Brazil: Foreign Investor Manages To Exempt Income Tax In TRF-3; Read The Newsletter

In this Tax Law newsletter, you will find:

• Foreign investor granted a decision to avoid WHT
• Superior Court of Justice allows taxpayer to replace the judicial attachment of real estate with insurance
• Superior Court of Justice rules that Selic interest in tax refunds must be included in the PIS/Cofins base
• Superior Court of Justice permits the use of PIS/Cofins credits on ICMS-VT (VAT tax)
• Superior Court of Justice allows use of tax losses to settle interest and fines of a succeeded company
• Superior Court of Justice upholds the incidence of tax on manufactured products on the exit of imported products to another company of the same economic group
• Superior Court of Justice rules that taxpayer cannot deduct goodwill expenses from the CSLL calculation base

Foreign investor granted a decision to avoid WHT

The 4th Panel of the Federal Regional Court of the 3rd Region decided that an American investment fund does not need to pay the Withholding Tax in a symbolic foreign exchange operation to change its investment registration with the Central Bank of Brazil. The operation involved the transfer of shares from a Brazilian company to an American fund.

According to the decision, a simultaneous exchange operation for investment conversion does not trigger taxation for Income Tax, because there is only a symbolic transfer.

This case involves the American fund Global Environmental Emerging Markets Fund II that had shares of a Brazilian holding company named Daleth Participações S/A. The company approved a reduction in its capital stock and transferred a portion of its shares to Global Environmental.

As alleged in the case, due to the devaluation of shares at the time, there was no profit associated with this transaction, which does not trigger taxation.

This decision does not have binding effects; but it is relevant as it sets a precedent that taxation should only occur in the case of actual asset sales. The Brazilian Federal Revenue argues that the fictitious foreign exchange operation would be sufficient to trigger taxation.

Superior Court of Justice allows taxpayer to replace the judicial attachment of real estate with insurance

The 2nd Panel of STJ denied an appeal presented by the State Treasury of São Paulo and allowed a taxpayer to replace the attachment of real estate with an insurance in a tax foreclosure.

The decision was based on the idea that the insurance has a greater potential for liquidation than real estate, thus applying Article 15, Section I, of Law 6.830/1980. This article states that, at any stage of the judicial proceeding, the defendant may request a replacement of attached assets by deposit or bank guarantee.

Minister Francisco Falcão considered that this type of guarantee is more effective, as it can be liquidated at the end of the judicial proceeding, which should be harder in case of real estate. This eliminates the need for the defendant to invoke the principle of least onerousness to request the substitution. Furthermore, according to the Minister, the situation does not require consultation with the Tax Authority.

This decision does not have binding effects; but it is relevant as it sets a precedent for taxpayers who do not wish to dispose of large sums of money as guarantee for tax foreclosures.

Superior Court of Justice rules that Selic interest in tax refunds must be included in the PIS/Cofins base

The 2nd Panel of STJ has ruled that the Selic interest rate obtained in the refund of undue taxes should be included in the calculation base of the Contributions to the PIS and Cofins.

In the case, taxpayers had obtained favorable decisions in the Regional Federal Court of the 4th Region (TRF4), arguing that Selic interest rates do not represent an increase in assets. The National Treasury filed an appeal against such decisions.

However, according to reporting Minister Mauro Campbell, the calculation base for PIS/Cofins should be the company's total revenue (a broader concept); therefore, Selic interest on tax refunds should be included in the contribution bases.

Superior Court of Justice permits the use of PIS/Cofins credits on ICMS-VT (VAT tax)

The 1st Panel of STJ has allowed the use of PIS/Cofins tax credits on ICMS-ST (State VAT on substitution regime).

This confirmed the right of the tax substitute to account the PIS and Cofins tax credits on ICMS-ST levied on products acquired for resale. This tax credit relates to the State tax paid by the Substitute Taxpayer preceding the purchase of goods.

Reporting minister Regina Helena Costa accepted the taxpayers' argument that the pre-paid ICMS-ST should be considered as part of the acquisition cost. Furthermore, she emphasized that the recognition of the right to PIS/Cofins tax credits does not depend on the levy of the contributions on the amount of ICMS-ST paid by the substitute in the prior stage.

Therefore, the decision secured the taxpayers' right to offset such tax credits, subjecting the procedure to subsequent review by the tax administration, with the return of the cases to the lower court to consider other requests.

Superior Court of Justice allows use of tax losses to settle interest and fines of a succeeded company

The 2nd Panel STJ has permitted the use of tax losses and the calculation base of CSLL (Social Contribution on Net Profits) to settle interest and fines of a succeeded company.

The decision followed the understanding of reporting minister Assusete Magalhães. According to the minister, the company, as the tax debtor, assumed responsibility for the taxes and fines of the succeeded company, in accordance with Article 133, I, of the National Tax Code.

The minister explained that the article imposes full responsibility on the successor for the taxes owed and the fines, whether they are moratory or punitive, when there is an absorption of the assets of the succeeded company by the succeeding company.

Therefore, the decision considered that the credits and debts become the property of the acquiring company and cannot be classified as third-party values.

Superior Court of Justice upholds the incidence of tax on manufactured products on the exit of imported products to another company of the same economic group

The 2nd Panel of STJ has decided to maintain the incidence of the Tax on Manufactured Products (IPI) on the exit of imported products to another company of the same economic group.

The taxpayer argued that the tax should not be due in mere transfer operations of inputs between branches, since there is no manufacturing and/or commercialization in such cases, whether the respective acquisition has occurred in the domestic or foreign market.

However, the decision followed a previously established precedent rendered in the judgment of Special Appeal 1403532/SC, which determined the legitimacy of the IPI incidence on the exit of products for resale.

Superior Court of Justice rules that taxpayer cannot deduct goodwill expenses from the CSLL calculation base

The 2nd Panel of STJ has ruled that the taxpayer does not have the right to deduct goodwill expenses from the calculation base of the CSLL.

In this case, when calculating the base for IRPJ (Corporate Income Tax), the taxpayer, added the amount corresponding to the accounting amortization of goodwill. The taxpayer calculated this expense after acquiring a company.

However, when calculating the base for CSLL for the same period, the taxpayer followed a different approach. This was because they considered that the rule should only apply to taxable income.

Reporting minister Francisco Falcão emphasized that the accounting amortization of goodwill should have its tax effects annulled for both IRPJ and CSLL, if there is no sale or liquidation of the acquired investment, except in cases where the invested company is merged by the investor.

In conclusion, reporting minister stated that this operation should be done only if it had a legal provision authorizing the deduction of goodwill from the CSLL base.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.