How startup investments are taxed in Brazil: convertible loans and equity

This note covers individual investors who are tax residents of Brazil. Corporate investors, investment funds and foreign investors are subject to separate rules that are not discussed here. The sales discussed are private transactions, carried out outside the stock exchange and organized over-the-counter markets.

At a glance: which tax applies at each stage

Before conversion, the investor is a lender

The Brazilian Startup Legal Framework (Complementary Law No. 182/2021) lists the convertible loan among the investment instruments that do not form part of the company’s capital (article 5, paragraph 1). An investor using this route becomes a quotaholder or shareholder only after formal conversion into equity (article 5, paragraph 2) and, until then, is not treated as a quotaholder or shareholder (article 8, I). The law does not create a separate tax regime for these instruments. For income tax purposes, the starting point is therefore the loan agreement.

If the loan bears interest, that interest is income to the investor. When the payer is a company, the startup withholds income tax under a declining rate schedule (article 1 of Law No. 11,033/2004 and article 47 of Normative Instruction RFB No. 1,585/2015): 22.5% for up to 180 days, 20% for 181 to 360 days, 17.5% for 361 to 720 days and 15% after that. The period runs from the date the funds are advanced to the date the interest is paid, including when interest is paid in installments. If the loan has an indefinite repayment term, the rate is 22.5% (article 47, paragraph 4, of the same Normative Instruction). The withholding is final. The income is reported as subject to final withholding, although it may still count toward the annual minimum tax, where applicable.

Many convertible loans carry no interest. In that case, no income arises during the term of the loan, and repayment of the amount lent alone does not trigger tax. When the agreement provides for interest to be converted into equity, the conversion of that interest is treated separately. In a ruling on a loan between two companies, the Brazilian Federal Revenue Office (RFB) treated the conversion of debt into capital as a form of payment for purposes of withholding on the interest (COSIT Tax Ruling No. 190/2015). The agreement should therefore address how that interest will be handled and whether the startup will have the cash to pay the tax.

What about IOF?

The tax on financial transactions (IOF) applies to loans of money when the lender is a legal entity (article 13 of Law No. 9,779/1999 and Declaratory Act SRF No. 30/1999). Where the investor is an individual, the RFB has ruled that the tax does not apply (Tax Ruling SRRF04/Disit No. 76/2012). Where the investor is a company, the startup, as borrower, is the taxpayer, and the lender collects and pays the tax. Other convertible instruments, such as debentures, may be treated differently.

The nature of the payment determines how the preference is taxed

A liquidation preference gives the investor a contractual priority to receive certain amounts on a liquidity event, such as the sale of the startup. That priority does not guarantee that enough money will be available, and it does not rank ahead of creditors in a liquidation.

If the transaction extinguishes the loan before conversion, the portion that compensates the lender, such as the second half of a 2x preference, may be taxed as income from the loan. This can happen even if the payment is made by a third party, such as the buyer, on the startup’s behalf. Who transfers the money does not, on its own, determine the tax nature of the payment.

If the investor converts and then actually sells the equity stake, the return is governed by the capital gains rules. An assignment of the loan receivable to a third party, without conversion, is a different transaction and calls for its own analysis.

If the money comes out of the company itself, in a liquidation or a capital reduction, the amount received may fall into three categories: a return of the capital invested, a distribution of profits, or a capital gain, when the cash returned exceeds the tax cost of the stake. Each portion follows its own rules, and returns of capital in kind are subject to a specific regime (article 22 of Law No. 9,249/1995).

A worked example

An investor advances R$ 1 million under a convertible loan with no periodic interest, an indefinite repayment term and a right to receive 2x on a liquidity event. Three years later, the startup is sold, and the investor receives R$ 2 million on either path. If the investor takes that amount to settle the loan, and the R$ 1 million excess is treated as compensation for the loan, the withholding rate is 22.5% because the loan has an indefinite repayment term: the tax comes to R$ 225,000 and the investor keeps R$ 1.775 million. If, instead, the investor converts the principal at its tax cost and sells the stake for the same R$ 2 million, the R$ 1 million capital gain falls in the lowest bracket, at 15%: the tax comes to R$ 150,000 and the investor keeps R$ 1.85 million. In this example, converting leaves the investor R$ 75,000 better off after tax. If the loan had a fixed repayment term, with payment still occurring three years after the investment, the withholding tax rate would be 15%, and both options would result in the same tax liability. The example disregards transaction costs and any effect of the annual minimum tax.

On conversion, the loan becomes equity

On conversion, the investor exchanges the loan for quotas or shares. When the loan principal is used to pay up capital at its tax cost, the individual generally recognizes no capital gain, and that amount becomes the tax cost of the stake (article 23 of Law No. 9,249/1995). If the tax cost of the loan differs from the value assigned to the capital contribution, or if interest is converted, the tax consequences must be analyzed separately. For that reason, the investor should keep the agreement, proof of the transfer of funds and the corporate act approving the conversion.

For the startup, the conversion may allocate part of the subscription price to share capital and part to a capital reserve as share premium. For corporations (S.A.), article 38, I, of Decree-Law No. 1,598/1977 provides that this premium is not included in taxable income under the actual profit (lucro real) regime, subject to the statutory requirements. For Brazilian limited liability companies (Ltda.), the issue is disputed. In 2014, the Superior Chamber of the Administrative Council of Tax Appeals (CARF) held, by casting vote, that a premium on the issuance of quotas is taxable (Decision No. 9101-002.009). The precedent signals a risk, and whether it applies depends on the company’s tax regime, its corporate structure and how the transaction is booked. This is one more point to weigh before converting a loan into equity in a Ltda. company, alongside the corporate issues covered in our note on liquidation preferences.

Complementary Law No. 182/2021 also requires the startup to record the amounts received according to the accounting nature of the instrument (article 5, paragraph 3).

After conversion, the investor is an equity holder

On a private sale of the stake, tax is levied on the capital gain, that is, the difference between the sale price and the tax cost. The rates are progressive and apply to each bracket of the gain (article 21 of Law No. 8,981/1995): 15% on the portion up to R$ 5 million, 17.5% on the portion between R$ 5 million and R$ 10 million, 20% on the portion between R$ 10 million and R$ 30 million, and 22.5% on anything above R$ 30 million. Sellers calculate and pay the tax themselves.

Where there is a preference, each seller computes the gain based on the share of the price allocated to that seller under the waterfall, the rule that governs how the proceeds are split, and on the tax cost of that seller’s own stake. The preference changes how the price is divided, but it does not, by itself, tell you who will have the larger taxable gain: a founder with a very low tax cost may have a larger gain while receiving less. The split must be backed by the equity holders’ rights and by the transaction documents.

Dividend taxation changed in 2026. Since January, profits and dividends above R$ 50,000 in a month, whether paid, credited, applied or delivered by the same company to the same individual who is a tax resident of Brazil, are subject to 10% withholding on the full amount (Law No. 15,270/2025). The amount withheld is taken into account in the annual tax return and may result in a refund. The same law created an annual minimum tax for individuals with annual income above R$ 600,000, at a rate that rises to 10% for income of R$ 1.2 million or more. Dividends count toward this calculation, including those not subject to monthly withholding, and interest subject to final withholding may also count, with credit for the tax already withheld. Capital gains from private sales, such as those discussed here, are generally excluded. Transition rules apply to profits earned through 2025. For startup investors, who usually earn their return by selling their stake, this means that return generally falls outside the minimum tax.

What about angel investment?

The term angel investor usually refers to anyone who invests early in a startup, through any instrument. Complementary Law No. 123/2006 (article 61-A), however, provides for a specific contract, the participation agreement (contrato de participação), which is also listed in the Startup Legal Framework. For that contract, Normative Instruction RFB No. 1,719/2017 applies the same declining rates, from 22.5% to 15%, depending on the term.

Practical steps

• Specify in the loan agreement whether interest accrues and, if so, how it will be paid on conversion and who will provide the cash for the withholding tax.
• Set a definite repayment term in the loan agreement. Without one, the rate on the income is 22.5%.
• Model both paths on a liquidity event: collecting the preference as a lender, or converting and selling. The comparison should look at net proceeds, after tax.
• Check the type of company before conversion. In a Ltda. company, share premium may lead to a tax dispute for the startup.
• Agree with the accountants on how the instrument will be classified, based on its terms and the applicable accounting standards, as required by Complementary Law No. 182/2021 (article 5, paragraph 3).
• If the investor is a company, include IOF in the cost of the round.
• Keep the documents that support the tax cost of the stake: the agreement, proof of the transfer of funds and the conversion act.
• Put the waterfall in writing, backed by the equity holders’ rights, the shareholders’ or quotaholders’ agreement and the sale agreement.

Frequently asked questions

Does the investor pay tax on a convertible loan?

On the interest, yes. The startup withholds the tax on payment, at rates from 22.5% to 15% depending on the time elapsed until payment. If the loan has an indefinite repayment term, the rate is 22.5%. If the loan bears no interest and only the amount lent is repaid, no tax is due.

Does converting the loan into quotas or shares trigger tax?

When the principal is converted at its tax cost, the investor generally has no gain, and that amount becomes the tax cost of the stake. Converted interest may be subject to withholding on conversion. For the startup, share premium may give rise to a tax dispute, especially in a Brazilian limited liability company (Ltda.).

How much tax is due on the sale of a stake in a startup?

On a private sale, an individual pays capital gains tax on the difference between the price and the tax cost, at progressive rates by bracket: 15% on the portion of the gain up to R$ 5 million, rising to 22.5% on anything above R$ 30 million.

Is IOF due on a convertible loan?

Yes, when the investor making the loan is a legal entity, in which case the startup, as borrower, is the taxpayer. When the investor is an individual, the RFB has ruled that it does not apply.

Are startup dividends taxed in 2026?

They can be. Monthly withholding of 10% applies when the amounts paid, credited, applied or delivered by the same company to the same individual exceed R$ 50,000. Even without monthly withholding, dividends may count toward the annual minimum tax, subject to the transition rules.

Open questions

How a multiple received before conversion should be characterized, and how share premium on the issuance of quotas in a Ltda. company is taxed, still depend on an analysis of the specific transaction. The RFB’s rulings on loans and related transactions do not add up to a complete tax regime for convertible investments. The agreement, the accounting records and the way the transaction is carried out should all reflect the same deal.