The CARF witch hunt

The perspective of using FIPs as an investment vehicle

The discussion about how far the limit of fiscal planning and approval by tax authorities goes is always a controversial issue. Going hand in hand with tax planning we have the legal uncertainty caused by the constant change in the profile of administrative bodies such as CARF (before and after operation Zelotes), in which a tax planning is valid, sometimes invalid, launching the taxpayer to a Russian roulette at the mercy of the judges.

We already had the golden years of taking advantage of tax goodwill through vehicle companies until CARF began its witch hunt and tax legislation had to adapt to the creativity of tax planners, expressly prohibiting the use of internal goodwill, with the edition of the Provisional Measure No. 627/2013. The examples did not stop there. We have already used tax havens, transactions known as “casa-e-separa”, among others in tax plannings.

But the taxpayer is not always the defeated party. In August 2018, CARF issued a judgment (nº 1201-002.278) in which it validated the use of a Private Equity Fund (FIP) as an object of tax and succession planning involving a hospital network. The winning vote acknowledged that the transfer of an investment to a FIP for reasons of succession planning and subsequent sale of such investment with the offer of capital gain to taxation by the FIP, is a measure that can be opposed against the Tax Authorities, provided that there is no simulation, fraud or abuse of rights.

The court recognized that there is no legal abuse even though the tax planning is based on tax savings. The taxpayer cannot be penalized for making use of such an instrument (that is, when creating more favoured tax legislation) as a form of tax planning.

The National Treasury appealed the decision. This process will be judged at the Superior Chamber of Tax Appeals of CARF and there is a high chance of defeat, due to the composition of this Chamber. But even with this scenario, the recognition of such reasons that are not tax orientated by the court is already a victory for taxpayers.

In this sense, at the end of last year, the IRS celebrated the arrival of Christmas with a gift to foreign investors, determined by means of a Declaratory Act that the taxation of non-resident investments must be determined based on the country of the direct investor, ensuring application of the special taxation regime (exemption).

The outlook for the future is good, and perhaps the structures involving FIPs will once again be an interesting alternative for family groups and, certainly, for foreign investors.

By Marcela Leal Sammarone, associate at Candido Martins
tributario@candidomartins.com.br