Companies seek to pay dividends with redeemable preferred shares

This mechanism would enable companies to distribute dividends this year without an immediate cash outflow, allowing them to benefit from the income tax exemption on accumulated profits calculated through the end of the year.

Although the Senate’s Economic Affairs Committee (CAE) approved a bill on Tuesday (2) extending the deadline for calculating and paying such dividends through April of next year—aligning it with companies’ annual financial reporting—the search for tax-efficient payout strategies remains urgent.

The bill also introduced the concept of a “non-taxable profit reserve,” which would allow companies to distribute these earnings tax-free until 2028. This provision aims to give legal clarity to corporations, whose regulations require dividends to be paid within the same fiscal year in which they are declared.

Still, uncertainty remains over whether the Senate-approved text will survive unaltered, as the bill must return to the Lower House and then be signed into law. Tax experts recommend companies proceed with planning as though the original deadlines remain, to maximize the tax-exempt portion of retained earnings.

To that end, several companies are evaluating whether to distribute dividends using redeemable preferred shares. Under current rules, companies listed on the Novo Mercado are allowed to issue only common shares, which come with voting rights.

Temporary waiver

As a result, requests have begun arriving at B3 for a temporary waiver that would allow these companies—some of the country’s largest, with billions of reais in retained profits—to issue redeemable preferred shares for this specific purpose, without violating listing rules.

The Brazilian Association of Listed Companies (Abrasca) is leading this effort after being approached by member firms. In recent days, the association has surveyed companies to assess demand for such issuances, according to a source. Companies confirmed their interest on Tuesday, the person said.

B3 is expected to decide in the coming days whether to grant this flexibility, so companies can hold shareholder meetings before year-end. Brazilian corporate law requires a minimum 21-day notice to call such meetings.

Abrasca told its members the timeline is tight, as companies choosing this route must complete corporate approvals before year-end. In a letter reviewed by Valor, the association said B3 has shown a “willingness” to evaluate an “exceptional treatment with urgency.”

A person close to the matter said B3 is currently reviewing the request. Approval would depend on the condition that the “one share, one vote” principle is preserved, meaning the redeemable preferred shares must carry voting rights equivalent to common stock until they are redeemed. A decision is expected soon.

Pressure on currency

“Redeemable preferred shares have already been used by some private companies,” said Conrado Stievani, a capital markets partner at law firm BMA.

He noted that this strategy not only helps companies avoid draining cash or increasing debt but could also ease pressure on the exchange rate this month. That’s because a significant share of these companies’ stock is held by foreign investors, who would repatriate the funds if dividends were paid in cash.

By paying dividends in redeemable preferred shares, companies can stagger the redemption, essentially converting the shares to cash, over the coming years.

This approach has already been taken by Axia (formerly Eletrobras), which announced around R$40 billion in retained earnings this year and opted to pay shareholders in redeemable preferred shares. These can be redeemed in future years, without triggering income tax. Axia, currently listed on B3’s Level 1 governance segment, which allows preferred shares, plans to migrate to Novo Mercado.

Stievani added that his firm has seen this structure increasingly adopted by privately held companies. Publicly listed firms are also exploring other options, especially those with large foreign investor bases.

One such strategy is to launch follow-on offerings and extend dividend rights to new investors participating in the offering. “In those cases, the company aligns the right to receive dividends with the new shareholders,” he explained, noting that companies with strong stock performance are particularly interested.

He said the more conservative companies are likely to announce the dividend and complete the offering still this year, despite the shortened capital markets calendar in December. Others may announce now but execute the offering next year.

Erickson Oliveira, a partner at law firm Levy Salomão, said the pace of dividend announcements reflects a split between more conservative companies, with available cash, and others. “Our advice is that companies stick to their plans and act as if the law hasn’t changed, given the tight deadlines,” he said.

Thiago José da Silva, a corporate law partner at Pinheiro Neto Advogados, agreed. He recommends companies declare dividends on profits accumulated through the end of September, based on their third-quarter results, and pay them if cash is available. “That way, they protect as much of the retained earnings as possible,” he said.