Doing Business in Brazil in 2026

Employment law and employees: Understanding Brazilian worker protections

Employment law in Brazil, codified in the Consolidation of Labor Laws (CLT), is among the strictest in the world. Brazilian labor courts have traditionally ruled in favor of employees, which creates an environment for foreign employers where even a minor administrative mistake can have serious financial consequences. The law provides that an employment relationship exists in fact whenever four elements are met: personal performance of work, regularity, subordination, and remuneration. Once these elements are present, the relationship cannot be contractually “renamed.”

One of the biggest risks is so-called “pejotização” – an attempt to hire workers as independent legal entities (PJ) so that the company avoids payroll charges. If a court finds that the contractor in fact acted as an employee (was subordinate, had fixed working hours), the relationship will be retroactively reclassified as employment.

The company must then pay all outstanding contributions, benefits, and vacation entitlements for the entire duration of the relationship, plus significant penalties. ARROWS attorneys regularly handle cases where foreign owners unknowingly created this “hidden employment,” and fines for an unregistered employee can reach thousands of reais per person.

Mandatory employee benefits: The hidden economic reality

Employee costs in Brazil are far from limited to gross salary. Employers must contribute to a range of funds that effectively increase labor costs by 60–80% compared to gross pay.

Each month, the employer pays 8% of gross salary into the employee’s restricted account in the FGTS fund. Employer-paid social security contributions (INSS) typically amount to 20% of the payroll base, with additional contributions added on top.

In addition, there are mandatory benefits:

• 13th salary (Décimo Terceiro): Mandatory, paid in two installments.
• Vacation and bonus: Entitlement to 30 calendar days of vacation per year with a bonus of 1/3 of salary.
• Transport and meal allowances: Employers are required to contribute to commuting costs and often also to meals.

ARROWS attorneys can help you structure remuneration and benefits to ensure compliance with the applicable sector collective bargaining agreements (CCT), which are very strong in Brazil and often impose obligations beyond statutory requirements.

Termination of employment: From hiring to dismissal

The standard in Brazil is an open-ended employment contract. Fixed-term contracts are permitted only exceptionally (seasonal work, replacement, projects) and for a maximum of 2 years. The probationary period may last no more than 90 days and cannot be extended. We address the practical risks of terminating employment during probation (including dispute prevention) in more detail in How to terminate employment during probation without the risk of a court dispute.

Termination without cause is very expensive for employers. You must pay:

• Notice period: At least 30 days, plus 3 days for each year worked for the company (max. 90 days).
• FGTS penalty: The employer must pay the employee a penalty equal to 40% of the total amount deposited into their FGTS account.
• Other entitlements: A pro-rata portion of the 13th salary and unused vacation with the bonus.

Dismissing an employee “on the spot” for gross misconduct is possible only for serious offenses (theft, drunkenness, competition), and the burden of proof lies with the employer. Brazilian courts often invalidate such dismissals if they are not documented perfectly.

Foreign companies also often underestimate working time records, which are mandatory for companies with more than 20 employees. Overtime is paid with a surcharge of at least 50%, and the limit is 2 hours per day. Missing records lead courts to automatically uphold an employee’s claims for overtime pay.

Tax system: Navigating a complex and changing reality

2026 is a watershed year in Brazilian tax law. A pilot phase of the tax reform comes into effect, aiming to replace five existing taxes with a new dual VAT system:

• CBS (federal tax on goods and services).
• IBS (state and municipal tax on goods and services).

In 2026, a transitional period begins in which CBS is collected at 0.9% and IBS at 0.1%, and the taxpayer may credit these amounts against existing PIS/COFINS contributions. This means that in 2026 companies must handle the administration of both the old system and the new reporting system.

Standard corporate taxation (the Lucro Real regime) includes:

• IRPJ (Income Tax): 15% + a 10% surcharge on profits above BRL 240,000 per year.
• CSLL (Social Contribution on Net Profit): 9%.
• Effective profit taxation is therefore around 34%.

Imports of goods are subject to import duty (II), an industrial tax (IPI), social contributions (PIS/COFINS-Import), and the state tax ICMS. Due to the cascading effect under the old system, the total import burden can reach 60–100% of the value of the goods.

Watch out for dividends, which have historically been exempt from withholding tax. However, the introduction of dividend taxation is being intensively prepared as part of the “second phase” of the tax reform. Although the law may not yet be fully effective at the beginning of 2026, this risk must be factored into your business plan.

Commercial contracts: From drafting to enforcement

Brazilian law recognises the principle of freedom of contract, but it is strongly limited by the principles of “public order” and the “social function of the contract”. This means that certain provisions (especially those disadvantaging the weaker party or violating Brazilian laws) may be declared invalid by a court even if you have signed them.

A key rule for foreign entrepreneurs is language. For a contract to be enforceable before a Brazilian court, it must be in Portuguese. If it is drafted in a foreign language, it must be translated for court proceedings by a sworn translator (tradutor juramentado) in Brazil.

Contracts in English are common in business practice, but for legal certainty we recommend bilingual versions with a clause stating that, in the event of a dispute, the Portuguese version prevails. The choice of law and jurisdiction is then crucial for any dispute resolution.

Brazilian courts are notoriously slow, so for larger contracts we strongly recommend an arbitration clause. Brazil has a modern arbitration act and is a signatory to the New York Convention.

If you choose arbitration, it is critical to specify the arbitration “seat”. If the seat is in Brazil, the award is immediately enforceable, whereas a foreign award must first be recognised by the Superior Court of Justice.

Company formation and management: From planning to implementation

For foreign investors, the most common forms are Sociedade Limitada (Ltda.) – similar to a Czech s.r.o., and Sociedade Anônima (S.A.) – similar to a Czech a.s. The Ltda. form is administratively simpler and cheaper to manage.

A key requirement is a local representative. A foreign shareholder cannot act as the company’s direct executive director (statutory representative) unless they have permanent residence in Brazil. They must appoint a representative (a Brazilian citizen or resident) with a power of attorney who will act on behalf of the company and receive service of process.

This representative bears significant personal liability, especially in tax and employment matters. In addition, since 2019 it has been mandatory to declare the ultimate beneficial owner (UBO) down to the level of natural persons.

If a foreign company fails to document its ownership structure, its tax ID (CNPJ) will be suspended and its bank accounts will be frozen. Establishing a branch of a foreign company in Brazil is administratively very demanding and is almost never used in practice; the standard approach is to establish a subsidiary.

Compliance, ethics and anti-corruption measures

Brazil has very strict compliance legislation. The Clean Company Act introduces strict liability of legal entities for corrupt conduct. This means the company is liable for the acts of its employees or representatives even if management was unaware of the corruption.

Another key regulation is the LGPD (Lei Geral de Proteção de Dados) – Brazil’s equivalent of the GDPR. It applies to all companies processing the data of individuals in Brazil, and fines for breaches can reach up to BRL 50 million per violation.

Related compliance questions

1. Does the Brazilian anti-corruption law apply to a foreign parent company?
Yes, if it has a branch or representation in Brazil, or if it is proven that it benefited from corrupt conduct in Brazil.

2. What are the AML (anti-money laundering) requirements?
Banks require detailed KYC (Know Your Customer) processes. When opening an account, you will need to provide not only your passport but also complete corporate documents, financial statements, and evidence of the source of funds.

Litigation and disputes: Navigating the Brazilian legal system

The court system is overloaded; a civil dispute at first instance takes years, and appeal proceedings take additional years. Therefore, prevention and alternative dispute resolution are a priority:

• Arbitration: As mentioned, this is the preferred option for international trade.
• Mediation: It is strongly supported in Brazil; courts often order a mandatory mediation hearing before proceedings are commenced.

If you must sue a Brazilian entity, be prepared for an obligation to post security for legal costs (if you have no assets in Brazil). Enforcement of foreign judgments in Brazil requires a homologation process before the STJ, which reviews formal requirements and compliance with public policy.

Conclusion

Doing business in Brazil in 2026 offers enormous opportunities, but it requires professional preparation. The combination of the new tax reform, rigid employment law, and bureaucratic requirements for foreign investors means that “improvisation” does not pay off here.

The lawyers at ARROWS advokátní kancelář specialise in international law and have experience navigating the Brazilian environment. We are insured for damages up to CZK 400 million, which gives you peace of mind.

Contact us at consultation@arws.cz and arrange an initial consultation before you take your first binding steps in the Brazilian market.

Read also:

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• Flexible Employment in the Czech Republic: Legal Pitfalls and Compliance Risks
• Summary Termination of Employment: Legal Requirements and Employer Risks
• How to Structure Intercompany Agreements in a Holding to Avoid Disputes and Tax Risk
• How Israeli firms can navigate Czech courts: Practical guidance on litigation