“MATTER: CORPORATE INCOME TAX - IRPJ.
Calendar year: 2007, 2008.
PREMIUM. GROUNDS. CONTEMPORARY DEMONSTRATION OF FACTS. NECESSITY.
The law requires the assessment of the premium based on market value or on the expectation of future profitability to be based on the demonstration that the taxpayer will file as bookkeeping proof. There is no requirement for the proof to be presented through reports, but through any form of demonstration, contemporary to the facts, indicating the decision for paying overpriced values.
In this case, it was demonstrated that the premium was paid based on the expectation of future re- sults, both by contemporary documents to the investment and by a report prepared thereafter based on information at the time.
TAKEOVER, MERGER, OR SPIN-OFF. DISSOLUTION OF OWNERSHIP INTEREST. PREMIUM AMOR- TIZED IN THE ACCOUNTING RECORDS. NON-DEDUCTIBILITY.
There is no legal provision for using the premium already amortized in the accounting records at the time of dissolution of the ownership interest due to the merger, takeover, or spin-off of companies with dissolution of shares or capital shares (quotas) of one company owned by another.
In such cases, the premium already amortized and recorded in the LALUR (Taxable Income Control Book) may no longer be used, and must simply be written off.
AMORTIZATION OF PREMIUM. USE OF OPERATING COMPANY. USE BY ANOTHER COMPANY OF THE GROUP. BUSINESS PURPOSE. POSSIBILITY.
As a rule, the deductibility of expenses deriving from the amortization of effectively paid premium, arising from the transaction between independent parties, is legitimate.
In case of a valid business purpose and in case it is possible to deduct the premium through a direct takeover, there are no obstacles for the economic group to “transfer” the effectively paid premium to one of its subsidiaries through an operating company, enjoying the tax benefit in another part of the corporate structure.
The same way it is necessary to curb the plans that create tax benefits to which the taxpayer is not entitled, it is not possible to allow excessive formalism to prevent the use of a legitimately acquired right.”
The decision in question deals with Tax Assessment Notices issued for the collection of the Corporate Income Tax (“IRPJ”) and the Social Contribution on the Net Income Social (“CSLL”), under the claim that amounts had been unduly deducted from the tax bases of the mentioned taxes as expenses relative to the amortization of the premium.
The premium subject matter of the assessment under analysis is encompassed within a broad spectrum of corporate transactions, which can be summarized as follows: (i) in 2004, the Taxpayer acquired owner- ship interest with a third party for a price superior to the shareholders’ equity of the invested company, and this transaction generated a premium based on future profitability; (ii) after several corporate transactions involving companies of the Group, including using an operating company, in 2006, the generated premium was transferred to an invested company of the Taxpayer, which in turn took over the company acquired by third parties, proceeding with the tax use of this premium; (iii) subsequently, in 2007, the Taxpayer’s invested company was spun-off, and the equity was transferred to the Taxpayer itself, which continued to use the premium.
The reason that led to the premium being disregarded, triggering the assessment under analysis, was the Tax Authorities’ position that the premium generated with the acquisition of the ownership interest in 2004 could not be used, due to the fact that the evaluation report of the future profitability had been prepared in 2006 only. In addition, the Tax Authorities viewed that the premium transaction actually represent the crea- tion of a “second premium”, different from the “first one”, and that therefore such “second premium” could not be used, since it had been created internally, between companies of the same group – thus constituting internal premium.
In an Opposition, the Taxpayer defended that the premium dealt with in the case is only one, that it had undergone a transition due to the merger of the company in which it had been recorded, and that the existence of two premiums could not be considered. Moreover, the Taxpayer contended that the report of fu- ture profitability expectation had been prepared only in 2006, on the transaction of 2004, but it had analyzed the economic grounds of the premium paid in 2004 under the expectations at the time, and that, in addition to that, a complementary advisory assessment had been prepared, which confirmed the future profitability and ratified the expectation of future profitability used to justify the premium.
The Opposition was then found to lack grounds by the DRJ, under the claim that the report prepared after the creation of the premium (i.e., acquisition of ownership interest) was not effective, as it was untimely, and that the transfer of premium between companies of the same group consists of a transaction lacking a busi- ness purpose, not allowing the tax deduction of the premium, thus constituting a tax planning tactic known as “premium in itself”. The DRJ therefore upheld the assessment.
The Taxpayer then filed a Voluntary Appeal, repeating the claims in the Opposition, mainly as to the existence of a single premium, which was later transferred and was “held” in the investment represented by the shares of the company, whose shares had been transferred. In addition, the Taxpayer submitted internal studies, in a PowerPoint format, prepared at the time of the investment (2004), demonstrating the future results projected for the investment.
Due to such, the Rapporteur decided to recognize the premium paid by the Taxpayer, stating as follows: “(...) the fact that the report prepared in 2006, using similar data to those used in the internal studies, reached similar results, leads to the conclusion that the study was, in fact, carried out at that time”. As to the claims of the Attorney General of the National Treasury that the report leads to the suggestion of premium paid by goodwill, the Councilor stated that “in the case of documents having technical basis and prepared by specialized professionals, it is not possible to oppose them with mere generic arguments”.
The CARF further found that the transfer of capital with shares recorded at a premium, at book value, (i.e., transfer of the premium), corresponds to the transfer of the same premium to the company that received capital increase, and does not constitute a different premium from the previous one (i.e., there is no “second premium”), provided that there is a business purpose for the transactions, as verified in the case in question. According to the Rapporteur, resorting to an operating company for premium tax purposes has already been accepted as being perfectly valid and “all the more natural that the economic group should seek to carry out the business so as to obtain the best structure in order to enjoy the economic benefit, which, in its view, was to reduce the taxes in the operating company”.
However, the CARF found it was impossible to use, for tax purposes, the premium that had already been amortized in the accounting records in the period between the acquisition of the investment (2004) and the corporate event that allows the tax deduction (2006), as it considered that the legislation does not allow the tax use of premiums already amortized in the accounting records, therefore the lawmaker’s oblivion may not result in tax benefits not provided under the Law.
Thus, the CARF found the Voluntary Appeal to be partially valid, in order to cancel the assessment relative to the of the premium that had not been amortized in the accounting records, upholding the assessment concerning the premium that had already been amortized in the accounting records.