Angel Investor and the Simplified Taxation System (Simples Nacional)

Brazilian Supplementary Law No. 155/2016, in force since January 2017, amended the Simplified Taxation System LawLei do Simples Nacional) to expressly foresee the figure of an “angel investor”, bringing more protections to investors and stimulating the development of start-up companies in Brazil.
 
The law allows foreign investorsnatural persons or corporations domiciled abroad) to be angel investors in Brazil. This is an opportunity to boost foreign investments in Brazil via small businesses with growth potential.
 
Pursuant to the new rules, the angel investor will not be treated as a shareholder of the invested company. Therefore, the prohibition for companies, which are subject to the Simplified Taxation System, to have foreign shareholders do not apply for investments made through angel investors.  In other words, the companies subject to the Simplified Taxation System may be able to obtain foreign investment through angel investors and still be compliant with such tax system.
 
The angel investor will not be liable for any of the company’s debts, including an eventual judicial recovery. The protection of the angel investor’s equity in case of disregard of the legal entitydesconsideração da personalidade jurídica) is another strong argument to stimulate this type of investment. On the other hand, the angel investor will not have right to vote in shareholders´ meetings or manage the company’s business.
 
The angel investor will be compensated in accordance with its contribution, which may represent up to 50% of the company´s profits. Although debatable, any compensation received by the angel investor should not be treated as dividends and, therefore, should not be tax-free. If this understanding is confirmed by Brazilian tax authorities, the angel investor may lose interest in this type of investment, and keep using structures commonly-known in the Brazilian market, such as debentures.
 
The investment made by angel investor shall be accounted in the net worth of the company, but not as capital.  It will not be considered revenue for purposes of the Simple Taxation System. Thus, the company shall have more resources to expand its business without risking to lose the benefits of the Simple Taxation System.