Partners’ Remuneration – Potential changes are foreseen in the Brazilian Tax Reform

 

The forms of partners' remuneration, as we know it, may change during 2023 or the upcoming years with the foresee tax reform. Details will still be clarified by the progress of the norms in the Senate and the House of Representatives. 

 

Brazil is one of the few countries that do not tax dividends, dividends may be paid to the shareholder without any withholding tax. 

 

Currently, we have three types of partners' remuneration, the Pro-Labore, which is intended to remunerate the partners and administrators for the work performed in the company, is levied on the Individual Income Tax (IRPF – Imposto de Renda de Pessoa Física). The other modality, which will be the focal point of this article, is the remuneration modality which is based on the positive result of the company, that is, either by the distribution of profit and dividends or by the payment of Interest on Equity (JCP – Juros Sobre o Capital Próprio).

 

The Brazilian Corporations Law No. 6.404/76, which set out the rights and duties of shareholders. In the same Law, it is presented the understanding of the profit payments, which is stipulated by the resolution of the General Meeting, provided in article 205, paragraph 3 of Law No. 6404/76, and the time for their destination, reminding that the company may decide to destine the profit to capitalization, to the formation of reserves, some of them even mandatory, or to distribute it among the partners. After the decision regarding the distribution of profits, if it is the case, the shareholders of the company become creditors of the dividends.

 

And so, through the resolution of the General Meeting, it will be stipulated when the dividends will be paid, or if they will apply the Interest on Equity (JCP) as a form of remuneration to the shareholders.

 

Regarding the partners' remuneration dividends are considered the payment modality on the company's profit, which is distributed when the company generates profit on the shareholder or partners' investment. For the payment, there is no need that the investors are working in the company, that is, they invest in the company to assist in the positive results and successively wait for the growth of the company.

 

In this search for good investments, investors must pay attention to the percentages that companies are reinvesting and paying to shareholders, remembering that balance is the key word. Because if the company distributes more dividends than it retains, it can be understood that the company is not returning the investments to the company, a warning sign to the shareholder, because the company must invest in new technologies for its expansion, to maintain good financial health and continue paying the dividends in a correct way to its investors. Without profit, there will be no dividend payment to its investors.

 

Analyzing the current context, Brazil is one of the few countries in the world that does not tax dividends, but it has not always been this way.

 

In 1988, by Law No. 7.713/88, which changed some provisions of the Income Tax, it was stipulated in article 35, that the dividends would be taxed by the tax on Net Profit, such determination stipulated a rate of 8 percent income tax withheld at source (IRRF – Imposto de Renda Retido na Fonte) for shareholders.

  

After this determination, the country's political context was undergoing drastic changes, with various economic moves to hold back the hyperinflation that was haunting Brazil, with percentages that at their peak reached 80 percent per month.  

 

In 1991, Law No. 8.383/91 in its article 77, stipulated changes in the payment of dividends for 1993, so that the tax would only be levied on dividends remitted abroad, appearing for the first time the hypothesis of exemption on dividends. 

 

Amidst this dichotomy, later in 1994, the distribution of profits and dividends was taxed again, with a higher rate than previously stipulated, now with a 15 percent rate, based on Law No. 8.849/94, in its article 2. 

 

Currently, the legislation that lasts is stipulated by Law No. 9064/95, which analyses the taxable event and understood that double taxation was occurring there, thus defining a broad exemption for dividends. 

 

Since 2008, the National Congress has brought several bills for the resumption of dividend taxation, being: Law Project (PL) 3.007/2008, Law Project (PL) 1.619/2011, Law Project (PL) 9.636/2018, and Law Project (PL) 2.015/2019, but none of these followed.

 

In 2021, presented by the Executive Power, signed by the Minister of Economy, Paulo Guedes, the Law Project (PL) 2337/2021 brought this topic back to discussion. Remembering that the Brazilian system is not as fast as other countries in the world, it is noted that it was annulled by the House and awaits the deliberation of the Senate in 2021, to be approved and thus instituted the Law. 

 

According to Law Project (PL) 2337/2021, in its approved text, taxation on profits and dividends distributed by companies to individuals or legal entities will also be levied for those domiciled abroad and concerning any type of share. However, taxation will not apply to all sizes and types of dividend-paying companies.

 

The cases of exemption will fall over the micro, small company participants of the Simples Nacional (Simplified Taxation System) and companies that do not participate in this special regime, taxed by the presumed profit, with invoicing until the limit of “Simples” framing, today equivalent to ~5M BRL yearly revenues.

 

Still, on the exemptions, it will fall on companies participating in a holding company, which may be fulfill some specific criteria.

 

As presented in the text, profits and dividends may not be deducted from the corporate income tax (IRPJ – Imposto de Renda de Pessoa Jurídica) and Social Contribution on Net Profits (CSLL – Contribuição Social Sobre Lucro Líquido) calculation basis, it will have the IRPJ ascertainment period changed, and may only be every quarter. 

 

Finally, it is important to remember that there will not be an alternative to stipulate the distribution of profits, as the Interest on Equity (JCP) modality will be extinct in case the potential new law project is accepted. Reminding that currently Shareholders can choose through the General Shareholders Meeting the dividends payment or by Interest on Equity (JCP) or by Dividends.

 

With the new economic agenda, given the election of the new president, and the change of ministries, we can assume that the approval of the Law for the taxation of dividends will be delayed until priorities have been settled. In other words, it is still unpredictable when it will come to enforced. 

 

According to the government plan, presented by Luiz Inácio Lula da Silva, the intention is to promote the tax reform, studying the application of a VAT (IVA – Imposto sobre Valor Agregado) to reduce the tax burden on consumption and promote progressivity. And with this, there will be an increase in taxes on income, affecting profits and dividends.

 

This way, the main impact of the taxation of dividends is presumed, as there may be a reduction of the Net Profit of the companies, affecting the controlling companies, which would have to pay the 15 percent tax rate over the profit, as stipulated by the Law Project’s (PL) approved text. The payment would take place upon receipt of the results, and for investors, there would be a motivation to substitute the variable income investment for a fixed income one.

 

Based on the uncertainties that new measures may bring, since we are talking about the highly bureaucratic Brazilian legislation, the current text may undergo alterations. We recommend that the companies stay plugged in to this topic. Based on the potential scenarios the companies shall to prepare a tax planning in order to optimize their cash flow.