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


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 (, of Mattos Filho.

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