Super-dividend stocks for funding

With a third of the world population under measures of social distance, quarantine or lockdown, I believe that we have all been affected by this pandemic to some degree, and therefore, no introduction is needed regarding the unique moment the World is going through. And if you allow me a little digression, I deeply wish that you and everyone around you are well, despite the adversities.

Regarding the economic environment, there is an expectation about the extent of the impact of the new coronavirus on small, medium and large companies.

If even hospitals are suffering from reduced revenues due to the cancellation of elective procedures, the only certainty is that all markets will be affected in some way and the reinforcement / maintenance of cash will be essential in this period.

Having this in mind and in view of the difficulty of finding suitable credit facilities, many entrepreneurs have faced a deadlock: receiving a capital contribution and giving up control of the company or resorting to high cost debts?

If you have already seen yourself in this deadlock, the good news is that there are alternatives to enable solutions that do not fall into this duality: the super voting shares or super shares, which have been adopted by Azul Arline Company and were proposed in the prospectus of Track & Field’s IPO, just to mention the most recent examples.

With these super shares, preferred shares are created with reinforced economic rights in relation to common shares (for example, the right to receive dividends, the right to tag-along and the priority on capital reimbursement).

Thus, a company could issue preferred shares with economic rights 10 times greater than the economic rights of common shares. This structure would allow holders of preferred shares representing 1% of the total share capital to receive 10% of the dividends distributed. Ultimately, the controlling shareholder could keep 10% of the economic rights and still maintain control of the company.

In this way, super shares offer a more efficient guarantee to the creditor in relation to collateral, by adjusting payments to the company’s cash flow and profits and avoiding a more bureaucratic procedure in relation foreclosure of guarantees.

These characteristics can be especially interesting in mezzanine-type debt transactions (a middle ground between a debt and a capital contribution) and be the difference that will allow more advantageous conditions for a company to overcome this turbulent moment.

Despite the flexibility and the various cases in which they can assist the parties involved, it is very important that the decision on the adoption of super shares must consider all the particularities of the transaction.

For this, Candido Martins Advogados is available to clarify any doubts on the matter.

By Mateus Lopes da Silva Leite, associate at Candido Martins Advogados

The deductibility of interest on equity to usufructuaries of shares: CARF’s consistent decision

Last January, the Brazilian Administrative Council for Tax Appeals (CARF) published decision No. 1401-004,050, which discussed the tax treatment given to the payment of Interest on Equity (JCP) to beneficiaries who would, in fact, be beneficiaries of the company’s shares.

In accordance with Article 9 of Law No. 9,249/1995, the legal entity may deduct, for the purposes of calculating taxable income, the JCP credited to the holders, partners or shareholders of the company.

In the case at hand, the Federal Revenue of Brazil understood that deducting the JCPs credited to the usufructuaries of the shares was not possible due to the literal interpretation of article 9 of Law No. 9,249/1995, under the rationale that the legal provision would not cover the JCPs paid to beneficiaries for purposes of deductibility in calculating the profit due.

CARF, in a very coherent manner, disregarded the grounds from the Tax Inspection, as it understood that since the tax legislator omitted to attribute effects to specific cases such as this one, one should seek the typical effects resulting from private law.

In this sense, both the Civil Code and the Brazilian Corporation Law are clear in establishing that the usufructuary has the right to possession, use, administration and perception of the proceeds (article 1,394 of the Civil Code), in such a manner that both dividends (Article 205 of the Brazilian Corporation Law) and JCP (interpretation of Article 9, § 7, Law No. 9,249 / 1995) must be credited to the usufructuary.

CARF’s ruling was undeniably well received by taxpayers and lawyers who work daily with the Administrative Council. It is important, however, to ask: why are such decisions received by taxpayers with surprise? It is clear that there was already a position taken by CARF in the sense of recognizing the deductibility of JCPs credited to usufructuaries of shares, but why are decisions that reflect objective interpretations of this type not as frequent?

A significant number of lawsuits, especially those involving more material tax infraction notices, are decided in a favorable manner to the tax authorities, usually by a casting vote, for reasons that do not necessarily reflect the more technical interpretation of the tax law.

These reflections, therefore, lead us to another question: would the extinction of the casting vote introduced by the amendment to the recent Provisional Measure nº 899/2019 – provided its constitutionality is not questioned -, be capable of increasing the number of decisions current rendered that are considered bold?

It is up to us, lawyers and taxpayers, to monitor the next debates.

By Júlia Malafaia Vituli Silva, associate at Candido Martins Advogados
tributario@candidomartins.com.br