Equity, debt or mezzanine: how to fund your company’s growth

When a company needs money to grow, there are three main doors: equity (an investor comes into the share capital and owns part of the company), debt (a bank or other lender lends and is repaid with interest) and mezzanine (a middle ground: debt that is repaid after bank debt and can often convert into equity). The choice affects control of the company, the founders’ risk and the IRC (corporate income tax) bill. This analysis compares the three from the point of view of whoever is raising the money.

Equity: no repayment, but a new shareholder

The investor puts in money and receives a stake in the company. There are no instalments or interest, and if the company fails the money is not returned. That makes it the most expensive route in terms of control and value: the investor shares in profits and in a future sale, and usually asks for rights (a seat on the management or board, a veto on major decisions, preference on exit).

• Dividends paid to the investor are not an expense for the company: they come out of profit that has already borne IRC.
• If the investor is an individual resident in Portugal, dividends are taxed at the 28% flat withholding rate (art. 71 of the Código do IRS, the personal income tax code).
• Since 2023 there has been a tax benefit that brings equity closer to debt: the incentivo à capitalização das empresas (capitalisation incentive), in art. 43-D of the Estatuto dos Benefícios Fiscais (Portuguese tax benefits statute).

How the capitalisation incentive works

The company can deduct from its taxable profit an amount equal to the net increase in equity (cash contributions, share premiums, debt-to-equity conversions, profits kept in the company) multiplied by the average 12-month Euribor for the year plus 2 percentage points.

• The increase counts in the year it is made and in the six following periods, provided it is not cancelled out by capital reductions or distributions of reserves and retained earnings.
• The deduction has an annual cap: the higher of €4,000,000 and 30% of tax EBITDA.
• It only applies to companies with full accounting records, whose main activity is commercial, industrial or agricultural and whose tax and social security affairs are in order.
• Contributions funded by loans from related parties do not count, nor do those from entities in countries without a tax information exchange agreement with Portugal.

Debt: control stays intact, but the instalment is fixed

The bank does not take a stake or make decisions, but it requires repayment on a fixed schedule, whether or not there is profit, and almost always security (a mortgage, a personal guarantee from the shareholders or a mutual guarantee).

• Interest is a deductible expense for IRC.
• Net financing costs are deductible up to the higher of €1,000,000 and 30% of tax EBITDA (art. 67 of the Código do IRC, the corporate income tax code). For the vast majority of SMEs, which pay far less than €1 million of interest a year, this limit never bites.
• Any excess can be deducted in the following five periods.

Mezzanine: the middle ground

Portuguese law has no instrument called “mezzanine”. The term describes subordinated financing: it is repaid after bank debt and before the shareholders. The most common forms are:

• Suprimentos (shareholder loans) — loans from the shareholders themselves to the company (Código das Sociedades Comerciais, the Portuguese companies code); in an insolvency they are paid after the other creditors.
• Convertible bonds or loans with an option to convert into equity.
• Loans with variable returns linked to results.

They cost more than a bank loan, because the lender takes more risk, but dilute less than a direct equity investment, or only dilute if conversion happens. Until conversion, the interest is treated as a financing cost, subject to the same art. 67 limit. If the lender is a shareholder or related party, the interest rate must be the one independent parties would agree.

Worked example

An SME with €60,000 of taxable profit before any of these effects needs €500,000. IRC rates for 2026: 15% on the first €50,000 for SMEs and 19% on the excess (art. 87 of the Código do IRC and Lei n.º 64/2025). The interest rate and the Euribor are hypothetical, for illustration only. The municipal surcharge (derrama) is left out.

The incentive deduction uses a hypothetical average Euribor of 2% plus the 2 percentage points set by law. The reading is simple: with the incentive, equity is no longer much worse than debt for tax purposes. The difference now lies in control and risk, not in IRC.

The three routes at a glance

Recommendation: it depends on three questions

• Does the business already generate regular cash to pay an instalment? If so, debt is almost always the cheapest and keeps control. If not, a fixed instalment can sink the company in a bad year, and equity is safer.
• Are the shareholders willing to give up a stake and share decisions? If not, stick to debt or mezzanine. If so, equity also brings contacts and experience, and today carries a tax benefit many people are unaware of.
• Is the bank asking for personal guarantees the shareholders do not want to give? This is where mezzanine, or a mutual guarantee, comes in.

In practice, many companies combine all three: equity for the start-up risk, debt for what already has secured revenue. Before negotiating an investor’s entry, model the effect on the shareholding in the and check the capitalisation incentive calculation for your specific case with your accountant.