The Convertible Loan (into equity) is widely used to document investment in Brazilian companies, mainly startups.
It is necessary to pay attention to 2 key points.
1. Change in corporate form. Generally, companies are constituted in the form of limited liability companies, as this form brings lower administration costs and time to comply with compliance.
However, in the case of the convertible loan into equity, if the investor decides to enter the company effectively, it is advisable that the company be transformed into a corporation.
The reason is because the premium for the sale of the shares by the company being invested is not taxed only if the company has the form of a corporation. If it remains as a limited liability, there is a 34% tax on the amount invested. Imagine you entering a company with an investment of $ 10 million, and, at the entrance, already having to leave approximately $3.4 million to the government in taxes.
2. Dividends. Dividends are exempt from taxes. In a limited liability company, it is possible to distribute dividends unrelated to the shares. For example, someone who has 10% of the shares can keep 50% of the profits, if it is agreed among the partners.
In the corporation, this disproportionate distribution of profits cannot be made. The alternative is to create two classes of shares, and distribute them in the best way to represent the differences in the distribution of dividends and voting power in the company.
Therefore, it is very important for the tax and corporate areas to work together to seek the best tax efficiency.