Subject to constant appreciation by Brazilian Administrative Courts, tax planning operations has gained bigger, and better defined, contours.
Tax planning consists, as the name suggests, in the elaboration of strategies to minimize tax burden over determined taxpayer or operation held.
It is true, for Brazilian taxpayers, that there is explicit legal provision that authorizes the Administrative Authority to disregard legal acts carried through to conceal the triggering event of the tax obligation, or to mask the nature of the constitutive elements of said obligation (as stated by the article 116 of the Brazilian National Tributary Code). Said provision, however, still lacks regulation.
In this context, there is intense debate over the meaning of said article. While there are those who understand that the legal text clearly limits the possibility of disregarding legal acts to when there is simulation or fraud involved, there is, in the other hand, those who maintain that it represents a prohibition on tax avoidance.
Employing the second interpretation – which, for convenience, is the one used by Tax Authorities – any legal act which sole purpose is the reduction of tax burden for determined taxpayer or operation would be susceptible to disregarding by the Authorities.
It would be the case of the so-called “legal acts without cause” – in the lack of better terms, the “unjustified legal acts” – which are those realized solely to reduce tax incidence, with allegedly no true business purpose.
Under another view – vigorously championed by taxpayers – the legal text mentioned would represent just a defense mechanism for the Tax Authorities, against fraudulent and deceptive acts.
There is, then, significant difference between both interpretations. While the interpretation utilized by the Authorities can represent a form of prohibition to any kind of business structuring that entails reduced tax incidence, the one supported by the taxpayers represents the possibility of disregarding acts just when there is clear intent of fraud or simulation.
It is the case, for instance, of a real estate sales operation carried through with the establishment of a legal person, who will be submitted to subsequent capital reduction. In this case, a legal person was utilized to mask the real operation intended – the real estate sale – aiming the reduction of tax incidence (as capital reduction is exempt of taxation, in contrast to real estate sales).
In that example, not only the sole purpose of the act was to minimize tax incidence, there was also an effort to hide the real operation intended. It represents, therefore, circumstances completely different from when taxpayers shape their operations to reduce tax burdening within the limits of law, such as tax planning in one of the most basic levels: choosing between determining the Income Tax based on the Real Profit or Assumed Profit, when legally authorized to do so.
Although said option is possible by explicit legal provision, it helps understanding that taxpayers are not obliged, in any way, to be taxed in the most burdensome way possible.
The discussion, thus, revolves precisely around the contours and differences between a real Tax Planning (licit tax avoidance), and tax evasion, illicit and susceptible to sanction by Tax Authorities.
Fortunately – at least for taxpayers – the Administrative Tax Appeals Council (CARF – second instance of federal administrative tax proceedings), has been defining, gradually, those contours.
A recent example is the Judgment nº 1302002.389, issued by said Council, in which sanctions were withdrawn, regarding to a North American society that implemented numerous corporate acts within its subsidiary companies in Brazil, so to fend off taxation, in Brazilian territory, over future assets disposal.
The Council stated that the “allegation of inexistence of business purpose comes from foreign jurisprudence construction”, which does not find any support in the Brazilian Legal Order, guided by a series of principles, such as Tax Lawfulness.
Even more recently, the same Council issued the Judgment nº 1401002.835, in which a company was sanctioned for shaping its operations so to reduce Income Tax and Social Contribution on the Net Profit burdening.
In this case, Brazilian Tax Authorities didn’t glimpse any business purpose, so that the operations were designed only to lower tax incidence.
Discussing the dispute, the Council, once again, excluded all sanctions, stating that tax saving represents a business purpose by itself.
There were, moreover, quotations of numerous precedents of the Council stating that “the fact that the executed acts aimed only for tax economy does not make them illegal or invalid”.
It seems, thus, that the understanding under development is that legal acts cannot be disregarded just for having no apparent cause, as long as they are executed within the limits of the Law, without fraud or simulation.
The scenario, therefore, is favorable to taxpayers, for there is more liberty to structure and sustain their operations in a way that reduces tax incidence, which, especially in a country like Brazil, can represent the difference between failure and success for a development.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Hugo Reis Dias
Professor, Attorney and Legal Adviser based in Belo Horizonte, Minas Gerais. Attending Masters Degree in Public Law, Specialization degree in Tax Law and Law graduate from Pontifical Catholic University of Minas Gerais (PUC/MG). Experience as attorney and legal adviser in the area of Corporate Law, with a focus in Tax Law. Experience with international legal practice at Trowers and Hamlins’ tax team, based in London. Post-graduation professor at IEC – PUC/MG (Tax Law). Post-graduation professor at “Centro de Atualização em Direito Tributário – CAD” (Upgrade Center in Tax Law). Post-graduation professor at “Escola Superior de Advocacia – ESA da Ordem dos Advogados do Brasil” (Lawyer’s Superior School of the Brazilian Bar Association). Chief-Counselor of Três Corações’ Municipal Taxpayers Board. Member of the Brazilian Association of Tax Law (ABRADT) and Tax Law Committee of the Brazilian Bar Association’s Minas Gerais Section.
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