Doing Business in Brazil

36. Innovation, Startups and Corporate Venture



1.1 Introduction

Innovation and entrepreneurialism are keywords for the sustainable development of the global economy and have been playing an increasingly important role in the Brazilian economy 1.

Investments in startups are an attractive alternative because they allow portfolio diversification in a low interest rate environment, as well as economies of scale and numerous advantages in relation to other benchmarks, such as listed stocks.

Startups focus on creating new products and services, under extremely uncertain conditions, through business models that have low operating costs and are potentially scalable. This is done through the use of technology 2.

As a startup goes through the phases of maturation – from the early stage, in which it does not yet have a tested product, which is known as a minimum viable product, or MVP, through to the development of the MVP, implementation of operations, creation of a skilled team and reaching economies of scale – a startup will usually need several investment rounds.

Sources of capital during the initial phases include the founder’s own funds and those of family members and friends, as well as those of so-called “angel investors.” These angel investors are usually experienced entrepreneurs who have already achieved success in their own business and who now invest in early-stage companies. In addition to funding, their support includes helping develop the business through their knowledge and network of contacts, among other things.

The investment required for a startup to build and validate its MVP and organize and implement its operations generally runs from BRL 800,000 to BRL 2 million. This investment is referred to as seed capital. It is normally during this phase that the first venture capital funds invest in the company. The startup’s growth will frequently require new rounds of investment, which are referred to as series A, B, etc. These new rounds are used to attract increasingly large investments (from BRL 2 million to BRL 20 million in series A, for example) to allow the product to reach scale and optimize logistics and manufacturing, among other needs.

Companies from the traditional economy might also establish relationships with startups. They can do this as part of their open innovation program or by investing capital. In either case, the goal is to add value to the final product through operational synergies. This is referred to as corporate venture capital. 

Through each of these stages, the founder offers an equity interest in exchange for investments. This raises various issues regarding corporate governance and control of the business. Nonetheless, this alternative is more advantageous than bank financing, which is not always available to recently founded companies since they generally lack a banking history, collateral and assets.

In light of this reality and based on contractual practice in other countries, especially in the United States, in which models such as convertible notes have been used to develop innovative companies in Silicon Valley, Brazilian investors have created contractual instruments such as the mútuo conversível, which is a form of convertible note adapted to Brazilian law. They have also taken advantage of corporate structures that exist in Brazilian law, such as the Sociedade em Conta de Participação, or SCP (a Brazilian type of special partnership), and Special Purpose Entities, or SPEs, among other types.

More recently, Supplementary Law 155/2016 was enacted, establishing a specific type of contract, called a contrato de participação, or equity contract, to facilitate investments by angel investors. This increases legal certainty for both investors and founders of startups.

There are therefore various legal instruments that are used to implement investments in startups in Brazil. Choosing the most appropriate one depends on what stage the company is in, an evaluation of the risks involved and tax consequences, among other factors.

Whatever model is adopted, preventative work by skilled lawyers is fundamental to avoid future conflicts among the startup’s founders. This involves preparing contracts that have been negotiated in advance among the founders to provide for things such as limitations on the sale of shares or equity interest, a standstill period, tag-along and drag-along rights and rights of first refusal, among others that will be analyzed below.

The most important legal structures for investing in startups include:

1.2. Convertible Notes (MĂştuo ConversĂ­vel)

Since direct equity ownership in a company involves risk, especially when dealing with startups, the concept of convertible notes from the United States has been adapted to Brazilian law, creating the mĂştuo conversĂ­vel figure. Such vehicle allows investors to make a loan to the company they are investing in, while having the option of converting the debt into equity if certain preestablished conditions are met.

Also, the mĂştuo conversĂ­vel allows the parties to establish the percentage of equity interest the investor will have in the future if he decides to convert his debt into equity, as well as defining the events that will give the investor the right to exercise such option.

Moreover, this type of convertible notes is advantageous for startup founders due the fact that the initial investment is made simply as a loan, preventing thus immediate significant changes in equity ownership, corporate control or day-to-day business activities.

However, there can be, and normally are, clauses in the those agreements restricting certain decisions by the startup’s founder, especially those that could, for instance, (i) damage the business, (ii) jeopardize its viability and/or (iii) diverge from the original purpose of the investment, and the violation of these clauses could even result in the acceleration of the loan.

This investment method is also advantageous for the investor because he acquires the right, but not the obligation, to take an equity interest. Until he takes an equity interest, he will not be exposed to the startup’s risks if it takes on debt and, in the event of bankruptcy, he will be one of the startup’s creditors. 

On the other hand, it is important to note that the investor will not enjoy certain rights that apply only to equity partners, such as the right to share in profits. However, since this is not a startup’s main goal during its initial stages, a mútuo conversível brings significant advantages as an investment method, mainly due to the fact that it secures the investor an eventual right to convert the loan into, providing him with the yields, rights and obligations of an equity holder.

It is extremely important that both investors and founders of startups be properly advised by lawyers when they are structuring convertible notes. This will help them to find the best contractual structure in order to avoid potential legal disputes. 

This legal advising will include preparing mainly a contract with the proper clauses to protect the interests of everyone involved, including, for example, (i) a clause that defines when the investor can convert the debt into equity, (ii) a clause that establishes the maturity date of the loan and any events that will result in its acceleration and (iii) a clause requiring the parties to enter into a shareholders’ agreement after the investor converts the debt to equity, with provisions that protect both the entrepreneur/controlling shareholder and the investor/minority shareholder and that determine the corporate structure with an eye to facilitating further fundraising, among other things.

1.2.1 Taxation of Convertible Notes (MĂştuos ConversĂ­vels)

As noted earlier, convertible notes (mútuos conversíveis) are referred to as atypical contracts, meaning that this type of contract is not explicitly provided for in Brazilian law. 

Not least because it is an atypical contract, with characteristics of both a loan and an investment, its taxation by the personal and corporate income taxes is provided for in different provisions of the legislation.

Because it is indeed a loan, the lender can receive income, which is to say interest, if he decides not to exercise the option to convert the debt into equity, thereby becoming an equity partner in the startup he has invested in.

We know that this is not what normally happens in the startup market, particularly in the cases in which the startup is not able to survive the challenges of the so-called “valley of death.” In this kind of situation, it is common for the investor to go so far as to waive his credit rights since, despite being granted in the loan agreement, there is a certain “moral” understanding among more experienced investors that the angel investor should not be fully exempt from the business risks, obviously limited to the amount of his investment.

Nevertheless, it is important to note that, as long as it is not converted into an equity interest, the loan is a credit right for the investor/lender and the balance of the loan, if it is from a natural person, must be reported to Brazilian Federal Revenue in the lender’s annual declaration of assets and rights, as is described in answer 648 from Brazilian Federal Revenue, in the Questions and Answers for the Personal Income Tax Return 3.

Personal Income Tax on Income from Convertible Notes:

If the loan is from a natural person to a corporate entity (i.e., the startup that is invested in), the interest on the loan is subject to personal income tax, exclusively at the source, at the following tax rates:

a) 22.5%, if for a term of up to six months; 

b) 20%, if for a term of six months and one day to 12 months; 

c) 17.5%, if for a term of 12 months and one day to 24 months; 

d) 15%, if for a term of more than 24 months.

– Personal Income Tax on Capital Gains on Conversion of the Equity:

If the debt is converted into an equity interest and if at the time of the conversion the equity interest acquired has a value greater than the amount reported for the loan in the natural person’s most recent tax return, the conversion of the debt into equity will result in a capital gain that is subject to the personal income tax.

For natural person, the income tax rates are established in article 21 of Law 8,981/95:

I – 15% on the portion of the gains that do not exceed BRL 5,000,000.00;            

II – 17.5% on the portion of the gains that exceed BRL 5,000,000.00 but do not exceed BRL 10,000,000.00;    

III – 20% on the portion of the gains that exceed BRL 10,000,000.00 but do not exceed BRL 30,000,000.00; and    

IV – 22.5% on the portion of the gains that exceed BRL 30,000,000.00.    

The rates indicated above are incident on capital gains, which are the difference between the acquisition cost of the right (in this case, the balance of the loan reported on the most recent personal income tax return) and the value of the disposition (which is the value of the equity interest acquired at the time the loan is converted into equity, which is to say, the market value of the equity interest – in accordance with article 19(II) of IN/SRF 84/2001).

The personal income tax is incident on capital gain separately – the capital gain amount should not be added to the basis for the annual income tax and the tax on the capital gains cannot be deducted from the personal income tax calculated in the annual income tax return (article 21(2) of Law 8,981/1995).

– Corporate Income Tax on Capital Gains

If the loan is made by a corporate entity, when it is converted into an equity interest in another company (i.e., the startup invested in), the capital gain on the disposition of the loan will be the positive difference between the value of the disposition (which is to say, the value of the equity interest obtained) and the value of the acquisition, under the terms of article 222(2) of RIR/18. This capital gain must be added to the calculation basis for the corporate income tax calculated by the actual profit method (main part of article 222 of RIR/18) and by the presumed profit method (article 595 of RIR/18).


In the case of a convertible note in which the lender is a corporate entity, the income (interest) is subject to the Social Integration Program Tax (Programa de Integração Social), or PIS, and Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS, at a rate of 4.65% under the noncumulative method, while there will be no tax under the cumulative method as long as the primary corporate purpose of the entity that made the loan is not to invest in other companies. 

However, this point is somewhat unsettled since Brazilian Federal Revenue could maintain that the income (interest) is operational and, therefore, a company that uses the cumulative method should pay taxes on them (at a rate of 3.65%) regardless of the company’s corporate purpose.

On the other hand, there is no PIS or COFINS tax on capital gains on the conversion of a loan into equity at an amount greater than the loan. This is true under both the cumulative and noncumulative methods.

– IOF:

In the case of a convertible note, the calculation basis for the Financial Transaction Tax (Imposto sobre Operações Financeiras), or IOF, is the principal amount to be used by the borrower, or in other words, the startup that is being invested in (article 7(b) of Decree 6,306/2007).

If the lender is a corporate entity, the rate is 0.0041% a day, limited to 1.5%.

Since the IOF tax is only incident on a convertible note, but not on an equity contract entered into under Supplementary Law 123/06, an equity contract has a tax advantage in relation to a convertible note.

1.3. Equity Contract

In an effort to encourage innovation and productive investment, Supplementary Law 155/2016 created what is known as an equity contract (contrato de participação), seeking to provide legal certainty for investments in companies classified as micro-businesses or small businesses. Investors who use equity contracts, whether they are natural persons or corporate entities, are called angel investors and they contribute capital to the startup without these amounts being considered part of the company’s share capital.

Therefore, as with a convertible note, an equity contract gives investors the option of making investments without having to become an equity partner in the startup and without becoming liable for any of the startup’s obligations.

To invest through an equity contract, the startup must be classified as a microbusiness or small business under Supplementary Law 123/2006. In other words, the startup must have gross annual revenue of BRL 360,000.00 or less to be a microbusiness or greater than BRL 360,000.00 and up to BRL 4,800,000.00 to be a small business.

Supplementary Law 155/2006 also establishes that investments can be made by natural persons or corporate entities. Equity contracts have a maximum term of seven years and, as consideration for the investment, the investor will have the right to compensation of up to 50% of the company’s profit for a maximum period of five years.

It is important to note that the investor cannot perform any administrative duties, vote or perform management acts in the company. The investor can only redeem the investment, adjusted monetarily, after a minimum period of two years.

Although the law’s intent was to increase investment in innovation, it has received various criticisms from the market due to the tax rules created by Brazilian Federal Revenue through Normative Instruction 1,719/17, which provide that the income received by the investor is subject to the withholding income tax at the regressive rates of 22.5% to 15%. This will be dealt with in greater detail in the next topic.

1.3.1 Taxation of Equity Contracts

Brazilian Federal Revenue Normative Instruction 1,719/2017 governs taxation of angel investments made under article 61-A of Supplementary Law 123/2006 (Simples Nacional Tax Method), as amended by Supplementary Law 155/2016, which introduced the classification of investment “to encourage innovation activities and productive investments) in companies classified as micro-businesses or small businesses.

Below are the main points regarding the tax treatment of angel investment under Brazilian Federal Revenue Normative Instruction 1,719/2017:

  • A company is not required to use the SIMPLES tax method in order to receive contributions/investments. 
  • Brazilian Federal Revenue Normative Instruction 1,719/2017 establishes the taxation of “income resulting from capital contributions made.” It was made equivalent to an investment in fixed income (cf. article 65(4)(c) of Law 8,981/1995, read together with article 1 of Law 11,033/04), with the tax following a regressive table as a function of the period during which the investment is maintained:

Income Tax Rates – Equity Contract (art. 61-A of SL 123/06):

22.5% Up to 180 days
20% From 181 days to 360 days
17.5% From 361 days to 720 days
15% Period longer than 720 days


Making the taxation of an equity contract equivalent to the taxation of a fixed income investment is one of the main criticisms leveled against Brazilian Federal Revenue’s regulation of angel investment. This is because, exclusively from a tax perspective, this treatment gives no incentive to invest in startups since these investments are considerably riskier than an investment in fixed income.

  • The tax is incident at the following points:
  1. Distribution of results by the company invested in, limited to 50% of its profit. At this point, we see that the tax treatment under the Brazilian Federal Revenue Normative Instruction is closer to that of a loan than an investment, properly speaking. This is because, for a conventional investment, there is an exemption for the results/dividends distributed, which have already been taxed at the corporate entity level. This presents the possibility of what is referred to as “double economic taxation,” since the same income is being taxed at the corporate level (the company invested in) and the individual level (the angel investor), which is certainly a disincentive to making angel investments and which is contrary to the purpose of article 61-A of Supplementary Law 155/2016.
  2. Gain on the redemption of the investment: at this point, the treatment under the Brazilian Federal Revenue Normative Instruction is similar to a typical capital gain tax levied on conventional investments.
  3. Gain on the disposition of the rights of an equity contract received by a natural person or corporate entity that is exempt or pays using the Simples tax method, with the basis being the positive difference between the disposition value and the value of the contribution.
  • The income tax withheld from the income will be considered a final tax if the income is paid to a natural person investor but will be considered a mere prepayment if the investment is made by a corporate entity.
  • The due date for the income tax is the third business day after the 10-day period in which the triggering events occur.
  • There is a waiver for withholding the withholding income tax on income and net capital gains earned by the portfolios of investment funds that invest capital as angel investors. Closed-end investment funds that do not allow redemptions during the duration of the fund must observe their own rules (article 16 of Brazilian Federal Revenue Normative Instruction 1,585/2015).


  • PIS and COFINS:


In the case of an equity contract loan in which the investor is a corporate entity, the income (interest, settlement and assignment) are subject to the PIS and COFINS taxes (4.65% rate under the noncumulative method).

Under the cumulative method, there should be no taxation for a corporate entity if its main corporate purpose is not investing in other companies. However, this point is somewhat unsettled since Brazilian Federal Revenue could maintain that the income (interest) is operational and, therefore, a company that uses the cumulative method should pay taxes on them (at a rate of 3.65%) regardless of the company’s corporate purpose. 

1.4. Crowdfunding

An important alternative capital source for startups is the collective financing model, which is referred to as crowdfunding and now has a presence in the Brazilian ecosystem and law. Crowdfunding is a particularly attractive alternative for startups that have businesses with high social impact, giving them a greater ability to engage potential users and consumers.

Crowdfunding is a way of raising funds through an online platform. It can be done for consideration (in other words, there can be a promise of financial return for the investor) or without consideration (as a simple donation or for the receipt of a nonfinancial reward).

For regulatory purposes, crowdfunding for consideration is subject to the rules and standards of Brazilian authorities, particularly the Brazilian Securities Commission (Comissão de Valores Mobiliários), or CVM, which is the Brazilian agency responsible for the rules governing receiving investments from the public through the issuance of securities, and the Brazilian Central Bank, which is responsible for regulating the Brazilian financial market.   

1.4.1. Investment Crowdfunding 

Investment crowdfunding is governed by CVM Instruction 588/2017 and defined as: 

Raising funds through a public offering for the distribution of securities that do not require registration, carried out by issuers that are considered small-scale business companies under the terms of this Instruction, and distributed exclusively by means of an electronic platform for participatory investment, with those to whom the offer is made being a multiplicity of investors who provide financing within the limits provided for in this Instruction 4.

In other words, it is a fund-raising method for consideration through which the company targeting capital issues, in consideration for the funds raised, securities 5, whose value might or not go up on the market, creating gains or losses in relation to those securities for the investors. 

Under the terms of Instruction 588/2017, investment crowdfunding offers are waived of the CVM registration requirements for both the securities offering and the issuing company, as long as certain objective requirements are met, for example:

(i) The securities issuance is done by a business company with gross annual revenue of up to BRL 10 million during the year prior to the offering;


(ii) The issuing company has not been previously registered with the CVM as a securities issuer;


(iii) The fund-raising is done through an electronic platform duly registered with the CVM;


(iv) The target amount for fundraising is no higher than BRL 5 million;


(v) The maximum period for fundraising is 180 days;


(vi) The investor has the right to desist from the investment, without penalty, for a period of seven days; and


(vii) The funds raised are not used for a consolidation, acquisition, merger (including a share merger), purchase of an equity interest in other companies or granting credit to other companies.

Additionally, the CVM regulation mentioned above includes a series of rights and obligations that must be observed by the issuing business company, the electronic participative investment platform authorized by the CVM and the investor. These rules include, among other provisions, a prohibition of a new investment crowdfunding offering within 120 days from the end of the previous offering made, as well as an investment limit of BRL 10,000.00 per year, except in the case of the lead investor 6, a qualified investor 7 or an investor whose gross annual revenue or annual financial investments are greater than BRL $100,000.00 8. 

Peer-to-Peer Lending 

Entrepreneurs can also raise funds from any investor by using a type of crowdfunding that is based on peer-to-peer lending. This is done through a financial institution duly authorized by the Brazilian Central Bank and defined as a Person-to-Person Loan Company (Sociedade de Empréstimo entre Pessoas), or SEP. By means of such vehicle, investors receive debt instruments from the entrepreneur that are payable at an interest rate negotiated at the time the investment is made through the SEP.

This type of crowdfunding is governed by Resolution 4,656 of April 26, 2018. It also requires the existence of an electronic platform (which is owned, administrated and executed by the SEP) as an indispensable condition for the validity of direct loan transactions between the entrepreneur and the investors.   

1.5. Innovation and Seed Capital Funds

In Brazil, the CVM is also the authoruty responsible for the rules governing the incorporation, operation and administration of investment funds and for monitoring investment funds’ compliance with such rules.

Under Brazilian law, investment funds are a pool of resources, constituted as an entity with a special type of joint ownership/condominium, incorporated for the specific purposes of investing in financial assets, assets, and rights of any nature 9.

Investors acquire quotas of the equity of the investment fund. After funds are raised in this way, the fund invests in securities, undertaking to pay the investors the income that results from the investments made under a professionally administered and managed portfolio, observing the quota redemption rules and in accordance with the fund’s term and/or liquidation.

It is also important to mention that article 1,368-D(I) of the Brazilian Civil Code, recently introduced by Law 13,874 of September 20, 2019, expressly provides for the possibility under Brazilian law of limiting the liability of fund quota holders in relation to the fund’s obligation – making these investments even more legally secure for the investor.

Investment funds are therefore an attractive model for fundraising for Brazilian innovation companies and startups, particularly for those that already have revenue and operations and are still seeking capital to implement/accelerate their disruptive and scalable business.

This capital, which is generally referred to as seed capital, is usually raised through private equity funds – seed capital (Fundos de Investimento em Participações – Capital Semente) under the terms of CVM Instruction 578/2016, and rests on the following basic premises:

  • Fund intended for qualified investors, under Chapter VII of CVM Instruction 539/2013 10;
  • Companies receiving investments must have gross annual revenue of not more than BRL 16 million during the fiscal year prior to the year in which the fund is making the investment and in the three previous fiscal years 11;
  • Companies receiving investments are, as a rule, not required to comply with the corporate governance practices established in article 8 of CVM Instruction 578/2016 12.

Taxation of Seed Capital Funds

The gains earned by seed capital investment funds (private equity funds) on the disposition of the assets and their portfolios are not subject to the income tax and IOF tax until the income is distributed to the fund’s quota holders.

Gains are subject to the income tax at the time of the redemption or disposition of the quotas by the quota holders. The following rates apply:

  Natural Person Corporate Entity Nonresident
Private equity funds (FIP) (including seed capital funds) 15% on redemptions and on gains on the disposition/amortization of the quotas 13 15% on redemptions and on gains on the disposition/amortization of the quotas 13  Exempt from income tax 14


IOF (Foreign-exchange): Zero Rate


1.6. Mapping Regulatory Risks

Regulations governing economic activity in Brazil are scattered throughout a veritable tangle of rules arising from laws and decrees approved through the legislative process, as well as from regulations approved and strictly enforced by regulatory agencies and other government entities.

Activities that pose a greater potential risk to consumers are subject to greater regulation. These activities include those of the pharmaceutical, cosmetics, insurance, finance, aeronautics, healthcare, power and other industries.

Both founders and investors in startups must be attentive to regulations that could affect startups’ business models.

Although it is impossible to exhaustively address this subject, below we will provide a brief summary of the main points to pay attention to in this area in Brazil. This will facilitate the identification of potential risks resulting from regulations applicable to startups.

1.4.1. Understanding the Brazilian Regulatory System

The Brazilian regulatory system was mainly structured to stimulate investor and consumer confidence in products and services offered in Brazil, seeking to provide them adequate legal certainty and safety.

The general rules regarding regulated activities are stated in laws and decrees approved according to Brazilian legislative procedures. These establish rules such as which activities are prohibited, their limitations, which regulatory agency has jurisdiction, prohibitions, penalties and respective limitations for the application of those penalties, for example.

The procedural rules, technical parameters regarding the limitations for each activity, formalities of administrative proceedings, measures for applying sanctions and deadlines, for example, are subject to regulation by the agency with authority. It issues these regulations through ordinances, circulars and resolutions, as the case may be, always in keeping with the applicable legislation.

These public agencies are, as a rule, given autonomy. In other words, although they are connected to the executive branch of the government, they are not subordinated to it and, therefore, are largely protected from political interference.

This means that changes from one administration to the next should not directly influence the functioning of these agencies. Additionally, these agencies must be directed by people with proven professional qualifications for the position, who, although they are nominated by the president of Brazil, must be approved by the Senate.

These are ways of ensuring investors that the rules for production/provision of services are prepared in keeping with technical criteria by agencies whose employees have the proper professional qualifications. Additionally, it makes it easier for investors to contact and access these regulatory agencies for discussions and participation in the preparation of regulations. 

An example of this is the Consultative Committee created by the National Council of Private Insurance (Conselho Nacional de Seguros Privados), or CNSP, which has as its “purpose to propose measures aiming to correct potential asymmetries between Brazilian regulation of reinsurance and global best practices.” 15

This also increases consumer confidence in products and services coming from regulated activities since it presupposes that the monitoring of those products and services is strict and that the risks of noncompliance with the rules are high, including the stoppage of the activity or making it unfeasible.

1.4.2. Regulated Activities in Brazil

As mentioned above, the activities that are subject to more regulation in Brazil are those that have more potential for harm, whether to consumers, the population in general or even the environment.

It is extremely important that both founders and investors in startups analyze the regulatory issues involved in the innovative activity so that they can map the risks involved. Due to the new business models employed, a startup’s activities frequently do not perfectly fit the existing regulations concerning similar activities. 

Transportation apps, which engage in an activity similar to those of taxi services, are the most emblematic symbol of this. The question as to whether these apps are subject to the same rules that apply to taxis has generated large-scale political and legal debate and even today it is not completely settled.

Therefore, even if the existence of regulations does not necessarily prejudice the investment decision to the detriment of the business model, mapping the risks involved is, without a shadow of a doubt, highly recommended.

Bearing in mind the extent, complexity and particularities of the issue, as well as the objectives of this guide, it will not be possible to thoroughly address all activities regulated in Brazil here. Regarding this matter, we make reference to the more detailed information about regulations contained in specific chapters of this guide. 

With these reservations, we offer here an overview of the main regulatory topics to be researched by startups and investors.

a) Handling Personal Data

Handling personal data is regulated by Law 13,709/2018. In summary, this law governs any handling operation done by a natural person or public or private law corporate entity, regardless of the medium, of the country in which it is headquartered or of the country in which the data is located, so long as the operation has a relation to Brazil 16. 

In other words, any operation done with personal data, such as those regarding its collection, production, receipt, classification, use, access, reproduction, transmission, distribution, processing, filing, storage, elimination, evaluation or control of information, modification, communication, transfer, diffusion or extraction, is subject to this law, which imputes liability on all those involved in the process of handling data.

This law provides that it will be regulated by the National Data Protection Authority (Autoridade Nacional de Proteção de Dados), or ANPD, which is still in the process of being formed. This agency will be tied to the president in Brazil and its technical autonomy is guaranteed by law. At the time of this writing, due to the Covid-19 crisis, it is uncertain when this law will go into effect because there is a provisional measure that has changed its effective date to May 2021, as well as a bill before Congress, which has already been approved by the Chamber of Deputies (Bill 1179/2020), that delays the beginning of the effectiveness of the penalties resulting from the Data Protection Act to August 2021.

Although the sanctions provided for in Law 13,709/2018 have not yet gone into effect – including a fine of up to 2% of revenue, limited to BRL 50 million, and the suspension of the activity of handling data, as well as making the conduct public – the rules in the Data Protection Act have become important guidelines. Complying with them could serve as a defense in civil lawsuits involving data leaks.

b)  Financial Activities

Activities of financial companies in Brazil that are part of the National Financial System (Sistema Financeiro Nacional), or SSN, are supervised by the Brazilian Central Bank, which is also responsible for executing monetary, foreign-exchange and credit policies.

It is not possible to establish and operate a financial institution or payment institution (including fintechs) in Brazil without first obtaining authorization from the Brazilian Central Bank. It is therefore essential to perform a detailed analysis of Brazilian Central Bank regulations before making an investment in this area.

c) Activities that require health inspection

The production or sale of pesticides, food, cosmetics, medication and laboratories are examples of products/activities that involve monitoring and regulation by the National Health Inspection Agency (Agência Nacional de Vigilância Sanitária), or ANVISA.

ANVISA is responsible for ensuring that such products/services are safe, high-quality and have proven efficacy. The agency also regulates the information that is presented to the market, such as through product labeling.

The list of technical rules issued by this agency is very complex. Monitoring it for compliance purposes frequently requires a technical team, and not just a legal one, as well as the operational team for the intended activity.

d) Regulated professions

In Brazil, certain professions are subject to specific regulations regarding their obligations and rights. 

There are dozens of regulated professions in Brazil. They include doctors, lawyers, psychologists, nurses, accountants and economists. 

As a rule, regulations governing them concern issues such as: technical qualification to work in the profession, approval in technical examinations, standards of ethical conduct, minimum wages and requirements for personal safety, among other rights and obligations in keeping with the specific nature of each profession.

Only properly authorized professionals can practice these professions. Therefore, potential business models that results in the performance of activities which only these professions can do could lead to regulatory issues. 

Examples could include telemedicine or an app that performs eye exams.

Determining whether a given startup’s business model could come into conflict with the practice of regulated professions is therefore an important part of mapping the risks involved. Violating these rules could result in penalties imposed by the professional bodies concerned.

e) Transportation Technology Operators

Companies that operate urban mobility apps, such as those providing ride-hailing services and bike sharing, are also subject to regulation in Brazil.

Unlike with the majority of regulated activities, private transportation for payment falls under the exclusive legal and regulatory jurisdiction of municipalities and the Federal District 17. In other words, the rules governing this activity in Brazil are not uniform.

This is a factor that makes evaluating the risks and monitoring changes in the applicable rules, and therefore proper compliance, even more difficult.

To the present, in general terms, these regulations commonly require that drivers who provide services with automotive vehicles have an ID document that is valid in Brazil, a license to drive the category of vehicle they use to perform the services, documentation proving possession and ownership of the vehicle and an accident insurance policy, for example.

In the case of bicycles and skates there are requirements such as: (i) prioritizing the public interest, seeking methods to distribute the skates/bicycles to the largest number of regions in the municipality, (ii) emphasizing integration with other transportation methods, especially public transportation, (iii) requiring data sharing with the municipal government (such as the origin, destination and duration of travel, for example) and (iv) the maximum rate that can be charged, among other things.

There are also cases in which the municipal government charges a fee based on the number of kilometers traveled, in addition to the Tax on Services of Any Nature (Imposto Sobre Serviços de Qualquer Natureza), or ISSQN, that applies.

1.5. Weighing Regulatory Risks

The regulatory risks in the Brazilian legal system go far beyond the system’s intrinsic complexity, the nature of the regulated activity itself, or even the seriousness of the consequences of violating the pertinent rules. The risk often originates from the excessive bureaucracy of the rules and procedures, which makes them difficult to comply with, thereby complicating operation in the intended regulated area.

Noncompliance with regulations can result in:

  • It being impossible to conduct the activity:  depending on the activity, the regulatory agency’s authorization can be required before the activity can begin, and this authorization depends on complying with a series of requirements and procedures.

Additionally, it might also be necessary to face extremely long wait times for approvals. An example of this is the time it takes for approval of the registration of a medicine in Brazil, which can be 356 days for new and innovative medicines.

  • Penalties: if rules are broken, the regulatory agency is required to apply the appropriate sanctions, in keeping with the respective legal provisions.

These penalties can vary from a warning to a fine to shutting down the activities, among other things.

The amount of the fines can frequently reach extraordinary sums. For example, violating the Brazilian data protection law can result in a fine of up to BRL 50 million per infraction, while fines for health violations can reach BRL 1.5 million. 

  •  Personal liability for managers: given the intensive monitoring of companies performing regulated activities, the probability of a given situation being understood to result in personal liability for the managers of the company is likewise high.

Finally, it is important to note that the penalties imposed by regulatory authorities with jurisdiction are administrative and, therefore, do not limit potential civil and/or criminal liability, making the situation of the company suffering the penalty even more serious.

Despite this, the business environment in Brazil has enormous space for innovation and prosperous economic growth, even with its complex legislation and regulatory environment.

This Brazilian regulatory environment is of extreme importance in relation to activities that influence and place at risk life, health and people’s well-being, as well as the environment, and also affect the economy and investments made in Brazil.

Therefore, for investments in certain areas in Brazil, it is certainly indispensable to perform an adequate study of the purpose of the activity and the rules that apply to the industry in order to properly map the risks. 

Based on the initial study, a strategy should be outlined to build a satisfactory compliance program and use all the legal tools to create adequate protective measures.

Having adequate legal support before making the investment – during the strategic and business phases – is crucial. This not only helps avoid future penalties, but also ensures that funders’ and investors’ interest are appropriately protected.


2.1. Open Banking and PIX

The regulations governing open banking that were recently approved by the Brazilian Central Bank and the National Monetary Council through Joint Normative Instruction dated of May 4, 2020, are an important milestone for the Brazilian fintech market.

These regulations governs the well-known open banking, named as Open Financial System, having as main purposes: (i) encouraging innovation, (ii) promoting competition, (iii) increasing the efficiency of the National Financial System and the Brazilian Payments System, and (iv) promoting financial citizenship.

In summary, the Open Financial System seeks to literally open the market for the analysis and use of banking data so that the final customers, after being consulted and giving consent, can seek new financial products and services based on their banking history. Likewise, the banking data can be processed and used for financial products and services offered by a larger number of authorized agents, making the environment even more competitive. 

Open banking is to be implemented in four separate stages, beginning in November 2020 and scheduled to be fully implemented by October 2021. It is to be structured the following way in Brazil:

I – By November 30, 2020, financial institutions must disclose information about the products and services they offer;

II – By May 31, 2021, if authorized by the final customers, customer data will be shared;

III – By August 30, 2021, the payment transaction stage begins;

IV – By October 25, 2021, the expansion of open banking services. 

It is also important to note that, in parallel to and as a support for the development of open banking in Brazil, the PIX instant payment system is being implemented by Brazilian Central Bank and likely to revolutionize the payment methods market in Brazil.

PIX and instant payments are based on the premises of availability, speed, convenience, security, and open environment, multiple use cases and added information 18. They are defined by the Brazilian Central Bank as “electronic money transfers in which the transmission of the payment order and the availability of funds for the user receiving them occur in real time, with the service available 24 hours a day, seven days a week, every day of the year. The transfers occur directly from the user payor’s account to the user recipient’s account, without the need for intermediaries, which leads to lower transaction costs.


Although cryptoassets are long been present in the Brazilian economy, they do not yet have a legal or normative definition nor a single regulatory body to give them an exact legal definition. 

Cryptoassets are currently traded in Brazil by exchanges companies – which are not currently and specifically regulate yet, representing an economic and legal reality in Brazil of the 21st century. For so, Brazilian authorities have not only made statements about the legal nature but also taking efforts to implement a regulatory sandbox in order to further define and understand such assets, what can possibly bring up a secure legal definition for these virtual assets.

The Brazilian Central Bank’s view

The Brazilian Central Bank has stated over the course of the last decade that cryptocurrencies, or virtual currencies, are not subject to regulation, supervision or any type of control by the Brazilian Central Bank 19.

The Brazilian Central Bank has clearly argued that there is a difference between electronic currency, which is provided for in Law 12,865 of October 9, 2013, and virtual currency (cryptoassets) that, the Central Bank argues, have not been defined in any legal provision or regulatory area for which it has authority. This led to the introduction of Bill 2,303/2015, which is still under consideration, and aims to include virtual currencies under the definition of payment arrangements supervised by the Central Bank.

However, despite the statements, the Brazilian Central Bank has adhered to the proposal for a regulatory sandbox, which is headed up in Brazil in conjunction with the Brazilian Securities Commission, the Special Secretariat of the Treasury of the Ministry of the Economy and the Superintendency of Private Insurance (SuperintendĂŞncia de Seguros Privados), or SUSEP. The main objective of the regulatory sandbox is to allow companies to test innovations and disruptive technologies in the Brazilian capital, financial and insurance markets, while regulatory authorities at the same time test and analyze the security of these innovations. There is an expectation that the Central Bank will soon introduce a normative definition regarding the subject, ending any conflicts resulting from the current lack of definitions.

Additionally, it is important to note another important step by the Central Bank regarding the definition of cryptocurrencies. Beginning in the second half of 2019, the Central Bank has recognized cryptocurrencies as nonfinancial assets produced on Brazilian commercial balance sheets, maintaining that “because they are digital, cryptoassets do not have customs registration, but purchases and sales by residents in Brazil result in entering into foreign-exchange agreements. The import and export statistics for goods will therefore begin including purchases and sales of cryptoassets.”

The Brazilian Securities Commission’s view

The Brazilian Securities Commission (CVM), in turn, maintains that crypto assets might or might not have the legal nature of securities, meaning their public offerings could be subject to regulation by the market authority.

Such understanding is based, in particular, on the general definition of a security provided for in article 2(IX) of Law 6,385 of December 7, 1976 20, and, in the only precedent regarding classifying ICOs as a public offering of securities, CVM stated that the nature of a utility token (a cryptoasset intended to be used by its holder on an innovation platform developed based on raising the respective funds) should not trigger the need of regulation by CVM given the lapse, in such case, of the security nature as per Brazilian law.

Notwithstanding, on May 15, 2020, CVM Instruction 626/2020 was promulgated, providing the rules for the establishment and operation of the regulatory sandbox. Its purpose is:

I – Encouraging innovation in the capital market; 

II – Providing guidance to participants regarding regulatory issues during the development of activities to increase legal certainty; 

III – Decreasing maturation costs and time for the development of innovative business products, services and models;

IV – Increasing the visibility and traction of innovative business, with possible positive impact on its attractiveness for risk capital;

V – Increasing competition among service providers and suppliers of financial products on the securities market;

VI – Financial inclusion resulting from the launch of financial products and services that have lower costs and are more accessible; and

VII – Improving the regulatory framework that applies to the regulated activities.

The objectives listed above, together with statements from the Brazilian Securities Commission itself during discussions concerning Instruction 626/2020 regarding crypto assets possibly being subject to Brazilian Securities Commission regulation, could bear projects involving crypto assets and their offering on the market to create precedents regarding the definitions and rules to be applied when structuring and using these virtual assets. 

Finally, even if the rule above is applied with uncertainty and to only a limited number of companies (which must apply to be part of the regulatory sandbox project in light of the innovative activity), the results could define the terms and conditions related to crypto assets in this previously sparsely-regulated environment. 

Crypto currencies and Exchanges. Applicable Taxation and Tax Rules

– Personal income tax on capital gains

Brazilian Federal Revenue has interpreted cryptocurrencies as “assets and rights,” and not as currency properly speaking. In this regard, cryptocurrencies must be declared on the Assets and Rights Return as “other assets,” at their acquisition value.

Capital gains on the disposition of cryptocurrency are subject to the personal income tax. The tax rates are provided for in article 21 of Law 8,981/95, which concerns the taxation of capital gains on the disposition of assets and rights of any nature:

I – 15% on the portion of the gains that do not exceed BRL 5,000,000.00;            

II – 17.5% on the portion of the gains that exceed BRL 5,000,000.00 but do not exceed BRL 10,000,000.00;    

III – 20% on the portion of the gains that exceed BRL 10,000,000.00 but do not exceed BRL 30,000,000.00; and    

IV – 22.5% on the portion of the gains that exceed BRL 30,000,000.00.    

The rates indicated above are levied on the capital gains, which are considered to be the difference between the acquisition cost of the cryptocurrencies and the amount of their disposition.

The amount of the brokerage commission paid on the acquisition of cryptocurrencies through exchanges can be included in the acquisition cost under article 17(II) of IN/SRF 84/2001.

Capital gains seen within one month and up to the limit of BRL 35,000.00 are exempt under article 22(IV) of Law 7,713/88 and article 1(II) of IN SRF 599/2005.

The personal income tax is incident on capital gains separately – the capital gains amount should not be added to the basis for the annual income tax and the tax on the capital gains cannot be deducted from the personal income tax calculated in the annual income tax return (article 21(2) of Law 8,981/1995).

Income Tax on Payments to Beneficiaries Abroad in Cryptocurrencies (Natural Persons and Corporate Entities):

From a technical perspective, in a cryptocurrency transaction there is no physical transfer of the cryptocurrency from one location to another. There is therefore no foreign-exchange transaction in the manner described in legislation.

However, income tax law requires the withholding income tax at the source at a rate of 15% on any amounts paid, credited, delivered, employed or sent by a source located in Brazil to a natural person or corporate entity resident abroad. 

Therefore, payments made in cryptocurrencies to beneficiaries resident abroad are subject to this rule. On the other hand, there is no IOF tax because there is no formal foreign-exchange transaction.

– Cryptocurrencies: Accessory Obligations 

Normative Instruction 1,888/2019 establishes the duty to provide information regarding transactions with cryptoassets – such as bitcoin and other cryptocurrencies – to Brazilian Federal Revenue.

The rule requires that various transactions with cryptoassets be reported. These include purchase and sale, exchange, donation, transfer and withdrawal from exchanges, rent, payment in kind and issuance, among other things.

The obligations essentially fall on exchanges – which are defined as corporate entities that conduct cryptoasset transactions, including brokering, trading or custody, and that can accept any other payment methods, including other cryptoassets – as well as natural persons who conduct transactions with exchanges domiciled abroad or that conduct transactions on their own account, without using an exchange.

In regard to natural persons, the obligation to provide information is limited to transactions that exceed BRL 30,000.00 in one month.

This normative instruction requires that information in regard to the date of the transaction, type of transaction, cryptoasset used, amounts traded, the value in BRL with an itemization of service charges, if any, the addresses of the wallets for sending and receiving, identification of the exchange and identification of the principals in the transaction, among other things, be reported on a monthly basis.

The exchanges are also required to provide information on an annual basis regarding each user of their services, including the balance of fiduciary currencies in BRL, the balance of each type of cryptoasset and the acquisition cost in BRL declared by the users of their services.

The information must be provided to Brazilian Federal Revenue through the Coleta Nacional system, which is available through the Brazilian Federal Revenue website (e-Cac).

There is a provision for penalties for filing the information late or providing inaccurate information. These can reach 3% of the value of the transactions omitted or inexactly or incorrectly reported, in the case of corporate entities.




3.1. Taxation of the Sharing Economy

The term sharing economy describes an economic and social phenomenon that includes apps for transportation, deliveries and residential real estate rental that has become a greater factor in Brazilian culture and day-to-day life.

The sharing economy uses information technology to allow for resource optimization through the sharing of surplus. By facilitating access to information about the existence of goods and services whose supply was hidden, technology has contributed to reducing search and transaction costs, generating value and encouraging economic efficiency.

Below we discuss the taxation applicable to the main business models in this category:

Transportation Apps 

The majority of Brazilian courts have held that activities conducted by these companies are equivalent to the brokerage of services (between the user and the driver) and that they are provided remotely through online platforms. In light of this, the following basic tax treatment obtains:

ISS Tax on the Fee (Intermediation):

These transactions can be classified under item 10.02 of the list in Supplementary Law 116/03, which provides for the incidence of the Service Tax (Imposto sobre Serviços), or ISS, on acting as an agent, brokering or intermediating contracts of any kind.

The rates range from 2% to 5%, depending on the municipality in which the service provider’s establishment is located.

The calculation basis is the fee charged by the platforms (in other words, the commission for intermediation), which does not include the total value of the transportation service performed by the individual driver. The specific municipal law that is applicable must be consulted. 

Public Price:

Most large Brazilian municipalities, such as São Paulo, have been establishing the collection of a public fee from the transportation apps because they use public thoroughfares. This is somewhat questionable from a legal perspective because there is not a service provided by the municipal government of “making a public thoroughfare available.” Specific municipal law must be consulted regarding this matter.

Social Security Contribution:

Decree 9,792/19 requires that private individual passenger transportation drivers be registered as individual taxpayers under the General Social Security System. 

The sole paragraph of article 2 of that decree allows the drivers to register as Individual Micro-entrepreneurs (Microeempreendores Individuais), or MEIs, so long as they meet the requirements provided for in Simples Nacional legislation (article 18-A of Supplementary Law 123/2006).

The decree also provides that the Social Security tax will be paid on the driver’s own initiative.

Simples Nacional Management Committee Resolution 140/2018 includes the category of independent transportation apps driver as one of the occupations that can register as an individual micro-entrepreneur.

This possibility emphasizes the nature of the intermediation service provided by the apps and reinforces the absence of an employment relationship between the apps and the individual drivers. It also eliminates any liability by the apps for paying the social security tax owed by the drivers. This is because the tax payment made by the individual micro-entrepreneur includes municipal, state and social security taxes.

The courts have rejected attempts to classify the relationship between the apps and the individual delivery people as an employment relationship, recognizing the autonomy of the service performed by the individual delivery people in relation to the basic activity of the apps 21.

Delivery Apps

The taxation of delivery apps is, in general, similar to that of transportation apps. The majority of case decisions hold that this activity is one of intermediation, meaning that there is no employment relationship. These services are therefore subject to the ISS tax, with rates varying from 2% to 5%. However, local municipal law must always be consulted.

Simples Nacional Management Committee Resolution 140/2018 also includes the category of independent delivery people as one of the occupations that can register as an individual micro-entrepreneur.

Bike Sharing Apps

Bike sharing apps are a rental of chattel property. As such, they cannot be subject to either the municipal service tax (ISS) or the state Tax on the Circulation of Merchandise and Services (Imposto sobre Circulação de Mercadorias e Serviços), or ICMS, because they are not merchandise.

However, Brazilian municipalities, such as São Paulo, have been establishing public prices charged to transportation apps due to their use of public thoroughfares. This is somewhat questionable from a legal perspective because there is not a service provided by the municipal government of “making a public thoroughfare available.” Specific municipal law must be consulted regarding this matter.

3.2. Omnichannel and Taxation

Through the business strategy known as omnichannel or multichannel, businesses are able to integrate their sales and online and off-line service channels. This allows consumers to acquire merchandise through websites and/or digital platforms and choose the most convenient way to pick up or received that merchandise. The following are important multichannel methods:

  1. Pick up in store: the consumer acquires the merchandise over the Internet and picks it up at the seller’s physical location;
  2. Ship from store: the consumer acquires the merchandise over the Internet, the nearest physical store fills the order and sends the merchandise to the address indicated by the consumer;
  3. Click & collect: the consumer acquires the merchandise over the Internet, the e-commerce company sends the merchandise to a pick up point and the consumer goes there to receive the merchandise, which ends the purchase transaction;
  4. Showroom: the consumer goes to the physical store and, if the merchandise is not in inventory, the consumer is assisted in purchasing it over the Internet through the digital platform provided by the physical store; and
  5. Reverse logistics: the consumer acquires the merchandise at a particular physical or virtual location (including over the Internet) and, independently of cause, returns it to another partner establishment (especially a physical store or pick up point).

The methods described above can be complementary and the solutions can be mixed together. Additionally, this list is not exhaustive since the development of technology could lead to new business strategies.

On the one hand there is tremendous innovation and progress in the way retailers conduct their activities, while on the other the Brazilian tax system has not kept pace with these possibilities for selling/delivering merchandise. This is especially so in issues related to the ICMS tax and to the fulfillment of supplementary tax obligations. This is because, in the methods in which various establishments are involved (branches or partner establishments), various questions arise concerning issues such as: at which step in the process the ICMS tax should be charged since there are various shipments of merchandise to various establishments that are all connected with a single sales transaction; who is responsible for paying the tax in light of the several establishments involved; tax documents that must be issued; and questions involving the credit for the tax if the merchandise is returned (as occurs with reverse logistics), among others.

The scenario becomes even more complex when one considers that multichannel transactions can occur on an interstate or even international basis. Since Brazil has 26 states and a Federal District, one can imagine the difficulties that arise when conducting such transactions. Lawyers with a focus on the tax area should be consulted to properly map and mitigate the risks involved in this kind of transaction and request authorization for special payment methods from state authorities, among other things.

In an effort to solve some of the problems resulting from these strategies, Supplementary Law Bill 148/2019 is currently being considered by Congress. This bill would amend certain provisions of Supplementary Law 87/1996 (the Kandir Act), which contains the general rules applicable to the ICMS tax on a national level.


1 – See, for example, a study published by the OECD that shows that startups contribute proportionally more to innovation and job creation than do incumbent companies from the traditional economy: Calvino, F., C. Criscuolo and C. Menon (2015), “Cross-country evidence on start-up dynamics”, OECD Science, Technology and Industry Working Papers, 2015/06, OECD Publishing, Paris.

2 –  RIES, Eric. A Startup Enxuta. 1. ed. Brasil: Leya Brasil, 2012.

3 –

4 – Article 2(I) of CVM Instruction 588/2017

5 – Under article 2 of Law 6,385 of December 7, 1976.

6 – A natural person or corporate entity with proven investment experience under the terms of article 35(2) and authorized to lead a participatory investment syndicate (article 2(VI) of CVM Instruction 588/2017)

7 – Under the terms of chapter VII of CVM Instruction 539/213, as amended.

8 – Under the terms of article 4(III) of CVM Instruction 588/2017.

9 – Under the terms of article 1,368-C of the Brazilian Civil Code (Law 10,406 of January 10, 2002).

10 – In accordance with article 4 of CVM Instruction 578/2016.

11 –  In accordance with article 15(I) of CVM Instruction 578/2016.

12 – In accordance with article 15(II) of CVM Instruction 578/2016..

13 – Obs.: Valid so long as the fund complies with CVM limits and rules and has in its portfolio at least 67% shares of share corporations, debentures convertible into shares and warrants. If these limits are not complied with, the fund will be taxed according to the table of decreasing income tax rates provided for in article 1 of Law 11,033 (article 2(5) of Law 11,312; article 32(5) of Normative Instruction 1,585) 15%-22.5%.

 14 – This benefit does not apply to the owner of a quota in a private equity fund (FIP), quota investment fund of private equity fund (FIC-FIP) or emerging company investment fund (FIEE) who holds (alone or jointly with related parties) 40% or more of all of the quotas, or whose quotas give him the right to income greater than 40% of the total income earned by the fund; or to funds that hold in their portfolio more than 5% of equity in debt instruments (except debentures convertible into shares and Brazilian government securities) (articles 2 and 3(1)(I-II) of Law 11,312; article 95(1 and 3) of Normative Instruction 1,585).

15 –  Article 3 of CNSP Resolution 322 of July 20, 2015.

16 – The following operations handling personal data are subject to this law: (i) those done within Brazil; (ii) those that have as their purpose offering or supplying goods or services with the handling of data of individuals located in Brazil; or (iii) those where the personal data being handled was collected in Brazil.

17 – Article 11-A of Law 12,587/2012.

18 –

19 –

20 – See recent Decisions by the Superior Labor Court and the Superior Court of Justice: TST-RR-1000123-89.2017.5.02.0038, Fifth Panel, Reporting Justice Breno Medeiros, 02/05/2020/STJ, CC 164.544/MG, Second Section, Reporting Justice Moura Ribeiro, 08/28/2019



Lawyer in the Tax Litigation area at the law firm Gaia, Silva Gaede & Associados – Sociedade de Advogados in São Paulo

Postgraduate degree in International Tax Law from IBDT

Master’s degree in Economic, Financial and Tax Law from the University of São Paulo

Law degree from Mackenzie Presbyterian University



Senior Manager in the Business Consulting area of the law firm Gaia, Silva, Gaede & Associados – Sociedade de Advogados in Curitiba

Master’s degree in International Business Law from The London College – UCK

Postgraduate degree in Accounting Management from the Administration and Economics Faculty – FAE

Specialization in Business Law from the Brazilian Academy of Constitutional Law – ABDCONST

Law degree from Centro Universitário Curitiba – UniCuritiba



Lawyer in the Business Consulting area of the law firm Gaia, Silva, Gaede & Associados – Sociedade de Advogados in Curitiba

Law degree from the Pontifical Catholic University of Paraná – PUCPR

Pursuing a postgraduate degree in Corporate Law from the Pontifical Catholic University of Paraná – PUCPR



Lawyer in the Business Consulting area of the law firm Gaia, Silva, Gaede & Associados – Sociedade de Advogados in Curitiba

Law degree from FAE – University Center



Lawyer in the Corporate Law and Contracts area of the law firm Gaia, Silva Gaede & Associados – Sociedade de Advogados in São Paulo

LLM (Contract Law) from Instituto de Ensino e Pesquisa – INSPER

Law degree from Mackenzie Presbyterian University

Gaia, Silva, Gaede & Associados

Rua da Quitanda, 126
BR-01012-010 São Paulo – SP
Tel +55  (11) 3797 7400/3797 4435
E-mail: [email protected]

FCR Law / Fleury, Coimbra & Rhomberg Advogados

Tax Challenges in the Digital Economy

The digitalization of the economy is an unquestionable reality, originated from the technological development verified in the recent years. In Brazil, this reality poses challenges to the application of the tax law, especially considering that the local tax system is based on a rigid Federal Constitution, promulgated in 1988, a time when the digital economy was unthinkable. Moreover, the terms “digital” and “internet” do not even appear in the constitutional text, in any of its parts. Thus, it is possible to see that, the Brazilian tax system is based on an “analogical” Constitution.

The innovative environment of the digital economy has contributed to the development of new business models and consumer relations, originated from the digital revolution, which has changed the ways and means used in the production, circulation and use of what the economic activity makes available to meet consumer demands, with the prevalence of intangible assets as major components of the value of the businesses.

Examples of new business models and consumer relations include cloud computing, digital media platforms, shared economy platforms, e-commerce, streaming of audio and video content over the Internet, marketplaces and others. 

These changes cause difficulties with the qualification of these models and relations for the purpose of defining the taxes levied on the digital economy. This is because, as mentioned, the current Brazilian constitutional tax system has been shaped based on the “traditional” economy, with the prevalence of distinct tax bases for the taxation of goods and services. Such changes also lead to conflicts of jurisdiction between taxing entities, especially between States and Municipalities.

Specifically regarding the use of technology in the new business models, there is also the issue of defining whether it represents a simple tool for the development of the business (“means activity”) or if it is the object of the business itself (“core activity”). The tax implications in these situations are different.

The aspects related to the Brazilian taxation on some of the new business models that have emerged in the digital economy will be presented below. The aim of this publication is to present general considerations about the matter, for information purposes. The subject is complex, and, for this reason, we do not intend to exhaust it on this publication.


1. Taxation on software



1.1. Basic tax regimes


General information related to the tax regimes to which taxpayers may be subject to in Brazil can be found on items 11.1 to 11.21 of the publication “Doing Business in Brazil” from Swisscam Brasil 1. 

Some peculiarities of the regimes applicable to legal entities operating with the software licensing activity are presented below.


a) Corporate income tax (“IRPJ”) and Social contribution on net profit (“CSLL”) – presumed profit method on transactions with software


Corporate income tax (“IRPJ”) and Social contribution on net profit (“CSLL”) are federal taxes levied on the profits of legal entities. IRPJ is levied at the rate of 15% and, on the cases in which the tax base exceeds R$ 240.000,00 annually, a surtax of 10% is also applied.  CSLL is levied at the rate of 9%, except in the case of financial institutions, which are subject to specific rates. 

As mentioned on items 11.3 and 11.4 of Swisscam Brazil’s “Doing Business in Brazil” publication, the calculation basis of IRPJ and CSLL may be determined by the actual profit method (i.e. net profit adjusted by additions and exclusions provided for in the legislation) or presumed profit method (i.e. application of a variable percentage according to the activity and applicable on the gross revenue earned by the legal entity), according to the method chosen by the taxpayer.

Under the presumed profit method, the legal entity’s profit is defined by applying a fictitious percentage, fixed by law and variable according to the activity developed by the legal entity, on its gross revenue.

The percentage applicable in the case of activities of sale of goods is 8% for IRPJ purposes and 12% for CSLL purposes. 

In the case of rendering of services in general, the applicable percentage on gross revenue is 32%.

Specifically in relation to software licensing activities, the following percentages apply, according to the understanding consolidated by the Brazilian Internal Revenue Service (IRS) 2:

  • 8% (IRPJ) and 12% (CSLL): in the case of licensing of standard software (software not developed on demand), prevailing the nature of sale of goods.
  • 8% (IRPJ) and 12% (CSLL): in the case of licensing of adaptable or customizable standard software, when the adaptation or customization corresponds to mere adjustments in the software, allowing it to meet the needs of the client, prevailing the nature of sale of goods.
  • 32% (IRPJ and CSLL): in the case of licensing of software developed on demand to the client, prevailing the nature of a service provision. This percentage also applies if the adaptation or customization represents the development of a software that adheres to the client’s needs and implies a new version of the software or is significant to the point that it does not qualify as a mere adjustment.
  • 32% (IRPJ and CSLL): in the case of provision of technical support services in general, related to the licensed software. 

Thus, it can be noted that in the case of licensing of a standard, adaptable or customizable, software, the tax burden of IRPJ and CSLL on the presumed profit is lower than the tax burden applicable in the case of the development of software on demand.


b) Social Contributions on Revenues (“PIS” and COFINS”) – cumulative system on operations with software


As mentioned on item 11.8 of Swisscam Brazil’s “Doing Business in Brazil” publication, the Contribution for the Financing of Social Security (“COFINS”) and the Social Integration Program (“PIS”) are levied on the revenues received by the Brazilian legal entities, with the exception of few cases. 

As a rule, entities that are subject to the actual profit method are subject to the non-cumulative system of the contributions 3. 

According to this system, the taxpayer can calculate credits from the contributions, based on certain costs and expenses stablished by Law. The contributions are levied at the rate of 7,6% (COFINS) and 1,65% (PIS).

In contrast, legal entities opting for the presumed profit method are subject to the cumulative system of contributions 4. Under this system, it is not possible to calculate credits from the contributions, which are levied at the rate of 3% (COFINS) and 0.65% (PIS).

It should be noted that some legal entities and some types of revenues are compulsorily subject to the cumulative system of the contributions, regardless of the profit method adopted.

That is the case of revenues earned by IT services companies, arising from software development activities and their licensing or assignment of the rights to use, as well as analysis, programming, installation, configuration, consulting, technical support and maintenance or updating of software 5. 

Such obligation does not extend to the commercialization, licensing or assignment of the rights to use imported software 6.


1.2. Taxation on software – conflict between ISS and ICMS 


In Brazil, the legal nature of the software and its corresponding tax incidence are the subject of discussions between taxpayers and tax authorities, as well as conflicts of jurisdiction between States and Municipalities.

The concept of software is complex, involving, in principle: (i) the intangible content, which involves the source code and functionality of the software; and; (ii) the corpus mechanicum, in other words, the physical medium on which the intangible content of the software is found. 

The discussion about the competence to tax such transactions arises from the complexity in defining the legal nature of the economic exploitation of software: whether it corresponds to a circulation of goods, taxable by the States by means of the Tax on the Circulation of Goods and Services (“ICMS”); to a rendering of services, taxable by the Municipalities by means of Services Tax (“ISS”); or to an activity different from both, not taxable by either ICMS or ISS.  

With the technological evolution, software is becoming less and less available by means of physical support, which gave it the tangible aspect of a good, and increasingly by means of electronic data transfer or remote access (download or streaming).

In this context, we verify the emergence of the Software as a Service (SaaS), corresponding to an integrated solution of software, server and data processing. Its provision is not related to the purchase of licenses or to a download, but to its access and use through the Internet. In general, the provision of the use of SaaS is remunerated by means of monthly or annual fees.

The discussion was enhanced in 2015 by the National Finance Policy Council (CONFAZ) when publishing ICMS Agreement 181, from December 29th, through which the Council authorized several States to grant a reduction in the tax base for operations with “digital goods,” such as “standard software, programs, electronic games, applications, electronic files and similar, even if they are or can be adapted, made available by any means, including operations carried out through electronic data transfer”. The authorized reduction corresponded to the minimum tax burden of 5% of the value of the operation (significant reduction considering that ICMS rates vary between 4%, 7%, 12% and 18%, depending on the State and type of transaction).  

Until then, only in a few States the ICMS was levied on transactions with software and the tax base corresponded to the value of the physical support in which it was made available, which meant that the tax did not reach transactions with software made available without physical support, by electronic means or remote access (download or streaming).

In October 2017, CONFAZ published ICMS Agreement 106, from September 29th, with the purpose to stablish the ICMS collection procedures for transactions involving such digital goods provided by means of electronic data transfer.

Thus, some States, such as SĂŁo Paulo and Rio de Janeiro, currently have provisions in their local legislation to charge ICMS on transactions with such digital goods destined to end-consumers, including standard software, even if customizable. For the States, only the software that is developed on demand would not be subject to ICMS, but subject to ISS.

Similarly, the Municipalities also have a provision in Law to charge ISS on such transactions, based on item 1.05 of the list attached to Supplementary Law 116/03 (1.05 – licensing or assignment of rights to use software). In general, the Municipalities understand that the ISS is levied regardless of whether the software is standard or developed on demand. 

That is the conflict of jurisdiction stablished between States and Municipalities.

It should be noted that the levy of both ICMS and ISS in this transaction may be challenged in court. This is because ICMS is a tax levied on the circulation of goods, understood as the transfer of ownership from the seller to the buyer. Such transfer does not occur in the provision of software through licenses of use or access to SaaS. In addition, one may question the characterization of the software as a good, given its intangibility 7.

The levy of ISS can be questioned because of the fact that ISS is a tax levied on the provision of services, characterized as an “obligation to do” something previously non-existent for the benefit of the service recipient. In the case of the licensing of use of software there is no “obligation to do” by the provider, but an obligation to give a license to use or access the software. In that case, the “obligation to do” would only be characterized in the case of development of the software on demand. 


2. Online advertising   


The tax levy on advertising activities has been object of doctrinal and jurisprudential questioning for years, especially with respect to its legal nature.

The activity was established on item 17.07 of the list of services annexed to the Supplementary Law 116/03 (“promotion of texts, drawings and other advertising and publicity materials, by any means”), but the item was vetoed at the time of the issue of the Law. 

Still, some Municipalities, such as SĂŁo Paulo 8, tried to tax the activity by framing it in other items of the list of services, such as “advertising and publicity, including sales promotion, planning of campaigns or advertising systems, elaboration of drawings, texts and other publicity materials” (item 17.06).

In general, it is discussed whether the activity has the nature of: 

(i) supply of communication services taxable by ICMS, within the jurisdiction of the States; 

(ii) supply of services taxable by ISS, withing the jurisdiction of the Municipalities; or 

(iii) rental/assignment of online advertising space, activity not subject to any of the taxes, since it is considered as rental of a movable asset. The non-levy of ISS on the rental of movable assets was recognized by the STF, which issued Binding Precedent 31 on the following terms: “It is unconstitutional to levy the Municipal Services Tax – ISS on the rental of movable assets”. The Court later recognized that the same understanding applies to the rental/cession of advertising space, even considering it as an assignment of rights 9.

With the issue of Supplementary Law n. 157/2016, which included on the list of services the subitem 17.25 – Insertion of texts, drawings and other advertising and publicity materials, in any means – the Municipalities now have legal grounds to charge ISS on the activity.

This legislative change has particularly affected the online media sector. Nevertheless, there are grounds to judicially question the levy of ISS on the activity, especially if we consider the activity as a rental/assignment of online advertising space.

It should be noted that advertising carried out in newspapers, magazines, radio and open TV, is not taxed, due to the exemption provided for on article 150, VI, d, of the Federal Constitution.


3. Provision of video, audio, text content, by means of streaming 


With the emergence of the online streaming of audio and video business model, in 2016, the ISS legislation was changed to include the activity on the list of taxable services, in its subitem 1.09: Provision, without definitive assignment, of audio, video, image and text content over the Internet, respecting the exemption of books, newspapers and periodicals.


4. Cross-border technology transactions 


The taxes levied on some international operations involving transactions with services and rights on the digital economy field will be presented below.


4.1. Import of technical services, technical and administrative assistance 


Remittances for the payment of import of technical services, technical and administrative assistance are subject to the taxes presented below. For more details regarding the taxes, refer to the Swisscam Brazil’s “Doing Business in Brazil” publication.  

  • Withholding income tax (WHT): Levied at the rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25%. As a rule, WHT is a burden of the beneficiary of the income and is deducted from the amount to be paid. Thus, in a remittance of R$ 100.00, WHT will be due at the amount of R$ 15.00 and the beneficiary will receive R$ 85.00. The payer and the beneficiary can establish that the burden of the tax is to be transferred to the payer, in which case the income is considered to be net and a gross up must be done. Considerations regarding the application of double tax treaties can be found on item 11.22 of the the Swisscam Brazil’s “Doing Business in Brazil” publication.  
  • Contribution for Intervention in Economic Domain (CIDE): Levied at the rate of 10%. CIDE is considered to be a cost of the importer of the services and it is not a recoverable tax. 
  • PIS/COFINS-Import: Levied at the rate of 7,6% (COFINS) and 1,65% (PIS). If the taxpayer is subject to the non-cumulative system of the contributions, credits can be calculated from the contributions paid on imports, as long as some legal requirements are met.
  • Tax on Financial Transactions (IOF): Levied at the rate of 0,38% on the amount effectively remitted abroad for the payment of services.
  • Service Tax (ISS-Import): Levied at rates that vary from 2% to 5%, depending on the Municipality where the importer is located and the type of service that is provided. 

For the purposes of the levy of the taxes, the following is considered: 

  • Technical service: the execution of a service that depends on technical specialized knowledge or that involves administrative assistance or consulting services, performed by independent professionals or employees or that derive from automated structures with clear technological content; and 10; e
  • Technical assistance: the permanent assistance rendered by the provider of a process or secret formula, by means of technicians, drawings, studies, instructions sent to Brazil and other similar services, which make effective the use of the process or formula provided 11.

Given the wide definition of “technical service” stablished by the IRS, in general, most part of the imported services are considered to be technical. 

The development of software on demand is included on the definition.


4.2. Remittances for the payment of licenses to use off-the-shelf software


For tax purposes, off-the-shelf software, those that are standard, made available on a large scale, licensed in a general, non-exclusive way, even if customizable, have been considered by the tax authorities as a merchandise. Thus, international remittances for the payment of licenses to use such software, when imported without physical support (via download), are subject to the following taxes:

  • Tax on Financial Transactions (IOF): Levied at the rate of 0,38% on the amount effectively remitted abroad for the payment of licenses.


  • Service Tax (ISS-Import): The levy to the tax on the licensing of rights to use software can be judicially questioned since it is not an effective provision of services. However, the tax is charged by the Municipal tax authorities 12. The applicable rates vary from 2% to 5%, depending on the Municipality where the licensee is located.


Note that according to the understanding of the IRS, there is no levy of WHT 13, CIDE 14 and PIS/COFINS-Imports 15 on the operations.

There is also an attempt of the States to charge ICMS on transactions with standard software, provided by any means, including by download or streaming. As mentioned, the levy can be questioned. 


4.3. Remittances for the payment of rights to use Software as a Service (SaaS)


According to the understanding of the IRS 16, international remittances to pay for Software as a Service (SaaS) are taxed in the same way as the import of technical services. Such understanding can be questioned, considering that the provision of a SaaS is not necessarily a provision of a service.

Similarly, there is also an attempt of the States to charge ICMS on transactions with standard software, provided by any means, including by download or streaming. As mentioned, the levy can be questioned. 


4.4. Remittances for the payment of royalties for the rights to commercialize SaaS


Royalties consist of revenue arising from the use, fruition and exploitation of rights, such as rights to commercialize software, rights to use technological platforms, right to use trademarks and patents, among others. 

The international remittances for payment of royalties for the right to commercialize SaaS and software in general, are subject to the taxes below.

Note that the remuneration by means of royalties is a viable alternative for entities that intend to provide SaaS on the Brazilian Market, subject to a lower tax burden when compared to the direct import of licenses to use SaaS 17.

  • Withholding income tax (WHT): Levied at the rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25%. 
  • Contribution for Intervention in Economic Domain (CIDE): The contribution is not levied on the remuneration from the license to commercialize software, except if it involves the transfer of the corresponding technology, in which case the tax is levied at the rate of 10%. 
  • Tax on Financial Transactions (IOF): Levied at the rate of 0,38% on the amount effectively remitted abroad for the payment of royalties.
  • Service Tax (ISS-Import): The levy of the tax on the licensing of rights to use software can be judicially questioned since it is not an effective provision of services. However, the tax is charged by the Municipal tax authorities 18. The applicable rates vary from 2% to 5%, depending on the Municipality where the licensee is located. 


4.5. Remittances for the payment of online advertising space 


The acquisition and sale of online media is a business model that has consolidated with the growth of the digital economy. A lot of the suppliers of online advertising space do not have Brazilian subsidiaries, which make the international remittances to pay for the space needed. 

As mentioned, the provision of online advertising space can be considered as a rental/assignment of a movable good and, thus, not a provision of services. Therefore, the remittances for the payment of the spaces are subject to the following taxes:

  • Withholding income tax (WHT): Levied at the rate of 15%, except if the income is earned by a legal entity located on a tax haven; in this case the applicable rate is 25%. 
  • Tax on Financial Transactions (IOF): Levied at the rate of 0,38% on the amount effectively remitted abroad for the payment of the space.

It is important to formalize the relation between the seller and the buyer of the space by means of a specific rental agreement so that the corresponding tax treatment can be applied and to support that it is not an import of services.


4.6. Remittances for the payment of datacenter 


According to the IRS’s understanding 19, international remittances for the provision of data center infrastructure (storage and processing of data for remote access) are considered, for tax purposes, remuneration for the provision of technical services and not remuneration arising from a rental of movable good. Therefore, they are taxed in the same way as the import of technical services. 

1 – Available at: 11.1. a 11.21. Taxation in general (taxes, fees and contributions) | Swisscam Brasil

2 – Answer to Advance Tax Ruling Request COSIT n. 269/19 and 123/14.

3 – Stablished by Law n. 10,637/02 and n. 10,833/03.

4 – Stablished by Law n. 9,718/98

5 – Pursuant to item XXV, article 10 of Law n. 10,833/03.

6 – Pursuant to paragraph 2, article 10 of Law n. 10,833/03.

7 – The levy of ICMS on those transactions is the subject to Direct Unconstitutionality Action (ADI) n. 1,945, pending trial by the Federal Supreme Court (STF).

8 -Normative Opinion SF n. 1/2016.

9 – AI 854553, judged in 2012.

10 -Article 17, II, a, Normative Instruction RFB n. 1.455/14.

11 – Article 17, II, b, Normative Instruction n. 1.455/14.

12 – Pursuant to subitem 1.05 of the list annexed to the Supplementary Law n. 116/03: licensing or assignment of rights to use software

13 – Answer to Advance Tax Ruling Request COSIT n. 407/2017.

14 – CIDE is not levied, except if the source code of the software is transferred.

 15 – Answer to Advance Tax Ruling Request COSIT n. 303/2017

16 – Answer to Advance Tax Ruling Request COSIT n. 191/2017.

17 – Technical services taxation, as per the understanding of IRS.

 18 – Pursuant to subitem 1.05 of the list annexed to the Supplementary Law n. 116/03: licensing or assignment of rights to use software.

19 – Declaratory Act n. 7/2014.

Authors: Marcelo Coimbra, Julia Lima

Fleury, Coimbra & Rhomberg Advogados

Rua do Rocio, 350 – 10º andar – Vila Olímpia
BR-04552-000 São Paulo – SP
Tel (11) 3294 1600

[email protected]