All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Multinationals are not making the most of judicial reorganisation in Brazilian investments

mattos-filho.jpg

In view of Brazil’s complex constitutional system, the country’s large number of taxes, and the great frequency with which taxpayers file lawsuits to challenge tax assessments, it is quite common for companies in Brazil to face a large number of tax assessments and/or to be involved in numerous tax challenges at any given time.

When such companies become investment targets, especially for foreigners investors, standard due diligence requires investigation of pending tax matters, which will often reveal considerable tax contingencies.

Such potential liabilities are sometimes deal breakers, which is why it is necessary to investigate alternative means to mitigate risk for those intending to invest in Brazil.

In many cases, the only alternative that will permit a transaction to proceed is judicial reorganisation pursuant to Law No. 11.101/2005. This law introduced important changes to Brazil’s tax code and in particular, to Article 133, which determines the tax liability of an acquirer of goodwill or a business – assuming it will continue to engage in the same economic activities – regarding taxes related to such goodwill and/or business.

As amended, the new law provides that the acquirer will not be liable for taxes related to the acquired goodwill and/or business if the acquisition:

· Pertains to a productive unit of the business; and

· If it occurs in the context of a judicial reorganisation.

The term “productive unit” is not defined in the law and is determined on a case-by-case basis in view of the economic nature and degree of autonomy of the business acquired.

Indeed, the law is clear that there is no successor liability for the acquisition of goodwill or a business, with continuous operation, in the event of a sale via judicial reorganisation.

By excluding purchaser liability in the event of the sale of a productive unit, the law assumes that a company which has tax contingencies will continue to perform its activities normally until it is able to extinguish its tax debts. In this situation, selling a productive unit and continuing operations can be an alternative for the company attempting to recover its financial footing.

Or course, there are a number of prerequisites for judicial reorganisation and, above all, the reorganisation plan must be submitted by the company for court approval. The process is time-consuming and, once approved, must be strictly followed by the company.

The acquisition of a productive unit of the target company in the course of judicial reorganisation may be the only alternative to an investor who seeks to obtain a business, but cannot assume great risk. It is an alternative that, depending upon the circumstances, can and should be better exploited by those who wish to invest in Brazil.

By principal Tax Disputes correspondent for Brazil, Glaucia Lauletta Frascino (glaucia@mattosfilho.com.br), of Mattos Filho.

more across site & bottom lb ros

More from across our site

The companies have criticised proposals for the gig economy, while the UK and EU VAT gaps have fallen in percentage terms, and ITR speaks to a European Commission adviser about its VAT reforms.
Corporations risk creating administrative obstacles if the pillar two rule is implemented too soon, sources say.
Important dates for the Women in Business Law Awards 2023
The Italian government published plans to levy capital gains tax on cryptocurrency transactions, while Brazil and the UK signed a new tax treaty.
Multinational companies fear the scrutiny of aggressive tax audits may be overstepping the mark on transfer pricing methodology.
Standardisation and outsourcing are two possible solutions amid increasing regulations and scrutiny on transfer pricing, say sources.
Inaugural awards announces winners
The UN’s decision to seek a leadership role in global tax policy could be a crucial turning point but won’t be the end of the OECD, say tax experts.
The UN may be set to assume a global role in tax policy that would rival the OECD, while automakers lobby the US to change its tax rules on Chinese materials.
Companies including Valentino and EveryMatrix say the early adoption of EU public CbCR rules could boost transparency of local and foreign MNEs, despite the short notice.