Brazil: Brazilian Federal Revenue Authorities publish new administrative guidance
07 October 2014
Posted by: Author: Durval Portela
Authors: Durval Portela, Phillippe Jeffrey and Mark Conomy (PwC Brazil)
August 14, 2014, the General Tax Coordination Department (COSIT) of the Brazilian Federal Revenue Authorities
(RFB) published Tax Ruling No. 224, providing that merger of shares, when
carried out at a value which exceeds the book value of the shares (i.e. where a
gain is deemed to have been
realised) should be subject to capital gains taxation.
tax ruling issued by the RFB is the latest development in an effort to
provide administrative guidance in relation to this complex area of Brazilian
The concept of a merger of shares has been subject to
considerable judicial debate. The results have been mixed with some decisions
finding in favour of the taxpayer (i.e. considering the merger of shares does
not constitute an alienation of shares), while others have been decided in
favour of the RFB, viewing the merger of shares in a manner akin to alienation
and, therefore, subject to capital gains taxation.
tax ruling issued by the RFB draws a comparison between a merger of shares and
a contribution of capital (i.e. the merger of shares constituting a capital
contribution in kind), with a substitution of shares in the merged company for
shares in the new parent entity. On this basis, any positive difference between
the value of the shares received and the value of the shares
contributed by the shareholder should be viewed as constituting a capital gain
and be subject to capital gains taxation.
Contrary to the
position held by the RFB, on May 19, 2014, the Specialised
Federal Attorney (Procuradoria Federal Especializada or PFE), legal representative of the Securities
and Exchange Commission (Comissão de Valores Mobiliários or CVM), published a
legal opinion regarding the treatment of a merger of shares, attempting to
in relation to whether the merger of shares should be construed as
‘sale of shares.’
key points addressed by the legal opinion can be summarised as follows:
- The merger of shares is an operation
specifically contemplated by Brazilian legislation. It is a transaction between
two entities, in which one company becomes a wholly owned subsidiary
- The merger of shares is a different operation
from the merger of entities, considering that in the former operation both
companies continue to exist after the operation occurs (each
with its own assets and liabilities, as well as distinct equities),
whereas in the latter, one company will cease to exist.
- Further, the participants of the merger of
shares operation are not the individual shareholders themselves, but the
companies, who decide whether to implement the merger of shares at
a general meeting and carry out all necessary formalities on behalf of the shareholders.
Such operation requires approval by the majority of shareholders
rather than unanimity with dissenting shareholders provided
certain withdrawal rights.
such, the legal opinion considers that a merger of shares should not
constitute an alienation of shares on the basis that the individual shareholders
do not participate in the transaction.
Despite a favourable legal opinion for taxpayers on this
issue, it is important to note that the legal opinion is not
binding on the RFB or the CVM and, therefore, the taxation
consequences arising from a merger of shares remain subject to considerable
debate, especially following the publication of a contradictory tax ruling by
the RFB. For these reasons, specific advice considering a taxpayer’s individual
should be sought prior to implementation of such an operation.
This article first appeared on pwc.com.