Taxation Of Dividends And Disguised Dividends Distribution

Much has been said about the return of dividend taxation in Brazil.

Yes, it comes back, because in the past there was already this type of taxation in the country established by law in 1988. Since 1991, however, dividends have been taxed only for remittances abroad, followed by a period of exemption between 1992 and 1993. Once more, from 1994 on, the distribution of dividends was again taxed until in 1996 came the exemption established in the current legislation.

In those previous opportunities, taxation occurred at source and the applicable rate was 8% in the first period and 15% in the second period of taxation.

The announced possible return of taxation should, in principle, occur in approximately the same terms, possibly having a rate between 10% and 20%. In addition, at least as far as the current government’s economic team is concerned, this taxation should be accompanied by a reduction in income tax rates for legal entities.

Concomitantly with the government’s plans, there are also several bills in the National Congress, intending to amend article 10 of Law 9,249 / 1995, thus ending the exemption from dividend taxation provided for in this article.

As we known, each change brought by the legislation naturally brings, on the other hand, a dynamic response from the market as a whole, accommodating itself to the new tax reality.

Today, for example, a vast number of companies remunerate their shareholders mostly, if not exclusively, through the exempt distribution of dividends. With its taxation, this is a scenario that can change significantly.

In this sense, much has been said about the possibility of companies starting to incur personal expenses of the shareholders or to acquire assets for their personal use. Thus, for example, instead of the shareholder buying a car for the use of his family under his own name, he would acquire the vehicle through the legal entity, but on his behalf.

This practice, in theory, would configure what is called “Disguised Dividends Distribution” widely referred to by its acronym in Portuguese “DDL”. This is because, this type of operation would not be in fact an acquisition of a certain asset for the company’s activity, but effectively a distribution of dividends to the shareholder, so that he can enjoy the asset directly. It is about creating a legal disguise for the true nature of the intended operation.

The norms that currently regulate DDL are articles 60, 61 and 62 of Decree-Law No. 1,598 / 77, amended by Article 20 of Decree-Law No. 2,065 / 83, which were reproduced in Articles 528 to 532 of the current Regulation on Income Tax, Decree No. 9,580 / 18.

It happens that there is a widely accepted understanding that the current legislation referring to DDL is only applicable to companies opting for the real profit tax regime, not encompassing those taxed by the deemed profit regime or the simplified regime.

This is because the aforementioned DDL provisions, when dealing with the treatment of possible differences in the tax calculation basis, expressly mention only taxpayers subject to the real profit regime.

Thus, observing the principle of tax legality, it is understood that it is not possible to apply the rules related to DDL and its consequences to companies that use the Deemed Profiit regime or adhering to the simplified regime.

There is clearly a legislative gap here and we still don’t know whether it will be filled or not.

Some of the proposed legislative bills are already paying attention to the issue of DDL rules, such as PL 31.29 / 2019, for example, which expressly extends its applicability to companies opting for the simplified and deemed profit regimes.

There is no certainty as to whether and how dividend taxation will be reestablished in Brazil, but in the event that it occurs, if the disguised dividends distribution aspect is not expressly regulated, it is possible that we will see a large movement by companies using the deemed profit regime and the simplified regime starting to hold relevant assets for the effective use of its shareholders and beginning to bear their expenses.

In these cases, of course, it will be of paramount importance to consider the risks of the exposure of the shareholders’ personal assets to the business activity of the companies, as well as the analysis of the possibility of having what is called abuse of the corporate veil, characterized by the deviation of purpose or patrimonial confusion between the legal entity and the natural person, which, according to the current legislation, can cause the piercing of the corporate veil, with all its effects.

In any case, the fact is that discussions of this nature are just beginning, and it is certain that modifications like these should undoubtedly cause numerous changes in the corporate and tax structures of Brazilian companies, proving to be essential that the entire local business community is absolutely aware and prepared.

By Ivan Luvisotto

10/20/2020