Artigos e Alertas


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Brazilian IRS and Carf have different views about Special Partnerships

08/01/2019

The Special Partnership (Sociedade em Conta de Participação, or SCP) is a flexible alternative often used in investment structures as it protects the limited partner and gives personal liability to the general partner.

The general partner is responsible for the day-to-day operation of the business and is personally liable for the obligations of the Special Partnerships. The limited partners, on the other hand, participates in the profit sharing and have no liability before third parties.

The question is whether the limited partner can carry out activities within the scope of the Special Partnership without disregarding the corporate entity.

The Brazilian Federal Revenue Service (Brazilian IRS) understands that the performance by the limited partner of any activity within the Special Partnership should be considered as an event to disregard the corporate entity.  Consequently, the dividends paid to the limited partner should be taxed as income and not as dividends, which are exempt from taxation.

Recently, the Administrative Council of Tax Appeals (Carf) took a different view from the Brazilian IRS by recognizing as legitimate the Limited Partnership that had a limited partner carrying out activities within the scope of the Special Partnership, providing an important precedent in favor of the taxpayers.

In the case No. 1401-002.823, Carf analyzed a claim against an educational institution that plays the role of the general partner in several Special Partnerships, which has teachers as limited partners. As limited partners, the teachers performed activities in the Special Partnership and received part of the company’s profits as dividends and, therefore, without taxation.

Carf decided, by majority of the votes, that the fact that the limited partner carries out activities within the Special Partnership only changes the liability he/she has before third parties, but it is not sufficient to disregard the Special Partnership. In other words, there is no tax impact on the income he/she receives from the entity.

Taxpayers using Special Partnerships to invest in businesses should consult their advisors to confirm the tax impact, so to identify potential risks and verify the applicability of the important precedent discussed here.

Candido Martins Advogados is available for any clarification.