Brazil sanctions Legal Framework for Startups: check it out what was approved and what was vetoed

In a statement, the General Secretariat of the Presidency of the Republic informed that the provision that created a tax waiver that was not part of the original project was vetoed

Photo: Fabio Rodrigues Pozzebom/Agência Brasil
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  • The text creates the special mode of government-public bidding for hiring startups;
  • The law left out elements such as support for angel investment.

Brazil‘s President Jair Bolsonaro sanctioned on Tuesday the Legal Framework for Startups. The law will come into force in two months.

According to the law, startups are business or corporate organizations acting in innovation applied to the business model or the products and services offered. These companies must have annual gross revenue of up to BRL 16 million and up to ten years of enrollment in Brazil‘s National Register of Legal Entities. They must also declare that they use the innovative business model in their activities, according to Agência Brasil.

The government vetoed two provisions of the bill, which created a loss offset for investors, according to which capital gains earned by an individual investor in startups would take into account losses incurred in investments in other startups, reducing the tax to be paid, recalled the law firm NELM Advogados.

READ ALSO: Brazil’s House of Representatives approves Legal Framework for Startups; tax issues remain out

It was also vetoed the inclusion of an item which gave the CVM (Brazil‘s Securities and Exchange Commission) the power to dispense or modulate the form of determination of the fair price and its review, which determine, in summary, that in public companies, the holders of at least 10% of outstanding shares in the market may require the company’s directors to convene a special meeting of shareholders to decide on a new evaluation of the company.

In a statement, the General Secretariat of the Presidency of the Republic said that the provision that created a tax waiver that was not part of the original project was vetoed. The veto was a request from the Ministry of Economy because the text was not accompanied by an evaluation of the budgetary impact and it did not indicate compensatory measures.

What was approved in Brazil Legal Framework for Startups

According to Agência Brasil, among the novelties of the new law is the creation of the regulatory sandbox, which is a differentiated regime where the company can launch new experimental products and services with less bureaucracy and more flexibility in its model, according to the government.

READ ALSO: Legal Framework for Startups: We need to resume the stock options proposal for startups in Brazil

Another innovation is the provision for the figure of the angel investor, who is not considered a partner or has any management or voting rights in the company’s administration, and is not liable for any of the company’s obligations, but is remunerated in venture capital rounds, for instance.

The text also creates a special mode of public bidding for hiring startups. Under the law, the public administration may hire individuals or legal entities, individually or in a consortium, to test innovative solutions developed by them or to be developed, with or without technological risk.

The public notice of the bid must be published at least 30 days before the date on which the proposals are received.

With the result of the bidding, the Public Contract for Innovative Solution will be closed with the selected startups, with a term-limited to 12 months, extendable for an equal period. The maximum amount to be paid to the startups is BRL 1.6 million per government’s contract.

READ ALSO: Brazil stock exchange B3 tests online platform to simplify and accelerate startups’ fundraising

What was left out of the Legal Framework for Startups

Kiko Afonso, president of the Dínamo Group, told LABS that the enactment of the Startup Legal Framework brings benefits to the ecosystem in terms of the definition of startups, government bidding, regulatory sandbox, and permission to apply mandatory investments of innovation incentive laws in startups, but leaves out essential elements such as support for angel investment, retention of talent (stock options), and a corporate regime in which startups fit.

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