Tax Penalties Are Subject to Successor Liability, Brazil's Superior Court Rules


Tax Penalties Are Subject to Successor Liability, Brazil's Superior Court Rules


Originally published in the August 2, 2010 edition of World Tax Daily (Copyrights Tax Analysts)

Brazil’s Superior Court of Justice (Superior Tribunal de Justiça, or STJ) has ruled that penalties, not just taxes, are transferable to the surviving company of a corporate reorganization (merger, split, or amalgamation).

The decision could affect valuation of mergers and acquisitions as well as due diligence procedures carried out by accountants, auditors, and law firms. Before the decision, many believed that only taxes were subject to tax successor liability in a corporate reorganization.

The decision in Special Appeal No. 923012, filed by Companhia de Bebidas Müller, was delivered on June 9. In the appeal, the taxpayer argued that under article 132 of the National Tax Code tax successor liability applies only for taxes due before the act of corporate reorganization and that this has been interpreted to mean that no successor liability applies to penalties of any kind. Article 132 of the National Tax Code provides that the legal entity resulting from the amalgamation, change of company status, or merger is responsible for taxes due up to the date of the reorganization event.

Upon reviewing the case, Justice Luiz Fux, who delivered the court’s opinion, said that article 132 must be interpreted along with article 129 of the Tax Code. Article 129 provides that tax successor liability applies to assessed or declared taxes up to the date of the corporate event, and also to taxes assessed or declared after the event that relate to tax obligations originating before the event.

Justice Fux said the merged company (Industrias de Bebidas Müller) was subject to a state VAT (ICMS) assessment before the merger. Therefore, upon the merger, the surviving company (Companhia de Bebidas Müller) inherited the entire debt resulting from the tax assessment issued before the merger. The court also held that delay penalties and assessed penalties should follow the same rule (delay penalties are usually paid voluntarily by the taxpayer with no need of a tax assessment).

Two important issues, however, remain unresolved because they were not discussed in the case: tax successor liability for aggravated penalties — that is, those penalties assessed in cases of tax evasion, fraud, or collusion — and1 tax successor liability for assessed penalties when the assessment is issued after the corporate event but relates to taxes due before the event.

Analysts have argued that aggravated penalties should not be imposed on the surviving company because their purpose is to punish the person responsible for tax evasion, fraud, or collusion. If the surviving company did not take part in any of these actions, it should not be liable for the aggravated penalty.

Regarding penalties assessed after the corporate event but related to taxes due before the event, Companhia de Bebidas Müller filed a motion for clarification with the STJ.

Ramifications

The decision is binding on lower courts because the STJ has declared that the issue is legally relevant and that its effects should surpass the subjective interests of the parties directly involved in the case. Thus, all lower Brazilian courts will eventually have to follow the STJ’s position.

The decision could adversely affect surviving companies of corporate reorganizations because these taxpayers could be held responsible for penalties due from companies they have acquired or merged with in previous years. The decision will also affect future corporate reorganization, merger, and acquisition deals and due diligence procedures because tax successor liability for penalties is now an important consideration.

David Roberto R. Soares da Silva

1 At the federal level, aggravated penalties can reach 150 percent, twice the regular assessed penalty for unpaid tax (of 75 percent).