Brazil: Brazilian Federal Administrative Tax Court (CARF) Alleviates Taxation On Capital Gain Arising Out From The Selling Of A Company By Means Of Closely-End Investment Funds (FIPs)

CARF – which is the highest administrative tax court within the framework of the Brazilian Ministry of Finance – has recently issued two opinions with regards to the deferral of the taxation of capital gains arising out from the sale of share control of a company by means of closely-end investment funds (Fundos de Investimentos em Participações - FIPs).

Under the CVM's Regulation no# 578/2016, a FIP consists of a closed-end condominium that is intended for the acquisition of shares, securities and any other bonds and notes that are convertible in shares of either publicly or closely-held companies. CVM's regulation also requires that a FIP must hold a significant influence over the decisions of its invested companies.

FIPs are designed to allow the serial investment in other companies. There are specific types of FIP intended for the investment in startups (seed capital's FIPs) and other emerging companies.

Due to its legal features, FIPs are also a legal device commonly adopted by family offices for the purposes of investment management and inheritance planning. 

In the September/12th session, CARF heard the case of the IRS against Mr. MF1. (administrative proceedings nos# 12448.725823/2016-47 and 12448.727473/2016-53). Mr. MF is the co-founder of the wealthiest network of hospitals in Brazil according to Forbes Magazine (Rede).

Mr. MF has appealed the decision of the lower tax court that had disregarded the sale of his shares in the chain of labs controlled by Rede (Labs) to the GF's group in 2011 for around BRL 1.04 Billion (around 500 million dollars at the time of the events), under an allegation of abusive tax planning.

The IRS challenges the round of operations that ended up with the sale of Labs to FG on grounds of lack of business purpose other than the tax saving. Prior to the FG's takeover, Labs had merged companies over which Mr. MF held share control. Mr. MF, in turn, reduced his position in Labs, from 100% to 21.89%.

Following to the merger of MF's companies by Labs, the D. FIP has paid-in a BRL 212 Million capital into Labs in order to take-over 75% of the shares then held by Mr. MF.

Because the taxation of capital gains of the FIP is deferred upon the sale of its quotas by its quota holders, the IRS has claimed that Mr. MF had actually transferred its shares over Labs to the FIP with the only purpose of avoiding the taxation of capital gains in the individual level that would apply otherwise, if Mr. MF had sold his share position in Labs to FG rather than by means of the FIP.

The IRS has disregarded the FIP in order to charge Mr. MF for the Income Tax on the capital gains allegedly arising out from with the sale of Labs to FG plus a 150% fine for malicious behavior and tax fraud.

The IRS also claims that, because the FIP has been shut down right after the FG's takeover, the FIP would have failed to accomplish its very purpose, that is, to develop other investments.

Mr. MF, though, claimed that the IRS's assumption is incorrect, since the FIP has played a central role in the operation, for the FIP held a preemptive right to acquire one of the key companies in the transaction.

The 2nd panel of the 2nd chamber of CARF's second session has granted Mr. MF's appeal in order to cancel all charges against him. The CARF's official option has not been published yet.

This case has close connections with another case which was heard by the 1st Judging Panel of the 2nd Chamber of 1st Section on 17th/July/2018.

This last case's facts date back to 2010, when Hospital SL – a health excellence center in the City of Sao Paulo – was taken over by Rede. The deal mounted to 1 Billion Reais (around 500 million dollars at the time of the events).

The Hospital's shares had been owned by a holding company (HMV's Holding). The HMV holding's shareholders setup a FIP which became one of the shareholders of the holding company.

The HMV holding reduced its capital and transferred the Hospital's shares it owned to the investment fund (FIP). As an outcome, the FIP acquired the share control over the Hospital. Eventually, the FIP sold the Hospital's shares to Rede.

If the deal was made directly between the HMV holding and Rede the Income Tax would apply at rate of 34%.

By a vote of 6-2, CARF ruled that the transaction by means of the FIP was legitimate. The majority opinion has found that there was a business purpose for the FIP, because an expert report had shown that there was an economic and technical rationale for its creation, which was justified by expectations of future rentability.

The CARF's opinion at the case Rede's case dissented from a precedent issued in 2017, where a similar structure, involving FIP, was put in place by the taxpayer, the largest animal protein provider in the world.

Because there is a divergent opinion issued by CARF in the aforementioned case, the IRS is likely to appeal to the Highest Chamber of CARF. Brazilian Congress is also debating some changes to the rules that govern investment funds taxation, so to avoid that this structure is put in place by taxpayers in order to defer the taxation on capital gains.

A Provisory Measure was issued by the Brazilian President last year in order to introduce changes to the taxation of investment funds (PM no# 806/2017). However, said PM did not pass in the congress by then, and its legal effects have ceased.

Investors with an interest in Brazil should be aware of the upcoming developments concerning the taxation of the FIPs, as they may provide an interesting tool for tax planning.


1. While this paper has been based on the information available at the Taxpayers' Federal Council (CARF) official website (, some names and identifying details have been changed to protect the privacy of individuals.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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