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On 30 November and 5 December 2023, a renowned newspaper, Valor Econômico, reported that the Ministry of Finance of Brazil finalized the draft of a new proposal to change the mechanism of the Interest on Net Equity (INE). Following the articles’ publication, a purported draft of the proposal began circulating among tax policy associations. The document which shows (i) an increase to the withholding tax (WHT) rate from 15% to 20%, (ii) a 50% limit for the deduction of the profit of the current year, (iii) a restriction limiting the calculation to the current year only (i.e., eliminating the possibility to pay INE retroactively), and (iv) changes to the calculation basis, including removing several items from the net equity amount.
According to the publication, the new proposal was drafted to be incorporated into Provisional Measure (PM) 1,185, which currently deals with investment incentives. To be effective from 1 January 2024, the PM must be approved in 2023.
This approach shows a change in the Government’s plan to eliminate INE as a repatriation alternative, which had been proposed in a bill of law presented on 31 August 2023. The newspaper reported that the government intends to impose these limitations to prevent what it considers “abusive tax planning” via a series of mechanisms connected to INE used to reduce the taxes paid in Brazil. These include:
- Equity increases that do not represent an effective inflow of assets into the company
- Goodwill for future profitability
- Intangible assets or options granted
Finally, to be valid in 2024, the INE proposal needs to be approved by the Chamber of Deputies and Senate by 31 December 2023.
Implications
INE was introduced in the Brazilian tax system in 1995 as a means of attracting new investments to Brazil by creating a deductible mechanism to remunerate the shareholders and compensate loss of value of investments due to local inflation. (For background, see EY Global Tax Alert, Brazilian Government proposes the elimination of interest on net equity deduction, dated 6 September 2023.)
For now, the Brazilian INE rules remain unchanged. However, the public reporting indicates that the government is willing to be flexible, which could lead to Congress passing some limitations to INE this year. As a result, this potential development needs to be carefully monitored.
For additional information with respect to this Alert, please contact the following:
EY Assessoria Empresarial Ltda, São Paulo
- Gustavo Carmona
- Mariano Manente
- Mark Conomy
- Priscila Vergueiro
- Rita A Martins
- Tiago Aguiar
Ernst & Young LLP (United States), Latin American Business Center, New York
- Ana Mingramm
- Aline Millá
- Monique Zuzarte
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.
