Seeking to encourage innovative activities and productive investments, the angel investor concept was introduced into Brazilian law. This type of funding is applied for contributions in companies classified as microenterprise or small business, a legal regime generally adopted by startups in Brazil.
Up to that time, investments in innovation companies were performed mainly through convertible loan and share purchase contracts, which discouraged the investment considering the partnership risks.
In turn, the angel investor is not classified as a partner and he or she does not have management or voting rights before the company, reducing the liability risks regarding company contingencies.
The Brazilian angel investor contribution does not incorporate the startup share capital and there are basically three types of remuneration: a) Redemption of contributions performed after the minimum period of 2 years of the investment; b) Remuneration for the contributions through participation in the distributed results, not exceeding 50% of the company’s profits, for the term of 5 years; and c) Contributions ownership sales to third parties or to the partners.
Aiming to regulate a better tax regime to such remuneration, the Brazilian Federal Revenue stated a special treatment for the angel investor. The main benefit announced by the Tax Authorities was the withholding tax into the income earned on the contributions under a regressive rate from 22.5% to 15%, depending on the term of the investment. The 15% tax rate is applicable to investments with terms longer than 720 days and the 22.5% would apply to agreement terms shorter than 180 days.
In comparison with the models previously used for startup investments, i.e. loans or share purchase, we cannot affirm that the angel investor tax regime will always be the most favorable.
Regarding the loan taxation, there is no significant benefit to the angel investor tax regime since loan income is also taxed at a regressive rate of 22.5% to 15% depending on the agreement term. However, loan transactions can trigger Tax on Financial Operations (IOF) depending on the term of the contract.
Concerning the share purchase taxation, remuneration through dividends are tax exempted. On the other hand, the gain on the share’s redemption is taxed at a progressive rate of 15% to 22.5% depending on the amount of the gain.
Therefore, although the legislation purpose is to improve innovation, the special tax regime does not necessarily reflect relevant benefits for angel investor investments. From a tax perspective, a complete analysis of the intended structure is required, such as the term of the investment and the value of the gain on eventual sale, to verify which investment instrument would be most interesting for optimizing the tax burden. Business issues and corporate risks for the investor should also be considered.