Created in 1996, the interest on equity (juros sobre capital próprio, or JCP) is a mechanism available to certain Brazilian companies to compensate their equity holders in addition to profits and dividends.
Because JCP generates a tax deduction, it applies only to companies under the Lucro Real tax calculation regime, as it is the only tax regime where tax deductions are possible. Lucro Real is the method where the taxpayer pays corporate income tax (IRPJ) and the social contribution on net income (CSL) based on its actual taxable income, after computing all income, gains, and deductible costs and expenses, including net operating losses of prior years.
In some cases, the use of JCP may be an instrument for tax planning and reduction of the company’s IRPJ and CSL. It generates a tax deduction equivalent to up to 34% of the interest paid (34% being the maximum combined rate of IRPJ (15% or 25%) and CSL (9%)). As for banks and other financial institutions the deduction is greater and can reach as much as 45% as they pay CSL at the rate of 15% or 20%, as the case may be.
The JCP is calculated using a two-part test, the first being the application of a government-monitored long-term interest rate (Taxa de Juros de Longo Prazo, or TJLP), on a pro-rata die basis, over the company’s net equity. The TJLP is an annual interest rate established by the Central Bank; it is reviewed quarterly and may be subject to change. Because the JCP considers TJLP on a pro-rata die basis, any change to the TJLP during the year requires adjustments to JCP calculation.
The following equity accounts can be used as a basis to calculate JCP:
- Capital reserves;
- Profit reserves;
- Treasury stock;
- Accumulated losses.
The amount of JCP arising from this calculation (first test) is the maximum potential amount payable to equity holders before the second test.
The second test requires that the JCP payable cannot exceed 50% of the company’s retained earnings or current-year earnings, whichever is higher. If a company does not have retained or current earnings, no JCP payment (or deduction) is available.
The JCP is subject to a 15% withholding tax regardless of the nature of the beneficiary (corporate or individual), except for beneficiaries located in listed low-tax jurisdictions or under favorable tax regimes for whom the tax is 25%. For Japanese residents, the withholding tax is 12.5% because of the Brazil-Japan tax treaty. For companies under Lucro Real and Lucro Presumido regimes, the withholding tax is an advance against the IRPJ due by the beneficiary.
JCP payments are tax-efficient when paid to individuals, tax-exempt organizations, or foreign beneficiaries. The paying company can take a tax deduction of up to 34% (up 45% for bank and financial institutions) of the JCP amount for a tax of 15% at the beneficiary’s level (12.5% for Japan, or 25% for low-tax jurisdictions).
For many years, the JCP had an advantage over profit and dividend distributions because the tax deduction to the payor was greater than the tax burden at the beneficiary’s level. This situation changed, and in many cases, taxation on the beneficiary is more burdensome than the deduction to the payor. That is the case of JCP payments made to Brazilian corporate beneficiaries within the same economic group.
The receipt of JCP by corporate beneficiaries is subject to P.I.S. and COFINS at 1.65% and 7.6%, respectively, for those under the Lucro Real regime; for companies under Lucro Presumido, the rates are 0.65% (P.I.S.) and 4% (COFINS).
If one considers that a company under Lucro Real subjects JCP received to IRPJ and CSL at the combined rate of up to 34%, adding 9.25% of P.I.S. and COFINS makes the overall tax burden reach 43.25%. In this case, exchanging a 34% tax deduction at the paying company’s level with a 43.25% taxation at the beneficiary’s level is certainly not tax efficient from a group’s perspective.
In economic groups where several Brazilian companies may pay JCP among themselves, it is crucial to consider how JCP affects the group’s overall taxation. The more tiers a group of companies has, the less tax advantageous is the JCP because P.I.S. and COFINS apply at each level of companies, with no possibility of tax credits.
In recent years, the Government has considered revoking the JCP. The idea behind the JCP repeal was to limit tax deductions for large corporate taxpayers and increase tax revenues from IRPJ and CSL. The last attempt was during the discussions of the 2021 tax reform bill, but Congress has not approved the reform so far.
 The Lucro Presumido regime is a simplified income tax calculation method in which the IRPJ and CSL are paid as a percentage on the taxpayer’s gross income without any tax deductions.
 P.I.S. and COFINS are federal social contributions levied on taxpayers’ monthly gross income.
David Roberto R. Soares da Silva, is an expert in tax, estate and succession planning, founding partner of Battella, Lasmar & Silva Advogados, author of Brazil Tax Guide for Foreigners (2021), and coauthor of Planejamento Patrimonial: Família, Sucessão e Impostos (2022), Renda Variável: Tipos de investimentos, tributação e como declarar (2021), and Tributação da Economia Digital no Brasil (2020), published by Editora B18.
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