Overview of the tax depreciation of goodwill in Brazil – Taxation

0


The amortization of the goodwill paid for the acquisition of a stake in a Brazilian target company appears to be the most relevant tax incentive when it comes to M&A transactions in Brazil. However, the first unorthodox corporate reorganizations coupled with the enforcement of illegal substance-over-form control by tax authorities cast a shadow over the incentive, leading to the perpetuation of biased interpretations of the applicable rules.

Tax law provides that goodwill paid for the acquisition of a stake in a Brazilian target company and not allocated to specific identifiable assets can be amortized, i.e. deducted for corporate tax purposes. Brazilian, provided that the legal and regulatory conditions are met. This advantage represents a tax saving equivalent to approximately 34% of the amount of goodwill, reduced to the present value.

The rules allowing for the tax depreciation of goodwill on the basis of future profitability were first introduced in 1997 and have since undergone changes, some of which were intended to incorporate restrictions or conditions to the benefit, as argued. by tax authorities (for example, prohibition of amortization of goodwill generated in intra-group share transactions, a subject addressed in another article of this newsletter), and others stimulated by the convergence of accounting rules Brazil with International Financial Reporting Standards (IFRS), which radically affected the nature and calculation of goodwill.

However, certain aspects and conditions of the benefit remain unchanged, such as the residual nature of the amortizable goodwill; the need for a reorganization of the company which, after the acquisition of the participation, extinguishes the investment via the absorption of the target company by the investor or vice versa; and the minimum amortization period of 5 years, at a maximum rate of 1/60 per month.

Depreciable goodwill was and still is that part of the excess paid by the buyer, over the carrying amount of the investment in the target company, not attributed to specific identifiable assets. However, the old rules left a margin of appreciation in the allocation and justification of depreciable goodwill, requiring only that it be paid for the future profitability of the target entity, evidenced by documents that had to be filed. in support of accounting entries.

Under these initial rules, litigation abounded as to the proof of the justification of the goodwill. The tax administration, ignoring the dynamics of mergers and acquisitions and the absence of specific legal requirements, demanded proof of the economic justification of the goodwill in the form of expertises which should be available when acquisition and accounting for the investment, containing both the assessment of the target entity value (which the tax authorities have required to coincide with the actual purchase price!) and allocation of a part from the purchase price to the goodwill paid for future profitability.

Nowadays, due to the convergence of Brazilian accounting with IRFS, the rules have changed and depreciable goodwill is defined as the residual amount of surplus that exceeds both (i) the net book value of the ‘investment in the target company at the time of acquisition; and (ii) the fair market value of the identifiable net assets of the target company, in proportion to the interest acquired. In addition, taxpayers are now expressly required to prepare a purchase price award report but have up to thirteen months to file it with tax authorities or notarial registers, confirming that previous tax authority requirements (i.e. (that is, the availability of the ratio upon acquisition of the investment and the coincidence of the valuation with the actual purchase price) was not only illegal, but also impractical.

Even if it is correctly calculated and justified, without the prior extinction of the investment, goodwill cannot be amortized. It will simply be recorded in the acquisition cost of the investment and will offset the sale price for the calculation of the capital gain in the event of the sale of this investment. However, if this investment is extinguished by merger (incorporation), spin off (cisão) or merger / consolidation (fusão) between the target entity and the investor, the amount of the purchase price attributable to goodwill should not be lost, hence the possibility of amortization for corporation tax.

The reorganizations of companies structured to allow the extinction of the investment and therefore the tax amortization of goodwill have been the subject of numerous tax adjustments and are the source of interminable disputes with the tax authorities which, despite the legitimacy of the goodwill paid and the evidence that these transactions are not only expressly authorized, but also induced by law, claim that they have no other economic reasons than to authorize the tax depreciation of goodwill and therefore should not bet to be entitled to the tax benefit.

In this regard, one of the common sources of taxation is the prior incorporation of a Brazilian “vehicle company” which receives funds from foreign investors to acquire the stake and then merge with the target entity (reverse merger). , a question widely discussed in another article in this newsletter.

As goodwill amortization occurs over a minimum period of 5 years, the same transaction can give rise to several tax notices relating to different tax periods and it is not uncommon to see different outcomes in these cases. , analyzed by administrative tax jurisdictions. Judicial decisions are still rare, but those already rendered tend to yield to the law and reject the application of substantive-in-form review by tax authorities, giving hope to taxpayers and signaling that the Goodwill tax write-off is a benefit worth fighting for.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


Share.

Comments are closed.