How to prepare for dividend taxation
Have you ever gone kart racing? Have you ever driven a Formula 1 car? Maybe not, but most likely you have already driven a car or rode a motorcycle or bicycle…
Anyone who has had any of these experiences knows that it is not enough to just sit on the seat and accelerate as if there is no tomorrow. It is necessary to plan the route, pay attention to the direction and, especially, plan the movements in advance. Simply turning the steering wheel in the middle of the curve, for example, greatly increases the chances of a skidding or crashing into the vehicle traveling alongside you.
The golden rule of motorsport is to anticipate changes. This rule also applies to the business environment, where major changes are frequently announced in Brazil.
Minister Paulo Guedes’ economic team, for example, have favorably indicated the return of dividend taxation and it will be a matter of time before it is implemented.
Bills of law in this sense are not lacking in Congress and this scenario can already be seen in the rear view, accelerating more every second. The tax authorities are coming strong in a straight line and this time with a more powerful engine than has been seen since 1995 (last year in which such taxation was in force).
In 2001, the Brazilian Corporate Law was amended to provide that profits that are not allocated under the terms of the current legislation are to be distributed as dividends.
Publicly-held companies are more accustomed to this scenario, but many closed corporations (that is, that do not have publicly traded shares, debentures or securities) still maintain the generic “retained earnings reserves” today, without the proper destination required by law.
Considering that all shareholders are aligned with this withholding, this should not be a problem, but the scenario may change with the Tax Authorities looking closely at withheld dividends that do not meet the legal requirements.
In practice, most companies in the market adopt the payment of mandatory dividends in the amount of 25% of the net profit, but may be obliged to pay income tax on a much higher basis than that if they do not make the appropriate allocation of profit.
The good news is that the Brazilian Corporation Law provides for cases in which you are allowed to withhold the remaining profit. It is even possible to reduce the amount of the mandatory dividend to less than 25% of the net profit.
There is no silver bullet that solves all situations, as each company has its particularities (need for constant liquidity by shareholders, minority investors, expected distribution versus the possibility of capitalizing reserves, etc.) and the most appropriate solution to avoid taxation of dividends beyond what is desired must be analyzed on a case-by-case basis.
Whichever is your case and that of your company, the most important point is to anticipate these scenarios in order to avoid stalling on the track.
In the words Raul Seixas’ song, “Don’t stall on the track, if you stall, the car can get you….. honey, give me your hand and I will take you, with no car and no fear, from the guard to fine”.
By Mateus Leite, associate at Candido Martins Advogados