In a scenario where Brazilian tax reform has narrowed the margin that partners have to distribute dividends in Brazil, the pressure to use company cash to cover personal expenses increases, amplifying tax risks and weakening governance.
As a way to regulate this impasse, avoiding not only tax risk but especially potential conflict between partners, a shareholders’ agreement is the instrument capable of addressing the issue in the necessary way in Brazilian Business.
To this end, we highlight 3 items that cannot be omitted from this analysis:
1. Dividends: Dividends can no longer be treated as an automatic extension of remuneration in Brazil. The shareholders’ agreement must objectively define: when the company distributes dividends (frequency and minimum conditions), how it distributes them (criteria between operational and investor shareholders), and to what extent they are recurring or not. This reduces the pressure for random withdrawals and protects the company’s financial planning.
2. Reinvestment: To prevent a lack of financial planning from compromising the company, it is essential to establish a reinvestment policy: a minimum portion of profits that remains in the company, allocation priorities, and a quorum to change this policy. When reinvestment is contracted, decisions cease to be reactive and begin to follow a previously agreed-upon logic.
3. Shareholders’ Expenses: The use of the legal entity to pay the shareholders’ personal expenses has always been discouraged in Brazilian business, especially when there is a need to seek investors or a future objective of carrying out a liquidity event. In cases where partners agree to this type of payment, the agreement must list very objectively which expenses can be borne by the company (such as benefits related to the activity, operational expenses, work structure), especially to avoid the appearance of disguised profit distribution, a Brazilian concept for ilegal dividends distribution. Furthermore, the shareholders’ agreement may provide for reimbursement and consequences in case of misuse of company funds, given the inherent tax risk of this type of conduct.
Including this topic in a Brazilian shareholders’ agreement means aligning three aspects: tax requirements, company needs, and individual expectations. Dividends, reinvestment, and shareholder expenses are central governance decisions. In a more rigid tax and regulatory environment, keeping these issues without contractual discipline means assuming that relevant decisions will continue to be made without a common benchmark among the shareholders themselves, with a total misalignment of expectations, which is a determining factor in generating conflict.
