Brazil’s Federal Revenue publishes rules for settlements for tax debts arising from goodwill tax amortization

2022 May.16

The Federal Revenue of Brazil (RFB), along with the Attorney General’s Office of the National Treasury (PGFN), published new rules for federal settlements involving tax debts related to goodwill tax amortization – currently in administrative or judicial litigation – arising from goodwill amortization for tax purposes under the legal regime valid until 2014.

As a brief background, it was common for international groups to set up special purpose vehicles (SPV) to perform equity investments in Brazil. This was due to the fact that any price paid over the net equity of the acquired entity could be recognized as goodwill in the acquiring entity. Such goodwill (if such payment was based on the acquired entity future profitability) was amortizable for tax purposes in Brazil in 5 years for Corporate Income Tax purposes, following the merger (most common structure) of the SPV into the invested entity.

The RFB, however, challenged several of these cases based on the interpretation that the majority of the transactions lacked sufficient economic substance and business purpose e.g. short existence of the SPV before the merger, same board of directors for the SPV and the acquired company etc.

It is also important to note that the corporate income tax burden in Brazil refers to Federal Corporate Income Tax (IRPJ at a rate of 25%) and the Social Contribution on Net Profit (CSLL at a rate of 9%). An additional issue raised by taxpayers was that goodwill amortization expenses should not be added back to the CSLL taxable base.

As the issues mentioned above created massive litigation in Brazil that could last years, if not decades, the RFB and PGFN seek to recover part of the tax credit through such settlement program.

Accordingly, Notice n°. 9/2022, published on May 3rd 2022 clarifies that goodwill amortization expenses (i) arising from the equity investments, (ii) limited to merger, consolidation and spin-off operations occurred until December 31st 2017, and (iii) whose equity investment has been performed until December 31st 2014, are eligible for the settlement. The settlement may also contemplate tax debts arising from litigation on the deductibility of goodwill amortization expenses for CSLL purposes.

The deadline to apply is July 29, 2022 and the settlement shall produce effects over all debts related to the same thesis. The application will not affect other legal thesis, even if they are part of the same administrative or judicial proceedings.

The taxpayers have to up-front 5% of the total debt amount with no discount, which shall be paid in in five equal installments. The remainder may be paid:

  1. a) up to 7 months, with a 50% discount;
  2. b) up to 31 months, with a 40% discount;
  3. c) up to 55 months, with a 30% discount.

The abovementioned discounts will also apply to the principal amount, fine, interest and other charges.

The application implies the withdrawal of administrative defenses and appeals and the waiver of legal claims filed by the taxpayer in relation to these debts, as well as any deposits related to such debts that must be transferred to the Federal Government.

The tax team at Rolim, Viotti, Goulart, Cardoso Advogados is available for any further information.

Related attorneys: Luis Felipe de Campos / Gabriel de Sá Balbi Cervino / Roberto Junqueira de Alvarenga Neto /