A recent judgment session of the Administrative Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais - CARF) analyzed the case of a services provider engaged in the health segment (a company formed by anesthesiologists who provided services to hospitals and health plans).

The discussion arose out of Law n. 8.212/1991, which establishes that the social security contribution does not apply to profit distribution. On the other hand, such taxation applies to the remuneration received for the work of the partners, the so-called pro-labore.

In order to draw up the tax assessment, the Tax Authority argued that the company would have failed to pay the social security contribution (INSS) that would apply to the "remuneration paid to its partners" in the years 2006 and 2007, because though the amounts were called "profit distribution", they would be, in fact, remuneration for medical services provided by the partners.

In its defense, the company argued that the articles of incorporation defined clearly the amount of the pro-labore (remuneration) of the partners as one minimum wage monthly and the rules of distribution/participation in the profits.

In view of this, the reviewer of the case – Board Member Marcelo Oliveira – expressed opinion that it had not been demonstrated by the Tax Authority the difference between remuneration consequent of work and consequent of the capital stock, in such a way that it could be confirmed that the amounts paid did not refer to participation in the profits but rather to pro-labore. Moreover, the legislation does not require from the company to pay a pro-labore to the partner, nor does it set a minimum amount to be paid as such. Therefore, because the payments are made by the company, as profit distribution, they are not subject to social security contribution.

Two points are made clear from the judgment to avoid any questioning by the tax authorities: (i) clear articles of association contemplating the possibility of payment of the pro-labore and establishing the rules for the profit distribution; and (ii) accounting bookkeeping demonstrating that the company effectively posted profits.

The decision to this effect eventually acknowledged that the payment of one minimum wage as pro-labore is not incompatible with the remuneration of specialized professional services, as intended by the Tax Authority.

The Federation has already filed special appeal from that decision, which will be examined by the Superior Chamber of Tax Appeals.

(Panel Decision 2301-002.905).