Brazil issues controversial ruling on tax treatment of indemnifications

Brazil’s Federal Revenue Department issued a private letter ruling that clarifies the department’s official position on taxation of indemnification received by taxpayers. The ruling makes a distinction between material and immaterial damages and provides for different tax treatment for each type of indemnification. For tangible damages, it concluded that no Brazilian tax should apply because such indemnification aims at reestablishing the taxpayer’s prior material status. As for the nontangible damages, the ruling said that the award was taxable because it represented no reestablishment of the taxpayer’s wealth. (Solução de Consulta No. 267/2007)