Venture Capital | 3 Points About Transfer Abroad of Corporate Control of Brazilian Startups in Venture Capital Rounds

It is common in venture capital funding rounds with foreign investors that Brazilian startups are required to transfer corporate control abroad.

See below 3 recurring points on this topic that raise doubts for startups, founders and investors in funding rounds:

1. Why do foreign investors condition the investment to the transfer of control of the startup abroad? Venture capital is one of the riskiest investment modalities, as startups are generally pulling their businesses. The risk/opportunity equation is directly proportional and, on the risk side, there are many linked to the target’s operation.

In this context, foreign investors prefer to acquire the capital of local startups through vehicles constituted outside Brazil in order to (i) enter into investment and shareholder agreements with the startup founders in jurisdictions with stable and clear laws and court decisions on venture capital – the state of Delaware (USA) being the most used by US-based “VCs”, and (ii) the tax consequences on the investment made and capital gain in an eventual future exit.

2. How is the startup transfer of corporate control to abroad implemented? The transfer takes place through the constitution of a holding company abroad (usually Delaware), and transfer, by the shareholders of the Brazilian startup, of the controlling shares to the holding.

These transfers of equity interest abroad and the new control structure must be (i) documented by the necessary corporate acts, (ii) registered with the Brazilian Central Bank, to the extent that the foreign holding company will hold the capital of the Brazilian startup as foreign direct investment – ​​FDI, and (iii) declared to the Brazilian Internal Revenue Service (Receita Federal).

3. Will the founding shareholders hold shares directly in the foreign holding company? When transferring the shares of the startup to the foreign holding company, the founding shareholders start to hold the shares of the holding company, which, in turn, directly controls the Brazilian startup.

Simultaneously with the transfer of corporate control to the holding company abroad, the shareholders must enter into a shareholders’ agreement at the holding company’s level to regulate the Brazilian subsidiary’s business, and corporate matters, such as capital contributions, dilution, drag along, tag along, non compete, among others.

According to the tax treaties, conventions and accords between Brazil and the country of the holding company (example, USA), it is common for the founding shareholders to also constitute an additional vehicle in jurisdictions such as the Cayman Islands, BVI, among others, which will hold the shares of the holding company.

If created in these locations, the shares that the founders will hold in this additional investment vehicle must be declared to the Brazilian Internal Revenue Services, as well as the profits and other income received through it in Brazil. With the increasing flow of investments from foreign investors in Brazilian startups, the issue of transferring corporate control abroad will become more and more discussed by the founders.


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