Government will propose an end to interest on equity, says Haddad

The Minister of Finance, Fernando Haddad, said this Monday (24th), that the government will propose the closure of the mechanism of interest on own capital. “It is one of the measures being prepared by the Treasury”, he said, as he left the Planalto Palace annex, after meeting with the vice president and minister of Development, Industry, Commerce and Services, Geraldo Alckmin.

The economic team has already been working on the measure for a few months with the aim of curb abuses in the distribution rule of interest on own capital and increase revenue.

Currently, there are two ways for companies to distribute part of the profit to shareholders. The first takes place through dividends, required by the Corporate Law, in which the company pays Corporate Income Tax (IRPJ) and Social Contribution on Net Income (CSLL) on profits, but the investor pays nothing. The Income Tax reform, to be discussed in the second half, intends to tax dividends for individuals and reduce taxation on companies.

The second occurs through interest on own capital, of an optional nature, in which the company does not pay IRPJ and CSLL, but the investor pays 15% Income Tax withheld at source. Interest transfers to investors are considered as expenses and deducted from profit.

The mechanism was created to attract investors in the stock market and facilitate self-financing with the partners’ resources, by encouraging the distribution of profits by the companies. In April, when commenting on the possibility of ending the mechanism, Minister Haddad explained, however, that several companies are artificially zeroing profits to transform them into interest on equity.

“There are companies, to give you an idea, that are no longer making a profit. There are very profitable companies that do not declare a profit and, therefore, do not pay Corporate Income Tax. What did they do? They artificially transformed profit into interest on equity. They do not pay either as a legal entity or as an individual”, explained the minister.

accelerated depreciation

The subject of the meeting between Haddad and Alckmin was the change in the accelerated depreciation of capital goods, in order to stimulate the economy, starting in 2024. According to him, for many years the industry has been demanding that the depreciation of machinery and equipment be done at a higher speed.

When a company purchases a machine, it may expense part of the price each year. The release decreases the profit and, therefore, results in a decrease in the Income Tax collected.

“This does not have a fiscal impact per se, except in time. In effect, instead of deferring (postponing) depreciation, you anticipate the tax effect. In time, it is nil, but this gives a great advantage to the industrialist who is willing to invest in his business in search of increased productivity, which has not increased in Brazil for many years”, he explained.

According to Haddad, the government reaffirmed its commitment to the thesis of accelerated depreciation for 2024 and will now define the scope of the measure, starting with the approval of the 2024 budget by the National Congress.

“The reach can be very different in relation to the sectors you are going to cover and in relation to the shortening of the term. So we are going to see the evolution of the budget process as of August 31st and we are going to define the starting point of the accelerated depreciation. But it is agreed that it starts in 2024”, he said.

“It can vary a lot because the general package can reach BRL 15 billion, but it can come from BRL 3 (billion), it can come from BRL 5 (billion), it can be from BRL 9 (billion). It will depend a lot on the space that Congress allows us due to the laws that will be passed. Calibration is the starting point. As in the following year you already start to recover credit, it is something that you can evaluate depending on the fiscal space you have”, he added.