Brazilian court allows full use of corporate tax losses by merged company
Paulo Victor Vieira da Rocha and Murilo Jakuk Ferreira Lopes of VRBF Advogados discuss a case decided by the Brazilian Administrative Court that focuses on the offset of losses in the event of the extinction of a company.
Applying the new casting vote criterion, the High Chamber of the Administrative Court of Appeals (CARF), the last degree of administrative disputes over federal taxes, issued a decision, on September 21 2021, ensuring the right of a taxpayer to fully offset the accumulated fiscal negative results for the purposes of income tax (IRPJ) and contribution social on profit (CSL) in case of legal entity extinction and merging.
In addition to representing a disagreement between doctrine and between judicial jurisprudence, the issue was also controversial in the administrative sphere. However, in administrative disputes it tended to be settled in favour of the tax authorities' interests. This is because, even if there were votes in different positions, the casting vote criterion favoured tax administration. However, after Law No. 13,998, the casting vote started to favour taxpayers, implying a possible shift in jurisprudence on several topics – such as the one in this case.
In summary, in order to warrant the tax revenues in a stable flow, Article 42 of Law No. 8.981/95 and Article 15 of Law No. 9.605/95 introduced a 30% limitation on the offsetting of losses from the corporate tax (IRPJ and CSLL) assessment base.
However, the question that has arisen is: does this limitation presuppose the permanence of the company's activity or not?
Initially, there are administrative decisions from 2001 in which the High Chamber of CARF had taken a stand for removing the limitation in case of extinction or merging of the legal entity. However, in 2009, the issue was still controversial, but as the old casting vote criterion was still in force, it was possible to change the case law in favour of the tax authorities. And this is how the High Chamber of CARF had been ruling in recent years.
In the meantime, the ‘30% limitation’ issue was judged by the Brazilian Supreme Court twice, Case RE 344.994 on March 25, 2009 and Case RE 591.340 on June 27, 2019, resulting in the maintenance of the limitation provision in lawful order.
They assumed losses offset was a tax benefit and thus, it could not be extensively interpreted. Conversely, taxpayers claimed that it was not a tax benefit, but a constitutional right to be taxed according to the universality and generality principles for income taxation, thus an ability to pay principle of consequence as well.
Although these decisions were against the taxpayers, they only assessed the issue concerning the validity of the limitation, they simply decided the legislator could impose such limitations and to decide this, they assumed regular situations, in which the legal entity keeps exiting after the offsetting and still can offset other parts of the losses in the coming years. They did not face a case in which the legal entity is extinct (whether by disincorporation or by being merged with another legal entity).
The specific issue of the ‘30% limitation’ in cases of permanent interruption of activities was only considered, then, by the Superior Court of Justice, on June 23 2020. On that occasion, the taxpayer had managed to set out the case distinguishing and argued that the very wording of the legal provisions would indirectly indicate that the maintenance of business activities was a premise of the scope of the discussed rules and, thus, for applying the ‘30% limitation’. However, even so, the court reiterated the STF's position that taking advantage of the losses to reduce the taxable basis would be a tax benefit that should be interpreted strictly.
In this scenario, therefore, the judicial case law of the Higher was very negative. It was full of uncertainties and featured a very strong trend in favour of tax administration. No wonder the aforementioned judicial precedents were commonly mentioned in administrative votes. Thus, the big surprise occurred on September 1 2021.
Despite the historical divergent positions of the judges, the final decision rendered by CARF High Chamber was in favour of the taxpayer. The votes were four to four, and according to the current rules of the administrative tax procedure, the tie-break was set in favour of the taxpayer.
The judges expressed the same known reasons from both sides, repeating their conclusions from judicial and administrative cases, and the only difference was the procedural rule. In other words, thanks to the new casting vote criterion, the case law, which was apparently very stable, changed, allowing the full use of negative tax results to reduce the taxable profits for the assessment of corporate taxes.
Paulo Victor Vieira da Rocha
Partner, VRBF Advogados
Professor, Instituto Brasileiro de Direito Tributário, State of Amazonas University, São Paulo University (temporary)
Murilo Jakuk Ferreira Lopes
Associate, VRBF Advogados