Brazil is on the verge of a significant transformation in its tax system and one of the controversial points of this reform is the future of Interest on Equity (JCP).
Created in 1995, the JCP was an ingenious solution to offset the high tax burden on corporate profits, allowing them to remunerate their shareholders in a more efficient manner from a tax perspective. With the Income Tax Reform proposal, the Federal Government is directly targeting this benefit, seeking to increase its taxation.
At the end of August, the Executive Branch sent to Congress Bill No. 3,394/2024, proposing, among other changes, an increase in the IRRF (income tax) rate on JCP from 15% to 20%. The Ministry of Finance expects to collect R$20.9 billion in 2025 with these measures. In 2023, another bill (PL No. 4,258) was submitted, which provided for the end of the possibility of deducting expenses with the payment of JCP in the calculation of the IRPJ/CSLL (income tax and contribution on profit) calculation bases due by the company.
Another change came at the end of 2023, with Law No. 14,789/2023, which added new criteria for calculating JCP, including the impossibility of using tax incentive reserves to compose the equity accounts to be considered in the calculation of JCP. This year, IN/RFB (Federal Tax Authority Normative) No. 2,201/2024 went further, determining, without any legal provision or time limit, that the value of tax incentive reserves that had been capitalized should also be excluded for the purpose of calculating JCP. These changes brought impactful changes, restricting the composition of accounts that can be used to calculate JCP, generating a wave of litigation.
Previously seen as an efficient strategy for remunerating shareholders and optimizing taxes, the measures proposed by the government impose limitations that may discourage the use of JCP, directly affecting the financial planning of large corporations.
The official justification is that JCP allows the deduction of interest paid to shareholders from the IRPJ/CSLL calculation base, leading to a reduction in revenue and, consequently, compromising the government’s ability to finance essential public policies. Is this a coherent justification?
Under the pretext of bringing greater equity, the government may in fact be pushing companies into a dilemma: opt for a more expensive and less efficient remuneration model, or seek creative, potentially riskier alternatives to continue attracting investment. This is because, with the increase in JCP taxation, companies will be more dependent on the distribution of dividends that, under the provisions of the Income Tax Reform proposal, may once again be taxed, which will make the Brazilian business environment even less competitive and the impact over the years may be troublesome.
The reduction in the attractiveness of the Brazilian market for investors, especially in a scenario of fierce global competition, could trigger an exit of flight of capital. In addition, companies that use JCP to optimize their capital structure will have to reevaluate their strategies, leading to a slowdown in investments and, consequently, in economic growth.
The question that remains is: is Brazil really prepared to bear the consequences of abolishing an instrument that, despite being criticized, has fulfilled its role for almost three decades? The tax reform promises to modernize the system, but it may be creating a new obstacle to economic development.
The future of the JCP is at stake and its elimination could represent a new era in Brazilian taxation with more challenges for companies and, possibly, less competitiveness for Brazil on the global stage. Is it a risk worth taking?