Originally published in the May 13 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Superior Court of Justice (STJ) on May 4 held that even though a tax exemption for stock kept for more than five years was revoked before the stock’s sale took place, an individual did not have to pay capital gains tax on the sale because he had already qualified for the exemption at the time it was revoked. The unprecedented decision is important because it recognizes the acquired right to a tax exemption when the taxpayer fulfills all the necessary conditions before an exemption is revoked.
Gilberto Caberlon acquired the stock in 1983, when Decree-Law 1510/1976 was in effect and granted a CGT exemption for sales of stock kept by individuals for five years. The exemption also applied to other types of corporate participations owned by individuals but did not apply to corporate investors.
The exemption was revoked in December 1988 by way of Law 7,713/1988. At the time of its revocation, Caberlon had owned the stock for more than five years. He ultimately sold the stock in 2008, 20 years after the tax exemption was revoked and 25 years after acquisition.
Tax officials argued that Caberlon did not have a right to the exemption because at the time of the stock sale, the exemption was no longer in place. After successive unfavorable decisions at the court and appellate levels, Caberlon filed a special appeal (No. 1126773) before the STJ.
For more than a year, the justices debated the taxpayer’s right to an exemption that was revoked 20 years before the actual stock sale took place. Finally, a majority voted for the taxpayer.
The STJ held that at the time the tax exemption was revoked, the taxpayer had already met the condition to apply it by holding the stock for five years. Therefore, he had acquired the right to the exemption regardless of the moment he actually sold the stock, it said.
Although the decision is final and binding only in Caberlon’s case, it is important as a favorable precedent for individuals who had held stock for more than five years as of December 1988. The decision is particularly relevant to traditional family businesses that are considering selling stock to third parties and that met, in December 1988, the five-year holding period established by Decree Law 1,510/1976. With the CGT rate at 15 percent for individuals, any chance to avoid the tax is unquestionably a good opportunity.
David Roberto R. Soares da Silva