Dividends to shareholders may rise as interest on equity increases; know how!

Equity interest (JCP) is an interesting form of profitability for investors who own shares in companies. This bonus method has become increasingly popular, as companies use JCPs as a tool to distribute a portion of their profits to shareholders.

Simply put, JCPs are a type of bonus that a company offers to its partners, shareholders or stake holders. It is possible to apply this type of benefit to companies owned by the public sector – those listed on the stock exchange – and to private and limited companies.

How do JCP programs work?

The structure of JCPs is as follows: The money that investors put into the company is understood as a type of loan. Therefore, the company uses the profits from this “debt” to compensate for the capital invested by the partners. For these companies, this is a very efficient way to distribute their profits, and serves as an alternative to paying dividends.

This method was created to replace the cash correction deduction in the calculation of real profit, and therefore in the tax calculation base. Before the Real Plan, uncontrolled inflation allowed companies to deduct inflation changes from their profits for the purpose of calculating taxes. With the de-linking of the economy, this formula was extinguished, leading to the creation of job creation programmes.

However, Law No. 9249/95, which deals with income tax for legal entities and social contribution on net profit (CSLL), eliminates the possibility of deducting inflation when calculating real profit. On the other hand, companies are now able to deduct JCPs, which acts as a reduction in the tax calculation base. Therefore, before paying taxes, part of the profits is transferred to the partners.

However, this reality may be about to change. At the end of August 2023, the Federal Government published a draft law (PL 4258/23) proposing the end of the JCP deduction when calculating real profit and the CSLL calculation rule from 2024 onwards.

What is the difference between JCP and dividends?

Both are ways of distributing profits by companies, and for shareholders they mean money in their pockets. However, there are differences mainly in the legal, accounting and tax form. Dividends are regulated under Law No. 76/6404, while JCPs are covered under Law No. 95/9249.

Pay JCP has simpler legislation. It has the advantage of not requiring a legal text, approval at the meeting, and no mandatory minimum distribution percentage. This decision can be made directly by the company’s management.

How are JCP points calculated?

Equity interest is calculated on the company’s net equity. The laws stipulate that only specific components of net worth should be taken into account when making this calculation: capital, capital reserves, dividend reserves, treasury shares, and accumulated losses.

Furthermore, the legislation sets limits on the amount that companies can pay in interest on shares, specifically to prevent companies from resorting solely to this type of bonus.

Should JCP be declared in income tax?

Yes, JCP should be announced. Although income tax is deducted at source, the JCP must be declared under “exclusive/final taxable income” in the Federal Revenue Program. Therefore, it is important for an investor to be aware of these tax liabilities when receiving this type of bonus.

In conclusion, equity interest is an attractive interest for investors who own shares in a company. However, it is also important to be aware of potential changes in legislation relating to this remuneration method, as well as the tax liabilities this may entail.