BRAZILIAN TAX REFORM:
The end of the INTEREST ON EQUITY
(“Juros sobre Capital Proprio”) payment rules?
The House of Representatives approved in September 2021 the Income Tax Reform Law Project (Projeto de Lei ‘PL’ No. 2.337/2021). It is not a definitive version, but another big step for a possible application in January 2022.
The Interest On Equity (“IOE”) fiscal regime is the possibility for companies operating on the Lucro Real Corporate Income Tax regime (all big corporations must apply this regime) to pay interest over the companies’ equity at a given rate (TJLP). This payment is deductible just like any other expenses for the calculation of the taxable profit (taxed altogether at 34% rate). The payment is subject to a withholding tax of 15%, considered a tax on the beneficiary of the interest (the shareholder).
This possibility enabled a greater return on the capital invested in Brazilian companies and induced the capitalisation of companies by its shareholders (this greater return is explained by the lower tax on Social Capital (15%) than on the Profit (34%)).
The extinction of the IOE, currently in the tax reform in debate, would demand the reassessment of general tax strategies.
Example of a Company with 1 MI BRL of equity, and an annual amount of interest on equity of 100,000 BRL:
The shareholder of this company received 85 and 66 with IOE, and just 132 without IOE.
This means that the end of the IOE will decrease the ROE from 15,1% to 13,2%.
It might be worth to update the Tax Strategy.