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Date: July 12, 2021
Posted by: CPDMA team

The Future of Holdings with the threat of IR reform

The exemption from Income Tax on dividends and the possibility of deducting as expenses the amounts paid as Interest on Equity (JCP) were created more than 25 years ago, as a way of making investment in national companies more attractive, in a plan to reach a greater share of foreign capital in Brazil.

Currently, in Brazil in 2021, the possibility of taxing the distribution of dividends is being considered, as well as of not admitting the deductibility of JCP. The main justification of the economic team that created the measures is that such mechanisms are anomalies that exist only in Brazil, which leave the country out of step with the world economy.

This justification is only partially true. This is because when the absolute tax burdens are considered, that is, adding the taxation on the Legal Entity and on the Individual, it is easy to see that Brazil already taxes income at levels equal to or higher than those practiced by other countries. In this sense, the mechanisms of exemption on the distribution of dividends and deductibility of the payment of JCP become merely different methods to practice taxation, modifying moments of tax incidence, and producing beneficial economic and financial effects for a country still seeking to reach the major development plan.

But it's not just that. In the more than 25 years of the IR exemption on the distribution of dividends and the possibility of deducting expenses with interest on equity in Brazil, several business structures were created based on these tax practices allowed by law. 

This is the case, for example, of holding companies. There are several types of holding, which can be adapted according to the needs and type of each business. There is a family holding company that aims to protect family assets; the real estate or equity holding, whose purpose is the management of properties and assets; the controlling holding company, constituted to hold the corporate control of another or other companies; the holding company, run by an administrator while investors receive dividends.

All these business structures, fully accepted by national legislation since the enactment of Law 6,404, in 1976 and, later, of the Civil Code of 2002 (Law 10,406/2002), have their operating logic based on the possibility of making the distribution of dividends without the incidence of income tax. If dividends are effectively taxed by the IR, there will be a need to revisit all business models based on holdings, whatever their nature, as there will be double or even triple taxation when dividends are paid through a holding structure.

This problem, which is being created by PL 2337/2021, which intends to tax the distribution of dividends in 20% of Income Tax, should be faced by entrepreneurs, quota holders and shareholders of companies in Brazil with great care and attention. If the Bill that will introduce a tax reform in the Income Tax is effectively approved, Brazilian companies will have to adopt new practices with regard to the treatment of their capital, their dividends and the way in which they are remunerated in the individual from the income of the legal entity. 

It will not be surprising if some common practices, albeit questionable, in European countries start to be adopted by Brazilian companies and entrepreneurs, such as the concentration of equity in legal entities, the use of legal entity resources to be entitled to expenses that in theory would be attributable to the individual, the most recurrent practice of reinvesting capital in the legal entity, to the detriment of indebtedness with third-party capital, all to avoid the moment of needing to distribute dividends to the partner and incur a higher tax burden at 40% of Income Tax.

In short, it is necessary to carefully and carefully monitor the legislative developments of PL 2337/2021, as well as surround yourself with professionals trained to evaluate the creation of new business structures that are prepared to face the possible new challenges that income taxation will bring. for Brazilian companies and entrepreneurs in the near future.

Source: Wagner Arnold Fensterseifer.

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