Arquivos FIP

Brazilian Federal Administrative Tax Court (CARF) rules on capital gains through Closely-end Investment Funds (FIPs)

Posted on 20 de September de 201824 de September de 2018 by Anni Varanda

CARF – which is the highest administrative tax court within the framework of the Brazilian Ministry of Finance – has recently issued two opinions with regards to the deferral of the taxation of capital gains arising out from the sale of share control of a company by means of closely-end investment funds (Fundos de Investimentos em Participações – FIPs).

Under the CVM’s Regulation no# 578/2016, a FIP consists of a closed-end condominium that is intended for the acquisition of shares, securities and any other bonds and notes that are convertible in shares of either publicly or closely-held companies. CVM’s regulation also requires that a FIP must hold a significant influence over the decisions of its invested companies.

FIPs are designed to allow the serial investment in other companies. There are specific types of FIP intended for the investment in startups (seed capital’s FIPs) and other emerging companies.

Due to its legal features, FIPs are also a legal device commonly adopted by family offices for the purposes of investment management and inheritance planning.

In the September/12th session, CARF heard the case of the IRS against Mr. MF[2] . (administrative proceedings nos# 12448.725823/2016-47 and 12448.727473/2016-53). Mr. MF is the co-founder of the wealthiest network of hospitals in Brazil according to Forbes Magazine (Rede).

Mr. MF has appealed the decision of the lower tax court that had disregarded the sale of his shares in the chain of labs controlled by Rede (Labs) to the GF’s group in 2011 for around BRL 1.04 Billion (around 500 million dollars at the time of the events), under an allegation of abusive tax planning.

The IRS challenges the round of operations that ended up with the sale of Labs to FG on grounds of lack of business purpose other than the tax saving. Prior to the FG’s takeover, Labs had merged companies over which Mr. MF held share control. Mr. MF, in turn, reduced his position in Labs, from 100% to 21.89%.

Following to the merger of MF’s companies by Labs, the D. FIP has paid-in a BRL 212 Million capital into Labs in order to take-over 75% of the shares then held by Mr. MF.

Because the taxation of capital gains of the FIP is deferred upon the sale of its quotas by its quota holders, the IRS has claimed that Mr. MF had actually transferred its shares over Labs to the FIP with the only purpose of avoiding the taxation of capital gains in the individual level that would apply otherwise, if Mr. MF had sold his share position in Labs to FG rather than by means of the FIP.

The IRS has disregarded the FIP in order to charge Mr. MF for the Income Tax on the capital gains allegedly arising out from with the sale of Labs to FG plus a 150% fine for malicious behavior and tax fraud.

The IRS also claims that, because the FIP has been shut down right after the FG’s takeover, the FIP would have failed to accomplish its very purpose, that is, to develop other investments.

Mr. MF, though, claimed that the IRS’s assumption is incorrect, since the FIP has played a central role in the operation, for the FIP held a preemptive right to acquire one of the key companies in the transaction.

The 2nd panel of the 2nd chamber of CARF’s second session has granted Mr. MF’s appeal in order to cancel all charges against him. The CARF’s official option has not been published yet.

This case has close connections with another case which was heard by the 1st Judging Panel of the 2nd Chamber of 1st Section on 17th/July/2018.

This last case’s facts date back to 2010, when Hospital SL – a health excellence center in the City of Sao Paulo – was taken over by Rede. The deal mounted to 1 Billion Reais (around 500 million dollars at the time of the events).

The Hospital’s shares had been owned by a holding company (HMV’s Holding). The HMV holding’s shareholders setup a FIP which became one of the shareholders of the holding company.

The HMV holding reduced its capital and transferred the Hospital’s shares it owned to the investment fund (FIP). As an outcome, the FIP acquired the share control over the Hospital. Eventually, the FIP sold the Hospital’s shares to Rede.

If the deal was made directly between the HMV holding and Rede the Income Tax would apply at rate of 34%.

By a vote of 6-2, CARF ruled that the transaction by means of the FIP was legitimate. The majority opinion has found that there was a business purpose for the FIP, because an expert report had shown that there was an economic and technical rationale for its creation, which was justified by expectations of future rentability.

The CARF’s opinion at the case Rede’s case dissented from a precedent issued in 2017, where a similar structure, involving FIP, was put in place by the taxpayer, the largest animal protein provider in the world.

Because there is a divergent opinion issued by CARF in the aforementioned case, the IRS is likely to appeal to the Highest Chamber of CARF. Brazilian Congress is also debating some changes to the rules that govern investment funds taxation, so to avoid that this structure is put in place by taxpayers in order to defer the taxation on capital gains.

A Provisory Measure was issued by the Brazilian President last year in order to introduce changes to the taxation of investment funds (PM no# 806/2017). However, said PM did not pass in the congress by then, and its legal effects have ceased.

Investors with an interest in Brazil should be aware of the upcoming developments concerning the taxation of the FIPs, as they may provide an interesting tool for tax planning.

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[1] Manager of the Tax Litigation department at Gaia, Silva, Gaede Advogados in São Paulo. Master’s degree in Tax and Financial Economic Law from the University of São Paulo, a specialization degree in International Tax Law from the Brazilian Institute for Tax Law (‘IBDT’), and a bachelor’s degree in law from Mackenzie Presbyterian University. Visiting Foreign Lawyer at Parr, Brown, Gee & Loveless (Salt Lake City, UT, USA). Author of articles published in specialized magazines.

[2] While this paper has been based on the information available at the Taxpayers’ Federal Council (CARF) official website (http://idg.carf.fazenda.gov.br/), some names and identifying details have been changed to protect the privacy of individuals.

BRAZILIAN TAX REVIEW – JULY/AUGUST 2018

Posted on 11 de September de 2018 by Anni Varanda

Brazil-Argentina Amendment Protocol to Double Taxation Convention

On August 28, Decree 9,482 was published in Brazil’s Federal Gazette, enacting the Brazil-Argentina Amendment Protocol to Double Taxation Convention, which is now in force in Brazil.

This Protocol introduces several modifications to the Brazil-Argentina DTC related to: (i) measures to prevent BEPS; (ii) incorporation of changes in the OECD and United Nations model conventions; and (iii) amendments that reflect the countries’ specific tax treaty policies.

Rota 2030: Brazil’s New Automotive Tax Benefit

On July 6, President Michel Temer signed a provisional measure that establishes Rota 2030, an automotive industry policy that replaces the previous one, which was known as Inovar Auto.

Rota 2030 establishes a discount on corporate income tax for automakers and auto parts suppliers, as well as the concession of ex-tariff to auto parts to reduce taxation on import transactions to zero, among other measures. These benefits will last five years.

This provisional measure is now being analyzed by the Brazilian Congress. If it is approved, the benefits will become effective on January 1, 2019.

Brazilian Government Reduces Reintegra tax benefits

On May 30, Decree 9,393 was published in Brazil’s Federal Gazette, reducing the rate for calculating Reintegra credits from 2% to 0.1%.

The Reintegra program aims to reduce the tax burden on goods exported by Brazilian manufacturers by granting PIS and Cofins tax credits. This measure therefore impacts the benefit exoneration of the export transaction.

The Decree is effective immediately, but the Brazilian Federal Constitution establishes several principles that protect individuals from government acts, such as retroactive taxes, and provides legal security. Therefore, the reduction should have become enforceable only 90 days from the date it was enacted.

Brazilian General Data Protection Law

On August 15, the Brazilian General Data Protection Law (“LGPD”) was published. It establishes a comprehensive data protection system in Brazil and imposes detailed rules for the collection, use, processing and storage of personal data, both digital and physical.

The LGPD was signed by President Michel Temer with some vetoes and will go into effect 18 months after its publication (February 2020).

Brazilian Government Attempts Again to Change the Taxation on Closed-End Funds and Private Equity Funds

In 2017, the Brazilian Government published Provisional Measure 806/2017, introducing significant changes to the tax treatment of Closed-End Funds (“Fundos de Investimento Fechados”) and Private Equity Funds (“FIP”). The main change was automatic investor withholding income taxation on a semi-annual basis, regardless the redemption or amortization of their fund shares.

However, the Brazilian Congress did not convert the Provisional Measure into law before the regulatory deadline. Therefore, in July 2018 the Senate presented Bill 338/2018, attempting again to implement the same changes to the tax treatment of those funds. The Bill is pending approval from the Brazilian Congress and subsequent Presidential ratification.

Brazilian Government Prohibits Taxpayers from Offsetting Any Tax Credit Against Corporate Income Tax Advance Payments

Law 13,670/2018, amongst other important provisions, forbids the offset of any tax credit against the IRPJ and CSLL tax monthly advanced payments, calculated by the annual actual profit method.

Considering the serious impact this will certainly have on a great many taxpayers, and given its clear violation of constitutional and other legal provisions, this new rule has been challenged in court, with favorable orders being granted so far. There have also been proposals for its revocation by some members of the Brazilian Congress.

Partial Restoration of Payroll Tax Affects Brazilian Companies

Since 2011, 56 industries have had the option of replacing the 20% payroll tax by a 1% to 4.5% tax on gross revenues (“CPRB”).

In the context of the economic crisis and aiming to increase its tax revenue, the Government restored the payroll tax for 39 of those industries (Law 13,670), generating widespread opposition from the affected companies and large-scale lawsuits regarding this matter.

Commissions Paid by Brazilian Exporters to Their Foreign Agents are not Subject to PIS/COFINS-Import tax

The Federal Revenue Office recently issued Private Letter Ruling 76/2018, stating that the commissions paid by Brazilian exporters to their foreign agents are not subject to PIS/COFINS-Import tax.

This is a change to the Federal Revenue Office’s interpretation. Previously, tax authorities had issued private letter rulings stating that services provided by foreign agents generate results in Brazil, triggering the PIS/COFINS-Import tax. Under the new interpretation, the result of the service (export of the goods) is deemed to be accomplished abroad, so the PIS/COFINS-Import tax is not due.

Taxpayers are Entitled to Refund of PIS/COFINS-Import Tax Non-Cumulative Credits Related to Exports

As provided under Brazilian law, taxpayers are entitled to maintain the PIS/COFINS tax non-cumulative credits related to exports (which are exempt from these taxes) and request a refund, which can be converted into an offset against any other federal tax debts.

Despite this, the Federal Revenue Office claims that this right applies only to credits derived from purchases on the domestic market and, therefore, has denied the refunds (and offsets) of PIS/COFINS-Import tax credits linked to subsequent exports.

This controversy may have reached a conclusion in the context of Private Letter Ruling 70/2018. This ruling recognizes the taxpayers’ eligibility for a refund (and offset against other federal taxes) of the PIS/COFINS-Import tax non-cumulative credits linked to exports.

BRAZILIAN TAX REVIEW – JUNE 2018

Posted on 15 de June de 201815 de June de 2018 by Anni Varanda

Brazil Signs New DTCs with Switzerland and Singapore, Seeking a Larger Tax Treaty Network

Brazil recently signed Double Treaty Conventions (DTCs) with Switzerland and Singapore. These DTCs contain several rules aligned with the BEPS Project (Base Erosion and Profit Shifting), such as general anti-avoidance rules and exchange of information among the contracting states’ tax authorities.

These DTCs still need to be ratified by the Brazilian Congress and implemented through a presidential decree before they become effective.

Brazil Expands its Customs Mutual Assistance Agreements (“CMAA”)

In 2010 the Brazilian Government signed a CMAA with Turkey, which was approved by the Congress in 2017 and now has become effective by means of a presidential decree published in April 2018.

Additionally, the Brazilian Congress approved another CMAA in May 2018, which was signed with China in 2012. This agreement still needs to be implemented through a presidential decree to become effective.

These bilateral agreements aim to provide each contracting state with administrative assistance for the proper application of customs law, for the prevention, investigation and combating of customs offences and to ensure the security of the international trade supply chain.

Important Decision on the Tax Deductibility of Royalties for the Commercialization and Distribution of Software Paid to Related Parties Abroad

The Administrative Tax Appeals Board (Conselho Administrativo de Recursos Fiscais), or CARF, has taken up an appeal filed by a Brazilian software provider that pays royalties to a related party abroad for the commercialization and distribution of software.

The taxpayer was issued an infraction notice by Brazilian Federal Revenue for having deducted all the royalty expenses from the income tax calculation bases (IRPJ and CSLL). The tax authorities claimed that tax legislation forbids this deduction if the payment is made to a non-resident owner.

The taxpayer argued that the licenser, even though it belongs to the same economic group, could not be characterized as an owner since it does not directly own its share capital. The CARF therefore held that all the royalty expenses could be deducted from the IRPJ and CSLL calculation bases.

Rules to Change Investment Fund Taxation are Not Implemented

In 2017 the Brazilian government published Provisional Measure 806/2017, introducing significant changes to the tax treatment of Closed-End Funds (“Fundos de Investimento Fechados”) and Private Equity Funds (“FIP”).

However, Provisional Measure 806/2017 became ineffective since the Brazilian Congress did not convert it into law before the regulatory deadline. The tax treatment of these investment funds therefore remains unchanged.

Brazil Approves WTO Protocol on Trade Facilitation

Brazil recently approved the first Protocol Amending the Marrakesh Agreement Establishing the World Trade Organization (WTO), by means of Decree 9,326 on April 3, 2018

This protocol is meant to insert the Trade Facilitation Agreement (TFA) into Annex 1A of the Marrakesh Agreement Establishing the WTO. In turn, the TFA contains provisions for expediting the movement, release and clearance of goods, including goods in transit.

The TFA also sets out measures for effective cooperation between customs and other appropriate authorities and trade facilitation and customs compliance issues. Furthermore, it contains provisions for technical assistance and capacity building in this area. The TFA came into force on February 22, 2017, when two-thirds of the 164 WTO members accepted it.

The TFA was the first agreement concluded at the WTO by all of its members. Brazil has been a WTO member since its creation in 1995. As for the incorporation of WTO agreements into Brazilian legal system, the Brazilian Congress must approve it and a presidential decree officially incorporates WTO agreements into Brazilian domestic legal system.

The State of São Paulo Launches a Groundbreaking New Tax Compliance Program

On April 7, 2018, the State of São Paulo launched a tax compliance program (Law 1,320) that is called “In Compliance” (“Nos Conformes”). The program is intended to foster a collaborative environment between tax authorities and taxpayers.

Under the new measures, taxpayers can be classified into categories – A+, A, B, C and D – according to certain factors: (i) outstanding ICMS tax liabilities; (ii) tax declarations, tax books and invoices issued; (iii) profile of taxpayer’s suppliers.

Highly ranked taxpayers will have access to benefits such as: (i) better conditions for using and transferring accumulated tax credits; (ii) simplified renewal for special tax regimes; (iii) special conditions for the payment of the ICMS tax under the tax substitution regime, and (iv) use of ICMS tax credits to pay the ICMS tax due on imports (customs clearance), among others.

Implementing regulations for the program must be issued for it to become fully applicable.

Federal Tax Tribunal (CARF) Allows Tax Offsets before Final Judicial Decision

Recently the Administrative Tax Appels Board (Conselho Administrativo de Recursos Fiscais), or CARF, granted a taxpayer the right to offset tax debts against tax credits that are still under judicial review. The allowance was based on the fact that the matter challenged by the taxpayer had already received a favorable decision from Brazilian Supreme Court in a binding legal precedent.

Based on a systematic interpretation of section 170-A of the Brazilian Tax Code – which prevents taxpayers from offsetting taxes before a final judicial decision is entered – the CARF held that the taxpayer could offset PIS/Cofins tax debts as a result of the decision on Extraordinary Appeal RE 357.950/RS, with no need for a proper decision in its favor.

Federal Tax Tribunal (CARF) Rules Stock Options Taxable

On March 21, 2018, the Superior Chamber of the Administrative Tax Appels Board (Conselho Administrativo de Recursos Fiscais), or CARF, ruled against a leading Brazilian bank, upholding a 20% Social Security Tax assessment. The decision reverses a 2015 decision from a lower chamber of the CARF.

The CARF has decided that the stock options granted under the company’s plans should be treated as compensation income rather than investment income, based on the specific characteristics of each plan. As compensation income, social security tax is due on it.

In two previous cases, the Superior Chamber of the CARF upheld lower court decisions in favor of employers.

Federal Tax Tribunal (CARF) Analyses PIS/COFINS Credits in Line with New Superior Court of Justice´s Position

For the first time, the Superior Chamber of the Administrative Tax Appels Board (Conselho Administrativo de Recursos Fiscais), or CARF, has considered the new concept of input adopted by the Superior Court of Justice (STJ) in Special Appeal #1.221.170 in a case providing Social Integration Program Tax (Programa de Integração Social), or PIS, and Social Security Financing Tax (Contribuição para o Financiamento da Seguridade Social), or COFINS, credits for purchasing a copyright.

STJ decision solidified the position that using these credits must comply with the criteria of the essentiality or relevance of the expense for the taxpayer´s activities.

Superior Court of Justice Considers Investment Abroad not Subject to IRPJ and CSLL

The Superior Court of Justice has issued a decision on Special Appeal #1.649.184 that reinforces the Court´s precedent that the Brazilian Corporate Income Tax (IRPJ and CSLL) is not due on the positive result of investment in a subsidiary abroad.

The Decision holds that article 7(1) of SRF Instruction 213/2002 expanded the tax base of taxes, with no legal basis, by considering the positive return of equity in earnings booked in the accounting of the Brazilian company, regarding the investments in the subsidiary abroad.