Distribution or Commercial Representation? A Practical Guide for Companies Seeking To Grow in Brazil

Two models, one same objective, but differences that make all the difference

Brazil ranks among the largest consumer markets in the world. Entering this market, however, requires more than a competitive product and a willingness to invest. Above all, it requires defining the legal and commercial structure best suited to enable sales in an efficient, secure manner aligned with the company’s strategic objectives. One of the most significant decisions a foreign company must make when starting commercial operations in Brazil is deceptively simple: should it engage a commercial representative or a distributor? Yet this choice carries profound implications for control, risk, flexibility, and cost.

At first glance, the two models may appear equivalent. In both cases, a local partner brings the product to market. However, the differences between them are structural, and choosing the wrong model can compromise everything from the company’s commercial strategy to the financial health of the operation, particularly if the partnership needs to be restructured or terminated in the future.

This article compares the two arrangements in light of Brazilian law, in an accessible manner, focusing on the practical consequences of each choice.

The core distinction: intermediary or independent reseller?

The starting point for understanding the two models is a distinction that is simple, yet fundamental: in commercial representation, the partner acts as an intermediary; in distribution, it acts as an independent reseller.

In commercial representation, the representative presents the product, negotiates terms, and solicits orders, but it is the supplier itself that sells, invoices, and delivers the goods. The representative functions as an extension of the company’s sales team, acting on its behalf and earning a commission on the transactions it completes. It never purchases the product; it merely facilitates the sale.

In distribution, the partner purchases the product and resells it on its own account. It bears the inventory, assumes the credit risk of its own customers, and operates with commercial autonomy. From the supplier’s perspective, this is akin to selling to a customer who, in turn, resells to others.

This distinction between intermediary and independent reseller is the principal element differentiating the two models, with significant implications across the legal, commercial, operational, and financial spheres.

How commercial representation works in Brazil

Independent commercial representation in Brazil is governed by Law No. 4,886 of December 9, 1965, as amended by Law No. 8,420 of May 8, 1992. It is a regime that affords significant legal protections to the representative, which often comes as a surprise to foreign companies accustomed to legal systems with less legislative intervention in commercial relationships.

The commercial representative is an independent professional, not an employee, yet the law grants it a series of rights that cannot be waived by contractual clause. It must be registered with the Regional Council of Commercial Representatives (CORE) for its region, which in turn is affiliated with the Federal Council of Commercial Representatives (CONFERE). This registration is mandatory and is one of the first matters to verify when engaging a representative in Brazil.

In practice, the representative operates under the terms set out in the agreement, that is, within a given territory, for a specific customer segment, and for a fixed or indefinite term. Once a sale is concluded, the representative becomes entitled to the commission agreed under the contract. As a general rule, payment of the commission is contingent upon the principal’s actual receipt of payment from the customer, subject to the applicable contractual and legal provisions.

Under this model, the supplier retains direct control over the sale price, commercial terms, and credit policy. It is the supplier that decides whether to accept or reject orders solicited by the representative. This control is an advantage where the company needs consistency in its pricing strategy and a direct relationship with the end customer. It is, however, also a responsibility, as the supplier bears the commercial risk of the operation.

An aspect frequently underestimated by foreign companies is that unilateral changes to essential elements of the commercial relationship, such as commission rates, territory, or customer base, may constitute a breach of contract and give the representative grounds to terminate the agreement, triggering the corresponding indemnity provided by law. This is a risk that many foreign companies fail to anticipate when attempting to “adjust” the commercial relationship during the term of the agreement, whether due to a change in strategy, a renegotiation of margins, or a reorganization of the sales department.

How distribution works in Brazil

The distribution agreement, in the sense most widely used in the Brazilian market, is structured as a purchase-and-resale relationship. The distributor acquires the products from the supplier and markets them on its own account, in its own name, and under its own commercial policy.

The Brazilian Civil Code governs the distribution agreement in Articles 710 to 721, establishing the general guidelines applicable to this type of arrangement. Under this model, the distributor has access to the supplier’s products and places them on the market, bearing the costs and risks of the commercial operation. In many cases, the distributor also invests in infrastructure, inventory, sales staff, and technical support, meaning that it bears real financial exposure in the relationship.

From the supplier’s perspective, distribution is a means of transferring commercial risk to the partner. The supplier sells to the distributor, and from that point on, whatever happens in the market becomes the distributor’s responsibility. If a customer of the distributor fails to pay, that is the distributor’s problem, not the supplier’s. This risk transfer is one of the main reasons many foreign companies choose distribution when entering Brazil.

Another central aspect distinguishing distribution from representation is how the partner is compensated. Whereas the representative earns a commission, a percentage of the value of the completed sale, the distributor receives no commission whatsoever from the supplier. Its compensation is the commercial margin itself, that is, the difference between the price it pays to purchase the product from the supplier and the price at which it resells it on the market. The larger that difference, the greater its profit. This means that the distributor has full autonomy, and full responsibility, to set its own resale pricing policy, and that the supplier, in negotiating the sale price to the distributor, is indirectly determining the margin available for the partner to operate. A narrow margin may discourage the distributor from investing in market development; a generous margin may create pricing inconsistencies in the end market. This balance is one of the most sensitive points in structuring a distribution agreement.

This structure, however, entails a significant trade-off: the supplier loses part of its control over the partner’s conduct in the market. The distributor sets its own resale prices, selects its own customers, and manages its own commercial strategy. Depending on the agreement and the sector, the supplier may have little visibility into what happens to its product once it leaves the warehouse.

The differences that shape the choice

The first relevant difference is the allocation of commercial risk. In representation, the supplier remains the direct seller and bears the risk of non-payment. In distribution, that risk shifts to the partner.

The second difference is control over commercial strategy. In representation, the supplier controls prices, terms, and conditions of sale. In distribution, once the sale to the distributor is made, the supplier largely loses that influence over the end market.

The third difference is visibility into the customer. In representation, the supplier knows who the end customers are, since it is the supplier that invoices them. In distribution, the supplier’s customer is the distributor, and the distributor’s own customers may be unknown to the supplier, which can be a problem in sectors where the relationship with the end customer is strategically important.

The fourth difference, and often the most significant, is the applicable legal regime and the consequences of terminating the agreement.

Ending the partnership: where the greatest surprise lies

One of the aspects that most surprises foreign companies entering the Brazilian market is the cost of terminating a relationship with a commercial representative. Law No. 4,886/1965 establishes a set of financial obligations that can accumulate significantly and that cannot be waived by contractual clause. These are matters of public policy: they apply regardless of what the agreement provides.

Prior notice and its consequences

For representation agreements of indefinite duration, the law requires the principal to give the representative prior notice before terminating the relationship. The minimum notice period is thirty days, subject to the particularities set out in the applicable legislation and the case law developed on the matter. The consequence of failing to give adequate prior notice is direct: the principal becomes liable to pay the representative an amount equivalent to one-third of the commissions earned by the representative over the preceding three months. In other words, silence or haste in terminating the relationship comes at a cost.

The one-twelfth indemnity: the principal financial burden

Where the principal terminates the agreement without just cause, that is, where the termination does not fall within the grounds recognized by law as sufficient to justify it, the principal becomes liable to pay the representative a minimum indemnity equivalent to one-twelfth of the total commissions paid over the entire term of the agreement.

This calculation deserves particular attention. The basis for calculation is not the commissions earned in the last year, nor any specific period, but all commissions paid since the inception of the agreement. In a long-standing commercial relationship with a strong sales volume, this amount can be substantial. As an illustration: if, over ten years of partnership, the representative earned a total of R$3,000,000.00 in commissions, the minimum indemnity owed would be R$250,000.00, calculated on the historical total of the relationship and adjusted for inflation. The longer and larger the partnership, the greater the indemnity.

Commissions on pending transactions

In addition to prior notice and the one-twelfth indemnity, the representative retains the right to commissions on transactions that were already underway at the time of termination, even if the sales are completed and invoiced after the agreement ends. If the representative had secured a significant order that was pending approval or delivery, the corresponding commission remains due. This obligation can be underestimated in sectors with long sales cycles, where many transactions are open simultaneously.

When the obligations accumulate

The most critical point is that these three obligations (prior notice, the one-twelfth indemnity, and commissions on pending transactions) may all arise at the same time. A poorly planned termination, without adequate notice and without a valid finding of just cause, triggers all three charges simultaneously. In well-established partnerships, the total amount can come as an unwelcome surprise to a company that failed to anticipate this liability when planning its exit.

When termination is for just cause, and what that changes

The law sets out circumstances in which the principal may terminate the agreement without being liable for the one-twelfth indemnity. These are the recognized just causes for termination, set out in Article 35 of Law No. 4,886/1965, which include: abandonment of the activity by the representative; conduct that discredits the principal commercially; a final criminal conviction for an offense affecting professional honor; and the representative’s own breach of its contractual obligations. In these cases, the principal may terminate the agreement without being liable for the statutory indemnity, although it remains liable for commissions on transactions already concluded.

It is essential, however, that the just cause be genuine, documented, and legally sustainable. Attempting to characterize a termination motivated by business convenience as one for just cause is a frequent and high-risk error: if a court rejects that characterization, the principal will owe the full indemnity, plus interest and monetary adjustment.

The reverse risk: when the representative terminates and still retains a right to indemnity

There is a situation that surprises foreign companies even more: the representative, too, may terminate the agreement and still retain a right to the one-twelfth indemnity. This occurs when the termination is motivated by the principal’s own conduct. Article 36 of Law No. 4,886/1965 sets out the just causes that entitle the representative to terminate the relationship with a right to indemnity, including: a reduction in the representative’s scope of activity in violation of the agreement (including changes to its territory or customer base); a breach of exclusivity, where exclusivity had been contractually agreed; abusive pricing within the representative’s territory intended to hinder its regular activity; failure to pay the commission when due; and the occurrence of force majeure.

In practice, this means that a principal who unilaterally decides to reduce the commissions paid or to narrow the representative’s territory may be handing the representative the key to terminate the agreement, with a right to the full indemnity. This is a significant legal trap in moments of contractual renegotiation.

Distribution: a different regime, but not free of risk

The situation is different under a distribution agreement. The Brazilian Civil Code provides, in Article 720, that a party wishing to terminate a distribution agreement of indefinite duration must give the other party reasonable advance notice, which, in agreements involving continuous performance, is no less than ninety days. Where owed, the indemnity is calculated based on the investments made by the distributor over the course of the relationship. If the distributor has made significant investments (in infrastructure, personnel, training, or market exclusivity), such amounts may become relevant in a termination dispute. This regime is more flexible than that governing commercial representation, but it is not free of financial obligations, particularly in partnerships where the distributor made investments specifically on account of its relationship with the supplier.

In both cases, careful contractual planning at the outset of the relationship makes a substantial difference in the cost of any eventual termination. Poorly drafted clauses on term, exclusivity, and termination conditions are frequent sources of disputes.

When each model makes more sense

There is no universal answer. The choice depends on the product, the market, the partner’s profile, and the company’s strategic objectives.

Commercial representation tends to be more suitable where the supplier wants to retain direct control over prices and terms of sale; where the relationship with the end customer is strategically important and cannot be delegated to a third party with excessive autonomy; where the product has technical characteristics that require close interaction between the supplier and the end buyer; or where the company wants to build a market presence before setting up its own operational structure in Brazil.

Distribution tends to be more suitable where the product requires substantial local inventory that the supplier does not wish to fund or manage; where there is a high volume of transactions with dispersed customers, making direct management by the supplier impractical; where the credit risk of the target market is high and the supplier prefers not to assume it; or where the company wants to scale the market quickly with less operational exposure.

It is worth noting that the two models can coexist within a single company’s strategy. It is possible to adopt representation in certain regions or segments and distribution in others, depending on the local profile and the type of product involved. This combination, when well structured, can be an efficient way to balance control and scale.

Practical considerations for foreign companies

Beyond choosing the model, there are practical matters that deserve attention before entering into any agreement in Brazil.

Putting the agreement in writing is essential. Verbal contracts or informal arrangements are legally valid in Brazil but extremely risky in the event of a dispute. A written agreement with clear provisions on territory, exclusivity, term, compensation, targets, and termination conditions is the supplier’s principal instrument of protection.

Brazilian law tends to prevail. In agreements with representatives or distributors established in Brazil, Brazilian courts tend to apply local law regardless of what the agreement provides. This is especially relevant for commercial representation, whose legal protections are matters of public policy.

Exclusivity must be handled with care. In both representation and distribution, it is possible to grant the partner territorial exclusivity. This clause, however, must be carefully calibrated: exclusivity that is too broad may limit the supplier’s expansion; exclusivity that is too narrow may discourage the partner from investing in market development.

Prior due diligence on the partner is always advisable. Before formalizing any relationship, the foreign company should conduct a basic review of the prospective partner, covering tax compliance, market reputation, financial capacity, and compatibility with the company’s integrity policies.

Conclusion

The choice between commercial representation and distribution is not merely a legal decision, but a strategic one that will define how the company positions itself in the Brazilian market, what risks it assumes, how much control it retains over its brand and its customers, and what it will cost to adjust or terminate the partnership in the future.

Both models have their merits and their limitations. Representation offers control and a direct market presence, but requires close attention to the legal obligations imposed by Law No. 4,886/1965 and means the supplier retains the commercial risk. Distribution offers scalability and risk transfer, but reduces operational control and distances the supplier from its customer.

The choice between commercial representation and distribution should result from an integrated assessment of the company’s commercial objectives, the profile of the product, the desired degree of control over the market, its expansion strategy, and the legal risks it is willing to assume. More than a contractual matter, it is a strategic decision capable of directly influencing the mode of market entry, the pace of growth, and the cost of any future reorganization of the operation in Brazil.

References

BRAZIL. Law No. 4,886, of December 9, 1965. Governs the activities of independent commercial representatives. Brasília, DF: Office of the President of the Republic, 1965. Available at: https://www.planalto.gov.br/ccivil_03/leis/l4886.htm. Accessed: June 18, 2026.

BRAZIL. Law No. 8,420, of May 8, 1992. Amends Law No. 4,886, of December 9, 1965, which governs the activities of independent commercial representatives. Brasília, DF: Office of the President of the Republic, 1992. Available at: https://www.planalto.gov.br/ccivil_03/leis/l8420.htm. Accessed: June 18, 2026.

BRAZIL. Law No. 10,406, of January 10, 2002. Enacts the Civil Code. Brasília, DF: Office of the President of the Republic, 2002. arts. 710-721. Available at: https://www.planalto.gov.br/ccivil_03/leis/2002/l10406compilada.htm. Accessed: June 18, 2026.