The Brazilian IRS has issued a Private Letter Ruling (PLR COSIT # 176/2018) clarifying that the debt forgiveness in respect of a bank loan shall be classified as financial income (except in the case of financial institutions) and be subject to the levy of PIS and COFINS, both Social Contributions on Gross Receipts at a combined rate of 4.65%. There were never doubts on the levy of Corporate Taxes (IRPJ and CSLL) in relation to debt forgiveness, but the position of the Brazilian IRS about the impact of such a transaction for PIS/COFINS purposes was unclear until the issuance of this Private Letter Ruling.
According to the Private Letter Ruling, the remission or forgiveness of a debt occurs when the creditor gives up credit without requiring any consideration from the borrower, resulting in the total or partial extinction of the obligation. Therefore, following current accounting standards, debt forgiveness should be deemed as earnings and recognized in the income statement when it results in an increase in future economic benefits related to asset growth or a decrease in liabilities, and can be measured reliably.
Finally, please note that, although binding on the tax agents, the conclusions of the Private Letter Ruling may be challenged by taxpayers before both administrative and judicial courts in advancing the argument that debt forgiveness does not qualify as income for PIS/COFINS purposes given that it does not represent an inflow of income, but rather an accounting adjustment.