The Court Decision 1401-002.307, published by the Federal Administrative Court of Tax Appeals (CARF) on May 8, 2018, renewed the taxpayers’ hopes concerning the acceptance of tax planning by the Brazilian Revenue Service (RFB) once, by unanimity of votes, the Voluntary Appeal that sustained the legal right to choose a less costly way, under a tax point of view, for the alienation of shares was considered valid.

The transaction questioned by the RFB was a corporate restructuring intended to transfer the property of controlling stake of Suzano Petroquímica S.A. (Suzano Petroquímica) to Petrobrás, in which the capital gain related thereto would be ascertainment by the regime applicable to individuals.

Initially, the shares of Suzano Petroquímica were held by three different companies in Brazil and one abroad.

In a short length of time (about three months) the shares of Suzano Petroquímica, in view of a capital reduction occurred in certain corporate shareholders of Suzano Petroquímica, were delivered to the individual shareholders of said corporate shareholders, by its book cost, with legal grounds on art. 22 of Law 9249 of 1995 and then contributed by the individual shareholders to the capital of a vehicle company. Thereafter, the shares of said vehicle company were contributed by its individual shareholders to the capital of another vehicle company. In a tight synthesis, at the end of the corporate restructuring, the vehicle company that indirectly held the shares of Suzano was sold to Petrobrás, moving the capital gain to the tax regime applicable to individuals.

The RFB, when analyzing this transaction, understood the practice of a sham, once the capital reduction justified by the excessive capital was not true, disregarding the transaction and applying an ex-officio fine. The Office of the Attorney-General of the National Treasury (PGFN) highlighted the corporate restructuring as a sham with the purpose of tax evasion and without corporate purpose.

The individual shareholders challenged the allegations of RFB and PGFN, considering i) the contractual demands to acquire Suzano, made by Petrobrás; ii) the legality to use the tax regime applicable to individuals to ascertain the capital gain, based on the art. 22 of Law 9249/95; iii) when the holdings no longer had the intention to participate in the economic object of its investees, justifying the capital reduction once it became excessive; and iv) the good faith on the corporate restructuring once the transaction was object of a request for advance tax ruling by RFN, not judged in its legal merit.

The vote of the reporting judge, Abel Nunes de Oliveira Neto, brought that the transaction had no legal or contractual obstacles. The individual shareholders exercise their legitimate right of property, choosing a legally acceptable way in which the capital gain was ascertained in view of the tax regime applicable to individuals, not being, therefore, an abuse of rights.

This precedent is crucial considering the repeated arguments used by RFB and PGFN    trying to disregard corporate restructurings that result in a less costly option to the taxpayer applying even the higher fine of 150% over the value of debt.

This is a light to the administrative discussions once it considers the licit right of the taxpayer to choose for the less costly option in exercising its property right.

The necessary counterpoint is the Court Decision nº 1401-002.196, of the sitting held on  February 21, 2018, issued by the 4th Chamber of the 1st Ordinary Class of the 1st Section of Judgment of CARF, also under the report of Abel Nunes de Oliveira Neto.

In this case the capital reduction of Arainvest, by means of payment through devolution of the shares of Aracruz, by its book value, to the shareholders Moise and Joseph Safra, and its subsequent sale to Votorantim Celulose e Papel S.A. was understood as a non-acceptable transaction by RFB, in view of the lack of corporate purpose beyond the tax economy (15% over the capital gain to individuals in face of 34% if taxable as a legal entity) and the tag along clause applicable to Arainvest and not to the shareholders.

It is important to highlight that the Voluntary Appeal was not accepted by the quality vote and, after 22 days of the adverse decision, the same reporting judge used the argument of the legitimate exercise of legal property to interpret a corporate restructuring, with the same elements, as valid.

Notwithstanding the fact that most recent decision is favorable, the predictability and the legal certainty continue to be endangered.

Author: Zancan Advogados.