CARF Allows the Deductibility of Interest on Equity Paid in Previous Fiscal Years and Profit-Sharing Paid to Employee Directors for Corporate Income Tax Purposes

In a session held a few days ago, Brazil’s Administrative Council of Tax Appeals (“CARF”), through Decision No. 1101-002.171, issued a significant ruling for companies subject to the Actual Profit Tax Regime (Lucro Real), recognizing the deductibility of retroactive payments of Interest on Equity (“JCP”) and Profit-Sharing (“PLR”) paid to employee directors.

The decision reinforces legal certainty for companies taxed under the Actual Profit Tax Regime, particularly with respect to the tax treatment of retroactively paid JCP and the deductibility of PLR granted to employee directors, both of which are frequently challenged during tax audits.

By granting the taxpayer’s voluntary appeal, CARF addressed recurring issues in corporate practice, as detailed below.

1) Deductibility of Interest on Equity (“JCP”) Paid in Previous Fiscal Years for Actual Profit Tax Purposes

According to the Reporting Judge, Article 9 of Law No. 9,249/95 does not establish any time limitation for legal entities to pay Interest on Equity to their shareholders. Consequently, there is no legal obligation requiring taxpayers to deduct JCP exclusively in the same fiscal year in which the profits were generated.

In addition, CARF held that, since JCP payments are not always classified as financial expenses — as acknowledged by Brazil’s Federal Revenue Service itself, which only authorises the exclusion of the accumulated amount in the Taxable Income Book (LALUR) — compliance with the accrual accounting principle should not be required for deductibility purposes, especially given the absence of any express legal provision prohibiting the deductibility of retroactive JCP.

The Reporting Judge also expressly endorsed the precedent established by Brazil’s Superior Court of Justice (“STJ”) under Repetitive Appeal Topic No. 1319 (Special Appeal No. 2,162,629/PR), according to which JCP may be deducted from the Corporate Income Tax (“IRPJ”) and Social Contribution on Net Profits (“CSLL”) tax bases, even when calculated in a fiscal year preceding the shareholders’ meeting that approved the payment.

2) Profit-Sharing (“PLR”) Paid to Employee Directors for Actual Profit Tax Purposes

According to the prevailing opinion, amounts paid as PLR to employee directors may be deducted as operating expenses, pursuant to Article 3, Paragraph 1 of Law No. 10,101/2000. As this legal provision is more recent, it should prevail over prior regulations.

In the case at hand, the taxpayer demonstrated, through documentary evidence, that the directors qualified as employees and were duly registered in their Employment and Social Security Records (Carteira de Trabalho e Previdência Social – CTPS).

3) What Are the Practical Implications of CARF’s Position for Your Company?

Companies that have made JCP payments relating to previous fiscal years now have both administrative and judicial support to defend the deductibility of these amounts for Actual Profit Tax purposes, given the absence of any express legal provision preventing the deduction of retroactive JCP.

As for PLR paid to employee directors, the matter remains subject to divergent interpretations among CARF’s ordinary panels, which requires a case-by-case assessment when defining the appropriate strategy for claiming the deductibility of these amounts.

Our team is available to assess the impacts of this decision on your company’s tax and labour structures.