In Brazil, the distribution of profits and dividends calculated based on the results calculated by the companies is not subject to income tax. In practice, corporate entities tax their profit with a nominal rate, as a rule, at the rate of 34% (income tax “IRPJ”, its additional IRPJ and social contribution on net profit “CSLL”), but their distribution to domestic partners and shareholders is exempt, causing no further taxation.
This exemption originates from a legislative change in 1995, with the enactment of Law 9249/95, which changed the legal system and exempted the incidence of income tax on the distribution of profits and dividends calculated based on the results as of January 1996.
At the time, the legislator decided to concentrate the taxation of profit on the corporate entity because it understood that such a measure: (i) it would facilitate tax collection and inspection — it is worth remembering that individual income tax returns were made by means of forms and delivered physically —; and, (ii) in the global scenario, there was a movement to stop taxing profits and dividends received by partners and shareholders, also as a tool to attract investments, especially in publicly traded companies and those held by foreigners.
The scenario lived in the 90’s, if compared with the current one, is quite different from today. Currently, in decades that the income tax returns of individuals and companies have become electronic and, in addition to this difference, the discourse in search of fiscal justice has gained strength, especially based on the inexistence of taxation on dividends paid to partners or shareholders (without any new fiscal burden), in relation to the taxation borne by an employee, whose earnings are subject to rates ranging from 7.5% to 272.5%.
This topic has come back to the agenda with more force in the last few years, because it is also identified as a mechanism to increase the revenues earned by the Public Administration, so necessary in the post-pandemic period, and it is in line with the tax policy of other international jurisdictions members of the OCDE. In the last Brazilian presidential elections, despite the evident political differences of the candidates, the income tax taxation of profits distributed to partners or shareholders is a unanimous issue, defended in a certain way by both contestants, in addition to being aligned and also supported by the fact that of the OCDE member countries, holders of the ten largest global economies, Brazil in comparison is the only one that does not tax such distribution.
Along these lines, with the intention of changing the income tax legislation, in 2021 was presented the Bill No. 2.337, initially already approved by the Federal Chamber and currently in progress in the Federal Senate that, among other topics, imposes the incidence of income tax on profits and dividends distribution of profits to partners and shareholders, with the creation of article 10-A, in Law No. 9.249/1995, making it mandatory for the paying legal entity to withhold 15% (fifteen percent) on income paid to partners or shareholders, domestic or foreign.
This possible change in the taxation of distribution has generated several questions by taxpayers and foreign investors, such as: At what point will the taxation of dividend distribution take place? If the change occurs, from what point in time should the taxation be carried out by the companies? Which profits will be taxed, only those produced in 2023 or also those generated in previous years?
With regard precisely to article 10-A of PL 2.337, and which would serve to amend Law 9.249/1995, there is an express determination that income tax will be due when profits and dividends are “paid or credited”. It seems to us that the rational used by the legislator was to determine as taxable event the event that occurs first, i.e. the payment or credit, without mentioning whether such taxation would reach profits produced as of 2023 or from previous years, which led many companies to distribute their accumulated profits, even if not paid to partners and shareholders, as a way to escape this new tax burden.
The potential taxation on the distribution of dividends has required thought by Brazilian taxpayers. This is because, also motivated by Brazil’s need to raise revenues and the need to wait for the behavior of the National Congress, the new Government has not yet presented a clear plan about its intentions and initiatives, and sparse releases create true conjectures about the future, deriving from diverse scenarios. Will the change follow the provisions of Bill No. 2,337 or will it be accomplished by another proposed legislative change? Are the taxable profits only those produced as of 2023 or will there be an attempt to tax profits from any profit distribution, even if produced in previous years? Is there any possibility of this new taxation attacking distributions made in the year 2023 itself, despite the constitutional legal limitations? Could the new legislation fix the payment event, exclusively, as the precursor of the taxable event?
There are many questions that must be clarified in the course of the new administration. And this is even more impacted because, although notably, the Federal Constitution guarantees, through clear constitutional principles, that the legislative amendment that intends to tax dividends should only generate effects from the following year, which would rule out distributions made while still imposing the inevitable conclusion that the taxable event practiced in 2023 will be protected by the exemption of the legislation of the 1990s, there is an effective discussion initiative to make this burden viable in 2023, a fact that, if it succeeds, will lead to many new waves of tax discussions.
The moment, therefore, calls for reflection on the treatment that companies will give to the accumulated and undistributed profits shown in the balance sheet, a behavior that can be determinant to avoid facing possible future discussions.
* This text was extracted from a Brazilian press vehicle.