Contributing real estate assets to a company’s capital is a strategic move for many businesses, particularly in the real estate sector.
In this context, with the aim of stimulating economic activity, the Federal Constitution provides an important exemption from the Real Estate Transfer Tax (ITBI) for this type of transaction.
The application of this rule, however, is not absolute and has been the subject of intense debate in the judiciary, culminating in an ongoing discussion pending a decision by the Supreme Federal Court (STF), which has led to significant legal uncertainty in the market.
Here are 5 key points to keep in mind:
1. The General Rule of Exemption and Its Percentual Impact: The starting point is Article 156, §2, I of the Constitution, which states that the ITBI does not apply to the transfer of assets or rights incorporated into a legal entity’s equity as part of a capital contribution. In practice, this results in a significant and direct tax saving, as the ITBI rate generally ranges between 2% and 3% of the property’s market value. In this respect, especially in cases involving high-value real estate portfolios, the exemption is a fundamental element of tax planning.
2. The Preponderance Rule: The Constitution itself establishes an exception: the exemption does not apply when the primary activity of the acquiring company is the purchase and sale of such assets or rights, leasing real estate, or financial leasing. In this context, the preponderance is defined – following the National Tax Code (CTN) – as more than 50% of the company’s operating revenue, in the two years before and two years after the acquisition, coming from these real estate activities. The consequence, in such cases, is severe: if preponderance is found in this period, the tax that was not paid at the time of capital contribution becomes due, along with interest and penalties. This is the heart of the main controversy, as tax authorities frequently apply this exception to holding companies and others operating in the real estate sector.
3. Exemption Limited to the Value of the Capital: In 2020, the STF ruled on RE 796.376 (Topic 796), establishing an initial parameter for the application of the exemption. In its decision, the Court held that the tax benefit only covers the portion of the property’s value that matches the capital stock being contributed. Thus, if the asset is valued above the amount subscribed for capital, the difference (recorded as capital reserve) will be subject to ITBI. While significant, this decision did not resolve the ongoing debate concerning preponderant activity.
4. Topic 1.297: The discussion took a major turn when general significance was recognized in RE 1.495.108 (Topic 1.297), in which the STF will specifically decide whether the exception relating to preponderant activity applies to the exemption in capital contributions. Among other noteworthy points, statements from some Ministers during the judgment of Topic 796 suggested that the exception would not cover capital contributions, leading to a surge in lawsuits. In this context, the forthcoming decision on this new topic is expected to finally provide the binding and much-anticipated definition for the market.
5. The Courts’ Position: While Topic 1.297 remains undecided, uncertainty persists. In many cases, the STF has declined to examine the merits of appeals on the subject, applying Precedent 279, which prohibits reconsideration of facts and evidence. As a result, lower court decisions – most of which deny the exemption to companies in the real estate sector – have largely stood. This situation demands maximum caution, as municipalities continue to assess companies, and judicial reversal is still not assured.
Although the exemption from ITBI on capital contributions represents an important benefit to foster the economy, there remains some legal uncertainty for companies in the real estate sector. In this scenario, even with a majority of STF votes already leaning toward the taxpayer’s position in Topic 1.297, it’s important to recognize that the matter has not yet been finally settled, and until the Supreme Court’s final decision, the divergence between municipalities and taxpayers is likely to persist. This only reinforces the importance of careful tax planning; given that each case has its own specificities, thorough analysis can help prevent unpleasant surprises in the future.
