Originally published in the May 31 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Federal Revenue Department has issued an interpretative declaratory act that clarifies the tax treatment of capital gains derived from the capitalization of securities into investment funds.
Interpretative Declaratory Act 7/2007 was published in the country’s official gazette on May 24. Because the act is interpretative, its provisions are retroactive and may apply to transactions that took place as long ago as five years before its publication.
According to the interpretative act, a taxpayer who uses his or her own securities to capitalize investment funds is deemed to derive a capital gain on the positive difference between the market value of the securities and the corresponding acquisition cost shown on the taxpayer’s tax return. The interpretive act considers the capitalization of securities into investment funds to be a sale, with the corresponding capital gain subject to income tax at a rate of 15 percent.
The goal of the interpretive act is to stop wealthy taxpayers from creating private investment funds by capitalizing their own securities and treating the capitalization as a tax-free exchange.
In support of its position on the issue, the Federal Revenue Department cites article 23 of Law 9,249/95, which allows individuals to capitalize legal entities with assets at acquisition cost or market value, at their own discretion. If capitalization is made for market value, a capital gain is realized for the sum that exceeds the acquisition cost. On the other hand, if capitalization is made for acquisition cost, then the recipient company retains the same basis, with a capital gains deferral.
By considering investment fund capitalization as a taxable sale, the Federal Revenue Department closes an important tax planning door to wealthy taxpayers who hold securities with significant potential capital gains. Because investment funds are exempt from capital gains taxation on the sale of their portfolios (only the investor is taxed at the time he or she sells the fund’s units), the capitalization of private investment funds was an excellent opportunity to defer taxation.
Act 7/2007 goes even further, providing that the Federal Revenue Department may challenge the market value of securities attributed by taxpayers when the claimed values are considered unreliable or notoriously different from known market values.
David Roberto R. Soares da Silva