Profit Capitalization: A Lawful Alternative to Withholding Income Tax on Dividends?

This interpretation does not appear to be correct. The path to understanding why begins with a precedent that, at first glance, seems unrelated to bonus share issuances: STJ Theme No. 1,226, concerning Stock Option Plans.

In that case, the Superior Court of Justice held that the mere acquisition of shares by an employee upon exercising a stock option does not constitute a taxable event for income tax purposes, because the potential gain remains unrealized. The gain becomes taxable only when the shares are subsequently sold and an effective profit is recognized.

The rationale underlying that decision is not the specific mechanics of stock options, but rather a broader principle: income tax applies to realized and available wealth, not to purely accounting-based or potential gains.

The issuance of bonus shares (or quotas) through the capitalization of profits is protected by the same rationale and, arguably, even more strongly.

In a stock option transaction, there is at least an onerous acquisition, meaning the beneficiary pays a price to acquire the shares, even if below market value. In a profit capitalization transaction, there is not even such consideration. The shareholder pays nothing, receives no cash distribution, and their patrimonial position remains mathematically identical before and after the transaction.

A shareholder holding a given percentage of net equity valued at amount X continues to hold the same percentage of the same amount X. The only change lies in the number of shares or quotas representing that interest and the accounting classification under which the value is recorded: previously as retained earnings or profit reserves, and subsequently as share capital.

If taxation under stock option plans arises only upon the disposal of shares and the realization of an actual gain, there appears to be no legal basis for treating bonus shares more harshly by characterizing them as an event generating taxable availability where no transfer of wealth between separate patrimonies has occurred.

Article 43 of the Brazilian National Tax Code (CTN) conditions the incidence of income tax upon the acquisition of economic or legal availability of an increase in wealth. Such realization is precisely what is absent in a profit capitalization transaction.

This reasoning, however, has important limitations that warrant caution.

It applies safely to a pure proportional bonus issuance, in which all shareholders receive shares or quotas of the same class, in the same proportion, without any change in their respective rights.

Structures that combine capitalization with a scheduled future redemption—such as redeemable preferred shares or quotas—already create a determinable credit right. These arrangements are much closer to the concept of legal availability that the STJ associated with the moment of sale in the stock option context and therefore deserve separate legal treatment.

Until the Judiciary specifically addresses the issue, the capitalization of profits, when structured as a simple proportional bonus issuance, remains a defensible alternative to dividend taxation. This position is supported not merely by an isolated interpretation of the new legislation, but by the same realization principle that the STJ has already recognized in another context involving potential gains.