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
II.C. Consequences of Exclusion
The exclusion of a installment agreement triggers the following consequences:
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:
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).
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:
Finally, according to article 66, §4th 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.