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Portuguese Venture Capital Funds: What and Why?

Background

Until the recent pandemic, the Portuguese economy has been one of the most buoyant in Europe and this has helped fuel interest in Portuguese Venture Capital Funds. Despite predictions of venture funding slowing down due to Covid-19, high net worth individuals and companies are continuing to look for new opportunities and request Venture Capital Fund Management companies manage their investment portfolios for them, to invest in start-ups and small to medium sized companies in exchange for equity. 

Another factor which has really driven interest in investing specifically in a Portuguese Venture Capital Fund is the Non-Habitual Residents Scheme and the Portuguese Golden Visa, which allows for Portuguese residency.

A Portuguese Venture Capital Fund works the same as any Venture Capital Fund. What is different is that individuals who invest in a Portuguese Venture Capital Fund, can, by extension, apply for a Portuguese Golden Visa.

Obtaining a Portuguese Golden Visa Through Investing in a Venture Capital Fund

The Portuguese Golden Visa scheme enables non-EU individuals to obtain the right to reside in Portugal for up to five years. This allows them and their family to travel freely to and from the majority of European countries.

To qualify for a Golden Visa, an individual must meet and maintain one of a number of qualifying investment options. Property is usually the preferred route; however, one option is to invest €350,000 in Investment Funds or Venture Capital; a considerably lower requirement compared to the level of investment required by other investment routes.

The specific criteria for investing in a Venture Capital Fund under the Golden Visa investment route is:

  • A minimum investment of €350,000 in Investment Funds or Venture Capital The fund must provide capital to companies, with at least 60% of the investment being made in a commercial company with a head office in Portugal.

What is a Venture Capital Fund?

Venture Capital Funds are investment vehicles with the objective of investing into a portfolio of assets, mainly composed of several companies offering high growth potential. They take a more active and overseeing role in the day to day management of the companies where the investments have been made and provide consultancy and business guidance services to help ensure that the companies receiving the investments, achieve their full potential.

Investments are generally made into a distinct sector of activity. The firms that receive venture capital investment have the capacity to deliver potentially attractive returns, for investors with different risk appetites, but with a long-term investment horizon.

Stages of Fund Investment

Portuguese companies can be invested into at different stages of their life-cycle.

Venture Capital Companies play an active role in a Fund’s Life-cycle, from sourcing and identifying the investments, raising equity from investors, monitoring the investment and growth of the companies’ value, to exit/liquidation of the funds and distribution of the earnings amongst the participants. That is the ultimate goal.

Any fund management company is reliant on the quality and experience of its professionals, who will seek to structure and promote Venture Capital Funds with investments in various fields of activity. Investments in Portugal are generally, but not exclusively, made into start-ups, in business categories such as; Tourism related areas, Hospitality, Health and Healthcare, and Technology, as well as into others sectors that are deemed to offer opportunities to generate high growth and commercial opportunities.

‘Seed Capital’

The term seed capital refers to the type of financing used in the formation of a start-up.

In this case the funding is provided by private investors, usually in exchange for an equity stake in the company, or for a share in the profit of a product.

The majority of the seed capital a company raises, generally comes from business owner(s) and often family, friends, and other acquaintances.

Seed capital funding is considered high-risk because the business is not fully functional and has no track record. Investors who provide seed capital funding often therefore do so for a stake in the company.

Once a start-up has demonstrated feasibility, it is more likely to attract venture capital or ‘angel’ investment, to provide the additional funds necessary to really get the business up and running.

Start-ups’

Venture capital investment companies (usually referred to as start-ups), are generally focused around a single flagship product or service, that the founder wants to bring to the international market.

These companies typically do not have a fully developed business model and, more importantly, lack adequate capital to move on to the next phase of business.

Generally, the capital, raised at this stage will be used for marketing, creation of stock or the launching of a product (existent or new) and/or service.

‘Early Stage’

This investment is aimed at newly established companies, which have completed the product development phase and have already managed to start a trade but are not as yet earning any profit.

Such funding is generally dedicated towards improving the manufacturing and distribution process, as well as undertaking marketing.

‘Growth Stage’

Investment is targeted at companies that have proven their product in the market and have secured finance and income. They are in the process of growing and trying to scale up but are possibly encountering some obstacles to achieving this growth.

The focus here is not on pure innovation but expanding on what is already working for the business.

The Benefits of Investing in a Venture Capital Fund?

  • Venture Capital Funds are managed by a Fund Manager with the inside knowledge to manage an individual’s investment portfolio and maximise the investors’ equity stake.
  • Venture Capital Funds are regulated and must comply with the rules stipulated by the Portuguese Securities Market Commission (CMVM). This means Fund Managers are regular audited by third parties and meet the highest levels of efficiency, transparency and due diligence.
  • You can obtain Portuguese residency as an extension of investing in a Portuguese Venture Capital Fund.

Portugal Tax Benefits

There are a number of tax benefits associated with investing in a Venture Capital Fund. These include:

  • Exemption from corporate income tax.
  • Exemption from withholding tax on payment of the capital generated by the fund if the investor is a non-tax resident in Portugal.
  • Withholding tax of 10%, on payment of the capital generated by the fund if the investor is tax resident in Portugal.
  • 10% tax on capital gains arising from the sale of company shares or the sale of commercial property.

A Number of Individuals Forming their Own Venture Capital Fund

Dixcart has assisted several individuals to form their own Portuguese Venture Capital Fund. This provides an opportunity for more substantial amounts of money to be raised to undertake various local projects in Portugal. These projects generally include investment in commercial real estate.

In Portugal all Venture Capital Fund Management Companies and Venture Capital Funds are supervised by the Portuguese Securities Market Commission (www.cmvm.pt) and Dixcart works closely with a licensed fund management company in Lisbon.

Additional Information

If you have any questions or require additional information regarding Portuguese Venture Capital Funds and the opportunities that they present, please contact Carlos Santos or Michael Maxwell at the Dixcart office in Lisbon: advice.portugal@dixcart.com

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