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Brazil: New divergent decisions regarding taxation of merger of shares



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 ( and Gustavo Carmona (



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