Originally published in the March 9 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s Federal Revenue Attorney General’s Office (Procuradoria-Geral da Fazenda Nacional, or PGFN) recently issued Ordinance 180/2010, clarifying the National Tax Code provisions on third-party liability for corporate tax debts.
The ordinance, published in the official gazette on February 26, attempts to establish clear rules for including third parties as liable for corporate tax liabilities under article 135, Item III of the National Tax Code. Article 135 provides that a company’s equity holders, managers, representatives, and employees may be responsible for tax liabilities resulting from irregular liquidation of the company or actions committed:
- in excess of their authority (granted powers);
- in violation of the law; or
- in violation of the company’s bylaws or articles.
Before Ordinance 180/2010, there were questions regarding who has the burden of proof to show that a given person has acted in excess of his granted powers. As a matter of practice, tax authorities and the PGFN have held individuals connected to a company as liable for the company’s tax debts without showing any evidence that the individual had any actual power to run the company. It was the individual’s burden to prove his innocence — a task that was not always easy, or even possible.
The situation could be even worse regarding social security taxes, as article 13 of Law 8620/1993 provided that sole proprietors and owners of limited liability companies were jointly liable, with their personal assets, for the social security tax liabilities of the companies they owned or ran. Although that provision was revoked effective December 3, 2008, by Provisional Measure 449/2008 (later converted into Law 11,941/2009), many individuals are still being held liable for social security debts for cases starting before December 3, 2008.
Ordinance 180/2010 establishes the procedures to hold third-party individuals liable for tax and social security debts for the companies they own or run. It generally provides that only those who actually manage the company, whether or not they are equity holders, can be held liable for the company’s tax and social security debts.
The ordinance also requires either the Federal Revenue Department or the PGFN to provide solid evidence and statements that support the inclusion of any person as liable for a company’s tax or social security debts under article 135 of the National Tax Code.
One exception applies: social security tax debts for which the taxable event occurred before December 3, 2009. In those cases, the ordinance applies the law that was effective on the date of the taxable event — namely Law 8620/1993 (article 13), which automatically included sole proprietors and owners of LLCs as jointly liable for their company’s social security debts.
This exception may be questionable, because the National Tax Code provides for retroactive effect of laws that impose less severe penalties on taxpayers. One could argue that joint tax liability for social security taxes — as provided in article 13 of Law 8620/1993 — amounted to a penalty on managers and sole proprietors, and that with the revocation of that provision, it can no longer apply, even for taxable events occurring before its revocation. But that is an issue that will be brought up before the courts in concrete situations.
Despite the controversial exception, Ordinance 180/2010 appears to be good news for corporate owners, managers, and representatives, as there are now clear rules — and need of evidence — for holding individuals liable for corporate tax and social security debts.
David Roberto R. Soares da Silva