In a recent decision, the Second Chamber of the Superior Court of Justice (STJ) understood that the exclusion of the income tax exemption in cases where the taxpayer uses the capital gains to pay off, completely or partially, the remaining debt of an acquisition of residential property already contracted by the taxpayer with payment in installments, is not applicable.

In accordance with article 2, paragraph 11, "I" of the Normative Ruling SRF No. 599/2005, the exemption of Income Tax on capital gains resulting from the sale of property, established by Federal Law No. 11,196/2005, is not applicable to cases where the seller of a residential property uses the capital gains to pay, completely or partially, the remaining debt from the acquisition of another residential property already held by the taxpayer.

Even though Judge Herman Benjamin had accepted the arguments presented by the Federal Revenue, the majority of the Chamber followed the interpretation favorable to the taxpayer, presented by Judge Mauro Campbell Marques, in the sense that the purpose of the rule is achieved when the property seller, observing the term of 180 days, applies the capital gain from the sale in the acquisition of another property, including within this concept the total or partial payment of the remaining debt resulting from a property acquisition previously contracted.

The exemption of the income tax on capital gains in these cases increases the market liquidity and stimulates the residential business from buyers, sellers, constructors, financial institutions and others. Based on this reasoning, the Judge Mauro Campbell Marques argues that such practices make the economy more dynamic, and encourage a "virtuous cycle", which he considers to be the purpose of the rule provided by Federal Law No. 11,196/2005.

Visit us at Tauil & Chequer

Founded in 2001, Tauil & Chequer Advogados is a full service law firm with approximately 90 lawyers and offices in Rio de Janeiro, São Paulo and Vitória. T&C represents local and international businesses on their domestic and cross-border activities and offers clients the full range of legal services including: corporate and M&A; debt and equity capital markets; banking and finance; employment and benefits; environmental; intellectual property; litigation and dispute resolution; restructuring, bankruptcy and insolvency; tax; and real estate. The firm has a particularly strong and longstanding presence in the energy, oil and gas and infrastructure industries as well as with pension and investment funds. In December 2009, T&C entered into an agreement to operate in association with Mayer Brown LLP and become "Tauil & Chequer Advogados in association with Mayer Brown LLP."

© Copyright 2017. Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. All rights reserved.

This article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.