Dividend distribution has become one of the most pressing issues in recent days in Brazil, considering the changes brought about by Bill 1,087/25, which will tax dividends, following the schedule of the Brazilian tax reform.
In order to avoid increasing the tax burden on the Brazilian operations, business owners are seeking to immediately distribute the largest possible amount of dividends in limited liability companies, but this distribution requires the adoption of certain corporate governance measures.
We highlight here essential points that deserve attention, so as not to invalidate the action taken:
1. Provision in the Articles of Association: In Brazil, the general method for distributing dividends in a limited liability company must be included in the articles of association, especially in cases where there is a possibility of disproportionate profit distribution, in order to meet the legal requirements for validity in Brazil. Therefore, if your articles of association do not contain clear provisions on distribution, it is necessary to amend them before distributing dividends to the partners.
2. Profit Retention Policy: The decision between retaining profits and paying dividends is crucial for a Brazilian company, influencing its growth and market value. Profit retention is advantageous for reinvestment and financial security, ideal for expanding companies or those facing uncertainty. Choosing between these strategies depends on the company’s long-term objectives and the expectations of the partners and/or investors, especially at this time when retaining profits may reflect a higher tax burden for the partners.
3. Shareholders’ Agreement: In addition to the articles of association, the shareholders’ agreement may also regulate the distribution of profits, including establishing conditions, obligations, and targets so that profits can be distributed according to each shareholder’s contribution to the company, and not just reflecting their percentage of ownership. Issues such as minimum cash reserves and profit retention policies, mentioned above, should also be included in the shareholders’ agreement. In Brazil the Shareholders’ Agreement in a valid toll well received by the courts.
4. Holding Regular Partner Meetings: Essential document in Brazil for the governance of the profit distribution process, as it is not only the appropriate instrument to organize the distribution among shareholders through the evaluation of the requirements established in the shareholders’ agreement, but it is also the most suitable tool to settle the shares with the company regarding the distributed amounts, preventing the possibility of future disputes. Therefore, the profits to be distributed in 2025 should be the subject of a shareholders’ meeting.
Dividend distribution must be aligned with corporate governance practices to ensure it is safe and effective in Brazil. In addition to guaranteeing legal compliance, this approach strengthens trust among shareholders, minimizing the risk of internal disputes.
It’s important to remember that distributing dividends cannot compromise the capital needed for future operations or obligations. Companies that deplete their cash reserves to reward shareholders today may face crises tomorrow—and this leads to liability.
