Brazilian companies rush to adapt to dividend tax change

In a race against time, companies are calling shareholder meetings to approve the distribution of profits earned through December 31. Under the bill, earnings recognized by the end of 2025 will remain tax-free, provided the distribution is approved this year.

Uncertainty surrounding the bill, which may still be altered by presidential vetoes, was evident during recent earnings calls for the third quarter. Companies such as Caixa Seguridade, Direcional, Mills, and Unipar told analysts they are still evaluating different options and have yet to make final decisions on how to proceed.

Tax experts report a surge in queries, noting that the bill contains provisions that clash with Brazil’s corporate law. “Companies are either going to end up in conflict with the CVM [Securities and Exchange Commission] or the tax authorities,” said Rodrigo Maito, tax partner at law firm Dias Carneiro Advogados. “There’s a complete mismatch between the approved bill and corporate law.”

While the Corporate Law (Lei das S.A.) requires dividends to be paid within 60 days of the decision in the same fiscal year, the bill allows profits and dividends recognized through the end of 2025 to be paid out as late as 2028.

The December 31 deadline to approve payouts from “past profits” is expected to trigger a rush to close interim financial statements, since full audited results for the fourth quarter will only be released next year. “This creates an incompatibility for corporations,” Maito noted.

Different paths

On an earnings call, Ricardo Gontijo, CEO of homebuilder Direcional, said the company is “still evaluating what can be done” to minimize the impact on shareholders. However, he noted that the company is well positioned, given its cash and leverage levels. “We’re looking at what’s feasible while maintaining our conservative and disciplined approach,” he said.

Mills, a machinery and equipment rental firm, is also assessing alternatives to “ensure the best return for shareholders,” said CFO Renata Vaz, though she acknowledged a strategy has not yet been finalized.

At Plano&Plano, the change in tax rules “pushes the company to try to maximize dividends for shareholders,” said CFO João Luis Ramos Hopp. But he noted that the decision depends on factors such as the company’s growth appetite and compliance with debt covenants.

Mahle Metal Leve has already decided not to distribute dividends early, citing the financial cost. “We’ve studied the topic, including the investor base,” said CFO Claudio César Braga. “What I can say is that if the law stays as it is, we don’t intend to advance dividends.”

Porto’s vice president of finance, Celso Damadi, told analysts the insurer is also monitoring possible changes to the bill. “We’ll wait to see how it turns out before deciding,” he said, adding that paying additional dividends in 2025 is not in the company’s plans. “We expect to distribute 50% [of profit] this year. In the coming years, given our cash generation, there are some possibilities,” he said.

In late October, Vulcabras’s board approved a capital increase of up to R$597.6 million, to be allocated to the company’s capital account and capital reserves via share subscription premiums.

“We’re calling a capital increase and allocating R$598 million as part of tax planning in anticipation of the tax reform that will likely tax dividends,” said CFO Wagner Dantas at the time. “It’s a way to favor shareholders through tax strategy without placing unnecessary leverage on Vulcabras’s balance sheet.”

Debt on the table

Tax attorney Alamy Candido of Candido Martins Cukier said the topic has dominated legal work this month. “Everything we’re doing is focused on this,” he said.

He noted that options for adapting to the new tax regime are limited. One approach is capitalization: by using profit reserves to increase capital, companies can issue bonus shares to existing shareholders.

This is an internal accounting maneuver, where the new shares are distributed at no cost to shareholders. “But it’s not so simple for companies with complex ownership structures,” he said.

Companies with profits and sufficient cash on hand may simply opt to pay out dividends. Others lacking the resources might resort to borrowing, which could lead to increased demand for financing, though this may be constrained by high interest rates.

An intermediate strategy would be to reclassify a portion of equity as liabilities on the balance sheet, essentially recognizing a future obligation to shareholders without deciding yet how the funds will be used. “Everyone’s drafting minutes and calling meetings,” said Maito.

One lingering source of uncertainty, Candido added, is the possibility of President Lula vetoing the provision allowing payments through 2028. In the event of a veto, there are two possible interpretations: either companies could pay earnings from 2025 whenever they choose, or they would be required to pay by the end of this year.

“It would be better to enact the bill as it is,” Candido said. “We’ve already had a lot of discussions. If the president vetoes it, there’ll be a rush to distribute dividends and growing discomfort in the market.”