The legal and commercial distinctions between initial capital, capital increases, share premium, secondary acquisitions, and the conversion of debt into equity.

In my previous articles, I examined the broader implications of Portugal’s proposed Golden Visa reform and the different ways in which investment funds finance businesses. One of my central concerns was that the proposed requirement to direct at least 80% of a fund’s investments through increases in the share capital of Portuguese companies could significantly restrict the investment structures available to fund managers.

Before examining those consequences in greater detail, however, it is worth looking at the terminology itself.

What does it actually mean to invest in a company’s share capital? Are all investments in shares equivalent? Does every increase in share capital necessarily bring new money into a business? And, perhaps most importantly, does the legal form of an investment always reflect its economic substance?

These are not merely technical questions. They go to the heart of the proposed reform.

The amendment submitted by the PSD and CDS-PP on November 6, 2026, as part of the 2027 State Budget, proposes that at least 80% of the value of investments made by qualifying investment funds should be channeled through increases in the share capital of commercial companies headquartered in Portugal. The proposal retains the €500,000 minimum investment and the requirement for a fund maturity of at least five years.

At the time of writing, the amendment remains a legislative proposal and has not become law. Its final wording and interpretation may change during the parliamentary process.

Nevertheless, the proposed requirement raises important questions about how different forms of equity investment should be treated.

Establishing a Company: Initial Share Capital

The most straightforward form of equity investment is the establishment of a new company.

An investor contributes capital in exchange for shares or quotas in a newly incorporated company. That capital becomes part of the company’s equity and provides its initial financial resources.

For example, an investment fund may establish a Portuguese company with €1 million in share capital, subscribing for 100% of its shares. The company may then use those funds to employ personnel, acquire equipment, develop a product, establish operations, or pursue a commercial project.

From an economic perspective, this is a direct injection of capital into a Portuguese business. The company receives new financial resources and begins operating with an equity base funded by the investor.

However, there is a distinction between establishing a company’s initial share capital and increasing the share capital of an existing company.

An initial subscription creates the company’s capital at incorporation. A capital increase, by contrast, takes place after the company has already been established and involves a formal increase in its existing registered capital.

The proposed Golden Visa wording refers specifically to increases in share capital. It does not expressly explain whether an initial subscription at incorporation should be treated in the same way.

This may appear to be a technical distinction, but it could have practical consequences. A fund that establishes a new Portuguese company and provides all its initial capital is clearly financing a new business. Yet, under a strict interpretation of the proposed wording, it is not self-evident that the initial subscription would qualify as an increase in share capital.

If the legislative objective is to ensure that capital reaches Portuguese businesses, excluding initial capital contributions would be difficult to reconcile with that objective.

This is one of the first matters that should be clarified.

Increasing the Share Capital of an Existing Company

A second, and perhaps more conventional, form of private equity investment is subscribing for newly issued shares in an existing company through a capital increase.

Consider a Portuguese company with existing share capital of €1 million. It requires additional funding to expand its operations, develop new products, or enter new markets.

An investment fund agrees to invest €2 million in exchange for newly issued shares. Following the transaction, the company’s share capital increases from €1 million to €3 million, assuming the full subscription amount is allocated to nominal share capital.

The company receives new funds, its equity base increases, and the fund becomes a shareholder.

This is the classic primary equity investment. The money is paid into the company rather than to an existing shareholder, and the company obtains additional financial resources to pursue its business objectives.

On the face of it, this is the type of transaction that the proposed amendment appears intended to favor.

However, even here, the legal mechanics can be more complicated than they first appear.

Under Article 87 of the Portuguese Companies Code, a resolution approving a capital increase must specify, among other matters, the amount of the increase, the nominal amount of the new participations, the nature of the contributions, and the share premium, if any.

The legislation therefore expressly distinguishes between the nominal amount of the new shares and any premium paid above that nominal value.

That distinction leads to another important issue.

Share Premium: When the Investment Is Greater Than the Nominal Capital Increase

In private equity transactions, it is common for an investor to subscribe for newly issued shares at a price significantly higher than their nominal value.

The difference is generally recorded as share premium, known in Portuguese company law as ágio.

For example, assume that an investment fund agrees to invest €5 million in a Portuguese company.

The company issues new shares with a total nominal value of €500,000. The remaining €4.5 million is allocated to share premium.

The company receives the full €5 million. Its registered share capital increases by €500,000, while the additional €4.5 million is recorded separately as share premium.

Why structure an investment in this way?

Because the nominal value of a company’s shares does not necessarily reflect its economic value. A company may already have valuable intellectual property, technology, contracts, assets, an established customer base, or substantial growth prospects. An investor subscribing for new shares should not necessarily be required to allocate the entire investment amount to nominal share capital.

The share premium reflects the difference between the subscription price and the nominal value of the shares.

From the company’s perspective, both amounts contribute to its equity, although they are accounted for separately and may be subject to different legal rules.

This raises a particularly important question under the proposed Golden Visa amendment.

If a fund invests €5 million in a capital increase but only €500,000 is allocated to nominal share capital, should the entire €5 million count toward the proposed 80% requirement, or only the nominal increase?

Article 87 of the Companies Code expressly distinguishes the amount of the capital increase from the share premium. The proposed immigration legislation does not, as currently drafted, provide a sufficiently clear answer to this question.

It would be inappropriate to assume that the treatment of share premium is already settled. Equally, it would be difficult to justify a system that recognizes only the nominal amount when the company has actually received the full subscription proceeds.

This is an important point requiring explicit legislative or regulatory clarification.

Acquiring Existing Shares: Investing in a Company Without Increasing Its Capital

Another common form of private equity investment is the acquisition of existing shares from an existing shareholder.

Unlike a primary capital subscription, the investment proceeds are paid to the seller rather than to the company.

For example, an investment fund acquires a 30% shareholding in a Portuguese technology company from one of its founders for €3 million.

The fund has made a €3 million investment in a Portuguese commercial company. It has acquired an ownership interest and may bring new strategic direction, management expertise, commercial relationships, and access to further financing.

However, the company’s registered share capital remains unchanged. The €3 million is paid to the selling shareholder, not to the company.

This is the fundamental distinction between primary and secondary transactions.

In a primary investment, the company receives new capital. In a secondary acquisition, an existing shareholder receives payment for transferring an ownership interest.

Does that mean secondary acquisitions have no economic value for the company or the Portuguese economy? Certainly not.

Secondary transactions can facilitate succession planning, allow founders to realize part of their investment, bring in strategic shareholders, support corporate restructuring, and provide an exit route for earlier investors. They can also be essential to the development of a functioning private equity market.

Furthermore, an investor acquiring an existing stake may subsequently inject additional capital into the company through a separate capital increase.

Nevertheless, under the proposed wording, a straightforward acquisition of existing shares does not appear to constitute an increase in share capital. It is therefore unlikely to qualify toward the proposed 80% requirement unless the final legislation provides otherwise.

The distinction may be understandable if the objective is specifically to ensure that companies receive new capital. But it should not be confused with an assertion that secondary investments have no productive economic purpose.

Converting Shareholder Loans Into Share Capital

A more complicated situation arises when an existing shareholder loan is converted into equity.

Imagine that an investment fund has previously advanced €2 million to a Portuguese company through a shareholder loan. The company has used the money to finance its operations, recruit employees, and develop its business.

At a later stage, the fund and the company agree that the loan should be converted into share capital.

The company’s debt is reduced or extinguished, and the fund receives additional shares or quotas.

From a balance-sheet perspective, this can be a significant improvement. The company reduces its liabilities, strengthens its equity position, and may improve its ability to obtain further financing.

However, the conversion does not necessarily involve a new injection of cash at the time it takes place. The money entered the company when the loan was originally advanced.

Portuguese company law recognizes specific mechanisms for converting shareholder loans, or suprimentos, into share capital. Article 89 of the Companies Code provides a particular procedure for verifying contributions in the case of qualifying conversions of shareholder loans.

This demonstrates that a capital increase does not always involve the transfer of fresh cash into a company at the moment the increase is registered.

The question under the proposed Golden Visa requirement is therefore whether a conversion of existing debt into share capital should qualify.

There are arguments on both sides.

On one hand, the transaction formally increases the company’s share capital and strengthens its equity position. On the other, the company has already received the original funding, and the conversion itself does not necessarily provide additional liquidity.

If the legislative objective is to increase the equity capitalization of Portuguese businesses, recognizing certain debt-to-equity conversions may be consistent with that objective. If the objective is to ensure that fresh capital enters the company, the analysis may be different.

The legislation should distinguish between these two objectives rather than leave the issue to uncertainty.

It should also be remembered that the specific statutory procedure for converting suprimentos in quota companies should not be confused with a general right to convert every form of corporate debt into share capital.

Capitalizing Reserves: An Increase in Capital Without New Investment

There is another transaction that deserves attention: increasing share capital through the incorporation of existing reserves.

A company may have accumulated profits or other eligible reserves over time. Instead of distributing those reserves or retaining them in their existing form, the shareholders may decide to incorporate them into the company’s registered share capital.

The company’s share capital increases, but no new money is transferred into the business.

The transaction is essentially a reclassification within the company’s equity.

For example, a company with €1 million in registered share capital and €2 million in eligible reserves may decide to capitalize €1 million of those reserves. Its registered share capital increases to €2 million, while its overall equity does not increase as a result of the transaction.

This is another reason why the expression “increase in share capital” should not automatically be equated with a new investment.

A capital increase through new contributions and a capital increase through the incorporation of reserves may have the same effect on the registered share capital figure, but their economic consequences are different.

If the proposed Golden Visa reform is intended to ensure that investment funds inject new capital into Portuguese businesses, a reserve capitalization would not ordinarily achieve that objective.

The final framework should therefore make clear whether it is concerned with the formal increase in registered capital or the actual contribution of new financial resources.

Follow-On Equity Investments

Finally, it is important to consider follow-on investments.

Private equity and venture capital funds rarely invest in a company only once and then leave it entirely to its own devices. Businesses develop, markets change, expansion plans evolve, and additional financing is often required.

A fund may initially invest €2 million in a Portuguese company through a capital increase. Two years later, the company may need another €3 million to expand internationally, acquire a competitor, or finance a new production facility.

The fund may decide to participate in another capital increase, providing additional equity in exchange for newly issued shares.

This is a further primary investment and, on its face, appears consistent with the proposed requirement.

But it illustrates an important practical issue: investment decisions must remain commercially driven.

There may be circumstances in which the company is better served by debt financing, a convertible instrument, or a combination of equity and debt. The appropriate structure will depend on the company’s financial position, valuation, risk profile, and intended use of the funds.

A regulatory framework that effectively requires every additional investment to take the form of a capital increase may limit the flexibility of both the fund and the company.

That issue will be examined in more detail in the next installment of this series, which will focus on debt financing and why businesses need more than equity capital.

The examples above demonstrate that equity investment is not a single, uniform concept.

A newly incorporated company receiving its initial capital, an existing company receiving a primary equity subscription, a company issuing shares at a premium, a shareholder selling existing shares, a shareholder converting a loan into equity, and a company capitalizing its reserves are all legally and economically different transactions.

Some bring new money into the company. Others strengthen its balance sheet without introducing fresh liquidity. Some transfer ownership between investors without providing the company with additional funds.

The proposed reform appears to favor transactions that increase the share capital of Portuguese companies. That may be a legitimate policy choice. The Government may reasonably want to ensure that investment funds contribute directly to the capitalization of Portuguese businesses.

But the drafting needs to recognize the distinctions that exist within corporate finance.

In particular, the final legislation should clarify:

  • Whether initial share subscriptions at the incorporation of a new company qualify.
  • Whether share premium is included in the qualifying investment value.
  • How capital increases funded by the conversion of shareholder loans are treated.
  • Whether capital increases through the incorporation of reserves are excluded.
  • How follow-on investments and successive capital increases are measured.
  • What constitutes the relevant value of the investment for the 80% calculation.

Without this clarity, fund managers may be left trying to design investment structures around an immigration requirement whose precise application remains uncertain.

That is not a sound basis for long-term investment planning.

Conclusion

The distinction between increasing a company’s share capital and investing in that company is more than a matter of terminology. It determines how capital enters a business, how investors participate in its development, and how companies structure their financing.

If Portugal wants to attract capital that supports business growth, innovation, and employment, it should ensure that its regulatory framework recognizes the commercial realities of investment.

There is a strong case for encouraging primary equity investment and ensuring that funds contribute to the capitalization of Portuguese businesses. But the rules should be drafted with sufficient precision to distinguish genuine new investment from internal accounting changes, and with enough flexibility to accommodate the different ways in which businesses raise and deploy capital.

The proposed reform may be intended to direct more capital into Portuguese companies. Whether it achieves that objective will depend not only on the percentage requirement, but also on how the law defines a qualifying investment.

In the next article, I will look at the other side of this equation: debt financing. Because while equity is an important source of business capital, it is certainly not the only one—and for many companies, it is not always the most appropriate one.