The US Tax Cuts and Jobs Act: consequences for hybrid instruments

2020 Apr.13

According to the BEPS Action 2, the Brazilian interest on shareholders’ equity (known as ‘JCP’ in Brazil) is deemed a hybrid instrument, as it has both the nature of dividends and interests. Because of that, at the international level, the remittance or payment of JCP to stockholders resident abroad suffers different implications, due to its hybrid nature.
After the enactment of the Tax Cuts and Jobs Act (TJCA) in 2017, the USA introduced some domestic rules aiming at neutralizing the tax effects associated with the use of hybrid instruments (anti-hybrid rules).

According to the TCJA criteria, a parent company based in the US, when receiving the interests on shareholders’ equity (JCP) paid by a Brazilian source, will no longer be able to credit the withholding tax paid in Brazil, and may not be contemplated with the ‘participation exemption’ granted by the US legislation.

Although this new regime may neutralize the tax effects associated with the use of JCP for the distribution and repatriation of profits to the US, there are some other legal structures applied to US-based companies in order to reduce the tax burden on the repatriation of profits of a Brazilian parent company.

We are at your disposal for any clarifications related to the topic addressed.

Related attorneys: Luciano Rezende Freire Estrela / Frederico de Almeida Fonseca