On the 21st, Normative Instruction RFB No. 1719/2017 was published in the Official Gazette of the Union, addressing tax matters involving capital contributions to companies classified as micro-enterprises or small-sized enterprises made by investors known as angel investors.
This type of contribution arises from participation agreements entered into between companies classified as micro-enterprises or small-sized enterprises and the angel investor. It is very common in the world of startups and entrepreneurship.
With this regulatory act, the Federal Revenue Service establishes that a micro-enterprise or small-sized enterprise that receives contributions under the modality addressed in the provision is not required to adopt the Special Unified Regime for the Collection of Taxes and Contributions Owed by Micro-Enterprises and Small-Sized Enterprises (Simples Nacional, Brazil’s simplified tax regime); thus, the micro-enterprise or small-sized enterprise may adopt any form of taxation accepted by income tax legislation.
Deadlines – As for the rule on Income Tax taxation of income arising from the capital contribution, it applies a regressive scale according to the term of the agreement, starting at 22.5% for participation agreements with a term of up to 180 days and decreasing to 15% for participation agreements maintained for a term exceeding 720 days.
As a general rule, the minimum rate of 15% will apply, given that, by the definition of Complementary Law No. 123 of 2006 itself, the redemption of the contributed amount may only be carried out after at least two years have elapsed from the capital contribution, which presupposes agreements with a minimum term of two years, and which may extend to up to seven years by limitation of the same legal text.
Subject to withholding at source, in accordance with the table set out in article 5, are the periodic income and the gain obtained upon redemption of the contribution earned by individuals and legal entities at the time of their payment, the income tax withheld at source being considered definitive for individual and legal-entity investors that are exempt or opting for the Simples Nacional.
In the event that the angel investor disposes of the ownership of the rights under the participation agreement, income tax will be levied at the regressive rates set out in article 5 of the Normative Instruction, with the period calculated between the date of the contribution and the date of disposal of the rights.
For investment funds, income tax withholdings on the fund’s transactions are waived, but upon redemption of the shares the rules established for investment funds governed by general regulation or the rules established for investment funds constituted in the form of a closed-end fund apply.
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