Interest on Equity (JCP) is a form of remuneration for partners/shareholders of a company who invest their own capital into the firm. It is calculated based on the company’s equity and is taxed at the source. Companies use JCP as a tax planning strategy for the amounts paid as JCP are deductible from Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL), resulting in a reduced tax burden.
Therefore, it is a form of remuneration paid by companies to their partners/shareholders as an alternative to dividends, with a focus on the tax benefits that this tool provides.
Accordingly, since the value of the Interest on Net Equity is deducted from the profit, the Corporate Income Tax (IRPJ) and the Social Contribution on Net Profit (CSLL) will be levied on a smaller amount. In other words, the company reduces the 34% tax burden. In this case, it is required to withhold 15% income tax at the source. In this context, it’s important to note that the financial and tax benefits may vary depending on the corporate structure and tax methods adopted by the beneficiaries of the Interest on Net Equity.
For individual beneficiaries, the benefit amount will be net of tax, as there will be a 15% income tax withholding. This amount cannot be used for future refunds or offsets.
Below, the main characteristics between Interest on Net Equity and Dividends are demonstrated:
| ASPECT | INTEREST ON NET EQUITY | DIVIDENDS |
| TAXATION | Interest on Net Equity (JCP) is considered a financial expense for the company, reducing its taxable base. This can result in tax savings. | Dividends are tax-exempt, with no tax benefits for the company. |
| IMPACT ON SHAREHOLDERS/PARTNERS | The value of the Interest on Net Equity is deducted from the company’s net profit before calculating dividends, which could lead to a lower total dividend amount. Additionally, the payment to shareholders must be proportional to their stake in the company. | Dividends are paid to shareholders after the net profit is calculated, without directly impacting the amount of profit distributed. Also, they can be disproportionate to one’s stake in the company. |
| FINANCIAL FLEXIBILITY | The company can choose the amount and timing of the payment of Interest on Net Equity , which can be useful for managing profit distribution. | Dividends may be more predictable and regular, but may not offer the same flexibility in terms of timing. |
| ACCOUNTING IMPACT | Interest on Net Equity (JCP) is accounted for as a financial expense, affecting net income. In the case of publicly traded companies, the amount can be accounted for directly in shareholders’ equity. It’s important to note that the amount to be paid as JCP may be subject to capitalization in the future. | Dividends directly impact the company’s net equity, reducing it on the date they are declared. |
It is also worth noting that in situations where there is a double taxation agreement between the country of origin of the company and the country of residence of the shareholder, it may be possible to recover the Withholding Income Tax (IRRF) on the Interest on Net Equity (JCP) paid. This agreement aims to avoid double taxation and allow the shareholder to receive credit for the tax paid abroad. Therefore, it is necessary to analyze the international treaties in effect, as well as the taxation of income taxes in the destination country for a better analysis of the tax benefits of Interest on Net Equity (JCP).
Furthermore, another opportunity related to Interest on Net Equity (JCP) arises from the possibility for companies to use amounts related to previous fiscal years that have not yet been decided upon, known as Retroactive Interest on Net Equity. This is because there is no time limitation in the legal text regarding the distribution and deduction of JCP, and such understanding is even supported by recent decisions (from 2023 and 2022, respectively) from Brazil’s main adjudicating bodies, the Superior Court of Justice (STJ) and the Administrative Council for Tax Appeals (CARF). Thus, taxpayers can still choose to pay interest based on the net equity of previous fiscal years, deducting it from the calculation basis of Corporate Income Tax (IRPJ) and the Social Contribution on Net Profits (CSLL) in the period in which the payment was actually recorded and approved.
Therefore, in the pursuit of alternatives that allow for the reduction of the tax burden of Corporate Income Tax (IRPJ) and the Social Contribution on Net Profits (CSLL), interest on net equity (JCP) serves as an excellent tax planning tool, generating efficient financial gains. For this reason, there is significant movement among companies seeking greater knowledge for the applicability of this mechanism.
Lastly, it’s important to highlight that the Federal Government’s intended ‘Tax Reform’ calls into question the deduction of interest on net equity (JCP) from the Corporate Income Tax (IRPJ) and Social Contribution on Net Profits (CSLL) tax base. Recently, a bill aiming to eliminate the possibility of JCP deduction starting from January 1, 2024, was submitted to the National Congress.
