In Brazil, there is a Municipal tax on real estate transfers that occur through a pecuniary interest (purchase or sale).
This tax is not levied on transfers related to capital contribution though. Recently, a wider interpretation of this tax immunity to include cases of companies and funds with mainly real estate activity has become a real possibility. This specific tax is usually levied at rates ranging from 2 to 3% depending on the Municipality, but it can reach 5% according to the Brazilian Constitution.
The Brazilian Supreme Court has presented a legal reasoning that extends the tax immunity to taxpayers that have prevailing real estate activity, but in an incidental way. This interpretation is not well-established in the Brazilian Judicial system, but it brings some possibilities though.
This interpretation has, basically, two consequences. On the one hand, the possibility to recover undue taxes paid in the last 5 years, which can be truly significant to holdings, companies and funds that own real estate to collect rent and save taxes, for instance.
On the other hand, the possibility to boost wealth and succession planning, considering that is commonplace to use holding companies to concentrate real estate to centralize its administration, as well as to simplify the real estate sale and purchase and as part of families’ wealth and succession planning.
In any case, it is important to define the best strategy for tax efficiency. As there is not a well-established interpretation in the Brazilian Judiciary System, it is worth considering filing a lawsuit to discuss the tax immunity, regarding the past (to recover undue taxes already paid) and looking forward to the future (so that the tax is not levied on real estate transfers related to capital contribution).
