How to define the remuneration for partners and directors in Brazil
For our Business Talks we invite international and Brazilian specialists to talk about different topics related to Brazil, ranging from market insights, business development, HR and legal, to tax related issues.
Business Talk #2 – we talked to:
Julia Silva e Lima
Julia Silva e Lima is a tax lawyer and associate at FCR Law – Fleury, Coimbra e Rhomberg Advogados. She has extensive experience in advising national and international clients in the field of Brazilian tax law. She is regularly involved in the structuring of cross-border operations, assessing tax risks and mitigating their tax impact.
Julia, choosing the right remuneration method for partners and directors in Brazil can be quite complex. What does a company need to take in consideration, especially from a tax lawyers’ point of view?
From a tax perspective, when choosing a remuneration method for partners and directors in Brazil, the company must not only consider the tax assessment of the remuneration on the individuals, but also the tax impacts on the company itself.
What are the main remuneration methods for partners and directors in Brazil?
In Brazil, the most common remuneration method for partners is the payment of dividends. Alternatively, partners can be remunerated by means of Interests on Equity (juros sobre capital próprio – JCP). For directors, whether shareholders or not, it is common to pay what we call a “pro-labore”.
Can you give us a brief explanation of each of the methods you’ve mentioned?
Sure. Dividends are paid based on the net profits after tax. In a limited liability company (LTDA), they can be distributed either proportionally to the shareholders’ quota or disproportionally, as long as such a criteria is established in the entity’s articles of association or specific resolutions. At corporations (SA), dividends must be distributed proportionally to the shareholders’ quota. However, it is possible for the entity to create preferred shares that give the shareholders that own them the right to receive either minimum or fixed dividends. The distribution of dividends, is not subject to taxes in Brazil. However, the dividends are not tax deductible for corporate income tax purposes.
What about Interest on Equity?
Interest on Equity (JCP) is a remuneration paid to partners/shareholders for the capital invested in the company. The amount due is established in the entity’s articles of association/bylaws or specific shareholders’ resolutions. The interests are calculated by the application of the Long-Term Interest Rate (TJLP) on specific net equity accounts. Contrary to dividends, the payment of JCP is deductible for corporate income tax purposes. The amount of interests that can be deducted is subject to limits established by law. The payment of JCP to partners/shareholders, individuals or legal entities, is subject to withholding income tax at the rate of 15%. Thus, whereas the company would pay 34% tax on dividends, the JCP payment results in a benefit of 19% for the paying entity.
You also mentioned “pro-labore”?
“Pro-labore” is a remuneration paid for the services rendered by directors on behalf of a legal entity. The amount due is usually established in the entity’s articles of association/bylaws or specific shareholders’ resolutions. Pro-labore is subject to withholding income tax at progressive rates of up to 27,5% and social security contribution of 11% (subject to a contribution limit). Both taxes are a burden to the director himself, and are deducted from the amount of pro-labore he receives. The payment of pro-labore is also subject to an employer’s social security contribution at the rate of 20%. Like JCP, pro-labore is tax deductible for corporate income tax purposes.
And what is the best way to figure out the right remuneration method for a company?
As can be seen, all remuneration methods have advantages and disadvantages. Dividends, for instance, are tax exempt for the receiver, but are not tax deductible for the company, whereas JCP and pro-labore are subject to taxes for the receiver but are tax deductible for the company. Thus, the entity must carefully consider and analyze the implications of each of the methods, on both the individual and the company.
Julia, thank you for the interesting conversation!