CVM Resolution No. 143 of June 15, 2022 — CVM — BR

SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM Rua Sete de Setembro, 111/2-5th and 23-34th Floors, Center, Rio de Janeiro/RJ – ZIP: 20050-901 – Brazil - Tel.: (21) 3554-8686 Rua Cincinato Braga, 340/2nd, 3rd and 4th Floors, Bela Vista, São Paulo/ SP – ZIP: 01333-010 – Brazil - Tel.: (11) 2146-2000 SCN Q.02 – Bl. A – Ed. Corporate Financial Center, S.404/4th Floor, Brasília/DF – ZIP: 70712-900 – Brazil - Tel.: (61) 3327-2030/2031 www.gov.br/cvm

CVM RESOLUTION NO. 143, OF JUNE 15, 2022
Ratifies Technical Interpretation ICPC 08 (R1) of the Accounting Pronouncements Committee - CPC, which deals with the accounting for the proposal to pay dividends.

THE PRESIDENT OF THE SECURITIES AND EXCHANGE COMMISSION OF BRAZIL - CVM makes it known that the Collegiate Board, in a meeting held on May 4, 2022, based on §§ 3 and 5 of art. 177 of Law No. 6.404, of December 15, 1976, combined with items II and IV of § 1 of art. 22 of Law No. 6.385, of December 7, 1976, as well as arts. 5 and 14 of Decree No. 10.139, of November 28, 2019, APPROVED the following Resolution:

Art. 1. The obligation for open companies to apply Technical Interpretation ICPC 08 (R1), which deals with the accounting for the proposal to pay dividends, issued by the Accounting Pronouncements Committee - CPC, as per Annex “A” to this Resolution, is hereby ratified.

Art. 2. Interest paid or credited, as remuneration for own capital, may only be imputed to the mandatory dividend (Law No. 9.249, of December 26, 1995, art. 9, §7), provided for in art. 202 of Law No. 6.404, of December 15, 1976, at its net value after withholding income tax.

Art. 3. CVM Deliberation No. 683, of August 30, 2012, is hereby revoked, from the effective date of this Resolution.

Art. 4. This Resolution enters into force on July 1, 2022.

Signed electronically by
Marcelo Barbosa
President

CVM RESOLUTION NO. 143, OF JUNE 15, 2022
ANNEX “A”
ACCOUNTING PRONOUNCEMENTS COMMITTEE
TECHNICAL INTERPRETATION ICPC 08 (R1)
ACCOUNTING FOR THE PROPOSAL TO PAY DIVIDENDS

Index Item
REFERENCES
BACKGROUND 1 - 12
Mandatory Dividend 1 – 5
Fixed or Minimum Dividend 6 – 9
Interest on Own Capital 10 - 11
Interim Dividend 12
SCOPE 13
MATTERS ADDRESSED 14 - 16
CONSENSUS 17 - 25
EXPLANATORY NOTE 26 – 27
TRANSITIONAL PROVISIONS 28

References
CPC 24 – Subsequent Event
CPC 25 – Provisions, Contingent Liabilities and Contingent Assets

CVM RESOLUTION NO. 143, OF JUNE 15, 2022

Background
Mandatory Dividend

Brazilian corporate law, Law No. 6.404/76, determines the distribution of mandatory dividend
to shareholders through article 202:
“Art. 202. Shareholders have the right to receive as a mandatory dividend, in each fiscal year, the portion of profits established in the bylaws or, if the bylaws are silent, the amount determined in accordance with the following rules…”
Corporate law provides that the mandatory dividend may not be distributed or may be
distributed at an amount lower than that established in the company's bylaws, when there is no realized profit in a sufficient amount (art. 202, item II). When the mandatory dividend, due by virtue of the company's bylaws or the law itself, exceeds the amount of the net profit of the fiscal year realized financially, the undistributed portion may be allocated to the formation of the profit reserve to be realized.
Corporate law also provides that the mandatory dividend may not be distributed when the
administrative bodies inform the Ordinary General Meeting that it is incompatible with the financial situation of the company (art. 202, § 4). This is a discretion conferred by law on the administrators with a view to avoiding the compromise of the entity's cash and cash equivalent management, provided that other legal conditions are observed. The portion of profits not distributed must be allocated to the formation of a special reserve.
In both cases, the procedure established by law is the retention of profits through the
formation of profit reserves that may not necessarily be destined for the payment of dividends, as they may be absorbed by losses in subsequent fiscal years. The law states:
“profits recorded in the profit reserve to be realized, when realized and if they have not been absorbed by losses in subsequent fiscal years, must be added to the first dividend declared after realization.” (Art. 202, item III) “profits that fail to be distributed in accordance with § 4 shall be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, must be paid as a dividend as soon as the financial situation of the company allows” (Art. 202, §5) (underlines added)
The mandatory dividend may also fail to be distributed, or may be distributed at a value
lower than that established in the company's bylaws or in the law, by the sovereign and unanimous decision of the General Meeting of Shareholders of:
(a) an open company, if registered with the CVM exclusively for raising funds through debentures not convertible into shares; or (b) a closed company, except if controlled by an open company registered with the CVM for raising funds through any type of security other than a debenture not convertible into shares (Art. 202, §3).

Fixed or Minimum Dividend
6. Regarding preferred shareholders, Brazilian corporate law, Law No. 6.404/76, in its
article 17, fixes a series of preferences and advantages that must be granted to them. Among them is the
right to a fixed or minimum priority dividend, to be regulated in detail and precisely in the company's bylaws.

Fixed or minimum dividends may or may not be cumulative (to be paid in the fiscal year
in which there are sufficient profits for such); may or may not participate in remaining profits (profits distributed as dividends beyond what is provided). The law states:
“unless otherwise provided in the bylaws, the priority dividend is not cumulative, the share with a fixed dividend does not participate in remaining profits and the share with a minimum dividend participates in distributed profits on equal terms with ordinary shares, after equal dividends to the minimum have been ensured to the latter.” (Art. 17, § 4) (underline added)
It should also be noted that, in accordance with Law No. 6.404/76 (Art. 17, § 6), the company's bylaws may
grant preferred shares with priority in the distribution of cumulative dividends the right to receive them, in the fiscal year in which profit is insufficient, from capital reserves.
Another relevant aspect of the law concerns the protection granted to preferred shareholders
regarding the allocation of the company's profits. Preferred shareholders with the right to receive fixed or minimum dividends to which they have priority, including arrears, if cumulative, shall not have their right prejudiced by the formation of statutory reserves, reserve for contingencies, reserve for tax incentives, reserve for profit retention, reserve for profits to be realized, special reserve or even the payment of the mandatory dividend. The law states:
“the provisions of articles 194 to 197, and 202, shall not prejudice the right of preferred shareholders to receive the fixed or minimum dividends to which they have priority, including arrears, if cumulative.” (Art. 203) (underline added)

Interest on Own Capital (JCP)
10. Interest on own capital – JCP is an instrument created by tax legislation, incorporated into the
Brazilian corporate legal framework by virtue of Law 9.249/95. It is usual practice for companies to distribute them to their shareholders and impute them to the mandatory dividend, in accordance with the current legislation.

CVM RESOLUTION NO. 143, OF JUNE 15, 2022

Thus, the accounting treatment given to JCP must, by analogy, follow the treatment given to the mandatory dividend. The amount of tax withheld at source that the company, by obligation of tax legislation, must withhold and remit cannot be considered when JCP are imputed to the mandatory dividend.

Interim Dividend
12. In addition to the mandatory dividend, Brazilian Law provides for the possibility that the bylaws of a joint-stock company provide for the payment of an interim dividend. In this case, respecting the bylaws and the Law, the decision of the administration is final, not being submitted to the shareholders' approval. The bylaws provision already means shareholder approval.

Scope
13. This Technical Interpretation must be applied:
a) to the dividend referred to in article 202 of Law 6.404/76 (“mandatory dividend”); b) to the dividends referred to in article 17 of Law 6.404/76 (“fixed and minimum dividends”); c) to interest on own capital - JCP, provided for in tax legislation; d) To interim dividends, declared in accordance with article 204 of Law 6.404/76.

Matters Addressed
14. Item 12 of Technical Pronouncement CPC 24 - Subsequent Event determines that “if the entity
declares dividends to holders of equity instruments (as defined in Technical Pronouncement CPC 39 – Financial Instruments: Presentation) after the reporting period to which the financial statements refer, the entity shall not recognize those dividends as a liability at the end of that period.”

Item 13 of CPC 24 warns that “if dividends are declared after the reporting period to which the financial statements refer, but before the date of authorization of issuance of those statements, those dividends shall not be recognized as a liability at the end of that period, because no obligation exists on that date. Such dividends shall be disclosed in the notes in accordance with Technical Pronouncement CPC 26 – Presentation of Financial Statements.”
The issue raised is whether the dividends provided for in Brazilian corporate law (mandatory dividend, fixed and minimum dividends, JCP and interim dividend) meet the three conditions
for recognition of a liability at the date of the financial statements, namely: (i) a present obligation; (ii) probable outflow of resources embodying economic benefits; and (iii) a reliable estimate capable of being made to arrive at its amount.

CVM RESOLUTION NO. 143, OF JUNE 15, 2022

Consensus
17. Technical Pronouncement CPC 25 - Provisions, Contingent Liabilities and Contingent Assets
establishes that a liability must be recognized when three conditions are observed.
Thus, Technical Pronouncement CPC 25 determines, in its item 14:
“14. A provision shall be recognized when:
(a) the entity has a present obligation (legal or informal) as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognized.”

From the preceding items, interim dividends, declared by decision of the administrative bodies in accordance with the formalities provided for in the company's bylaws and the Law, are final decisions and fall under item 14 of Technical Pronouncement CPC 25; therefore, if not paid, they must appear in the entity's liabilities as an obligation.
The same understanding should be applied to fixed and minimum dividends due to preferred shareholders, even if declared after the reporting period to which the financial statements refer. The characteristic of enforceability – present obligation – is even greater in this case, given that the General Meeting of Shareholders does not have discretionary power to decide on their distribution or not, serving solely to endorse what is already regulated in legal and bylaws provisions. They must be recorded as an obligation on the date of the end of the fiscal year to which the financial statements refer.
Regarding the mandatory dividend, the legal provisions for its distribution below what is legally or bylaws-prescribed, or for its non-distribution, already indisputably regulate the accounting treatment to be given: the undistributed portion must appear as a profit retention, via profit reserves. As for the portion of profits destined for distribution as a mandatory dividend, in a proposal forwarded to the General Meeting of Shareholders by the administrators, it actually represents a present obligation on the date of the financial statements, even if the dividends are also declared after the reporting period to which the financial statements refer.
Due to these special characteristics of our legislation, it is considered that the mandatory dividend must be recorded as an obligation on the date of the end of the fiscal year to which the financial statements refer. This has already been the practice adopted by Brazilian companies that have presented financial statements in accordance with North American accounting practice, notably those that are registered with the Securities and Exchange Commission of that jurisdiction
(SEC), as well as those Brazilian companies that have already been preparing and disclosing financial statements in accordance with the international standards issued by the IASB.
JCP, when imputed to the mandatory dividend, must receive analogous treatment, as has also been the practice adopted by Brazilian companies. The amount of tax withheld at source to be remitted to the tax authority is a present obligation separate from the obligation to pay dividends.
When this obligation is assumed by the company, and this is the case where the decision is for the non-payment of JCP to the partners and instead for their retention, including for future capital increases, the tax withheld at source should not be debited to the result, but to the account to which these JCP are destined. Thus, when these values are used, as in the case of a capital increase, it can only be done at the net value actually withheld, that is, from the JCP minus the tax remitted to the government, if that tax is actually paid.
Another issue to be evaluated related to the topic is the requirement of the Law on Joint-Stock Companies contained in article 176, § 3:
“The financial statements shall record the allocation of profits according to the proposal of the administrative bodies, on the assumption of its approval by the general meeting.”
To meet the definition of provision, reproduced in item 17 of this Interpretation, the portion of the dividend that effectively characterizes a present obligation must appear in the entity's liabilities. But the portion that exceeds what is legally or bylaws-prescribed must be kept in equity, in a specific account, of the type “proposed additional dividend”, until the final decision to be taken by the partners. After all, this additional dividend does not characterize a present obligation on the balance sheet date, as the partners' meeting or another competent body may, in the absence of any bylaws or contractual restrictions, decide or not on its payment or on payment at a different amount than proposed.
As required by items 12 and 13 of Technical Pronouncement CPC 24 – Subsequent Event, any declaration of additional dividend beyond what is legally or bylaws-prescribed or any other form of profit distribution that occurs after the balance sheet date and before the date of authorization of issuance of these statements shall not result in recording in the entity's liabilities on the balance sheet date, as it also does not represent any present obligation on that date.

Explanatory Note
26. Article 192 of Law No. 6.404/76 states:
“Together with the financial statements of the fiscal year, the administrative bodies of the company shall present to the ordinary general meeting, observing the provisions of articles 193 to 203 and the bylaws, a proposal regarding the allocation to be given to the net profit of the fiscal year.”

In view of what is stated in the preceding item, the Accounting Pronouncements Committee understands that the administration must, when preparing the financial statements, detail in an explanatory note its
proposal for the allocation of profits determined in the fiscal year, regardless of whether such disclosure has been made in the Management Report.

Transitional Provisions
28. This Technical Interpretation replaces ICPC 08 – Accounting for the Proposal to Pay Dividends, approved on 04.09.2009.

Lineage: No known changes