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The rise of goodwill litigation in Brazil

Paulo Camargo Tedesco and Luiz Antonio Monteiro Junior of Mattos Filho Advogados explore the macrocosm of increasing litigiousness in the Brazilian tax world.

Debates relating to the use of goodwill for tax purposes, which have been quite common in the arena of the Brazilian federal administration for at least a fifteen years, have begun to gain momentum in the Brazilian court system on a large scale over the past two years.

Stemming from typically large and relevant corporate transactions, litigation regarding this matter covers very significant sums, and it is not unusual to litigate on debts over one billion reais (BRL). Thus, most of the cases have the potential to generate great repercussions in the pockets of taxpayers and the coffers of the government itself, which has caused the topic to become one of the most pressing issues involving taxation in Brazil.

Much of the accelerated litigiousness arises from the resurgence of the Brazilian Administrative Council of Tax Appeals (Conselho Administrativo e Recursos Fiscais) (CARF), which has now come to construe in a restrictive manner the tax interpretation regarding the matter.

However, although in the context of the administrative courts the position of the adjudicators remains to the detriment of  private parties, the judicial courts have been very receptive to the taxpayers’ plea: the majority of the decisions so far issued ruled in favour of the taxpayer.

The subject – which is far from being simple – has several nuances, many of which arise from legal arguments created by the Tax Authorities to thwart the recognition of rights in favour of the taxpayers. Amongst said legal arguments, we highlight those that have found better reception by the courts: 
  1. use of the so-called “vehicle company” when acquiring equity interest;
  2. alleged absence of corporate purpose in the manner in which the transactions that gave rise to goodwill were structured;
  3. absence of merger between the assets of the invested company and the entity that acquired equity interest with goodwill when it did not originally spend the funds used in the acquisition (“real investor”); and 
  4. inadequacy of the future profitability report proving the economic basis of the goodwill.

Indeed, cases discussing related party transactions (the infamous “internal goodwill”) also have been well accepted.

This is because, as a rule, the courts have scrutinized the issue from the point of view of legality and free enterprise, weighing these principles in the face of the case at hand and rejecting the right to goodwill only in those cases in which willful misconduct with the intention of defraud tax authorities are verified.

It is not only substantive issues that can influence the success or failure of a lawsuit on the matter. The procedural strategy to be adopted has also proved to be extremely relevant. The type of lawsuit, the time in which it is filed (whether before or after receiving tax assessment notices) and, especially, the jurisdiction in which the claim will be filed must be carefully studied before going to court.

However, even in this macrocosm of increasing litigiousness and improving receptivity, there has yet to be any judgment rendered by the high courts which make the subject – quite a thorny one at that – continue to be far from a final outcome.


Paulo Camargo Tedesco
T: +55 11 3147 2826

Luiz Antonio Monteiro Junior
T: +55 11 3147 7607

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