Taxation of Judicial Deposits Made by Legal Entities

Mandatory Withholding, Taxation of Interests, Deductibility of Expenses and Other Relevant Tax Issues to the Depositor

Abstract

Judicial deposits generate several tax effects, which, if not duly complied, may expose the depositor to tax contingencies. This occurs, for example, when the deposited amount represents an equity increase for the beneficiary, which, in theory, compels the depositor to withhold and collect the related income tax as the income becomes available to the beneficiary. In addition, the deposited amounts are assets of the depositor, thus, the related interest must be taxed by him. The moment of recognition of the interest income, however, depends on the depositor’s tax regime. Lastly, the deposited amounts, in general, are classified as contingent liabilities or provisions, becoming a deductible expense in the calculation of income tax and social contribution, when applicable, as the amount is definitively released to the beneficiary. The inaccuracy as to the period of recognition of interest income or deductibility of the deposited expense, when it generates the postponement of tax payment or the undue reduction of real profit, imposes on the depositor the responsibility for the related tax difference, plus interests and penalties.