Rewriting the rules: Changes in Interest on Equity

The Conversion of Provisional Measure No. 1,185/2023 (MP 1,185), which took place on December 29, 2023, brought to light new issues involving Interest on Equity (JCP). 

This occurred because, together with changes in the tax treatment of investment subsidies during the legislative process in the National Congress of MP 1,185, new conditions for the calculation of JCP were introduced. 

It is worth noting that this mechanism is calculated by applying the Long-Term Interest Rate (TJLP) to certain accounts of the legal entity's equity, allowing taxpayers, who opt for actual profit taxation, to remunerate shareholders for the interest on capital invested in the company. 

Although these amounts are subject to taxation for shareholders, they are deductible from the calculation of Real Profit (as they receive treatment as financial expenses), resulting in lower revenue for the public coffers. 

While the government's intention to revoke the deductibility of JCP has not been fully achieved, it is certain that these innovations have substantially modified its calculation method. 

In summary, we present below the most relevant modifications on the subject: 

•  The calculation base of JCP has been adjusted, with the inclusion of the requirement that the calculation shall only be made on the fully paid portion of the share capital. 
• Regarding capital reserves, limitations have been imposed to those formed upon the subscription of shares, both concerning the portion exceeding the nominal value and in cases of specific provision for the composition of capital reserves. 
• Furthermore, concerning profit reserves, the new legislation has exempted the account of tax incentive reserves from the calculation. 
• Positive variations in equity resulting from corporate transactions between related parties cannot be considered in the JCP calculations if they do not involve the actual inflow of assets to the legal entity. In this regard, related parties are considered those directly or indirectly controlled by the same entity or resulting from a control relationship between the parties. 
• Lastly, the possibility of including treasury shares in the calculation has been maintained, including the provision for the consideration of accumulated profits (in addition to the existing provision for accumulated losses). 

It is worth to note that the increase in restrictions on the calculation of JCP is likely to reduce the amount of deduction eventually calculated by legal entities, resulting in an increase in the amount of Income Tax and Social Contribution to Net Income. 

We will continue to monitor the evolution of the topic and remain available for any eventual questions.