A Q&A guide to outsourcing in Brazil.
This Q&A guide gives a high-level overview of legal and regulatory requirements on different types of outsourcing; commonly used legal structures; procurement processes; and formalities required for transferring or leasing assets. The article also contains a guide to transferring employees; structuring employee arrangements (including any notice, information and consultation obligations); and calculating redundancy pay. It also covers data protection issues; customer remedies and protections; and the tax issues arising on an outsourcing.
To compare answers across multiple jurisdictions, visit the Outsourcing Country Q&A tool. This article is part of the PLC multi-jurisdictional guide to outsourcing. For a full list of contents, please visit www.practicallaw.com/outsourcing-mjg.
National law does not specifically regulate outsourcing transactions. However, from a labour law perspective, a direct employment relationship between the customer and the supplier's employees is normally inferred in these arrangements (Precedent No 331, Brazilian Superior Labour Court (Tribunal Superior do Trabalho) (TST)) (see Question 9, Initial outsourcing).
There are no additional regulations relevant to a financial services outsourcing.
There are no additional regulations relevant to a business process outsourcing.
There are no additional regulations relevant to a private IT outsourcing; however there are for government IT outsourcings (see below, Public sector).
There are no additional regulations relevant to a telecommunications outsourcing although specific regulations apply to a public sector outsourcing of telecommunications (see below, Public sector). However, if the outsourcing concerns telecommunication services, the customer remains accountable to the Brazilian Telecommunications Agency (Agência Nacional de Telecomunicações (Anatel)) and consumers for the outsourced services.
The Federal Constitution allows the federal government, states and the municipal districts to outsource certain public services, such as telecommunication and energy services, among others, through public concessions and permits.
Public services concessions and permits are regulated by Act No 8,987/1995 and Act No 9,047/1995, and must be preceded by a public bidding process (Act No 8,666/1993). The private party takes on the business risks under a public concession or permit but the contract is subject to certain restrictions in the public interest, such as:
The supplier is strictly liable to the public administration for the services provided, except in cases of force majeure.
The public administration can unilaterally modify or terminate the agreement in the public interest.
In contracts for essential services, the public administration has, among other things, the right to temporarily take over the services and the relevant premises when the agreement is terminated to enable an uninterrupted service.
Any contract between an employee and the public administration entered into without a public contest has no effect and only guarantees the employee the right to receive (TST Precedent No 363):
Compensation for the hours worked.
Payment into the employee's severance fund account (Contribuição ao Fundo de Garantia por Tempo de Serviço (FGTS)).
Public and Private Partnerships (PPPs) are public services outsourcings. The law allows more contractual flexibility in these types of projects. In a PPP, the public administration pays a service fee to suppliers and, depending on the contract, the supplier may also receive tariffs paid by consumers. The following limitations apply to PPPs (Act No 11,079/2004):
The contract value must be over BRL20 million (as at 1 February 2012, US$1 was about BRL1.7).
The contract can only be for:
the supply of employees; or
the supply of equipment.
The maximum term is five years.
There are also specific rules governing public sector outsourcings of IT and automation services (Decree 7,174 of 12 May 2010). The government outsources services to contractors in the following order of preference:
Where the goods and services are produced with technology developed in Brazil in accordance with the Basic Productive Process, as defined by the Brazilian government.
Where the goods and services are produced with technology developed in Brazil.
Where the goods and services are produced in accordance with the Basic Productive Process.
Micro and small-scale companies that meet the above requirements also have priority over medium-sized and large companies that meet these requirements. When determining whether micro and small-scale companies are to be given priority over other public bid participants, the government will also consider criteria such as:
Whether equivalent delivery dates can be provided.
The outsourcing of IT services that are classified as "common" (services that can be objectively defined in terms of quality and performance during the bid process) can be done through auction-type public bids as long as the participating companies comply with the Basic Productive Process. Public bids governed by the Public Bidding Law (Act No 8,666/93) (open competitive bids, price surveys and bids by invitation) must use the "method/technology and price" criterion to decide the winner.
In contrast to other outsourcings, in irregular outsourcings of employees by a private entity to the public administration, no direct employment relationship is formed between the public administration and the employees (TST Precedent No 313) (see Question 9).
Outsourcings are subject to statutory consumer protection warranties and indemnities (see Question 26).
There are no further legal or regulatory requirements concerning outsourcing transactions.
There are no requirements for regulatory notification or approval of outsourcing transactions in Brazil.
Description of structure. The most commonly used structure in an outsourcing is a services agreement that regulates the relevant terms and conditions. If the outsourcing is complex, it may be regulated by a set of agreements (including agreements for the transfer of assets). In addition, the outsourcing may be at the customer's or the supplier's premises. If so, agreements may become more complex and increase the risk of creating a direct employment relationship (see Question 9).
Advantages and disadvantages. This structure has the advantage of being cheap for the customer to set up and gives the customer more control over the price (as the agreement will specify either a fixed services fee or a determinable price). The disadvantage is that the customer may lose some control over the services provided, as the supplier has the expertise in the area. Although the customer can audit the supplier's work, it may not be able to control the quality of the services and details of the transaction.
Description of structure. Another possible structure is to incorporate a new entity as a joint venture, to which the supplier and the customer contribute capital, technology and/or assets. Under this structure, the customer may need to pay more to implement the outsourcing and to maintain the joint venture company than it would under another type of structure.
Advantages and disadvantages. The advantage of this structure is that the customer is able to participate more closely in the provision of services. The disadvantage relates to cost (see above, Description of structure).
Typically, the customer determines internally which services or activities are going to be outsourced, and what its requirements for the outsourcing and supplier are. It then issues a request for proposal (RFP) to identify possible suppliers. The RFP describes in detail what the customer expects from the outsourcing.
The invitation to tender is often used by government entities adhering to the provisions of the Public Bidding Law when contracting services and goods (see Question 2, Public sector). Government entities using this process must (unless the law provides otherwise) issue a call for bids describing, among other things:
The service to be contracted.
The requirements to be met by the bidder.
The bid procedure.
The date of bidding.
A draft of the contract to be executed with the company that will provide the outsourced services.
After analysing bid proposals, the customer selects a few potential suppliers and carries out a due diligence process to verify which supplier is the most suitable for the outsourcing. Before due diligence, the parties sign non-disclosure agreements. Once a supplier is selected, the parties negotiate the agreement (or agreements) and then implement the outsourcing.
When the supplier and customer are private companies, both parties are free to lead the negotiation in the direction that best suits their interests. However, when contracting with a public entity, a supplier has no other rights of negotiation than those stated in the call for bids.
The customer may retain ownership of its assets used in the outsourcing, as this gives it more control and flexibility if it intends to change supplier. The customer can grant the supplier the right to use the assets in the outsourcing while retaining ownership. Where the supplier acquires assets from the customer, or from third parties specifically for the outsourcing, the outsourcing agreement normally gives the customer an option to re-purchase the assets on the termination or expiry of the outsourcing agreement.
The transfer of title to immovable property must be in writing and the relevant transfer document (for example, the purchase and sale agreement) must be:
Registered with the relevant real estate registry.
Executed before a notary public as a public deed.
As a general rule, the transfer of IP rights must be in writing and, depending on the nature of the IP right, registration of the transfer with the authorities is required, as follows:
Trademarks, patents, industrial designs, geographical indications and mask works must be registered with the Brazilian Patent and Trademark Office (Instituto Nacional de Propriedade Industrial (PTO)).
Domain names must be registered with the Centre for Information and Co-ordination (Núcleo de Informação e Coordenação do Ponto br (NIC)).
Plant varieties must be registered with the National Service for Plant Variety Protection.
Registration of software and copyright is not mandatory. However, if they are registered in Brazil, then their transfer must also be registered, as follows:
Software transfers must be registered with the PTO.
Copyright transfers must be registered, depending on the work, with specific national entities.
Generally, the transfer or assignment of IP licences must be in writing and, depending on the terms and conditions of the licence agreement, the consent of the other contracting party may be required. The following must be registered with the PTO to be effective against third parties:
A supply of technology agreement.
A trademark or patent licence.
A franchise agreement.
As a general rule, there is no specific formality required to transfer movable property in Brazil, although it is advisable that the assignment be made in writing.
The assignment of key contracts must be in writing and, depending on the terms and conditions of the agreements, the consent of the other contracting party may be required.
There is no specific formality required for the lease of immovable property, but the agreement is subject to specific regulation and it is advisable that the lease agreement be in writing (Act No 8,245/1991 and Brazilian Civil Code (Act No 10,406/2002)). For the lease agreement to be effective against third parties, it must also be registered with the relevant real estate registry.
Brazilian law does not set out any specific formality for most IP licences but it is advisable that a licence agreement be in writing. In addition, to be effective against third parties, certain agreements and licences must be registered with the PTO (see Question 7, IP rights and licences).
Where the licensor is a foreign entity, for those agreements and licences that must be registered with the PTO to be effective against third parties, registration of the licence agreement with the PTO is necessary to enable the remittance of payments abroad and the deductibility of payments by the Brazilian licensee for local corporate income tax purposes.
Brazilian law does not require any specific formalities for leasing movable property but it is advisable that the lease agreement be in writing.
Contracts cannot be licensed or leased but only assigned. Subcontracting part of the obligations may be possible, depending on the terms and conditions of the relevant contract.
On an outsourcing, the employees attached to the outsourced business do not transfer automatically from the customer (transferor) to the supplier (transferee). If the parties want them to transfer with the outsourced business, the customer must terminate their employment, following the proper procedure and paying required severance pay. The supplier can then hire them. However, there is a risk that a direct employment relationship will still exist between the transferor and these employees (see Question 15).
Employees do transfer by law in the following circumstances:
Group company transfer. Employees automatically transfer as part of a business transfer between two members of the same group of companies.
Employer transfer. Employees automatically transfer in the context of an acquisition, or transfer of the business (all assets and employees transfer and the same activities and core business are to be maintained). If the transferee replaces the transferor as the employer because it has assumed ownership of the transferor's business, it employs the transferor's employees automatically without having to re-hire them.
In these two cases, the transferee is the transferor's legal successor, and is responsible for any employment-related liabilities and obligations.
On an outsourcing, there is a risk that a direct employment relationship will be formed between the transferor and the transferee's employees (see Question 15), unless the outsourcing relates to (TST Precedent No 331):
Temporary employment agreements.
Security, cleaning and maintenance services.
Specialised or expert services that are not related to the transferor's core business or corporate purpose, provided that there is no personal relationship nor any legal subordination between the transferor and the transferee's employee.
On a change of supplier, the employees attached to the outsourced business do not transfer automatically from the old supplier to the new supplier. The old supplier must terminate their employment for the new supplier to be able to hire them, and in this case there is a significant risk that the employee will claim, or the labour authorities will infer, a direct employment relationship with the transferor (see Question 15). This does not occur on a group company transfer or an employer transfer, however (see above, Initial outsourcing).
On termination, the employees attached to the outsourced business do not transfer automatically from the transferee back to the transferor. The transferee must terminate their employment for the transferor to be able to re-hire them (except where a group company transfer or an employer transfer occurs (see above, Initial outsourcing)).
Outsourcing does not generally involve the transfer of employees (see Question 9, Initial outsourcing). If the transferor terminates the employees' contracts and the transferee hires them, in principle the transferee does not take on any of the transferor's employment-related liabilities.
However, an employment relationship may be construed to exist between the transferor and the transferred employees even after the termination date (see Question 15). As a result, to avoid any employee claims, the transferor should ensure that both:
The transferee keeps all of the employment contracts in place on their existing terms.
The elements of a direct employment relationship do not exist concerning the transferor's relationship with the transferee's employees.
In cases where employees do transfer by law (see Question 9, Initial outsourcing), for example, if the transferee acquires the transferor's business (all assets and employees), the transferred employee is entitled to all of the economic benefits offered by the transferor (as the former employer), including salaries, pensions and benefits.
If the transferee (as the new employer) offers better salaries, pensions and/or benefits to its own pre-existing employees of the same category and level, transferred employees are also entitled to salaries, benefits and pensions that match those offered by the transferee, provided that:
Both groups of employees (the transferee's and the transferred employees) have the same job description.
Both groups of employees have the same technical proficiency or expertise.
Both groups of employees are equally productive.
The period for which the employees have been in the same position does not differ by more than two years.
Where employees transfer by law, the transferee takes on all employment-related responsibilities and liabilities, including liability for unpaid or accrued labour and social security obligations (see Question 9, Initial outsourcing).
In such cases, to avoid any employee claims, it is advisable for the transferee in relation to the transferred employees:
Not to modify their employment contracts for the worse.
To extend the benefits it offers to its employees to the transferred employees.
To confirm that all past labour and social security obligations have been paid by the transferor.
Social security pensions are paid by the Social Security Administration (the employer makes social security contributions towards such pensions). As a result, the transfer of employees should not have any effect on employees' pensions.
Where employees transfer by law and were previously part of a private pension scheme, if the transferee does not offer a similar scheme to transferred employees, the employees may be able to make a claim to ensure that their benefits are maintained. If the private pension scheme offered by the transferee to its own employees of the same category and level is better than the private pension scheme the transferor offered to an employee, the transferred employee is entitled to benefit from the better scheme.
Where employees transfer by law, the transferred employees have the right to keep the employee benefits that were granted by the transferor. In addition, if the transferee offers additional or more favourable benefits to its own employees of the same category and level, the transferred employee is entitled to receive those better benefits.
Collective bargaining agreements (CBAs) are entered into for a limited time only (usually one year). In cases where employees transfer by law from the transferor to the transferee, the transferred employees are entitled to all employee benefits granted under the CBA in force during their employment with the transferor until the expiry of the bargaining agreement. On the expiry of this agreement, the transferred employees are only entitled to the benefits granted under the CBA entered into by the transferee.
If the CBA applicable to the transferee's employees at the time of the transfer offers additional or more favourable benefits to the transferee's employees of the same category and level as a transferred employee, the latter is entitled to these additional benefits.
There are no specific rules governing redundancy pay in Brazil. Any dismissal other than one made for just cause is to be calculated on the same basis as a dismissal without just cause (see Question 13). Despite the lack of regulation regarding redundancy, there is precedent from the Superior Labour Court (Precedent TST ED-RODC - 30900-12.2009.5.15.0000) that requires prior negotiation with the employees' union on a collective dismissal.
As long as the benefits received by the transferred employees under their former employment are maintained (see Question 10), the transferee can harmonise the transferring employees' terms and conditions with those of its existing workforce (and must extend all benefits granted to its employees to transferring employees).
Generally speaking, dismissals can be made at any time, except where protection against dismissal applies, for example, in the case of pregnant employees.
In dismissals without just cause, the employer must both:
Give prior notice of at least 30 days (or pay compensation equivalent to 30 days' pay).
Make severance payments, including:
pay due up to the day of termination;
accrued Christmas bonus, corresponding to one-twelfth of the employee's monthly pay per month of employment;
a supplemental FGTS payment of 8% on all of the above payments;
accrued vacation pay, based on one month's compensation per year of employment (if termination occurs before the full year is completed, vacation pay is calculated proportionally);
a vacation bonus, corresponding to one-third of one month's pay;
40% of the employee's FGTS funds on the day of termination, plus 10% of the employee's FGTS funds that the employer must pay the government;
any other labour benefit granted under the relevant employment contract or collective agreement.
A terminated employee must execute a termination form setting out all payments that have been made, in the presence of:
A Labour Ministry officer.
The employee's union (if the employee has worked in the company for more than one year).
Dismissals can also be made for cause and as requested by the employee; in these cases the severance amounts payable differ.
There are no restrictions on foreign citizens performing services in Brazil provided that they comply with all visa requirements.
However, companies registering intellectual property rights with the PTO must either outsource any technology transfer or specialised technical assistance work to Brazilian workers or explain why they have not done so. If such services are outsourced to foreign workers, the outsourcing company must demonstrate that the foreign workers have special knowledge and skills that are necessary for the execution of the services.
The parties can structure the employee arrangements of an outsourcing as a secondment; in this case there is still likely to be a direct employment relationship between the seconded employee and the customer (see Question 9).
Under Brazilian law, the "reality principle" applies when determining whether an employment relationship exists. This means that, if the elements of an employment relationship exist when a person provides services, an employment relationship will be found to exist. The elements that characterise an employment relationship are:
Personal nature of the services.
A supplier's employee has a direct employment relationship with an outsourcing customer if he can prove that these elements exist in his relationship with that customer. If a customer replaces the supplier in an outsourcing but requests that the new supplier hire certain employees of the former supplier, it is most likely that a direct employment relationship will be inferred between the customer and those employees.
On a transfer of employees, the transferee should require information from the transferor regarding:
Payment of salaries, benefits and social security obligations.
Compliance with labour obligations.
All documents that prove the history of employment.
On a formal transfer of employees, the transferee is liable for labour and social security obligations accrued before the transfer. As a result, the transferee should carry out a due diligence process and confirm that the transferor has complied with its obligations to the employees before entering into any outsourcing agreement that transfers employees and their labour and social security rights (see Question 9 and 10).
On a formal transfer of employees (see Question 9), the new employer must update:
The employee's work card.
Its employee registry.
Its labour inspection book, which contains details of all employees.
Its monthly report on hired and terminated employees (CadastroGeral de Empregados e Desempregados (CAGED)).
Its annual report on social security information (Relação Geral de Informações Sociais (RAIS)).
Its food programme for employees (Programa de Alimentação do Trabalhador (PAT)).
If an employee changes location, this must be noted on his work card. If a direct employment relationship is created between the customer and the supplier's employee, the employer's records must be updated to reflect this.
General requirements. There is no specific law on the collection and use of personal data in Brazil, except in relation to consumers. However, under the Federal Constitution, fundamental rights and guarantees apply in relation to the protection of privacy and personal information. Other legislation regulates specific aspects of data and privacy protection, including, for example, banking and tax secrecy laws.
In relation to consumers, the Consumer Defence Code (Law No 8,078/1990) (CDC) regulates the collection, storage and use of consumer databases. It provides that the prior authorisation of a customer must be obtained to collect, process and use his personal data.
Consumers are entitled to secrecy with respect to any personal information they provide to businesses. In general, consumers:
Must be informed, in writing, if their personal data is to be included in a database.
Are entitled to access, at any time, the data to be included in the database, and can require the correction of any erroneous information. The owner of the database must make the correction and notify the consumer that this has been done.
If a business starts a database or begins keeping records that include information on consumers, it must notify those consumers of this, and explain how the personal data will be collected, used, stored, disclosed and otherwise processed (CDC).
In addition, no negative financial information (for example, credit restrictions) about a consumer can be stored on such databases.
Breach of any of the above rules may constitute a criminal act, punishable by payment of a fine or imprisonment for up to one year.
The right to privacy is a "personality right" that cannot be waived (Civil Code). Breaches of a natural person's right to a private life entitle the victim to compensation for damages (including moral damages). The court can also, at the victim's request, take action to stop or prevent any such breach.
Mechanisms to ensure compliance. Although most obligations and standards regarding personal data and its protection are contained in the CDC, its rules are commonly adhered to in other areas. As a result, it is strongly advisable to, for instance, make an individual aware if his personal data is to be included in any database.
International standards. Compliance with international standards for data protection and security is not required.
General requirements. Financial institutions wanting to provide further services to customers can outsource their services provided that the outsourcing complies with:
Central Bank Resolution No 3954/2011, which governs outsourcing by financial institutions.
Law No 105/2001, which governs banking secrecy in Brazil.
All confidential information provided to companies by its customers must be kept secret, that is, the information can only be disclosed in situations permitted by law or with the authorisation of the customer. In relation to financial institutions, the disclosure of data and client information can only be done in specific situations, for instance (Law No 105/ 2001):
The exchange of information between two banking institutions regarding their registry status.
The disclosure of criminal offences to the Central Bank.
The disclosure of confidential information with the express consent of the interested party.
The disclosure of information between a financial institution and a supplier providing outsourcing services. The supplier receiving the information must keep it secret. Note that the financial institution and the supplier can be held jointly liable for any disclosure by the supplier of banking data and information related to customers of the financial institution.
Mechanisms to ensure compliance. The most common way of ensuring compliance with secrecy requirements is to include a confidentiality obligation in an outsourcing agreement, which imposes a fine for breach of the obligation.
A breach of the rules on banking secrecy, except in circumstances expressly permitted by law, is a criminal offence; anyone who breaches the law may be subject to a fine and up to four years' imprisonment (Law No 105/ 2001).
International standards. Compliance with international standards on banking secrecy is not required, but it is recommended.
For issues relating to confidentiality of customer data see above, Data protection and data security.
The services specification is initially drawn up by the customer in the RFP. In the course of the negotiations with the supplier, the parties typically amend or add to the services specification and description. The specification is then usually included in the relevant agreement. It is also common practice to include a customer's RFP as a schedule to the agreement.
The service levels and key performance indicators are usually described in the relevant agreement (or a schedule to the agreement). Service credits schemes are usually included in the payment section and in a schedule to the agreement. The customer sometimes replaces the service credits scheme with non-compensatory penalties for failure to reach performance levels. In any event, service levels and service credits schemes are specific to each type of outsourcing and vary according to the customer's needs.
It is important that service levels:
Are objectively measurable.
Are based on availability, response times and so on.
Have their breach measured by level of severity.
If not, it can be very difficult to enforce the service credits scheme and reduce the fees where the supplier does not perform. The parties should review the service levels from time to time to ensure that they meet the customer's needs.
The agreement may also provide for the payment of a bonus to the supplier if performance exceeds certain thresholds.
The most common method used on an outsourcing is a fixed fee combined with other charges based on variation mechanisms (such as the number of employees, requests and so on).
It is also common to charge based on time and materials using a cost-plus model (or to use either of these plus a fixed price). In cost-plus models, the customer should be able to review the budget and the costs incurred.
The parties normally agree on benchmarking to set the fees charged under the agreement and engage a third party to compare the contractual fees with those generally charged in the market.
The agreement may also provide for a lump sum payment to the supplier for the initial costs of implementing the outsourcing.
When fixed prices are used, the agreement may specify that the service fees are subject to indexation on an annual basis according to a particular index, such as the Index of Prices to Consumers (IPC).
If the supplier fails to perform its obligations, the customer can:
Suspend compliance with its obligations under the agreement.
Terminate the agreement for cause (subject to compliance with the agreement's termination provision).
Seek indemnification for any damages caused to it arising from the supplier's breach, plus interest, indexation and legal fees.
Seek specific performance. Depending on the nature of the services, a court can authorise a third party to provide the services on the supplier's behalf and then charge the supplier a services fee.
The following customer protections are typically included in outsourcing agreements:
Penalties for breach or delay of key obligations.
Step-in rights for the customer to temporarily take over the outsourced services in cases of severe breaches by the supplier.
Service levels (see Questions 20).
Minimum insurance coverage, depending on the type of agreement.
The ability to review or adjust services fees based on service levels, benchmarking and so on.
Warranties and indemnities vary according to the type of outsourcing and the nature of the services being performed, but typical provisions included in outsourcing agreements are:
Confirmation that the parties are validly existing entities and are authorised to enter into the agreement.
Confirmation that the parties are independent contractors and that there is no employment, joint venture or agency relationship between them.
Confirmation that each party is responsible for its own employees, and indemnification against an employee filing a lawsuit or complaint against the other party.
Warranties of IP ownership and indemnities against IP rights' infringement.
If products are supplied, warranties regarding the product's quality or use.
Confirmation that the supplier will comply with applicable laws when providing the services.
Warranties from the supplier that the services will meet the contractual specifications.
A contracting party can reject a defective good or product, or demand a proportionate price reduction, within 30 days of delivery for visible defects, or 180 days from the day on which the defect is shown in the case of hidden defects (Civil Code).
If the agreement sets a warranty period, this overrides the term provided for by the Civil Code for the buyer to make a claim. However, even while the contractual warranty is in force, a buyer or contracting party who is harmed by the product defect must notify the other party of the defect within 30 days of the defect becoming apparent. Failure to do so renders the warranty unenforceable.
Consumer contracts have minimum protection requirements (statutory warranties), and a strict civil liability regime governing damages caused by the product or service or for a product's imperfections. Statutory warranties cannot be waived, as a matter of public policy.
The consumer can claim against visible or easily verifiable defects of durable products within 90 days of the actual delivery of the product. For hidden imperfections or defects, the 90-day term starts when the defect is shown. If the supplier does not correct the imperfection within 30 days, the consumer can demand one of the following, at the consumer's option:
Replacement of the product by another without defects of the same kind.
Immediate reimbursement of the amount paid, with indexation. This does not affect the consumer's right to recover any losses and damages.
A proportionate price reduction.
Customers have subsidiary liability in relation to services provided by a supplier and, as a result, may be held liable for any damages caused to clients or to third parties. A provision limiting the extent to which a supplier will indemnify its customer for losses incurred may be included in the contract as long as certain legal requirements are observed (see Question 36). Provisions regarding employee arrangements cannot be included (as responsibilities to employees cannot be limited).
There is no specific regulation concerning insurance issues on an outsourcing. Companies can, however, obtain insurance to cover potential liabilities arising from services or employee actions to be provided under an outsourcing arrangement.
As a customer has subsidiary liability for services provided by a supplier, and may be held liable for any damage caused to clients or third parties (see Question 27), it may wish to obtain insurance to cover these risks.
In addition, companies can obtain insurance to cover predetermined risks that may affect the company's business (Civil Code). However, if a company acts fraudulently to obtain insurance, the insurance agreement is null and void (Article 762, Civil Code).
As Brazilian law does not regulate outsourcing, there is no mandatory minimum or maximum term applicable to the length of an outsourcing. The parties are free to agree a contractual term in the outsourcing agreement.
A party can terminate an agreement on written notice to the other party. However, if one party has made substantial investments to enter into, and perform its obligations under, the agreement, termination of the agreement by the other party can only occur after a notice period that is deemed reasonable in view of the characteristics of the agreement and the investments.
In fixed-term agreements, early termination without cause may entitle the party that did not terminate the agreement (terminated party) to indemnification for losses sustained. However, if the agreement gives any party the right to terminate without cause, the risk that indemnification will be required is reduced, provided that the notice period is reasonable in view of the agreement's term and the investments made by the parties. In agreements with an indefinite term, it is advisable to specify in the agreement that:
Either party can terminate without cause.
The notice period must be reasonable.
Termination for cause does not require reasonable prior notice, but it is advisable to include a period in the agreement during which any breaches can be remedied (if a breach is not remedied in the specified period, the agreement can then be terminated).
As a general rule, a breach of contract justifies the termination of an outsourcing by the innocent party, provided that the breach is relevant to the agreement.
Although most agreements specify that insolvency or bankruptcy events terminate the agreement, this may be deemed unenforceable (Bankruptcy Act (Act No 11,101/2005)), in which case termination may give rise to a claim in damages against the terminating party.
In an agreement for an indefinite term, termination without cause cannot give rise to a claim in damages against the terminating party provided that:
The agreement specifies that either party can terminate it without cause.
The prior notice period for the termination is reasonable in view of:
the investments made by the terminated party;
the length of time that the agreement remained in force;
the impact that the termination may have on the terminated party's business.
Parties are generally free to agree on additional termination rights under the agreement, but a few restrictions apply, such as:
There is a general contract law principle that a party cannot be forced to remain in a contract indefinitely. As a result, if the agreement does not contain a right of termination, a party may claim in court that the agreement is abusive and request that it be terminated. However, this does not affect that party's obligation to indemnify the other contracting party for damage caused by early termination.
Prior written notice for termination should be reasonable in view of the investments made by the parties and the type of agreement involved (see Question 30).
If only one party is granted the right to terminate the agreement, there is a risk that courts will find the agreement abusive and grant the other party the right to terminate the agreement (the court analyses the facts on a case-by-case basis).
Any reason for termination that does not comply with the general principle of good faith may be deemed unenforceable under Brazilian law (depending on the facts).
The supplier has no implied rights to continue to use licensed IP rights after termination or expiration of the agreement, although the parties can allow for this in the agreement (see Question 34).
The supplier generally retains title to its know-how, that is, confidential information disclosed by the supplier and protected under the agreement's confidentiality obligations. On termination or expiry of the outsourcing, the customer is normally required to stop using the know-how and maintain its confidentiality (although the parties can allow the customer to continue using certain of the know-how).
If the supplier licensed the know-how to the customer under a separate agreement that was registered with the PTO, the supplier cannot retain the know-how on termination of the agreement. This is because the PTO does not recognise the concept of a technology licence and considers the technology to have been permanently transferred to the recipient.
Contractual liability is based on three requirements:
Wilful misconduct or a negligent act or omission.
Evidence of the damage caused.
A connection between the negligent act and the damage.
Indemnification is only due if these requirements are met and, in this case, liability cannot generally be excluded. However, this only covers:
Losses arising directly and immediately from the contractual breach.
Profits that could have been reasonably obtained if the contractual breach had not occurred.
Pain and suffering (moral damages).
Moral damages are only awarded for breach of contract where serious damage has been done to the image or personality rights of the other contracting party. Any other indirect, consequential or punitive damages are not available.
In IT contracts, contractual provisions are void if they purport to exempt either party from liability regarding claims brought by third parties as a result of software imperfections, software defects or copyright infringement (Brazilian Software Act (Act No 9,609/1998)).
Liability for torts, environmental risks, consumer contracts or the supply of products in the market place cannot be excluded under Brazilian law.
Brazilian courts normally accept limitation of liability provisions in commercial contracts as valid and enforceable, provided that:
Both contracting parties are legal entities and have negotiated the limitation.
The limitation is reasonable, that is, the cap is not so low that it would be considered a disclaimer.
There is a justification for the limitation and there is consideration or a reduction in costs in return for the limitation.
Damages are not caused by a high level of negligence or wilful misconduct.
The limitation does not violate Brazilian public policy rules (for example, a limitation on liability for damage to the environment).
The courts define reasonable limitation on a case-by-case basis, and do not uphold limitation of liability provisions that are excessively low in relation to the risks involved in the transaction. In addition, if there is a great discrepancy between the party's negligence and the damages caused, the courts may reduce the monetary compensation due (Brazilian Civil Code).
The parties to an agreement can agree on contractual penalties or liquidated damages for delay in performance, partial performance or breach of contract. The enforceability of these provisions depends on the following:
The parties must have agreed on the liquidated damages before the breach of contract occurred.
Liquidated damages do not apply in cases of breach due to force majeure events, unless otherwise expressly agreed by the parties (Civil Code).
Liquidated damages cannot exceed the contract price.
Where the breached obligation has been partially fulfilled, or if the liquidated damages agreed to by the parties are excessively high in view of the purpose and the nature of the contract, the court will reduce the amount to be paid to the non-breaching party.
The parties can specify in the agreement that the liquidated damages clause does not prevent the claiming of additional indemnification for damages arising from a breach of contract. If so, the amount of liquidated damages specified in the contract is deemed to be the minimum amount of indemnification available. If the damages exceed the cap, it is possible to recover additional indemnification from the breaching party.
Both supplier and customer are jointly liable for violations of consumer rights (CDC).
Where the customer transfers assets to the supplier, the supplier is deemed to have received income equal to the assets' fair value, to the extent that the supplier does not pay fair consideration.
The customer is subject to income tax levied on any capital gain it receives.
However, the transfer of assets from a customer to a supplier rarely occurs in an outsourcing transaction. Instead the parties usually enter into a free lease or a loan.
If employees are transferred to the supplier, the supplier is responsible for withholding payroll taxes and social security contributions, as well as paying and depositing other taxes and social contributions. The customer and supplier remain jointly liable for outstanding labour and social security debts.
There are two forms of VAT in Brazil:
Federal excise tax (Imposto sobre Produtos Industrializados (IPI)). IPI is levied on:
industrial products, when they leave the plant where they were manufactured;
imported industrial products, on their import or resale by the importer.
IPI rules allow the tax paid on previous transactions in a given production chain to be offset against future charges. In an outsourcing transaction that qualifies as a tolling arrangement (the customer purchases only the raw materials and sends them to the supplier for manufacturing, and the final products are returned to the customer's premises), it is possible to suspend the IPI levied on inputs sent by the customer to the supplier, provided that the industrial products return to the customer. If so, the customer does not receive an IPI credit to offset its sales and the IPI is ultimately charged on the sale of the manufactured product by the customer. IPI rates vary:
depending on how essential a product is for consumers and for the development of the country;
in accordance with the product's tax code, as determined by the harmonised system set by the Mercosul Common Nomenclature (no menclatura comum do Mercosul (NCM)).
State sales and services tax (Imposto Sobre Circulação de Mercadorias e Serviços (ICMS)). ICMS is another value added tax on sales and services, similar to IPI, payable on:
the importation of products into Brazil;
the sale or transfer of products within Brazil;
certain communications and intra- and inter-state transportation services.
ICMS rules allow the tax paid on previous transactions in a given distribution chain to be offset against future charges. It is a state tax and its regulation varies from state to state within Brazil. In an outsourcing transaction that qualifies as a tolling arrangement, most states suspend ICMS on inputs sent by the customer to the supplier, as long as the products return to the customer. If so, the customer does not get an ICMS credit to offset its sales, and ICMS is charged only over the amount related to the inputs and services added by the supplier. The remaining ICMS is then ultimately charged on the customer's sale of the manufactured product. The ICMS rate applicable in the main states of Brazil is 18%.
Services provided by a supplier to a customer under the outsourcing agreement may be subject to municipal services tax (impostosobre services) (ISS). ISS rates can vary between 2% to 5%, depending on the municipality in which the taxpayer is located.
There are no applicable stamp duty taxes.
There are no specific provisions on outsourcing that affect corporate income tax.
Qualified. Brazil, 1996
Areas of practice. Corporate, telecommunications and IT.
Qualified. Brazil, 1997
Areas of practice. Telecommunications, public procurement, IT and IP.