Market Entry Models in Brazil After the Tax Reform: What Foreign Companies Need to Know

Illustration of Brazil's Tax Reform and foreign market entry models

Entering the Brazilian market has always demanded strategic foresight. As one of the world’s largest economies, with a rapidly expanding consumer base and strong sectors such as agribusiness, energy, healthcare, and technology, Brazil continues to attract international investors. However, the complexity of its former regime, characterized by overlapping levies and varying regulations across states and municipalities, historically made selecting the optimal market entry structure a significant challenge.

The Tax Reform enacted in 2023—currently being phased in through 2033—marks the most significant overhaul of Brazil’s fiscal landscape in decades. While the reform leaves existing market entry structures intact, it fundamentally redefines the strategic criteria foreign companies must evaluate when determining the most suitable approach for expansion.

What Are the Entry Models in Brazil?

Before assessing the implications of the Tax Reform, it is essential to outline the primary market entry structures available for foreign companies seeking to establish operations in Brazil.

Subsidiary
The subsidiary remains the most prevalent market entry model. Structured as a Brazilian legal entity, wholly owned by the foreign parent company, it possesses its own legal personality. This model provides greater autonomy for strategic decision-making, streamlines compliance with domestic regulations, and facilitates access to local capital markets.

Branch office
A branch office functions as a direct extension of the foreign parent company and lacks a separate legal personality. While this structure can simplify governance, it also exposes the parent company to legal and financial liabilities in Brazil, which makes it more suitable for lower-risk or limited-scope operations.

Joint ventures
Joint ventures involve strategic partnerships with local companies and are particularly appealing in highly regulated sectors such as energy, infrastructure, and healthcare. This model enables risk-sharing, leverages local market expertise, and facilitates compliance with sector-specific regulatory requirements.

Distributors and commercial representatives
Market entry through distributors or commercial representatives is a frequent first step for testing the Brazilian market. While this approach entails lower operational and financial exposure, it also limits the foreign company’s control over brand positioning and customer experience.

All of these entry structures remain available. However, under the new tax system, their assessment is increasingly shaped by strategic business considerations rather than intricate tax optimization. Factors such as logistics efficiency, market accessibility, and the availability of qualified talent have become central to determining the most suitable path for expansion.

What Changes with the Tax Reform?

The former system, based on five different levies (IPI, PIS, Cofins, ICMS, and ISS), is being replaced by two value-added taxes and a selective tax:

CBS (Contribution on Goods and Services), under federal jurisdiction.
IBS (Tax on Goods and Services), jointly administered by states and municipalities.
Selective Tax (IS), applied to goods and services harmful to health or the environment.

This reform eliminates cascading taxation, broadens the application of tax credits throughout the supply chain, and mitigates structural distortions such as the long-standing “fiscal war” between states. It also aligns Brazil more closely with OECD practices, as the adoption of a dual VAT model reflects widely accepted international standards.

A critical consideration is the transitional period extending to 2033. During this phase, the former levies will gradually coexist with the new tax framework, which requires careful planning to avoid distortions in contracts, supply chains, and cash flow. According to KPMG, specific industries face particular challenges: exporters will face new border taxation rules, retailers must recalculate margins under a single IBS rate (estimated between 25% and 30%), and technology and digital services companies will need to adapt to interstate taxation of digital services.

Impact on Entry Models

Subsidiaries

The appeal of establishing subsidiaries is significantly augmented. The implementation of destination-based taxation and the full crediting of input taxes reduce regional disparities and create greater financial predictability. This allows companies to choose locations based on robust infrastructure, consumer proximity, and innovation hubs, rather than tax incentives.

Branches

For branches, the streamlined tax system is anticipated to yield a reduction in administrative overhead and a decrease in legal disputes, which have historically been significant under the previous fragmented fiscal regime. While the parent company still bears direct liability, the improved legal certainty mitigates part of the risk.

Joint ventures

Joint ventures will now undergo a more strategic evaluation. Historically, many were structured to benefit from local tax incentives. As tax harmonization eliminates those distortions, the focus shifts to the partner’s ability to add market knowledge, regulatory expertise, and complementary resources.

Distributors and representatives

Distributor or representative models, frequently chosen as an initial step, also benefit from diminished compliance complexities under the new tax framework. This makes market entry less costly. However, given the limited control over operations and branding, companies must carefully assess when to transition to a more robust structure, such as a subsidiary.

Operational challenges

There are also operational challenges to consider. For instance, the availability of tax credits will be contingent upon the preceding stage of the supply chain remitting its tax obligations, a factor that could impact liquidity and critical financial metrics such as EBITDA. For companies in retail, logistics, and digital services, this will require robust ERP integration and near real-time reporting capabilities to ensure compliance, which could also affect working capital management. Foreign companies must therefore adjust accounting systems and invest in digital compliance infrastructure to meet the new demands of the regime.

Investor Confidence Is Rising

Even during its transition phase, the Tax Reform has demonstrably enhanced perceptions of Brazil as an attractive investment destination. In 2024, Foreign Direct Investment (FDI) reached US$ 71.1 billion, a 13.8% increase compared to 2023, according to Brazil’s Central Bank. The OECD ranked Brazil as the second-largest recipient of FDI worldwide, behind only the United States.

Additionally, at the 7th Brazil Investment Forum (BIF 2024), over BRL 54 billion in new projects were announced, confirming investor confidence in the changing regulatory and tax landscape. These figures demonstrate that, while there will be adaptation costs, the long-term forecast is of a more stable, predictable, and competitive market.

Conclusion

The Brazilian Tax Reform does not eliminate existing entry models but redefines the logic behind their selection. By simplifying the system and increasing legal certainty, it provides multinationals with greater predictability and freedom to prioritize business strategy over tax complexity.

This new scenario is likely to attract more foreign companies, consolidating Brazil’s position as one of the most attractive long-term investment destinations. For global investors, the message is clear: now is the time to reassess expansion strategies and align entry models with the opportunities created by the new Brazilian tax system. Partnering with experts like ILM Group can help navigate this transition efficiently, turning regulatory change into a strategic advantage.