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Brazil: Federal government revokes COFINS tax exemption on sale of share and quota investments

Foreign investors that are unfamiliar with Brazilian tax legislation may find it unusual, but Brazilian taxpayers have long been used to a system that imposes taxes on corporate revenues as well as on corporate profits.

Such taxes are locally known as contribuição ao Programa de Integração Social (PIS) and Contribuição ao Financiamento da Seguridade Social (COFINS).

It may also seem unusual that the PIS and COFINS taxes are calculated under two alternative criteria: the cumulative method and the non-cumulative method.

The cumulative method is calculated upon the application of a 3.65% joint rate on the amount of gross revenues of the Brazilian companies. While gross revenues should be seen as those basically deriving from the sale of goods and services, the federal government has in the past attempted to widen it to include all the revenues of Brazilian companies.

A few years ago, however, the Federal Supreme Court overruled that attempt and since then taxpayers have been assured that gains deriving from the sale of share or quota investments originally maintained as permanent (or non-current) assets are PIS/COFINS exempt under the cumulative system.

An important change came in May 13 2014 with Law 12,973, which amended the concept of gross revenue concept to include – as of January 1 2015 – all other revenues that may be attributable to the business activity of the Brazilian company. While widened, that concept still does not include gains deriving from the sale of permanent (or non current) assets.

In turn, the non-cumulative method imposes the levy of a 9.25% joint rate on the overall amount of revenues of a Brazilian company, but the PIS and COFINS laws expressly exempt from taxation the gains deriving from the sale of share or quota investments originally maintained as permanent (or non-current) assets.

Provisional Measure 651

On July 9 2014, however, the federal government published Provisional Measure 651 describing that, as of January 1 2015, corporate taxpayers calculating PIS and COFINS taxes under the non-cumulative method must exceptionally allocate to a cumulative method basket the gains on the sale of the share or quota investments above – those already under the cumulative method must simply keep these gains in a separate basket subject to the same method.

Once those gains are in that cumulative basket, the PIS exemption on such gains will be assured, but COFINS tax will start being levied at a 4% rate.

Because it is still a provisional rule, the National Congress must approve it within four months of publication (not including the time during which the National Congress remains on mid-year vacation).

If approved, however, that increase may become the object of tax disputes: the COFINS tax basis under the cumulative method literally still remains focused on operating revenues (gross revenues and those of the business activities) of Brazilian companies, and it is therefore disputable that the imposition of a 4% levy on the assumption that such basis would include gains from non-operating activities.

Luiz Felipe Centeno Ferraz ( is a tax partner of Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados, the principal Brazilian correspondents of the Tax Disputes channel on

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