One of the
firm’s initiatives is to encourage lawyers to write articles for the monthly
newsletter. The subject is free, but it needs to be something current and that
stimulates the reader. In my last article entitled “End Game”, I left a
provocation that some measure needs to be taken so that the private equity
market is not wiped out. At the end of last year, specifically December 17,
2019, the Brazilian Tax authorities (“RFB”) published Interpretative
Declaratory Act No. 5. In summary, the RFB should look only at the direct
shareholders of the vehicles used by the private equity funds (the “FIPs”),
without escalating the corporate structure (except, of course, in cases of wilful
intent, fraud or simulation). At first, this measure gives a certain degree of
comfort that the RFB will observe only the direct shareholder to verify that it
is not in a jurisdiction with a favoured taxation or with a participation
greater than 40% (equity or revenue) for the purpose of taking advantage of the
tax benefit of the zero rate of income tax on the capital gains (in the case of
foreign investors). However, this measure has not yet been tested.
That is the
reason for naming the article “A New Hope”, which refers to the first (or
fourth) film in the “Star Wars” saga.
Are we witnessing
a change in the perception of the RFB in relation to FIPs, reflecting a greater
legal security (and thus stability)?
like to say yes. But what we are witnessing is the opposite. What counts most
are deeds and not words. The tax administrative courts’s (“CARF”) latest
decisions reflect a change in caselaw on a number of issues. I highlight here
the most controversial and which directly affect the appetite for investment in
the country: amortization of goodwill, incentive plans for administrators
(SOPs) and, finally, the use of capital reduction for tax optimization. In our
weekly internal technical meetings, I always ask my partner Alamy, “can we go
ahead with this structure?”, For example, goodwill amortization or capital
reduction. The answer always used to be yes, since its provided for in the
legislation, i.e., it has legal protection (of course, always with the caveats
of risk, etc.). Today, my partner replies (to paraphrase) “while the
representatives of the RFB in the CARF continue to legislate, legal uncertainty
will prevail”. He continues to say… “nevertheless, we have the expertise and
confidence to suggest a defensible structure to the client”.
What is the
purpose of the RFB releasing an interpretative declaratory act (we can ignore
for now any discussions on the definition of the name of the act – “declaratory
and interpretive”) if in its decisions they ignore all the consolidated caselaw
of the last years and the legislation itself? How will the RFB behave in
relation to the FIPs with this act? What about the tax assessment notices that
have already been drawn up against investors and FIP managers alleging breach
of the 40% tax benefit rule or the failure to identify the final beneficiary?
What about the recent decisions that affect sellers in capital reductions?
I go back
to the title of my article … “a new hope” (when rereading the article I was dubious
as to whether I should in fact change the title to “the empire strikes back”).
However, I maintain my conviction that this legal uncertainty created by the RFB
can be attacked head on by several means, which I include some below:
- The assessment of alternatives and risks involved in
an investment, including,
without limitation, how to bring funds from abroad, the vehicles to be used and
the quality of the assets to be invested; and
- Monitoring of legislative and jurisprudential changes.
Investors (buyers) and sellers seek solutions to their issues. In principle, they do not consider the size of the law firm, the field in which the law firm operates or the positioning of the law firm in the market. They need professionals they can trust and who will provide solutions to their problems. For this reason, having professionals who understand all these issues in depth and are prepared to propose adequate solutions is of paramount importance. We are facing a scenario of renewed hope in which we need to surround ourselves with good professionals who have elements to counter the legal insecurity that currently haunts us.
By Henrique Martins, partner at Candido Martins Advogados