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News - 01 July 2019

Loan operations are usual in legal entities, both with their partners/shareholders and with third parties, including financial institutions. Ideally they should take the form of an agreement stipulating at least the amount of the loan, the repayment date and the rate of interest, if any. As regards this point, we should mention initially the possibility of tax repercussions in the sense that the non-existence of a formal agreement may give rise to the view that the amount in question is in fact a donation to the legal entity that must necessarily be treated as income. The disbursement and the origin of the funds must also be proved. Furthermore, if there is no provision for interest, usual in operations with partners and associates, and if the creditor has loans with third parties subject to interest, these are deemed to be unnecessary expenses and are therefore non-deductible. It should also be emphasized that special attention must be paid to the incidence of IOF, which has been the target of tax investigations.

On expiry of the term of the loan, the funds must be repaid by the debtor to the creditor. However, even if the loan agreement provides for repayment by a given date, the creditor may waive repayment and forgive the debt at its entire discretion. Thus the debt is forgiven when the creditor waives recovery of the loan for the benefit of the debtor with extinction of the obligation.

The main tax implication of this situation relates to the forgiveness or remission of the debt. Initially, the Brazilian Federal Revenue Service, through Answer to Advance Tax Ruling Request no. 17 of 2010, ruled that forgiveness of a debt represents an economic benefit to the debtor, in view of the fact that a liability is annulled without the suppression of an asset of equal or greater value. From this ruling it may be concluded that the amounts pardoned form part of the tax base for assessment of IRPJ and CSLL, as well as being classified as taxable operational income subject to the incidence of PIS and COFINS contributions.

It should be noted that the Administrative Council of Fiscal Appeals (“CARF”), the final administrative level for judging the maintenance or otherwise of tax assessment notices, in a case involving novation of a debt arising from a judicial reorganization, adopted the view that the reduction of liabilities does not constitute taxable income subject to PIS and COFINS contributions, since there is no financial inflow. Therefore the possibility of a discussion as to the incidence of these contributions on the forgiveness of a debt cannot be overlooked.

Recently this topic acquired even further relevance as a result of the Revenue’s bid to demand tax also on amounts that are remitted on special instalments of tax debts, based on the view that such instalments involve rebates to debtors due to considerable reductions in the penalties and interest due on the debts.

This position was confirmed by the Federal Revenue Service through Answer to Advance Tax Ruling Request no. 65 of 2019, which has a binding effect, with the result that the discounts granted, especially on adhering to the Special Tax Regularization Programme (“PERT”), are subject to IRPJ, CSLL, PIS and COFINS, since they represent a reduction of tax liability, as against a corresponding income account.

In spite of this view that the taxpayer benefits from the reduction of interest and penalties when adhering to PERT, thereby diminishing its tax liabilities, for which reason the saving is subject to taxation, the matter is still controversial in the administrative and judicial areas.

At the administrative level CARF, although it has already decided that forgiveness of a debt cannot be treated as taxable income for the purposes of liability to PIS and COFINS contributions, since it does not represent a financial inflow in the company’s income statement (Appellate Decision no. 3402-004.002, of 2017), normally maintains the assessments in cases of reductions resulting from adhesion to PERT. It thereby establishes the position that the income generated from pardon of the debt must be subject to the said contributions, since Laws no. 10.637/02 and no. 10.833/03 do not expressly authorize their exclusion (Appellate Decision no. 3302-006.474, of 2019).

This prevailing view of CARF, however, runs contrary to the constitutional concept of income established by the Federal Supreme Court (“STF”) in the judgment of RExt no. 606.107/RS, which concerned the incidence of PIS and COFINS contributions on the assignment of ICMS credits. In this judgment it was held that the concept of income stated in art. 195, I (b) of the Federal Constitution should not be confused with the accounting concept, the gross income subject to the contributions being treated as the financial inflow that forms part of the assets as a new and positive element.

In the judicial sphere, the demand not only for the PIS and COFINS contributions, but also for IRPJ and CSLL, has ceased to be made on the discounts obtained on penalties and interest for tax debts included in PERT. The reasoning, according to a precedent of the STF, is that in the gains resulting from the pardon of a debt there is no acquisition of new cash assets, but only the elimination of an existing liability (case no. 1000052-91.2018.4.01.4103).

We may therefore confirm that there exist sound arguments to counter the bid of the Brazilian revenue authorities to demand taxes on the pardon of debts, principally in cases involving adhesion to instalment programmes, and it is even possible to claim a refund of any such payments made.


Gustavo Stüssi Neves

Gustavo Stüssi Neves

Firm: Stüssi-Neves Advogados
Country: Brazil

Practice Area: M&A