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Tax aspects of Brazil’s Judicial Reorganisation Law

Fernanda Sampaio, Bruno Santo and Camila Somadossi of Finocchio & Ustra discuss changes to the Judicial Reorganisation Law from a tax perspective.

On March 18 2021, the Brazilian Congress analysed the vetoes made by President Jair Bolsonaro to the provisions of Law  14,122/2020, approved on December 24 2020, which made important changes to the Judicial Reorganisation Law (Law 11,011/05).

Taxes losses

In total, 12 of the 14 presidential vetoes were overruled by Congress, and two of them (Article 6-B and Article 50-A) are specifically relevant from a tax perspective.

The first refers to the possibility of fully using taxes losses, without the 30% limitation, over net income resulting from capital gains from the disposal of fixed assets or rights by the legal entity under judicial reorganisation. As an exception, this does not apply for capital gains resulting from transactions with related entities and with an individual who is a controlling shareholder, partner, owner, or administrator of the legal entity which is the debtor.

Such a measure is unprecedented and will certainly impact taxpayers that are undergoing judicial reorganisation, who usually have significant amounts of tax losses but without taxable events that allow them to offset these losses.

Discount on debts

The second veto is related to the taxation of the discount on debts obtained by companies under judicial reorganisation, a widely debated and controversial issue in the tax environment.

With this change, the legislation guarantees that the revenue obtained by the debtor is not taxed by the Contribution for the Social Integration Program (PIS) and the Contribution for the Financing of Social Security (COFINS).

The doctrine and the jurisprudence on the matter already adhere to this understanding, under the argument that a ‘debt forgiveness’ cannot be treated as revenue for PIS/COFINS tax purposes, however the provision is important due to the fact that the Brazilian Federal Tax Authorities usually impose tax-deficiency notices on these cases.

Regarding corporate income tax (IRPJ) and the social contribution on net profit (CSLL) for companies that elect the actual profit method (lucro real), since taxable income is determined based on the accounting profit, adjusted by additions and exclusions as provided by law and, therefore, should be taxed for IRPJ/CSLL.

The changes made to the Judicial Reorganisation Law substantiated the understanding that the discount on the debt must be taxed by the IRPJ and CSLL when the debtor opts for the actual profit, however, it brings an important advance by allowing that this gain can be offset against tax losses and the negative base of the CSLL in an unlimited manner, without being subject to the 30% limit.

Despite remaining subject to IRPJ and CSLL taxation, it is certain that this measure brings a relief to companies under judicial reorganisation, since they can now fully offset their gains from debt renegotiations against accumulated tax losses and negative bases of CSLL.

Closing remarks

The new legislation makes it clear that the expenses corresponding to the obligations assumed in the judicial reorganisation plan are deductible in determining the taxable income and the CSLL calculation basis, as long as they have not been previously deducted.

The changes listed above do not apply in the case of debts with a related legal entity (parent, controlled, associated or interconnected company) and with an individual who is a controlling shareholder, partner, owner, or administrator of the debtor legal entity.

Such changes are positive for companies undergoing a judicial reorganisation plan and are in line with the purpose of the judicial recovery institute, which aims to "make it possible to overcome the debtor's economic and financial crisis situation, in order to allow the maintenance of the production source, the workers' jobs and the creditors' interests, thus promoting the preservation of the company, its social function and the stimulation of economic activity", as provided in Article 47 of Law 11,101/2005.

It seems neither logical nor reasonable for the federal government to neutralise or reduce the effect of its main measure in order to achieve the purpose of the rule, which is to grant special terms and conditions for payment of obligations due and falling due, demanding taxation on the discounts obtained. 

There is no doubt that the changes promoted by Law 14.112/20 are essential for the many companies that are trying to get back on their feet during a global pandemic.

Fernanda Sampaio
Senior consultant, Finocchio & Ustra
Bruno Santo
Partner, Finocchio & Ustra
Camila Somadossi
Head of restructuring and insolvency, Finocchio & Ustra

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