News

In the judgment of Theme 1319, the Brazilian Superior Court of Justice (STJ) unanimously decided that Interest on Equity (Juros sobre Capital Próprio – JCP) may be deducted from the tax base of Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) even when related to profits from fiscal years prior to the resolution authorizing their payment.

As the matter was ruled under the representative appeals system, the understanding must be followed by lower courts nationwide.

JCP is an alternative form of profit distribution, used to remunerate shareholders for invested capital. For companies, the amount paid can be recorded as a deductible expense, reducing IRPJ and CSLL, whereas individual taxpayersare subject to 15% in withheld income tax.

Background of the dispute

The controversy arose because the Brazilian Federal Revenue Service (RFB), since 1996, had required that JCP deductions be limited to profits from the same fiscal year, a position reinforced by Consultation Resolution No. 329/2014. The Federal Tax Administrative Council (CARF) also adopted a restrictive interpretation, denying deductions for retroactive payments.

STJ’s reasoning

Justice Rapporteur Paulo Sérgio Domingues stated that there is no violation of the accrual basis, since the expense is only triggered when the shareholders resolve to approve the payment of JCP. It is this corporate resolution – rather than the period in which profits were generated – that should be considered for tax purposes.

He also emphasized that until 2017 the Federal Revenue Service itself never imposed such temporal restrictions, this being later introduced by means of a more strict interpretative approach by the tax authorities.