On August 30, the Brazilian government submitted Bill No. 3,394/2024 to the National Congress, proposing to raise the Social Contribution on Net Income (CSLL) and Withholding Income Tax (IRRF) rates on Interest on Equity (JCP) payments.
Interest on Equity (JCP):
Interest on Equity (JCP) is a form of remuneration paid by Brazilian companies to shareholders. Unlike dividends, which are distributed based on profits, JCP is calculated using the company’s net equity and is treated as a deductible financial expense for tax purposes.
This deduction allows companies to reduce their Corporate Income Tax (IRPJ) and CSLL tax bases, which have a combined nominal rate of 34%, replacing them with a 15% IRRF withholding rate. This makes JCP an efficient mechanism for profit distribution to both Brazilian and foreign shareholders, as opposed to dividends.
According to the proposed bill, JCP payments would be subject to a 20% IRRF withholding rate, applied at the time of payment or credit to the beneficiary. Currently, these payments are taxed at 15%, resulting in a higher tax burden for JCP beneficiaries.
It is worth noting that the proposed text does not set a timeline for reducing the 20% rate, indicating that the higher tax may remain permanent, without a foreseeable return to the previous rates.
Social Contribution on Net Income (CSLL):
CSLL is a federal tax on a company’s net income, with a base rate of 9%, which can reach up to 20% for certain economic activities. The bill proposes a temporary rate increase across all sectors starting 1 January 2025, with rates reverting to current levels in 2026. The proposed changes are as follows:
| Private insurance companies, capitalization bond companies, brokers, and credit societies | The current rate is 15%, increasing to 16% until December 2025, reverting to 15% in January 2026. |
| Banks of all kinds | The current rate is 20%, increasing to 22% until December 2025, reverting to 20% in January 2026. |
| Other legal entities | The current rate is 9%, increasing to 10% until December 2025, reverting to 9% in January 2026. |
The increase in the IRRF rate on JCP is projected to generate additional tax revenue of BRL 6.01 billion in 2025, BRL 4.99 billion in 2026, and BRL 5.28 billion in 2027. The changes in CSLL rates are projected to increase revenue by BRL 14.93 billion in 2025 and BRL 1.35 billion in 2026.
The bill is under urgent constitutional review in the Chamber of Deputies, with a 45-day deadline for deliberation ending on October 14, 2024. If passed, the bill will then move to the Federal Senate for further consideration.
