How angel investors can supply funds to Brazilian startups
With the enactment of a new piece of legislation (IN RFB n. 1719/17 combined with Complementary Law n. 123, as amended), Brazilian authorities completed the legal framework as regards how angel investors can supply funds to Brazilian start-ups and the applicable taxation on their capital return.
Firstly we would like to point out that such local start-ups, to be covered by the new legislation, must meet some legal requirements considering their corporate and financial structure, such as having a maximum yearly turnover of BRL 4.8 million (around USD 1.5 million/€ 1.3 million).
Furthermore, such local start-ups cannot (i) take part in other incorporated entities as equity investors; or (ii) be incorporated as privately-held corporations ("sociedades por ações").
In a nutshell, the new legislation establishes that angel investors (usually a kind of investor that is focused more on helping startups to take their first steps, rather than obtaining immediate profits from their business) are able to channel funds to local start-ups without receiving equity in return.
Therefore, such angel investors will not be considered as an equity-holder and will be protected from any judicial decision trying to pierce the corporate veil of the local entity to reach their investments or assets.
On the other hand, considering that an angel investor will not have a say in the management of the business, it will be exempted from the effects of any bankruptcy/reorganization procedures involving the local entity.
Even though angel investors are not considered equity-holders, the legislation allows that they receive up to 50% of the net profits of the local start-ups, for a period of up to five years.
It is very important to highlight that such participation in the profits of the start-up would result in a withholding income tax varying from 15% to 22,5%, depending on the time investors’ money will remain in the local vehicle.
We point out the above-mentioned regulation does not prevent parties from regulating their interests in local investments by using more traditional ways to directly invest in Brazilian entities, such as direct lending, investment in debentures/notes, or direct investments resulting in equity interests in the start-up company. (Source: Migalhas International)