Publicado em 30/12/2020

New Brazilian Reorganization and Bankruptcy Law introduces important changes in tax legislation

Seeking to align Brazil with the best international practices in cases of transnational insolvency, among other relevant aspects, Law No. 14,112/2020 was published on 12/24/20, which amends the Brazilian Reorganization and Bankruptcy Law (Law No. 11,101/2005), as well as federal tax legislation applicable to entrepreneurs and companies undergoing judicial reorganization.

This Alert specifically comments on changes in tax legislation. In summary, the new law allows payment in installments of corporate income taxes on capital gains accrued by companies on the sale of assets during the judicial reorganization, provides different tax installment agreements for entrepreneurs and companies in judicial recovery (which, if not complied with, may even give rise to a liquidation request by the National Treasury), and introduces a specific tax settlement for them (Transação Tributária). Unfortunately, relevant provisions of Bill N. 4458/2020 that aimed to improve the judicial reorganization proceeding and provide a higher likelihood of a company’s recovery, with its preservation, were vetoed.

Law No. 12,112/2020 will come into force 30 days after its official publication (12/24/2020); in other words, on 01/23/2021.

Soon, the matters addressed by the new law will be subject to regulation, which should clarify and detail their application.

I. Moratorium on corporate income tax on capital gains

Law No. 14,112/2020 authorizes a moratorium of taxation on capital gains resulting from sale of assets or rights by companies under judicial reorganization, allowing payment in installments, with monetary adjustment, of Corporate Income Tax (IRPJ) and Social Contribution on Net Profits (CSLL).

Said installment of taxation must follow the tax installment agreement general rules provided by Law No. 10.522/2002, and use, as a maximum term, the average extension granted to other credits under the judicial recovery plan and subject to it. Such limit must be readjusted in case of any supervening amendment to the recovery plan.

This is an important innovation, since it allows the liquidation, in installments, of taxes on capital gains arising from sale of assets over an extended term, facilitating the debtor’s cash flow.

II. Tax Installment Agreements

Law No. 14,112/2020 also changed the rules and conditions of installment agreements, applicable to tax and non-tax credits of the National Treasury, for companies or entrepreneurs who file or have accepted a judicial reorganization request in court. The specific categories of installment agreements for debtors under judicial reorganization are commented below.

II.A. Categories and conditions

Installment Agreement Categories	Common conditions	Specific conditions
Up to 120 installments (debts enrolled, or not, as overdue liabilities to the National Treasury (dívida ativa), assessed or not, even if not due yet)	(i) obligation to sign a Commitment Term, in which it shall be provided: (i.1) the supply of banking information, including on investments, and occasional encumbrance of receivables or other future assets to the Brazilian tax authorities (RFB) and to the attorneys of the Federal Union (PGFN); (i.2) the obligation to amortize the outstanding balance of the installment agreement with a percentage of the proceeds resulting from the sale of assets and rights, booked as non-current assets, during the period of validity of the judicial recovery plan (percentage that cannot exceed 30% of the proceeds of the sale, corresponding to the ratio between the total the tax liabilities and all other debtor’s debts, on the date of the judicial reorganization request is filed); (i.3) maintenance of tax good standing; and (i.4) compliance with FGTS obligations. (ii) the adhesion will cover all debts payable by the taxpayer; debts subject to other tax installment agreements, or which are proven to be subject of judicial discussion may be excluded provided that the following is complied with: (ii.1) offer of a legitimate and sufficient guarantee, accepted by PGFN in court (a guarantee that cannot be included in the judicial recovery plan, being allowed its regular enforcement, including by means of expropriation – a rule which applicable to federal judicial deposits in cash); or (ii.2) the presentation of a court decision that determines the suspension of its enforceability. (iii) in case of opting to include, in an installment agreement, debts under administrative or judicial discussion, whether or not with its enforceability suspended, it is necessary to prove the express and irrevocable withdrawal of the defense or appeal filed, or of the lawsuit and, in addition, the waiver of legal arguments that ground the lawsuit and administrative appeal; (iv) Microenterprises and small-sized companies will be entitled to terms 20% higher than those regularly granted to other companies; (v) debtor can withdraw from other types of installment agreements in progress and migrate the outstanding balance to one of the new types of installment agreements for companies undergoing judicial reorganization; (vi) debtor can only have one installment agreement of this type. The adhesion to the installment agreement does not release assets of the debtor or responsible given or seized as a guarantee; (vii) the debtor is allowed to elect another special installment agreement established by federal law, provided that the Term of Commitment commented on in item (i) above is signed, under penalty of denial or exclusion; (viii) the installment agreement different categories can include debts of agencies and federal public foundations, as applicable.	(i) the following minimum percentages must be applied to the consolidated debt: (i.1) from the 1st to the 12th installment: 0.5%; (i.2) from the 13th to the 24th installment: 0.6%; (i.3) from the 25th installment on: percentage corresponding to the remaining balance, in up to 96 installments.
Up to 84 installments (debts not enrolled as overdue liabilities to the National Treasury (“dívida ativa”), and managed by the Federal Revenue of Brazil, assessed or not, even if not due yet)		(i) liquidation of up to 30% of the consolidated debt in the installment agreement by using credits arising from tax losses carryforwards and CSLL negative basis or with other own credits related to other federal taxes, in which case the outstanding balance may be paid in up to 84 installments, observing the following minimum percentages to be applied on the consolidated debt: (i.1) from the 1st to the 12th installment: 0.5%; (i.2) from the 13th to the 24th installment: 0.6%; (i.3) from the 25th installment on: percentage corresponding to the remaining balance, in up to 60 installments. (ii) the amount of the credit resulting from tax loss carryforwards and CSLL negative basis will be determined by applying the following rates: (ii.1) 25% on the amount of tax losses carryforwards; (ii.2) 20% on the CSLL negative basis, in case of private insurance companies, capitalization companies and companies referred to in items I, II, III, IV, V, VI, VII and X of § 1 of art. 1 of Supplementary Law No. 105, as of January 10, 2001; (ii.3) 17% on the CSLL negative basis, in case of legal entities referred to in item IX of § 1 of art. 1 of Supplementary Law No. 105, as of January 10, 2001; (ii.4) 9% on the CSLL negative basis, in case of other legal entities.
Up to 24 installments (debts enrolled, or not, as overdue liabilities to the National Treasury (“dívida ativa”), related to taxes subject to withholding at source mechanism, third party discount or subrogation, or related to IOF withheld and not paid)		(i) the following minimum percentages must be applied to the consolidated debt: (i.1) from the 1st to the 6th installment: 3%; (i.2) from the 7th to the 12th installment: 6%; (i.3) from the 13th installment on: percentage corresponding to the remaining balance, in up to 12 monthly and successive installments.

II.B. Cases of exclusion

• In any category, the exclusion from a installment agreement occurs in the following cases:
• lack of payment of 6 successive installments or 9 alternate installments;
• lack of payment of 1 to 5 installments, as the case may be, if all others are paid;
• the confirmation, by the Brazilian tax authorities or by the attorneys of the National Treasury, of any act tending to transfer assets of the taxpayer as a way of defrauding the the installment agreement;
• the liquidation decree in a bankruptcy proceeding or extinction, by liquidation, of the relevant company;
• the granting of a preventive remedy filed by the National Treasury to freeze assets of debtor;
• the certificate of CNPJ’s inability;
• the dismissal without prejudice, or the non-granting of a judicial reorganization, as well as the conversion of the latter in bankruptcy; or
• noncompliance with any of the conditions applicable to the installment agreements provided for debtors under judicial recovery.

II.C. Consequences of Exclusion

The exclusion of a installment agreement triggers the following consequences:

• the immediate enforceability of the total debt confessed and unpaid, with the continuation of tax enforcement actions related to credits whose enforceability was suspended, including the possibility of performing acts of constriction and alienation by the relevant courts;
• the automatic enforcement of guarantees;
• the reinstatement and collection of sums previously settled with tax credits, in case of previous adherence to the 84 installment agreement, using tax loss carryforwards and CSLL negative basis and other credits; and
• the option of the National Treasury to request the conversion of the judicial reorganization into liquidation.

III. Tax Settlement (Transação Tributária)

Alternatively, companies or entrepreneurs who have the request of judicial reorganization accepted in court may submit, to the attorneys of the National Treasury, a proposal for settling of debts enrolled as overdue liabilities owed to it (dívida ativa), under the terms of Law No. 13,988 / 2020, also covering credits from federal agencies and public foundations. The settlement proposal may be submitted by the debtor after the recovery plan approved by the general creditors meeting being presented in the records of the case, or after lapse of the term for creditors objecting the judicial recovery plan, under the category mentioned below. The presentation of the settlement proposal shall suspend the course of tax enforcement actions, except in cases in which PGFN (attorneys of the National Treasury) presents a justified objection, which shall be analyzed by the relevant court.

Law No. 14,112/2020 allows the granting of a term for liquidating the debt under settlement up to 120 months. This term can be extended for another 12 months to the extent that the debtor undergoing judicial recovery develops social projects under the terms of the tax settlement regulations. This is an important innovation on the matter since the current legislation set this maximum period in up to only 84 months. The term of up to 145 months for a tax settlement involving an individual, microenterprises and small-sized companies remains applicable.

The maximum limit for reductions will be up to 70%, increasing this limit for debtors in judicial reorganization, which until then could benefit from reductions limited to 50%.

Among the general principles of tax settlement, also applicable to debtors in judicial reorganization, the new law indicates as principles/criteria to be observed in the tax settlement the size of the company and the number of employment relationships maintained by it, as well as the proportion of the tax liabilities in relation to all other debts.

The full copy of the records of the administrative proceeding related to the settlement proposal, even in case of rejection, shall be forwarded to the relevant court.

The debtor in judicial recovery must also assume the following additional commitments:

• provide PGFN with bank and business information, including those on fund statements or financial investments and on any commitment of receivables and other future assets;
• maintenance of a good standing status with the Federal Union and with the FGTS, maintaining the clearance certificate of the latter;
• prove absence of loss resulting from the fulfillment of the obligations assumed with the execution of the settlement in case of sale or encumbrance of assets or rights booked as non-current assets.

The termination of the settlement, for default, occurs in the following cases: lack of payment of 6 successive installments or 9 alternate installments; lack of payment of 1 to 5 installments, as the case may be, if all others are paid.

The law allows States, Municipalities and the Federal District to apply the new tax settlement for credits held by them provided that they enact a specific law at their level based on their own initiative.

IV. Extra-bankruptcy credits

Law No. 14,112/2020 also classified taxes resulting from taxable events that occur after a bankruptcy/liquidation decree as extra-bankruptcy credits. It is worth mentioning that the new wording provided by item III of art. 83 of Federal Law No. 11,101 / 2005 kept tax credits in the same order of preference in a liquidation scenario, but excepted taxes owed after a liquidation decree as extra-bankruptcy credits (being paid before other creditors).

V. Vetoes

Relevant provisions that were originally in Bill No. 4458/2020 (which resulted in the enactment of Law No. 14,112/2020), have been vetoed. From a tax perspective, the following provisions have not become law:

• Art. 6-B of Law No. 11,101/2005, added by art. 2 of Bill 4458/2020: said provision allowed the deduction, from capital gains resulting from judicial sales of assets or rights of companies under judicial reorganization, of full tax losses carryforwards and CSLL negative basis in an unlimited manner (without the limit of 30% of taxable income);
• Art. 50-A of Law No. 11,101/2005, added by art. 2 of Bill 4458/2020: in the event of renegotiation of corporate debts within a judicial reorganization process, with debts subject or not to the referred process, and, for purposes of recognizing the effects on financial statements, said provision provided (i) non-taxation of PIS and COFINS on debtor’s income arising from discount achieved in the renegotiation (i.e., COD income); (ii) the possibility of offsetting COD income with full tax loss carryforwards and CSLL negative basis in an unlimited manner (without the limit of 30% of taxable income) from IRPJ and CSLL tax basis; (iii) deduction of expenses related to obligations incurred in the judicial recovery plan from the IRPJ and CSLL tax basis.

Finally, according to article 66, §4^th of the Brazilian Federal Constitution, the presidential vetoes shall be considered/reviewed by the Brazilian National Congress, within 30 days as of its receipt thereby, and can only be rejected by the vote of the absolute majority of the Representatives and Senators.

Our tax practice is available for any clarification required and to assist in respect of the measures above.