws that impose restrictions on non-nationals in respect of the ownership or control of a business in your jurisdiction?

Although Brazilian law does not properly impose restrictions, we confirm that there are some legal requirements to be observed by any legal entity (or individuals) domiciled abroad that holds equity interests in a Brazilian company.

Foreign entities, for example, must be enrolled with the Federal Taxpayer Registry for Corporate Entities ("CNPJ") and with BACEN. For that purpose, as well as for receiving summonses on its behalf, such foreign legal entity has to appoint a Brazilian-resident individual to act as its attorney-in-fact.

There are specific restrictions on the participation of foreign investors in certain sectors and types of company, such as the aerospace industry and cable TV.

2.2 What forms of business entity are typically used by franchisors?

Along with corporations ("S/A"), limited liability companies ("LLC") are the most common corporate entities in Brazil. Under the Brazilian Civil Code (Law n. 10.406/2002), both types of company enjoy the same tax treatment, though the costs of setting up an LLC are less significant, as they are not subject to the considerable expenses of publishing certain relevant corporate acts that an S/A incurs.

2.3 Are there any registration requirements or other formalities applicable to a new business entity as a pre-condition to being able to trade in your jurisdiction?

Yes. Registration, licences and formalities normally vary depending on (i) the type of entity to be incorporated, and (ii) its field of activity. In order to set up an LLC, there are some basic licences and authorisations that all companies are required to obtain, regardless of the field of activity in which they operate, as detailed below:

Federal Taxpayer Registry for Corporate Entities - "CNPJ" of the Foreign Investor (for the foreign partners...