04/9/2024
The Brazilian National Congress is currently discussing a project of Complementary Law Bill (PLP 108/24), which regulates the tax reform and, among the prosed topics, provides an important change regarding the imposition of the Brazilian Estate and Gift Tax (ITCMD) on disproportionate distributions of dividends and on other operations that are carried out disproportionately, such as spin-offs and increases or reductions in share capital at different prices. In the draft bill under discussion, specifically concerning disproportionate dividend distribution, the text states that any disproportionate distribution among “related parties” that is made freely and without a business purpose shall be treated as a donation, with the corresponding incidence of ITCMD.
Current Brazilian legislation allows limited liability companies to distribute dividends disproportionately; in other words, partners can approve a profit distribution that does not correspond to each partner’s ownership percentage, provided there is an express provision in the articles of association. Disproportionate dividend distribution is a common practice among limited liability companies in Brazil, and there is currently no requirement to prove a business purpose for such distributions.
From a corporate perspective, the distribution of dividends is a form of remuneration for the capital invested by the partners, providing a financial return on their investment. The purpose of disproportionate dividend distribution is to allow partners who have contributed more significantly or actively to the company’s activities and, consequently, to its profits, to receive an additional return on their investment. In limited liability companies, this aspect is particularly important, as the identity, skills, and personal relationships of the partners are crucial factors for the company’s operation and success. According to the draft bill, in companies where there is a business purpose for the disproportionate distribution—such as a partner who plays an active role in operational activities versus a partner who is merely an investor—there should be no incidence of ITCMD.
However, the potential approval of PLP 108/24 would represent a significant change, especially for family holdings, which are widely used in asset and succession planning in Brazil. Partners of a family holding would be included in the concept of “related parties” as defined in the bill, and therefore, disproportionate distributions without a business purpose would be subject to ITCMD. Considering that the corporate purpose of a holding is to own assets, the bill introduces a degree of legal uncertainty due to the lack of clarity about what will be considered a business purpose in these cases. This is a concept that will need to be analyzed in detail on a case-by-case basis, and the absence of a clear definition could result in a significant number of legal disputes.
In conclusion, PLP 108/24 represents a proposal with significant implications for disproportionate dividend distributions and other corporate operations. Given the relevance of the subject and the potential impact on our clients, our firm will closely monitor the next steps in the bill’s legislative process, providing updates with key information and guidance as discussions progress.
Co-authored by: Felipe Castro and Fernanda Domingues Pereira
