Business transformation does not trigger tax effects in Brazil, as the corporate type does not affect the taxation regimes or tax positions of a company.

With respect to corporate reorganizations, the Brazilian tax law presents several cases of rollover provisions that allow the performance these transactions with tax deferral on the potential/latent gains embedded in the company’s assets/business. These rules are an important feature for the performance of tax-free intragroup reorganizations aimed at a allowing more efficient allocations of corporate assets/functions/businesses.

It is important to note that these rollover provisions may be substantially changed with the adoption of new Brazilian transfer pricing rules. No specification was provided up to now on which corporate reorganizations will continue to benefit from tax deferral and which will be subject to transfer pricing rules.

Mergers

In a corporate merger the net assets transferred from the absorbed company to the absorbing company may be evaluated at book value or fair market value. If the merger is performed at book value, no taxable gain will be recognized by any of the Brazilian companies.

If a merger is performed at market value, however, and that value exceeds the book value, the merged company, which had its assets valued at market, will recognize a gain corresponding to the difference between their book value and market value and include that gain in its corporate tax assessment. In the event of a merger at market value, the surviving company will receive the assets already at the market value and use that as basis for future depreciation/amortization. If the market value is less than book value, the merged company would recognize a loss.

The absorbed entity must close its financial statements up to the date of the merger and also anticipate the closing of its computation of the corporate income tax in the ongoing year, providing the filling of the corresponding income tax returns as well. This obligation of early closing of the accounting and tax computations also apply to the absorbing entity unless they were under common control since the year preceding the merger.

Tax losses will be lost in cases of merger. The company that is merged into another one loses its tax losses, but the recipient company does not.

Mergers are very common in Brazil since they are a necessary step for triggering goodwill amortization in cases of acquisition of companies. A downstream merger of the purchaser causes a “pushdown” effect, whereby the goodwill, as well as any surplus of fair value booked at the purchaser with reference to the underlying assets/liabilities of the acquired (target) company, will be allocated to the corresponding ledger accounts of the target company and will be subject to amortization over a period of at least five years (for the goodwill) or the corresponding depreciation/amortization period (for the surplus of fair value allocated to the corresponding assets/liabilities). (see Sec. 1.1.1.1.3. for more details on strategies for acquisition of a target company).

This goodwill amortization has resulted in a great deal of litigation in Brazil and the regulations have recently changed. After the issuance of Law 12,973/2014, the IFRS criteria for purchase price allocation have been adopted for tax purposes, reducing the potential of tax amortization in future business acquisitions.

In short, the new accounting rules provide for a purchase price allocation method (“PPA”) which requires that the price be allocated first to assets and intangibles (based on the difference between their book and market values), leaving for future expected profitability only amounts that cannot be identified as related to either tangible or intangible assets. Before this Law, all excess price in relation to the net equity of the acquired company would be considered as goodwill.

Spin-offs

Similar to the merger, a split or a spin-off may be performed at book value or fair market value and taxation will only take place in the latter case.

The same comments made above with respect to tax losses and anticipation of the closing of accounting and tax computations are valid in the case of a spin-off.

Losses may be entirely lost when the net assets of spun-off entity are absorbed by the recipient entities (and the spun-off entity ceases to exist), or losses may be partially lost when the spin-off only strips out a portion of the net equity of the spun-off entity (and the spun-off entity continues to exist).

The recipient company (ies) will not be obliged to anticipate the closing of its(their) tax obligations if it (they) and the spun-off entity were under common control in the year before the spin-off.

Liquidations

From a commercial law standpoint, the dissolution of a company is preceded by a liquidation of its assets and liabilities. In this sense, the liquidation of a company requires the adoption of several procedures to secure the payment of all creditors with the net assets of the liquidated company.

After all creditors have been paid, the remaining assets may be transferred to the shareholders through distribution of accumulated earnings and capital reductions.

The accumulated earnings may be paid with the transfer of cash or other assets to the shareholders and there is no obligation to evaluate the assets transferred at fair market value (but all shareholders must agree with such decision).

Also, in the case of a capital reduction, cash or other assets may be transferred to the shareholders without the obligation to evaluate the assets at fair market value (upon agreement of all shareholders).

In case of transfer of assets at fair market value, either as profit distribution or as a capital reduction, the liquidated company will register a taxable capital gain, subject to the regular computation of IRPJ/CSLL.

Capital Contributions and Capital Increases

Rollover provisions also apply to capital contributions performed by both individual and corporate shareholders. In general, such rules allow the transfer of assets for capital contribution/increase at a cost or fair market value basis, allowing a deferral of taxation on the potential gain in case the transaction is performed at cost. (See Sec. 2.2. for more details on the application of these rules).

Capital Reductions

A specific rollover provision related to capital reductions, allows Brazilian companies to transfer cash or assets to their shareholder at their cost or fair market value, and taxation only takes place at the transferor (the entity suffering the capital reduction) on the corresponding capital gain if the fair market value of the asset is adopted as a price for the asset transferred.

Powerful Tax Solutions

Tax Rules Engine

Collaboration Tools

Latest Tax News