It is possible for a company to split-up partially aiming the transfer of tax credits, making the restitution or compensation of the Successor company own tax debts possible, provided that the corporate restructuring has “economic substance” or “business purpose”.
That is the interpretation of the Brazilian Revenue Service (known as “RFB”).
That is possible considering a spin-off in which the Distributing company continues to exist, but part of its equity, rights and/or obligations is transferred to another company, the Successor company. In such scenario, there is a succession of rights, and not just an assignment of rights. Therefore, tax credits may be transferred proportionally to the transferred equity.
The corporate restructuring related to the spin-off is extremely important because if RFB considers that there is no “economic substance” or “business purpose”, transferring the credits is considered illegal. That is because the Brazilian law prohibits the purchase and sale of tax credits and/or the use of tax credits from third parties by a company to compensate its own tax debts. In other words, corporate transactions that aim only the assignment of such rights between individuals are not allowed in Brazil.
The discussion about what would be “economic substance” or “business purpose” is hot in Brazil, but it is not to ignore that RFB has already given examples of aspects to be considered in corporate restructurings aiming the transfer of tax credits:
(i) in order to have economic substance, the corporate transaction may include a spin-off that transfers assets or a portion of equity to set up a “succession” of tax credits linked to the spun-off equity. Therefore, the Distributing company’s tax credits will become the Successor company’s own tax credits;
(ii) the partners or shareholders of the Distributing company must receive shares (or quotas) from the Successor company that absorbs their portion of equity. If part of the equity is simply transferred to another company, without the partners or shareholders of the Distributing company owning the Successor company shares after the restructuring, it is considered that there is no spin-off, but only purchase and sale of equity aiming the transfer of tax credits, which is prohibited by the Brazilian law.
It is worth noticing that the viability of a spin-off aiming the transfer of tax credits is only allowed because there is joint liability between distributing and Successor companies. If there is succession of rights and obligations (and not only assignment of rights), the restitution or compensation of tax credits is, therefore, allowed because they represent the Successor company’s own credits after the restructuring, and not third parties’ ones.