September 6, 2023
Brazilian Government proposes the elimination of interest on net equity deduction
On 31 August 2023, the Brazilian Government proposed a bill that would change the corporate income tax system by eliminating the deductibility of Interest on Net Equity (INE) as of 1 January 2024. Nevertheless, the text of the bill does not prevent the deduction of interest accrued to determine the corporate income tax basis related to calendar year 2023, even if paid or credited in calendar year 2024.
INE was introduced in the Brazilian tax system in 1995 by Law 9,249/1995 as a means of attracting new investments to Brazil by creating a deductible mechanism to remunerate the shareholders, and also to compensate loss of value of investments due to local inflation.
Specific conditions that must be observed for the deduction of INE expense to be allowed are:
In a nutshell, the calculation of INE capacity should consider, as basis for the TJLP, specific accounts of the Brazilian company's net equity, such as (i) paid-in capital, (ii) capital reserves, (iii) profit reserves, (iv) treasury shares, and (v) accumulated losses (art. 9 of Law 9,249/95, amended Law 12,973/2014).
Contrary to dividends, which are exempt from withholding tax, INE is generally subject to 15% withholding tax rate on the date it is paid or accrued, while being deductible at the combined nominal corporate income tax rate of 34% (composed of a 25% income tax (IRPJ) and 9% social contribution on net profit (CSLL)).
If enacted this year, the new rule would be effective 1 January 2024. Both chambers of the National Congress (i.e., Chamber of Deputies and Senate) still need to discuss and approve the bill in different voting rounds.
The legislative process usually takes time in Brazil, and the current wording of the bill may still be amended during the next steps of this process.
Taxpayers in Brazil should evaluate whether they need to act before year-end in light of the expected changes to Brazilian income tax legislation. Considerations in this evaluation would include waiting periods and other aspects that could prevent smooth implementation of changes in structure/activities, or of payments within their current INE capacity.
For additional information with respect to this Alert, please contact the following:
EY Assessoria Empresarial Ltda, São Paulo
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor