1. Interest on Equity and Dividends: the Brazilian Perspective Brazilian companies have two main instruments for remunerating shareholders for the capital invested in companies: dividends and interest on net equity (“Juros sobre o capital própio”, referred to as “IoNE” in this article). Both instruments can be used at the same time, but their tax treatment will depend on the particular characteristics of each case.
While dividends feature in most jurisdictions, IoNE is unique to the Brazilian system. The following paragraphs focus on describing -and characterizing IoNE- under Brazilian domestic legislation from the perspective of tax and corporate law.
1.1 Introductory comments IoNE first appeared in the Brazilian legal system in Federal Law no. 9,249, of December 26, 1995, which contains the following provision:
“Article 9. A legal entity can deduct, for the purpose of calculating its actual profit, the interest paid to the owner, members or shareholders, by way of return on net equity, calculated on the net equity accounts and to the extent of the variation in the long-term interest rate (“Taxa de Juros de Longo Prazo”) calculated pro rata per day.”
Law 9,249/95 however, places two restrictions that must be observed simultaneously to set the upper deductibility limit:
(i) IoNE must be calculated by reference to the net equity accounts. Therefore, if the enterprise does not have a significant amount of equity or has a negative equity figure, earnings cannot be distributed in the form of IoNE. The rate applied to the net equity accounts must be the long-term interest rate, published annually by Banco Central de Brasil, Brazil’s central bank.
(ii) The upper limit on IoNE is determined as the higher of: (i) 50% of net income for the year, before deduction of the IoNE and deduction of the provision for corporate income tax, but after the deduction of the social contribution on net income1, and (ii) 50% of retained earnings plus profit reserves.
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