Originally published in the July 24 edition of World Tax Daily (Copyrights Tax Analysts – www.taxanalysts.com)
Brazil’s Federal Revenue Department (FRD) has stated that corporate reorganizations and successions are subject to the 0.38 percent bank transactions tax (CPMF). That official position was published July 19 in the official gazette as Interpretative Declaratory Act (Ato Declaratório Interpretativo, or ADI) no. 13/07.
The ADI also provides the FRD’s position on withholding tax and financial transactions tax (IOF) levied on investment accounts in the same situations.
ADI 13/07 contains two articles that seek to resolve conflicting private letter rulings by the FRD on the levy of CPMF, withholding tax, and IOF on corporate reorganizations (mergers, split-offs, and amalgamations) and individual causa mortis successions. ADI 13/07 provides that CPMF is due, on any change of ownership, on funds (deposited in bank accounts) that arise from mergers, split-offs, amalgamations, and causa mortis successions. It also states that any of those situations triggers withholding tax and IOF, where applicable (IOF usually applies to fixed-income investments held by the taxpayer for less than 30 days), on investment income.
Until ADI 13/07, no official FRD position existed, except for a few private letter rulings applicable to only the requesting taxpayers. Sporadic private letter rulings on the subject have been unclear, accepting the nonlevy of CPMF in some corporate reorganization and successions situations. Taxpayers have requested that the banks — instead of transferring funds from a merged company’s bank account to the surviving company’s bank and paying CPMF — simply change the account holder’s name in some cases. Similar name changes have occurred in other corporate reorganizations and causa mortis successions, when successors (in causa mortis cases) have replaced the deceased as the account holder and no actual transfer of funds occurred.
Because the mere name change in the account did not represent a debit in the account, taxpayers took the position that the change should not trigger CPMF. Although many private letter rulings have been issued against taxpayers in the sense that CPMF was due even in those cases, some taxpayers were able to avoid CPMF in those cases by obtaining count injunctions. Many banks usually withhold CPMF in those situations, particularly because the CPMF rules attribute to banks joint liability for nonpayment of CPMF. In extreme situations, particularly when the amounts at stake were relevant, taxpayers have filed for injunctions.
To try to end the debate, the Federal Revenue Department issued ADI 13/07, which clearly states that mergers, split-offs, amalgamations, and causa mortis successions trigger CPMF. ADI 13/07 also establishes that those ownership changes trigger withholding tax and IOF on investment income in connection with the relevant bank accounts.
Some tax experts argue that the change of an account’s ownership should not trigger CPMF. They believe that the CPMF taxable event is the debit into a bank account and that the debit does not take place whenever the account holder is replaced by a new one. That argument is arguably weak, and with ADI 13/07, taxpayers will have a harder time obtaining injunctions against the levy of CPMF in those cases.
David Roberto R. Soares da Silva