Startups and the Legal Framework: Incentives Under Complementary Law 182/2021

This page is a translation of the original Portuguese text, provided for convenience. It deals with Brazilian law. If there is any discrepancy, the Portuguese version prevails. Read the original in Portuguese

Complementary Law No. 182/2021, known as the Startups Legal Framework, introduced important incentives for innovative companies. It makes investment easier, simplifies obligations, and sets specific rules for the startup ecosystem.

The law responds to a long-standing demand from the innovation sector for legal certainty and a regulatory environment that keeps pace with technology-based businesses. Lawmakers recognized that traditional legal tools were not suited to structuring the business models and investment relationships typical of the startup ecosystem.

Legal Definition of a Startup

The law defines a startup as a business organization engaged in innovative activity, with gross annual revenue of up to R$ 16 million and no more than ten years of registration in the CNPJ (Brazil’s National Register of Legal Entities). These limits are essential to determining whether the law’s benefits apply.

The company must have an innovative proposal, shown through the use of technology or a differentiated business model. The innovation must be real and verifiable. Simply operating in the technology sector is not enough to meet the criteria set by the legislation.

Companies that exceed the revenue or age limits automatically fall out of the startup category and lose access to the specific benefits. For this reason, legal and tax planning should take these thresholds into account and prepare the company to move to other regimes when necessary.

Investment Instruments

The law recognizes several investment instruments that do not make the investor a partner or shareholder, including call option agreements, convertible debentures, convertible loan agreements, and angel investor participation agreements.

This removes the labor and tax risks often associated with early-stage investments. Previously, when the nature of the relationship between investor and company was unclear, both sides faced legal uncertainty during fundraising rounds.

Legal recognition of these instruments lets funds, accelerators, and angel investors structure their stakes more precisely. They can choose the instrument best suited to the company’s stage and the investor’s risk profile without worrying that tax or labor authorities will reclassify the transactions.

The startup keeps the intellectual property in the technology it develops.

Angel Investors and Limited Liability

An angel investor is not liable for the startup’s debts unless the investor acts with intent, gross negligence, or fraud. This protection is essential to encourage investment in early-stage, high-risk companies, where failure is statistically more common than success.

The law also rules out disregard of legal entity status (piercing the corporate veil) with respect to the angel investor, except in cases of abuse of rights, excess of power, or misuse of the company’s purpose. This safeguard matters especially for individuals who invest their own capital in startups as part of a diversified portfolio of alternative investments.

Regulatory Sandbox

The law provides for experimental regulatory environments, allowing startups to test products and services under relaxed rules for a fixed period. This tool is especially important in regulated sectors such as finance, health, and education, where full regulatory compliance can be incompatible with the rapid iterations that product development requires.

The sandbox lets a startup operate under supervision while giving the regulator real-world data on the effects of the innovative product or service. At the end of the trial period, the regulation can be adjusted based on practical experience, benefiting both companies and end users.

Easier Public Procurement

The Legal Framework allows public contracting specifically for startups through the Public Contract for Innovative Solutions (CPSI), with an exemption from the bidding process in certain cases. This mechanism encourages innovation in the public sector and opens a significant market for startups offering solutions to highly complex government challenges.

A CPSI is awarded for a fixed term, with payment tied to the performance of the solution delivered. The startup keeps the intellectual property in the technology it develops. This sets the instrument apart from traditional public contracts and makes innovative companies less reluctant to join government projects that would require them to assign their rights in the product they developed.

Stock Options and Employee Benefits

The law reinforces the commercial nature of stock option plans in startups, reducing the risk that options will be treated as salary for labor and social security purposes. It also makes it easier to use profit-sharing programs as a tool for attracting and retaining talent in a competitive market.

A well-structured stock option plan should clearly define the vesting period, the minimum period of service before vesting begins (the cliff), the exercise price, and the conditions for acceleration in the event of a liquidity event or change of control. These elements protect both the company and its employees, and investors examine them closely during due diligence in fundraising rounds.

Inova Simples and the Simplified Regime

Complementary Law 182/2021 created Inova Simples, a special regime for startups that want to begin operating with less red tape. The goal is to let a company be formed and operate through a validation period, with simplified registration through the Redesim portal (Brazil’s national business registration network) and, where applicable, taxation under Simples Nacional (Brazil’s simplified tax regime for small businesses).

The regime suits a startup’s need to run operational tests without requiring a complex administrative structure in the early stage. Once the validation phase is over, the company can switch regimes, adjusting its corporate form and tax regime to the size the business has reached and to the demands of investors who will contribute capital in later fundraising rounds.

Inova Simples does not remove the need to meet basic tax and labor obligations. The simplification applies to the registration procedure and the minimum structure required. It does not excuse the company from paying taxes or respecting the rights of workers hired during the experimental phase of developing the product or service.

Corporate and Contractual Risks

Startups often involve multiple founders, investors in successive rounds, and employees paid partly in equity. This setup calls for careful attention to the quotaholders’ or shareholders’ agreement, which should include provisions on vesting, cliff, tag-along rights, drag-along rights, lock-up, preemptive rights, and dispute resolution among the partners.

The absence of these mechanisms, combined with informal contracts with service providers and advisors, is the leading source of disputes in the ecosystem. Early legal assessment and rigorous documentation of investment rounds reduce the risk of disregard of legal entity status and of the reclassification of working relationships as employment.

Governance also deserves special attention. Creating an advisory board or board of directors, even at an early stage, gives structure to decision-making and protects founders against excessive dilution. It also increases the company’s value in future fundraising rounds with domestic and international funds.

Intellectual Property and Protection of Technology Assets

Intellectual property is one of the pillars of the startup ecosystem. Software, algorithms, trademarks, and business models should be properly registered and protected from the start of operations, because investors see them as the company’s main asset during fundraising rounds.

Brazilian legislation, together with Complementary Law 182/2021, offers ways to register software with the INPI (Brazil’s National Institute of Industrial Property) and to protect trademarks and process patents, where applicable. Startups that neglect these registrations have difficulty proving ownership of their assets in mergers, acquisitions, or foreign investment transactions.

Another point to watch is contracts with outside developers and consultants. Without an express assignment of copyright and intellectual property rights in the service agreement, third parties may claim a share of the code or technology developed during the project. That can lead to disputes that jeopardize future funding rounds.

Taxation and Tax Incentives for Innovation

The Startups Legal Framework works alongside other tax incentives for innovation in Brazilian law. Law 11.196/2005 (the Lei do Bem, or “Good Law”) allows companies taxed under the lucro real (actual profit) method to deduct research and development expenses from the tax base for corporate income tax (IRPJ) and the Social Contribution on Net Profit (CSLL).

More advanced startups, with revenue consistent with the lucro real method, can benefit from these incentives by properly structuring their research and development centers. Correctly classifying R&D expenses for accounting purposes is a condition for using the tax credits without risk of a tax assessment by the Receita Federal (Brazil’s federal tax authority).

For startups under Simples Nacional, taxation by revenue bracket reduces the complexity of complying with ancillary obligations. Tax planning from the founding stage allows the company to choose the most advantageous regime, taking into account the revenue and expense profile expected for its first years of operation.

Frequently Asked Questions

Is every technology company a startup under the Legal Framework?

No. A company must meet the revenue, age, and innovation requirements. Established companies, or those without proven innovation, do not qualify even if they operate in the technology sector, because the law requires innovation to be a central element of the business model.

Can a startup have any corporate form?

In principle, yes. But limited liability companies and simplified corporations (sociedades anônimas) are the most common in the ecosystem because they offer greater flexibility for issuing convertible securities and for structuring quotaholders’ or shareholders’ agreements with multiple classes of capital.

How can a company prove innovation to the tax authorities?

Through a self-declaration, technical documents, intellectual property records, research and development contracts, and other evidence that shows the business’s innovative character in an objective and verifiable way.

As informações deste artigo são de caráter informativo e não substituem a consulta a um advogado especializado. Cada caso possui particularidades que exigem análise individualizada.

As informações deste artigo são de caráter informativo e não substituem consulta jurídica individualizada. Cada caso possui particularidades que exigem análise específica.