Business

Brazil's Legal Framework for Startups gets updates in its draft bill

Among the main updates, the validation of stock option plans and compensation of losses and gains for angel investors are now included

Startup workspace
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The Legal Framework for Startups, a bill that aims to boost the startup ecosystem in Brazil, making the sector more competitive, received a few updates this week.

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

Among the main updates, labor issues such as the validation of stock option programs – that was previously left out – and the inclusion of compensation of losses and gains for individual angel investors are now part of the draft.

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Recognition of stock option plans

One of the improvements in this latest draft of the Legal Framework for Startups is the recognition of stock option plans. A very popular agreement in startups, stock options are now acknowledged and, more importantly, recognized as non-remunerative. In practice, this means that they cannot be considered as part of the employee’s salary.

The novelty avoids legal uncertainty that usually led this program to several judicial interpretations, even different from the IRS in Brazil (Receita Federal) that is used to frame stock options as part of the salary, applying on the plan, thus, all taxes related to wages.

Felipe Matos, vice president of the startup movement Grupo Dínamo. Photo: Grupo Dínamo/ Courtesy

“This is an important victory in the sense of making the stock option process simpler, ceasing legal uncertainty, and making it clear that there is no incidence of labor charges on any stock options,” explains Felipe Matos, vice president of the startup movement Grupo Dínamo.

However, Matos points out that, as the bill sets a series of criteria on how stock option plans should be and how their contract must work, the application of what could be an edge for the sector, ends up being limited.

“This may be too specific in the law because it takes away some of the company’s freedom to negotiate the conditions of this stock option with the employee. This point should be improved,” says the expert.

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Taxes paid by angel investors

As for angel investors, whereas a previous version of the draft ensured that this player would not become a partner in the company invested, not having management rights over it, as well as not having to respond with their assets for any labor or tax debts, another update made this week is the possibility for angel investors to offset losses.

According to Matos, angel investors claim for tax exemption in line with what happens in other countries and also in Brazil with some business investments with lower risk. While this wasn’t contemplated (at least yet) by the new version of the bill, the draft now includes a mechanism to allow individual angel investors to compensate losses and gains when calculating the tax on capital gains.

When calculating the tax on capital gains, this is calculated on the individual gain of each operation, without considering the losses that the investor had with failed startups

Felipe Matos, vice president of the startup movement Grupo Dínamo.

“Usually these investors bet on several startups. As it is a high-risk investment, most of them fail, but the successful ones end up generating a high return, which pays for the losses,” summarizes Matos. “The problem is that when calculating the tax on capital gains, this is calculated on the individual gain of each operation, without considering the losses that the investor had with failed startups.”

With the new mechanism, it will be possible to subtract the losses in the calculation by paying tax on the total real gain. The compensation for losses and gains, however, is being proposed only for individual investors, leaving out accelerators and companies that invest as a legal entity in startups, for example.

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Joint-stock companies

The previous version of the draft already included the simplification of business corporations in order to allow that, not only startups but all joint-stock companies that earn less than BRL 78 million annually, can publish documents such as calls and annual balance sheets electronically.

But Matos warns that, although this was an important improvement, something that is asked by the sector for quite some time – but was left out – is the possibility for joint-stock companies to be eligible for the simplified tax system, known in Brazil as Simples Nacional.

“When you are a very small startup sometimes this [Simples Nacional] is the most advantageous regime, but you cannot choose it, precisely for being a joint-stock company,” he highlights. “Their claim is: as long as they are in the revenues range of micro and small companies covered by this regime, they should be eligible for the Simples Nacional to collect taxes.”

You fall into the worst case scenario: many shareholders and an analog format

Felipe Matos, vice president of the startup movement Grupo Dínamo.

Still regarding the joint-stock companies, while the bill simplifies the process of publication and management of the share books, which become electronic, the draft limits this update to companies with up to thirty shareholders. The limitation, Matos points out, ends 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.

“In this case, you fall into the worst case scenario: many shareholders and an analog format,” he summarizes.

“It would be important to recognize companies with public offers via equity crowdfunding, so they could also have their stock books published electronically, as long as they comply with the established BRL 70 million revenues range.”

Another labor aspect included in the new draft was the increase in the maximum duration allowed for temporary contracts. With the update, the hiring and firing process becomes more flexible for startups, since temporary contracts are exempt from paying some charges, such as FGTS (Severance Indemnity Fund), among others.

The bill now follows the usual procedure in the House of Representatives and the Senate, before going for presidential sanction and coming into force. The startup ecosystem in the country expects the process to move forward fast enough, as it has almost unanimous support from several political parties.

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