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Brazil: New decisions issued on deductibility of goodwill

Two recent decisions of the Administrative Court of Federal Tax Appeals (CARF), a rather technical court, ruled against the argument of simulation, raised by the tax authorities, on merger and acquisition transactions that may generate amortisable goodwill for tax purposes in Brazil.

The decisions gave a bit of legal and juridical certainty in relation to M&A transactions that are adequately structured. Although the text of the decisions has not yet been published in its entirety, its seems to generally state that when the goodwill is effectively paid by the Brazilian acquirer, the sale is carried out between non-related parties and the evaluation of the acquired company/future profitability projections are made in accordance with the applicable legislation, then the amortisation of such goodwill for tax purposes is generally considered legitimate, and not associated to a tax evasion planning.

New decisions on Brazilian CFC rules

Two recent decisions regarding the interaction of the Brazilian legislation regarding taxation of foreign profits and double tax treaties - DTT signed by Brazil, may be setting forth a different interpretation about the application of the Brazilian CFC rules for foreign subsidiaries established in a tax treaty jurisdiction.

One of such decisions was issued by the CARF, involving a Brazilian entity with a subsidiary in Hungary. The court has understood that article 7 (business profits) of DTTs signed by Brazil should not prevent the application of the Brazilian CFC rules. The decision stated that the Brazilian CFC rules are not focused on the taxation of the entity resident in Hungary (in which case the article 7 could be applied), but rather on the taxation of the Brazilian entity. The court therefore considered that the Brazilian CFC rules creates a fiction according to which the profits of the Hungarian entity are considered distributed at year end. Such taxation would not be prevented, according to the court, by article 10 (dividends) of the Brazil - Hungary DTT either.

It is important to note that this decision contradicts the decision in Eagle Case, which became quite known a couple of years ago, and which had accepted that article 7 of a DTT could, in theory, prevent the Brazilian tax authorities to tax CFC’s profits until actual distribution to the Brazilian entity.

Another important decision was issued against the Brazilian multinational of the mining industry, Vale. The Brazilian Federal Regional Tribunal (TRF - 2a Região) maintained the tax assessment issued against the company, in an amount of over BRL25 billion ($13.9 billion). It focused on the taxation in Brazil of the profits derived by Vale through its participation in foreign subsidiaries (mainly Belgium, Luxembourg and Denmark). The decision also followed a path similar to that taken by the CARF in its own decision: article 7 of DTTs should not prevent the application of Brazilian CFC rules, as the latter target the taxation of the Brazilian entity, and not that of the foreign subsidiary.

Nélio Weiss ( and Philippe Jeffrey (


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