Use of “vehicle companies” in share transactions and goodwill tax amortization in Brazil – Company and commercial law


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Share transactions involving Brazilian companies benefit from a relevant tax incentive granted by law: the tax depreciation (deduction) of goodwill paid on the acquisition of stakes in Brazilian companies by unrelated independent Brazilian companies. This advantage is faced with uncertainties caused by a restrictive and inappropriate interpretation of the applicable rules by the tax authorities.

The concept of goodwill, the rules for its depreciation and tax incentives are discussed elsewhere in this issue.

One of the many conditions for goodwill tax amortization is that after the acquisition, the investment in the target company must be extinguished by the absorption of the target company by the buyer or vice versa. , by merger (incorporation), spin off (cisão) or merger / consolidation (fusão) between these two entities.

Because of this requirement, investors often form a controlled “vehicle company” domiciled in Brazil for the specific purpose of making the investment (ie being the direct buyer). The company is then merged by or into the target company, or vice versa. This is common practice, for example, when the investor is a foreign-based company or when neither the investor nor the target company can be extinguished after the transaction for commercial, economic or operational reasons.

Especially in reverse mergers where an investment entity (vehicle-company) is created shortly before the transaction only to acquire the shares and is merged into the target company immediately after the acquisition to allow the start of the tax depreciation of goodwill, tax authorities frequently challenge depreciation based on a strict substance over form (i.e. the prevalence of economic substance of transactions over their legal forms).

The tax authorities claim that there is no reason to immediately incorporate and shut down the vehicle company, other than the tax benefit related to the goodwill. According to them, the company that controls the vehicle company is the actual acquirer / investment entity (in essence) and that company would not merge with the invested target entity as required by the law on tax depreciation of differences. acquisition. For this reason, the tax authorities understand that this tax benefit should not be allowed.

There are, however, valid arguments to challenge such a position and justify the use of company vehicles in this context, such as the following:

  1. the tax benefit relating to goodwill is expressly granted by Brazilian tax law, provided that the goodwill is actually paid on an acquisition of shares between independent, unrelated parties and that all other legal requirements are properly complied with; there is no legal restriction on the use of company vehicles to make the investment allowing the use of the tax benefit, nor are there any rules in force allowing for control based on the absolute primacy of substance over form, in particular in cases where there is no fraud, deception or other type of abuse; the acquiring group therefore has the right to organize itself in the manner deemed most appropriate to make the investment within the framework of the applicable legal rules;
  2. the goodwill paid and the associated tax benefit increase the purchase price of the target company and, consequently, the taxable capital gain of the transferor; thus, the tax depreciation of goodwill allowed by the use of a company vehicle does not harm the public treasury;
  3. while investors resident in Brazil would typically or have a pre-existing Brazilian company that could make the investment without being encompassed by anti-avoidance arguments, non-Brazilian investors would have to form a new local entity to gain the same benefit; these latter investors would thus be in unequal conditions to compete with Brazilian investors for not being able to use the tax advantage of goodwill; and
  4. the use of a company vehicle does not create additional, duplicated or artificial traffic.

In certain circumstances, using a Brazilian automobile company as a direct purchaser may also be necessary or practical for other reasons, such as corporate governance, regulatory requirements, or any other business or economic reason. This considerably reduces the risk of invalidation of goodwill amortization.

Based on some of the above arguments, Brazilian Administrative Courts (Second Level of Administrative Jurisdiction – CARF) have issued rulings authorizing the use of vehicle companies for stock acquisitions and their subsequent extinction to allow for the tax amortization of goodwill.

For this purpose, as specified in certain cases judged by the higher appeal chamber of the CARF (3rd degree of administrative jurisdiction – CSRF), the vehicle company itself must effectively proceed with the acquisition, by paying the price of The purchase and the goodwill, and the investment must then be extinguished by merging the target company with the vehicle company or vice versa. In some cases, the benefit was denied because it was not the Brazilian auto company, but rather its non-Brazilian parent company, that initially bought the shares by paying the price and goodwill, then transferred the shares and goodwill. to the Brazilian automobile company. via a capital contribution in kind. In other cases, the taxpayer lost the dispute because there had been no actual merger involving the target company.

Nevertheless, some recent rulings by CARF and CSRF confirm the position of the tax authorities that the real buyer (investment entity) is the company that controls the vehicle company and ultimately bears the economic burden of the acquisition. Since no merger takes place between this “actual purchaser” and the invested target entity, as allegedly required by the legislation on the tax depreciation of goodwill, the benefit could not be admitted.

Administrative case law is therefore not decided on the matter.

The highest Brazilian courts have still not analyzed the merits of the case. The Superior Court of Justice (STJ) has rendered certain decisions dealing only with procedural questions related to the tax depreciation of goodwill and company vehicles. At a lower level, only the Regional Federal Court with jurisdiction over the southern states of Brazil has properly addressed the issue in a few cases. In a more recent case, the Court accepted the amortization of goodwill related to an intragroup transaction using a company vehicle. In some other cases involving the use of company vehicles, the court denied depreciation, but only because, in those cases, the company vehicle had been used to create artificial or abusive intragroup goodwill, rather than to allow the amortization of goodwill actually paid in real acquisitions between independent parties (intra-group goodwill is specifically addressed in another text in this issue).

The current state of the case law in this area may soon change, however, as landmark cases judged by administrative courts in recent years begin to reach higher courts.

Regarding tax planning structures in general, the Federal Supreme Court of Brazil is currently adjudicating an important case that examines the scope and limits of a provision of the Brazilian National Tax Code used by tax authorities to support tax assessments. in cases of legal tax planning. This provision states that “the tax administration may override the acts and operations carried out with the aim of concealing the occurrence of the taxable event or the nature of the elements constituting the tax obligation, subject to the procedures to be established by common law“.

The five votes cast so far indicate support for the position that such a rule does not allow the imposition of “a completely lawful legal form which allows lower taxation, taxing the transaction even in the absence of a legal rule qualifying it as a taxable fact. The tax administration is only authorized to apply the tax rate and the calculation base to a taxable event defined by law and which has taken place.“The judgment is currently on hold for further consideration by one of the judges. If the above position prevails, the odds of success in legal disputes involving the use of company vehicles for gap amortization. The acquisition and many other legal tax planning structures will be significantly strengthened.

Originally posted 7/8/2021

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


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