Originally published in the May 26 edition of World Tax Daily (Copyrights Tax Analysts)
Brazil’s House Commission of Economic Development, Industry, and Commerce on May 19 approved a law project that would exempt sales of fixed assets by corporate taxpayers from capital gains tax under some circumstances. The law project is intended to promote tax-free capitalization of corporate taxpayers, who may use the tax-free proceeds to acquire more modern equipment for their business activities.
Sen. Marco Maciel presented Law Project No. 6714/2009 to the Federal Senate on July 16, 2009. After being approved by the Senate, it was sent to the House of Representatives on December 22, 2009.
Consisting of only three articles, the project would grant CGT exemption to corporate taxpayers that sell fixed assets (machinery, equipment, and possibly real estate). The exemption would extend to both corporate income tax and the 9 percent social contribution on net income (CSL) but would apply only to taxpayers using the so-called actual method (lucro real) to calculate corporate income tax (when income and expenses are taken into account).
Currently, sales of fixed assets are subject to corporate income tax and CSL at a combined rate of up to 34 percent (15 percent or 25 percent for corporate income tax and 9 percent for CSL). Depending on the market value of the assets, this taxation may be almost confiscatory because since 1996 fixed assets owned by corporate taxpayers have not been allowed any adjustment for inflation.
Law Project No. 6714/2009 does, however, impose conditions on the exemption. Because it is designed to allow better capitalization of corporate taxpayers, the law project would prevent the tax-free capital gains from being distributed to equity holders and require them be registered in a special profit reserve.
The project does not describe the conditions (such as for purchase of new fixed assets) under which the taxpayer would be allowed to use the capital gains registered in the special profit reserve. However, the project specifies the following will trigger future taxation of tax-free capital gains:
- failure to book the tax-free capital gains in the special profits reserve;
- capitalization of the special profit reserve and subsequent distribution to equity holders by means of a capital reduction;
- capital reduction within five years from the date the special profit reserve has been capitalized;
- use of the special profit reserve to calculate minimum dividend distributions; or
- adoption of the presumed method to calculate income tax during the five years following the realization of the capital gains.
The law project will now go to the House Commission of Finance and Taxation and then to the Constitution and Justice Commission. If approved by all House commissions, the project will go to President Luiz Inácio Lula da Silva for signature and promulgation.
David Roberto R. Soares da Silva