Companies seek strategies to distribute tax-free profits

Publicly-traded and private companies have begun consulting tax experts to explore alternatives. Some are even considering issuing debt to cover the payment of untaxed profit reserves. Others are weighing the use of available cash to pay part of their dividends in 2025 while capitalizing the remaining amount into profit reserves.

This rush to fall under the current tax regime is rippling through markets. Brazil’s stock exchange has seen a wave of inflows from investors seeking to benefit from untaxed earnings still accrued in 2025. In the foreign exchange market, an increase in dividend remittances from Brazilian subsidiaries to parent companies abroad is expected by year-end.

Some companies have already announced billion-real dividend payments. This week, Axia (formerly Eletrobras) disclosed an extraordinary dividend distribution of R$4.3 billion, drawing from its statutory reserve, with payment scheduled for this year. More companies are expected to make similar announcements in the coming weeks to secure tax-free status for their distributions.

The strategy is tied to Bill 1,087/2025, which fulfills President Luiz Inácio Lula da Silva’s campaign promise to expand the income tax exemption. To offset the revenue loss, the bill introduces a 10% withholding tax on dividends. However, it exempts profits already incorporated into shareholders’ equity, a provision companies are relying on.

Dividend approval

To qualify for the exemption, companies must approve the dividend distribution by the end of 2025, with the actual payment allowed to take place over the course of 2026, 2027, and 2028. There is an ongoing effort to extend the deadline for approval to April 30, 2026, under discussions tied to a separate bill on betting taxation.

Despite the three-year window to complete the payments, there is a legal contradiction when it comes to publicly traded corporations governed by the Corporations Law. Under that law, if a company announces a dividend, it must pay it within the same fiscal year. This means companies announcing dividends in 2025 would need to disburse them before December 31.

To avoid legal risks, more conservative firms are looking for ways to distribute accumulated profits before the year ends. Some have advocated for changes to the bill to grant full exemption for all retained earnings, which would resolve the issue.

Strategies under consideration include issuing debt securities such as debentures or using available cash to pay dividends now, then raising debt from controlling shareholders to restore the cash position.

Some companies that would typically carry out extraordinary debenture amortizations have decided to conserve cash to fund dividend payments this year. Another option is to capitalize profit reserves now and reduce capital later.

High leverage

Bank executives told Valor that the issue is causing concern, as some companies seeking financing to pay dividends are already highly leveraged.

Other companies are expected to announce dividend payments this year, in line with the bill, but postpone actual disbursement to the following three years. Some legal interpretations argue that the bill allows this, even for public companies.

Retained earnings amount to billions of reais and may have accumulated over the past 30 years, since the enactment of Law 9,249 in 1995, which established the current exemption for dividends.

Erickson Oliveira, partner at the law firm Levy & Salomão, said he has been fielding client queries. He noted that while the bill has been revised, the conflict with listed company rules remains unresolved, and that solutions must be evaluated case by case.

Debt issuance

Daniel Loria, former director at the Special Secretariat for Tax Reform and currently a partner at Loria Advogados, said his firm is also seeing increased demand. Private companies, which are not subject to the same scrutiny as listed firms and lack minority shareholders, are more inclined to take on debt. Others are expected to follow the bill’s guidelines and distribute dividends by 2028.

Among listed companies, Mr. Loria said, there is concern that announcing dividends this year while deferring payment could prompt pushback from investors demanding compliance with the Corporations Law. Many are expected to use available cash for 2025 distributions and then capitalize the remaining balance.