CARF allows the implementation of tax planning involving spinoff of activities – Leal Cotrim Advogados

Leal Cotrim Advogados


CARF allows the implementation of tax planning involving spinoff of activities

The Administrative Panel of Tax Appeals (CARF) acknowledged the validity of a tax planning implemented by means of the segregation and transfer of part of the activities of a company to one of its subsidiaries, aimed at using PIS and COFINS tax credits.

The panel has annulled an expressive assessment on the grounds that there is no simulation in the case of partial spinoff resulting in the allocation of part of the activities in another company of same group, with the aim to lower the tax burden, provided that the structure adopted is licit.

CARF, now with new members, published in April 2016 a decision in which, while examining a case of tax planning, annulled PIS and COFINS debts that had been deemed to exist due to the understanding of the tax inspection that the legal transaction carried out by the taxpayer would reveal a simulation. The panel sponsored the understanding that the carried out transaction was licit and, therefore, its disregard for tax purposes was not justified.

In the case at stake, a company dedicated to the production of wood laminates and boards of plywood, MDF and agglomerated wood had acquired “standing trees” from one of its subsidiaries, as raw material to be applied in its production line. Said tree, in their turn, had been planted in properties that had been previously transferred to the referred to subsidiary as payment for capital increase.

The tax authority claimed that there would be a simulation is said transaction carried out between the company subject to the tax assessment and its subsidiary because there would exist a unity of activity between the two legal entities, one of which held 99% of the capital of the other. In line with such line of understanding, the tax authority disregarded the purchase and sale of trees and treated it as mere internal transfer. Consequently, the tax authority deemed as non-existent the PIS and COFINS credits, that had been used under the acquisition of raw materials, and applied a fine corresponding to 150% of the unpaid taxes, arguing that there was tax evasion.

CARF, while judging the case, confirmed the first administrative instance decision, which had cancelled the tax debt and acknowledged that “the segregation of activities among companies of a same economic group, aiming at rationalising the transactions and lowering the tax burden, is not a simulation”, and that “the mere creation of a company with the objective to reduce the tax burden, per se, does not constitute a tax infraction, nor is sufficient to justify the disregard of actions and transactions carried out pursuant to the law.”

Thus, in light of the fact that the entities were independent, each had its own head office, tax enrolment, accounting and employees, and that the transactions were formally licit, the panel refuted the arguments leading to the disregard of the transaction due to simulation. In addition, the panel highlighted that the tax inspection had not provided evidence that the entities were hiding a legal relationship of diverse nature, and annulled the tax assessment.

Finally, the wording of the decision so concluded: “As one may note, the fact that a business segregates its activities in order to reduce the tax burden cannot and shall not be regarded by the competent authorities as an illicit action. After all, in order to obtain the best results in an unstable economy and with high tax rates such as the Brazilian one, one of the most significant instrument available for companies, in order to rationalise their tax costs, provided that the law concerning each tax is observed, is the tax planning.”

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01 December 2020