Brazil: New divergent decisions regarding taxation of merger of shares

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Brazil: New divergent decisions regarding taxation of merger of shares

jeffrey.jpg

carmona.jpg

Philippe Jeffrey


Gustavo Carmona

On August 14 2014 the General Tax Coordination Department (COSIT) of the Brazilian Federal Revenue (RFB) published Tax Ruling No 224, providing that merger of shares, when carried out at a value which exceeds the book value of the shares (that is, where a gain is deemed to have been realised) should be subject to capital gains taxation. The merger of shares has been subject to considerable judicial debate. Some decisions issued have been in favour of the taxpayer, while others sided with the tax authorities by viewing the merger of shares as something akin to alienation, thus subjecting such transactions to capital gains taxation.

The tax ruling based its understanding on the similarity between the merger of shares and the contribution of capital (that is, constituting a capital contribution in kind), with the substitution of the old merged company's shares for those of the new subsidiary. The new stock, which is now part of the shareholders' assets, may constitute a capital gain according to Brazilian law and would as such be taxable.

Contrary to the position held by the RFB, on May 19 2014 the Specialised Federal Attorney (PFE – Procuradoria Federal Especializada), legal representative of the Securities and Exchange Commission (CVM – Comissão de Valores Mobiliários), published a legal opinion regarding the merger of shares, attempting to provide clarity as to whether the merger could be construed as "sale of shares". The main points addressed by the legal opinion can be summarised as follows:

  • The merger of shares is a specific operation regulated by Brazilian legislation. It is a transaction between two entities, in which one company becomes a wholly-owned subsidiary of the other, through the acquirement of 100% of its common stock;

  • It follows that the merger of shares is a completely different operation from the merger of entities, seeing that in the former both companies still exist after the operation occurs, with their own assets and liabilities, as well as distinct equities, whereas in the latter case, one will cease to exist;

  • This unique attribute becomes evident when considering the participants of the transaction, who are not the individual shareholders themselves, but the companies, who deliberate the intended operation at a general meeting and carry out all necessary formalities on behalf of the shareholders, who, individually, may not necessarily agree with the intended operation.

As such, the legal opinion states that a merger of shares does not constitute an alienation of shares, since the individual shareholders do not participate in the transaction. Despite this favourable opinion, it must be considered that the merger of shares still remains a complex issue and the potential consequences remain subject to considerable debate, with both government agencies and judicial and administrative case law providing little guidance on the matter. While the legal opinion is not binding on the CVM or the RFB, it may be seen as a strong reference in defences at administrative and judicial level.

Data centres – viewed as service by Brazilian Federal Revenue

On August 18 2014, the RFB published Interpretative Declaratory Act No 07 (binding for the tax authorities) stating that amounts paid, credited, given or remitted to non-residents for the use of infrastructure for remote storage and processing of data, known as data centres, must be considered as payment for the provision of services for tax purposes. Consequently, according to this Act, federal taxes on import of services should be due as normal.

Philippe Jeffrey (philippe.jeffrey@br.pwc.com) and Gustavo Carmona (gustavo.carmona@br.pwc.com)

PwC

Website: www.pwc.com

more across site & shared bottom lb ros

More from across our site

APAs should provide a pragmatic means to agree to an arm's-length outcome for an Australian entity and for the ATO, the tax authority said
Overall revenues and average profit per partner also increased in the UK, the ‘big four’ firm revealed
Increasingly complex reporting requirements contributed towards the firm’s growth in tax, it said
Sector-specific business taxes, private equity tax treatment reform and changes to the taxation of non-residents are all on the cards for the UK, authors from Herbert Smith Freehills Kramer predict
The UK’s Labour government has an unpopular prime minister, an unpopular chancellor and not a lot of good options as it prepares to deliver its autumn Budget
Awards
The firms picked up five major awards between them at a gala ceremony held at New York’s prestigious Metropolitan Club
The streaming company’s operating income was $400m below expectations following the dispute; in other news, the OECD has released updates for 25 TP country profiles
Software company Oracle has won the right to have its A$250m dispute with the ATO stayed, paving the way for a mutual agreement procedure
If the US doesn't participate in pillar two then global consensus on the project can’t be a reality, tax academic René Matteotti also suggests
If it gets pillar two right, India may be the ideal country that finds a balance between its global commitments and its national interests, Sameer Sharma argues
Gift this article