Photo: Fabio Rodrigues Pozzebom/Agência Brasil

Brazil's Legal Framework for Startups has green light from the country's Senate; ecosystem remains unmet

The startup ecosystem in the country remains concerned with aspects left behind: the stock options' nature; tax equivalence; and tax simplification

The Legal Framework for Startups, a bill that aims to boost the startup ecosystem in Brazil, making the sector more competitive, received unanimous approval by the country’s Senate on Wednesday afternoon. There were 71 votes in favor and none against.

The draft, which included some amendments proposed by senators, will need to return to the House of Representatives for further analysis before going for presidential sanction.

After the merger of bills from 2009 and 2020 on the matter, Deputy Vinícius Poit presented to the House of Representatives in December his draft proposal, which received some changes compared to the first versions.

In the draft now approved by Senator Carlos Portinho, the draft’s rapporteur in the Senate, startups are defined as companies with innovative business models, which have up to 10 years of foundation [CNPJ registration] and BRL 16 million in annual revenue.

“It is totally an advance. Considering startups as a different type of business makes it possible to create specific legislation for them without compromising all companies in the economy,” says Rodrigo “Kiko” Afonso, executive director of Dínamo, a public policy advocacy group for startups in the country.

For the Brazilian startup ecosystem, although the Legal Framework gathered positive aspects for improving the sector; other important features were left behind.

“It took 6 years of struggle to see the Startups Legal Framework being approved completely outdated, disregarding the aspects considered essential by the [startups] ecosystem,” says Afonso.

“We are already in dialogue with the government and legislative authorities to assess ways for our claims to be met in the near future,” he adds.

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What is missing, according to experts

For Marcelo Frullani, a lawyer and expert in digital law, startups and personal data protection, among the points considered positive by the ecosystem in Brazil, the legal framework provides greater protection for the angel investor, reducing the chance for them being held responsible for the company’s debts.

“This is an attempt to reinforce jurisprudence so that angel investors are not the target of labor lawsuits in the case of the company’s bankruptcy,” adds Dínamos’s exec.

According to Frullani, another point addressed by the draft that was well received by the ecosystem was the establishment of special rules for startups to take part in public tenders.

In these cases, to help small businesses, which have short working capital, the government would advance part of the resources at the beginning of the project to stimulate the development of technology.

“And also the possibility for companies that are required by law to invest in R&D, to use part of these mandatory spending funds with investment in startups. These were considered positive points to stimulate investment in these companies.”

Another point well received by the ecosystem was the possibility for startups to publish documents such as calls and annual balance sheets electronically. While the bill’s original version predicted that companies would be allowed to publish such documents digitally, it also set two criteria for this: only companies with annual gross revenue of less than BRL 78 million and with less than 30 shareholders would be eligible.

As the limitation ended up leaving out cases of startups that raise money through systems like equity crowdfunding – public investment fundraising where you can have multiple investors, and in turn, a large volume of shareholders – the approved draft removed this bar.

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“The only limit is now the revenue. Above that, companies have to maintain the bureaucratic obligation [of physically publishing documents such as calls and annual balance sheets],” Frullani summarizes.

As for the aspects left behind, the lawyer points out the regulation of stock options and tax considerations. “There are divergent decisions about the nature of stock options. Some decisions believe that this is remuneration, so all charges are levied, as if it were a wage,” he ponders.

“Other decisions understand the legal nature [of stock options] as commercial, so it is not related to the wage on the labor contract. In this case, the tax rules are very different and much better for the company.”

According to Frullani, the initial idea of the Startups Legal Framework’s bill was to frame stock option plans as remuneration. “This was very criticized by startups as they considered that this would cause very high costs, much higher expenses. There was pressure for removing this aspect. And they did.”

“But at the same time, it was not clear in the law that its nature is commercial. What happens is that the situation is back as it was before, the nature of stock option plans remains uncertain. For now, it will depend on court decisions.”

Understanding that the issue goes beyond startups, and applies to companies in general, Senator Carlos Portinho withdrew all articles regarding stock options from the draft and said that he could present a new bill this year to deal with the matter.

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“It is not a wage, nor a bonus given to the employee, but the opportunity to participate in that startup’s corporate structure and, if the company grows, to participate in its financial success,” defends Afonso, from Dínamo.

Two other points the ecosystem was expecting but wasn’t attended by the draft are related to tax issues. “What the senator [Carlos Portinho] stated is that these tax points have to be discussed in a tax reform. This goes against what the startups were looking for, especially two points they were asking: first, that investment in startups should be considered exempt from taxation, that there should be a tax equivalence in the same way as other investments have,” explains Frullani.

“They [startups] consider that from the moment you tax investment in startups but not other types of investment you are discouraging people from investing in these companies. And this was not provided by the draft.”

“If startups are considered strategic for the country, as well as agribusiness and infrastructure, investment in them should be equated under the same taxation,” defends Afonso.

The possibility for joint-stock companies to be eligible for the simplified tax system, known in Brazil as Simples Nacional, was also left out.

“Currently, regardless of the company’s revenue, if they are framed as a joint-stock company or if it has another company as a partner, they are not eligible for the Simples Nacional. Even companies that are not so big, which causes a certain hurdle for investments,” says Frullani.

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“What the startups asked for was to, depending on the company’s revenue, for both joint-stock companies and companies that have others participating in their share capital, to be able to apply for the simplified tax system. This was also not accepted, the senators considered that this should be discussed in a tax reform,” he adds.

For the lawyer, although the Startups Legal Framework means progress for the Brazilian ecosystem, it still leaves several aspects uncertain. “In a way, they [Senate] wanted to pass this law very quickly, saying that it was very important for innovation, but many critical points for investment in startups are still open and continue to depend on a deeper discussion,” summarizes.

The draft will now return to the House of Representatives for further analysis before going for presidential sanction.