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 Social Contribution on Net Income (CSLL) tax bases —a combined nominal rate of 34%—replacing them with a standard 15% Withholding Income Tax (IRRF) rate. This makes JCP an efficient profit distribution mechanism for both Brazilian and foreign shareholders, as opposed to dividends.
Recently, this methodology has been scrutinized by foreign tax authorities due to the unique nature of Brazil’s tax regime. While JCP enables Brazilian companies to deduct these payments from their taxable base, many countries view it as a tax optimization strategy that could erode the global tax base.
Tax authorities in some countries argue that when JCP is sent abroad and taxed as dividends, it benefits from reduced rates or even exemptions in the destination country. Consequently, authorities in various jurisdictions have been challenging the use of JCP, asserting that it should be treated as “interest” under Double Taxation Treaties with Brazil, instead of “dividends,” which would align with Brazil’s domestic law.
This argument gained traction with a recent ruling by the 2nd Chamber of the Higher Chamber of Tax Appeals at the Administrative Council of Tax Appeals (CSRF – Carf) in Decision 9202-011.340. The unanimous decision was favorable to the Brazilian Federal Revenue Office, determining that JCP paid to residents of low-tax jurisdictions should be taxed at 25%, as it constitutes “income derived from any transaction” and should not be classified as dividends or given specific treatment under Brazilian tax law.
This decision reinforces Brazilian administrative precent but does not resolve the debate over the nature of JCP, which has been interpreted differently by Brazilian courts and is treated inconsistently in other countries. Nevertheless, JCP remains an effective tax planning tool in the Brazilian market. Foreign companies with investments in Brazil should continue to consider its use, while being aware that its treatment may change in the near future.
Interim Measure 1,262/2024 Establishes Additional Net Income Contribution to Comply with GloBE Standards
A new Interim Measure (IM 1,262/24) issued by the Federal Government implements significant changes in Brazil’s tax system, adding an extra Social Contribution on Net Income (CSLL) in order to ensure a 15% minimum effective tax rate. This measure is part of Brazil’s initiative to comply with the Global Anti-Base Erosion Rules (GloBE Rules), developed by the OECD/G20 Inclusive Framework on BEPS.
The additional CSLL is classified as a Qualified Domestic Minimum Top-up Tax (QDMTT), which, under GloBE Rules, serves as a supplementary tax to ensure that income earned within a jurisdiction is taxed at a minimum rate of 15%.
The new rule takes effect on 1 January 2025 and applies to constituent entities within multinational groups with consolidated annual revenues of at least €750 million in two or more of the last four fiscal years.
For the purposes of this legislation, covered entities include all legal entities except individuals, as well as any arrangements, structures, operations, or agreements required to prepare individual financial statements.
The CSLL surcharge will apply to profits classified as “excess profits” under Brazilian accounting standards, excluding those based on substance. The amount owed will be calculated as the positive difference between 15% and the effective tax rate and will be allocated proportionally among constituent entities based on excess profits. Payment must be made by the seventh month following the fiscal year-end. Constituent entities must provide all necessary information for calculating the CSLL surcharge and face financial penalties for non-compliance.
To clarify the concepts, calculation methods, and simplified rules and transitional regimes introduced by this Interim Measure, Regulatory Guideline 2,228 was also issued on the same day.
Given the significance and impact of these changes, we invite our clients to a briefing on the details and potential repercussions of IM 1,262/2024.
