Corporate Law & Financial and Capital Markets
Escrow and holdback mechanisms in Brazilian M&A
Guilherme Chambarelli
Published on
3 min read
In this article
In Brazilian M&A, escrow and holdback are the two most common ways to secure the seller’s indemnity obligations. In an escrow, part of the price is deposited with a bank in a blocked account and released according to the contract. In a holdback, the buyer simply retains part of the price and pays it later if no claims arise. Both work under Brazilian law; the choice depends on the parties’ bargaining power, the expected contingencies and the seller’s appetite for credit risk on the buyer.
Key points
- Brazilian targets often carry tax, labor and regulatory contingencies, which is why price protection is common.
- Escrow protects both sides through a neutral bank; holdback favors the buyer.
- Release schedules usually follow statutes of limitation for the main risks.
- Foreign sellers must consider FX rules and capital gains withholding.
- Clear claims procedures avoid disputes over the escrowed amount.
Why are escrow and holdback so common in Brazil?
Brazilian companies can carry contingencies that surface years after closing: tax assessments (the authorities generally have five years to assess), labor claims by former employees, and environmental or regulatory issues. A contractual indemnity is only as good as the seller’s ability to pay. When the seller is an individual, a fund about to distribute proceeds or a foreign party with no assets in Brazil, buyers ask for a mechanism that keeps money within reach.
Escrow vs. holdback: how do they compare?
| Feature | Escrow | Holdback |
|---|---|---|
| Who holds the money | A bank, under an escrow agreement signed by both parties | The buyer |
| Seller’s credit risk | Low: funds are segregated | Seller depends on the buyer’s solvency |
| Cost | Bank fees and onboarding (KYC) | Minimal |
| Interest on funds | Usually invested and accrued to the beneficiary | Depends on negotiation |
| Typical use | Balanced deals, private equity, foreign sellers | Buyer-led deals and smaller transactions |
How is an escrow structured in practice?
- Escrow agreement with a Brazilian bank, signed by buyer and seller, defining release instructions.
- Amount and term: usually a percentage of the price, released in tranches over time.
- Claims procedure: notice of claim, deadline for the seller’s response, and what happens to disputed amounts.
- Joint instructions or decision: funds are released on joint instructions or upon a final arbitral or court decision.
- Investment policy: conservative investments and allocation of yield.
Banks require full onboarding of both parties, which can take weeks for foreign entities. Start this process early so it does not delay closing.
Tax and FX points for foreign parties
When a non-resident sells a stake in a Brazilian company, Brazilian capital gains tax applies, and the buyer (or its attorney-in-fact in Brazil, when the buyer is also foreign) is responsible for withholding and paying it under Article 26 of Law 10,833/2003. The timing of taxation for escrowed or deferred amounts depends on how the price is structured and should be analyzed before signing. On the FX side, the investment must be properly reflected in the Central Bank’s foreign capital records under Law 14,286/2021, and parties must decide whether the escrow sits in Brazil, in reais, or abroad.
Drafting tips that avoid disputes
- link each release date to the risk it protects (for example, tax periods still open);
- define what counts as a valid claim and the documents required;
- agree on how to treat claims still under discussion at the release date;
- align the escrow with caps, baskets and survival periods in the purchase agreement;
- choose arbitration with clear rules to resolve disagreements over releases.
Frequently asked questions
Is escrow legally recognized in Brazil?
Yes. There is no specific escrow statute, but escrow agreements are valid contracts and widely offered by Brazilian banks.
Can escrow be combined with earn-out?
Yes. Many deals combine an escrow for indemnities with an earn-out for price adjustment. The contract must define whether claims can be offset against earn-out payments.
What about warranty and indemnity insurance?
W&I insurance is available in Brazil and can reduce or replace escrow, but policies usually exclude known contingencies, which remain a matter for specific indemnities.
How Chambarelli Advogados can help
Our Corporate Law & Financial and Capital Markets team and our Foreign Desk negotiate price protection mechanisms and coordinate tax and FX aspects for foreign buyers and sellers. Book a meeting with one of our partners.
Informational content, updated October 2026. It does not replace advice on your specific case.
