In line with the Brazilian federal government's action plan to stabilize its budget, on September 30, 2015 the extra edition of the Official Gazette of the Federal Executive (DOU) published Provisional Measure No. 694 ("MP N°. 694/15"), which increases the calculation of federal taxes. 

Among other provisions, MP No. 694/15 amends the current rules on withholding of tax ("IRRF") on interest on equity ("JCP") amounts due or payable, and those relating to the deduction of the corresponding expenses for calculation of corporate income tax ("IRPJ") and Social Contribution Tax on Net Income ("CSLL"). 

With respect to the rule on withholding tax, MP No. 694/15 increases the applicable rate from 15% (fifteen per cent.) to 18% (eighteen per cent.). Because no reference is made to favorable tax jurisdictions (JTF), in principle MP No. 694/15 does not change the current 25% (twenty five per cent.) rate applicable to amounts due or payable to recipients domiciled therein. 

According to the new rules, the current deduction of JCP expenses, which are based on the application of the daily pro rata variation of the government's long-term interest rate ("TJLP") levied on certain accounts of the net equity of Brazilian companies, will be replaced by the application (on those same accounts) of the lowest rate between the TJLP rate and 5% (five per cent.) per year. As a reference, the current TJLP rate is 7% (seven per cent.) per year, according to the Brazilian Central Bank Resolution Nº 4.437/2015. 

MP No. 694/15 expressly stipulates that these new rules will come into effect on January 1, 2016. However, Congress has up to 120 (one hundred and twenty) days to approve or reject the MP. 

If the approval occurs any time after December 31, 2015, the effectiveness of the new rules with respect to the withholding tax rate increase and with respect to the deduction of the expense in the IRPJ calculation will be postponed to January 1, 2017. This restriction should not reach the CSLL tax basis; this part of the MP No. 694/15 should be valid as of January 1, 2016.