Startups in Brazil: an overview on entity types, business set up and tax planning

Understanding the Brazilian scenario and tax opportunities for startups, such as special schemes, tax breaks and reliefs, helps investors in their business decisions

By Rita Araújo

Startups have gained prominence in the Brazilian corporate scene in recent years, fostering innovation and economic development in the country.

One could say that this ecosystem is undergoing a rapid evolution in Brazil, having gained increasing relevance and visibility. Nowhere is this more evident than with the arrival of many business events to the country, such as the Web Summit, whose first ever non-European edition was held in Rio earlier this year.

Data from the Global Startup Ecosystem Report 2023 show that São Paulo ranks first in Latin America as the most favorable environment for startups. The report considers factors such as funding, connectedness and market reach. The municipality of Rio de Janeiro ranked fifth in the same ranking.

Within this context, entrepreneurs and investors who wish to enter this dynamic environment should keep a few aspects in mind. Below, we provide an overview on the entity types, taxation schemes and procedures for establishing a startup company in the country.

What companies can be classified as startups?

Complementary Law No. 182/2021 established the legal framework for startups and innovative entrepreneurship. This standard also set out rules for businesses of the sort.

Thus, startups can be considered "businesses or corporate organizations, under formation or recently established, whose operations are characterized by innovation applied to their business model or to the products or services which they sell".

Establishing a startup

Despite the particularities of this business model, establishing a startup does not differ significantly from setting up a traditional company. It is necessary to make a few choices and follow some steps, which include:

• Defining the business location (which may entail tax benefits);
• Checking whether the business activity of choice can be performed in the desired location;
• Appointing an attorney-in-fact and a legal representative, in case the company is a foreign investor;
• Choosing the entity type;
• Determining the company’s National Classification of Economic Activities (CNAE);
• Business formation: registration with the National Registry of Legal Entities (CNPJ) and with the Board of Trade, obtaining a business license, registration with state and local tax authorities, among other registrations for business compliance.

Read more: Setting up a business in Brazil: entity types, compliance and registration of foreign capital

Tax planning for startups

Tax planning is essential for start-up companies to identify opportunities for reducing their tax burden. This process entails an analysis to assess which tax scheme is more beneficial, what tax breaks could be granted and other strategies. Check out a few key aspects below:

Taxation schemes

The choice of the tax regime under which the startup will operate has a major impact on business feasibility, cost formation and competitiveness. Many factors should be taken into consideration, such as the business size and sector, turnover projections, profit margin, etc.

The most adopted tax schemes in Brazil are the Actual Income method (“Lucro Real”), the Deemed Taxable Income method (“Lucro Presumido”) and the Simplified Taxation System (“Simples Nacional”). Click here to learn more about each of them.

Aimed at businesses self-declared as innovative companies, Inova Simples is applicable under certain circumstances. Created by Complementary Law No. 167/2019, this special tax regime grants startups benefits upon opening checking accounts. These benefits relate to more credit facility, sales of products and/or services on an experimental basis and priority for trademark registration.

Tax benefits

It is worth checking if the startup is eligible for tax benefits at the federal, state or local levels, as this information may dictate where to set up the business location.

At the federal level, the so-called Good Law (“Lei do Bem”) grants tax reliefs for companies that carry out research on technology and innovation. By doing this, startups under the Actual Income method can obtain funds to develop their projects. Those operating under other tax schemes can also benefit from partnerships with other companies that meet the requirements of the law.

Read more: Good Law: find out about the benefits for companies that invest in research, development and innovation

As the main entrepreneurship and innovation hubs in Brazil, the cities of Rio de Janeiro and São Paulo have sought to create a favorable environment for the development of new businesses. Below are some laws already in force and a couple of bills worth tracking for both cities:

Municipality	In force	Pending in Congress
Rio de Janeiro	Law No. 7,000/2021  Reduced the ISS (Municipal Services Tax) rates, from 5% to 2%, for companies providing IT and related services. This tax break applies to companies established in the Rio Technology Park (on Fundão Island) or in a delimited area along the port region.	Bill No. 1,893/2020 (“Port 21”)  Provides for the creation of a special taxation scheme (with the reduction of the ISS, IPTU and ITBI taxes) applicable to IT companies and creative industries located in the port region of Rio de Janeiro.
São Paulo	Law No. 17,719/2021  Reduced the ISS tax rates, from 5% to 2%, for services performed through digital platforms and applications, such as marketplace and intermediation of passenger transport, shipping and real estate.	Bill No. 642/2021  Provides for the granting of tax breaks in the municipality of São Paulo for creative industries classified as startups or innovative companies.

Support for innovative businesses

Accounting professionals play an essential role in assisting startups with meeting their set up requirements and maintaining compliance with their legal obligations, contributing to the safe development of their innovative business.

From choosing the best location all the way to carrying out the company’s tax planning, going through all the stages of business registration, Domingues e Pinho Contadores supports companies in their challenges and supplies accurate information to help in the decision-making process. You can count on our support: dpc@dpc.com.br.