How to Define Compensation for Partners and Directors in Brazil
For our Business Talks, we invite international and Brazilian experts to discuss various topics related to Brazil, from market insights and business development to HR, legal, and tax issues.
Business Talk #2 – Featuring Julia Silva e Lima
Julia Silva e Lima is a tax lawyer and associate at FCR Law – Fleury, Coimbra e Rhomberg Advogados. With extensive experience advising national and international clients on Brazilian tax law, she specializes in cross-border operations, assessing tax risks, and mitigating tax impacts.
Key Compensation Methods
1. Dividends
Dividends are paid based on net income after taxes. In limited liability companies (LTDA), they can be distributed proportionally or disproportionately, as defined in the entity’s articles of association. In corporations (SA), dividends must be distributed proportionally, but preferred shares can grant shareholders fixed or minimum dividends. Dividend distribution is tax-free for recipients but not deductible for corporate income tax purposes.
2. Interest on Equity (JCP)
JCP compensates partners/shareholders for capital invested in the company, calculated using the Long-Term Interest Rate (TJLP). JCP payments are deductible for corporate tax purposes but are subject to a 15% withholding income tax. This method provides a 19% tax benefit to the company compared to dividends.
3. Pro-labore
Pro-labore is compensation for directors’ services, established in the company’s bylaws or specific resolutions. It is subject to withholding tax (up to 27.5%) and social security contributions. Employers also pay a 20% social security contribution. Pro-labore is tax-deductible for the company.
Choosing the Right Method
Each compensation method has its pros and cons. Dividends are tax-free for recipients but not deductible for companies. In contrast, JCP and pro-labore are taxable for recipients but offer tax-deductible benefits to companies. Businesses must carefully evaluate the implications of each method to determine the most beneficial approach for both the company and its stakeholders.
Julia concluded the talk by emphasizing the importance of a tailored approach to compensation methods, considering the unique financial and operational circumstances of each entity.