Brazil’s STJ: tax benefits from goodwill valid when exhaustive legal requirements are met

On September 5, 2023, the First Panel of Brazil’s Superior Court of Justice (STJ) unanimously ruled in favor of the taxpayer in Special Appeal No. 2,026,473/SC. The case addressed the tax benefits from goodwill arising from a transaction allegedly carried out between related parties (internal goodwill) and with the use of a conduit company for tax periods prior to the enactment of Law No. 12,973/2014.

The appeal was filed by the Brazilian government against a ruling by the Federal Court of Appeals for the 4^th Circuit (TRF4), which had also been in favor of the taxpayer. The dispute arose from a notice of deficiency in which the Brazilian Internal Revenue Service (RFB) sought to collect Corporate Income Tax (IRPJ) and Social Contribution Tax on Net Profits (CSLL) due to the allegedly undue amortization of goodwill resulting from the corporate restructuring of a business group.

The court dismissed the government’s appeal and affirmed the lower court’s ruling that asserted the possibility of using the tax benefits derived from the goodwill in the corporate restructuring that the company carried out.

With the assistance of Justice Gurgel de Faria (who prepared the court’s opinion), the STJ concluded that there was no provision in the legislation in effect at the time of the facts prohibiting the tax benefits from goodwill generated in transactions between related parties, which, in Justice Faria’s view, were not even present in this case.

The court also found that there was no prohibition on using a conduit company; rather, it was the opinion of Justice Faria that the applicable statutes authorize and encourage the creation of specific-purpose holding companies – especially in relation to foreign investment, where such a structure is decisive for allowing the goodwill to be used for tax purposes. As for the business purpose (which was also not regulated by law), the court stated that even if the RFB’s concern regarding the identification of artificial corporate structures was understandable, it cannot oppose the use of goodwill strictly on this basis. For the court, only corporate structures with no material or economic basis should be prohibited.

The tax authorities had argued that only the actual acquirer – the one who originally had the financial resources for the corporate acquisition – could benefit from the tax benefits from goodwill. However, the STJ determined that the governing legislation required only the commingling of assets between the legal entity that effectively acquired the corporate interest and the acquired entity for this purpose.

According to Justice Faria, only transactions in which simulation or atypicality had been identified and proven should be rejected, which was not the case in the specific situation. This was evident as the tax authorities did not even attempt to raise the penalty for the taxpayer to 150%, which would be necessary to indicate the tax authorities’ belief that simulation, fraud, or malicious intent was present.

In summary, the STJ’s view was that the company could use the tax benefits arising from the goodwill amortization, given that the exhaustive legal requirements were met, namely:

• The legal entity’s acquisition of the shares acquired with goodwill;
• The absorption of the invested entity’s assets due to a merger, spin-off, and/or consolidation; and
• The economic justification of the goodwill being an expectation of future profitability.

Justice Faria’s opinion was firmly rooted in case law and legal theory, confirming that there was nothing in Brazil’s tax legislation that prohibited tax benefits from “internal goodwill” or the use of a “conduit company,” allegedly without “business purpose,” by a legal entity different from the one that initially had the resources for the corporate acquisition. Furthermore, according to the specific wording of the STJ’s ruling, the tax authorities’ incorrect interpretation of the statutes created these restrictions, which were not otherwise provided for by law.

This ruling constitutes an unprecedented signal from Brazil’s higher courts. It represents a good sign for taxpayers, especially considering the shifting background that remained undefined despite other important victories for taxpayers in several Federal Courts of Appeals. The STJ’s ruling echoes arguments that taxpayers have long put forward, essentially to the effect that there was no legal provision to support the requirements the tax authorities used to demand to approve the tax benefits arising from goodwill amortization.

Although this decision is not automatically binding on lower courts, it is expected to impact other cases regarding tax benefits linked to goodwill amortization that come up against the tax authorities’ restrictive interpretation, which is not supported by the law.

For more information on the tax benefits from goodwill amortization, please contact Mattos Filho’s Tax practice.