Tax authorities and taxpayers continue to fight battles, the most recent being the reduction of capital of companies abroad.
Taxpayers argue that the capital reduction that occurs with any positive exchange rate variation would be subject to income tax (IR) calculation according to the rules for calculating capital gains, subject to progressive rates from 15% to 22.5%.
In the Tax Authorities’ view, the positive variation in the exchange rate, in the capital reduction, would be treated as income and taxed through a one-off payment via the so called carnet leão, with rates reaching 27.5%.
The comparison between an initial value of acquisition cost (value initially contributed to the company’s capital) and the value received (value of the capital reduction) is an exclusive characteristic of the capital gains regime. The exchange rate variation (positive difference between the amount initially contributed and the amount received) follows the same rationale.
Income is another concept, like wages, rents and dividends. Exchange rate variation is outside this mechanic. Note that the Brazilian Federal Revenue Service (RFB) itself, in its “IRPF 2023 Questions and Answers”, does not even mention exchange rate variation in capital reductions (and nor could it).
“CARNÊ-LEÃO — COLLECTION
261 — Who is subject to the mandatory monthly payment (carnê-leão)?
Individuals residing in Brazil who receive:
(…)
2 – income or any other values received from sources abroad, such as employment or self-employed work, use, exploitation or occupation of movable or immovable assets, whether or not transferred to Brazil, profits and dividends. The provisions of international agreements, conventions and treaties signed between Brazil and the country of origin of the income must be observed;(…)” – our outline.
Recently, in October this year, a decision was published by the Administrative Council of Tax Appeals (Carf) unfavorable to the taxpayer, by majority vote (4×2), accepting the understanding of the tax authorities in the sense that the exchange rate variation in the capital reduction of capital of companies in the abroad must be taxed by the carnê-leão (judgment 2202-010.359, of 03.10.2023).
It turns out that the Tax Authority’s position, recently confirmed by Carf, is completely contrary to the guidance of the Ministry of Finance (hierarchy superior of the RFB). Why?
The Federal Government, with its team from the Ministry of Finance, made efforts to approve the change in the taxation of gains obtained from assets held abroad by residents in Brazil for tax purposes. The text approved by Congress was recently sanctioned by the president according to Law 14.754 on December 12, 2023.
According to the bill, the positive exchange rate variation of future capital returns will be part of the capital gains to be calculated by the individual.
The most interesting point is the ratification of the understanding that exchange rate variation is a gain and not income (15% to 22.5% compared to 27.5%), when the “questions and answers”, edited by the Ministry of Finance itself to explain the text of the new rule, makes it completely clear that the return of capital has always been subject to the calculation of income tax under the capital gains regime. See below:
“14. Will the exchange variation of the principal invested in entities controlled abroad also be automatically taxed in Brazil? What happens if I have a gain in one year and a loss in another?
(…)
The exchange rate variation on the principal invested will only be taxed when there is, effectively, a return of capital to the individual residing in Brazil (for example, when there is a capital reduction). At this time, the exchange rate variation between the date of remittance of resources and the date of return of resources will be taxed in Brazil. It will be classified as a capital gain and subject to income tax at rates of 15% to 22.5%, maintaining the same current rule and bringing more legal certainty to the taxpayer.” – our outline.
If the Ministry of Finance itself understands that capital gains taxation is the current rule and did so precisely to bring “more legal security to taxpayers”, how can the tax authorities proceed with assessments of taxpayers who merely followed this understanding?
And what’s worse, in addition to the undue collection of additional income tax, with fines and interest normally applied in assessments, the RFB applies an additional fine of 50% on the amount of income tax supposedly not paid, under the justification that the carnê-leão was not filled out.
The capital gain regime is the one that best fits capital reductions in foreign companies. The Ministry of Finance’s statement only reinforces this conclusion with the intention of eliminating legal discussions in Carf and the judiciary. Point for the evolution of our tax system with more legal certainty.
Although there is no express rule in current legislation, every time tax legislation deals with any income tax generated on the return of capital, it chooses the capital gains regime to calculate the tax. The Tax Authorities tried to distort this interpretation and, mistakenly, Carf validated this understanding. The Ministry of Finance accurately makes this correction.
With the presidential sanction of the new Law, at least this discussion will no longer be applicable to future capital reductions made from January 1, 2024.
We must closely monitor the position of the tax authorities in relation to the capital reductions that have already been made. We hope the battles remain in the past.