INTEREST ON NET EQUITY

Brazilian legislation (Law 9,249/05) states in addition to dividends, Brazilian companies may also pay shareholders with “interest on net equity" (in portuguese, "Juros sobre Capital Próprio").

The Interest on net equity election should result in  a deductible interest amount based on the entity’s net equity calculated from a Brazilian perspective. The interest on net equity represents a tax-deductible item for corporate tax purposes (income tax and social contribution tax on profits currently charged at a combined rate of 34%).

Interest on net equity is calculated by applying the long-term interest rate (TJLP) on the Brazilian entity’s adjusted equity, considering all equity variations occurred during the year (increases and reductions). The interest on equity deduction is limited to the larger of 50% of the payer’s retained earnings and 50% of the payer’s current profits, with some adjustments.

Interest on net equity is subject to 15% Brazilian income withholding tax on the date it is paid or credit to the recipient. Remittances will be also subject to IOF at 0%. The WHT can be reduced if the DTT provisions applies (e.g. Japan - 12.5% WHT).

The interest on equity amount can either be paid by the Brazilian entity to its owners or the amount can be capitalized by the Brazilian entity without the need to make an actual payment (the 15% Brazilian income tax withholding applies in any event and there are discussions whether a “symbolic” IOF would be charged).

The calculation of the interest on net income can be done in monthly, trimester, semester or anual basis. Moreover, the taxpayers can eventually make the election for this procedure till the maximum period of the submitance of the Income Tax Return to the tax authorities (June, 30 of the subsequent year).

The interest on equity deduction can be claimed on an annual basis. 

Retroactive Application.  This is support for taxpayers taking a position that interest on equity can be claimed retroactively in situations where the taxpayer could have benefited from the the election but failed to claim the deduction on its timely filed Brazilian income tax return. 

The statute of limitations in Brazil runs for five years from the filing due date of the income tax return.