Changes ahead for deemed interest on shareholders’ invested capital in Brazil
Fernanda Sampaio, Marina Di Nardo Silva and Milton Schivitaro of Finocchio & Ustra look at the possibility for retrospective payment.
The payment of deemed interest on shareholders’ invested capital (Juros sobre Capital Proprio or JCP, loosely translated to interest on net equity) is a form of remuneration for shareholders.
Different from dividends, it is considered as a financial expense and was created as a method to confront companies’ indebtedness by grating a similar treatment between shareholders’ invested capital and third parties’ capital. Thus, it reduces the company's taxable income and can generates a tax gain.
Currently, and similarly to loan interests, JCP is taxed at source at a rate of 15% and it can be deducted from corporate income tax (IRPJ and CSLL) calculation bases for companies electing the actual income method. From this systematic, there is the possibility to verify a tax gain of 19%, comprehended by the difference between the deduction of 34% v. withholding tax of 15%, which, for individuals, is a definitive taxation.
However, the possibility of having such economy may be at its end. In the midst of the Tax Reform (Bill of Law 2,337/21) discussion, which was approved by the Chamber of Deputies in September 2021, there is a clause proposing the extinction of JCP.
Although the bill still needs to be appreciated by the Federal Senate, if the extinction is maintained, this measure will represent a significant increase in the tax burden of legal entities and may interfere in the attraction of foreign capital to Brazil, as JCP is even considered by some foreign legislations as loan interests, which induces more investments from foreign companies.
On the other hand, there is also good news. The Superior Chamber of Tax Appeals (CSRF), the higher level of the Brazilian Federal Administrative Tax Court (CARF), in a judgment published in October 2021 (No. 9101-005.757), decided that the deduction of JCP is not subject, conditioned or limited to the accrual basis and such amounts may be reduced from taxable income after deliberation on their payment or crediting even if referring to previous periods.
In this specific case, the taxpayer was assessed for having deducted JCP in the calendar year of 2007 over the amount of BRL 14 million ($2.4 million), related to previous calendar years 1999, 2000 and 2003.
In the first analysis by the CARF, the assessment had been maintained on the grounds that the payment or crediting of the JCP should be the object of deliberation by the partners at the proper time, at which time the law allows its deduction for tax purposes. According to the members, in the absence of a resolution in the respective calendar year the waiver of the right of deduction provided for by law was presumed with no margin for late recognition of the expense.
In the Special Appeal to the CSRF, the taxpayer argued that Law No. 9,249/95 (the only legal provision dealing with the deductibility of interest on equity) does not imposes any temporal limitation on its calculation and use, nor does it determine, as a condition, compliance with the accrual basis. It also argued that regulations and infra-legal acts cannot suppress the scope of a regulation foreseen in the tax legislation, creating undue limitations. Moreover, the regulation only requires the calculation of entity's profits, calculated before the calculation of interest or retained earnings and profit reserves in an amount equal to, or greater than, the value of twice the JCP to be paid or credited.
Analysing the appeal, the Superior Chamber accepted the arguments presented by the taxpayer, emphasizing that there is no other rule that could, even if indirectly, indicate an obligation to comply with and repelling the necessity to observe the accrual basis. Furthermore, it reinforced that the requirements for the deduction would be just accounting (profit gains), corporate (contractual or statutory) and quantitative (calculation rules).
Although this matter has already been analysed by the judiciary in favour of taxpayers, the aforementioned decision is an important milestone in the CARF, since the latest decisions analysed on the same matter are unfavourable to taxpayers. In this case, the victory is due to the end of the casting vote, through which the tie was previously broken by the president of the judging panel, who was always a representative of the treasury. Nowadays, in the event of a tie, the decision must favour taxpayers, as determined by Article 19-E of Law No. 10,522/2002, included by Law No. 13,988/20.
In view of CARF’s new positioning and the possible approval of the tax reform that will extinguish the JCP institute, companies that meet the requirements for credit or payment of deemed interest on shareholders’ invested capital will have the opportunity to deliberate on previous years with greater legal certainty and, who knows, use the deductibility these amounts paid to shareholders for one last time.
Lawyer, Finocchio & Ustra
Marina Di Nardo Silva
Lawyer, Finocchio & Ustra
Lawyer, Finocchio & Ustra