Brazilian Supreme Court Recognizes General Repercussion On 30% Cap For Tax Loss Offset

The Court will assess whether the limitation can be waived in cases of merger, consolidation, spin-off, or company dissolution

On August 14, the Brazilian Supreme Federal Court (STF) published a decision recognizing general repercussion in the debate on whether the 30% limit on the offset of corporate income tax (IRPJ) losses and negative CSLL bases may be set aside in cases of termination, merger, consolidation, or spin-off of legal entities.

The 30% limit is a rule under the IRPJ and CSLL that restricts the use of accumulated tax losses and and negative bases. A company may offset up to 30% of the adjusted profit for the period, even if it has larger accumulated losses.

Over the years, taxpayers have argued that such limitation is illegitimate, claiming it results in taxation of amounts that do not constitute income. However, in its ruling on Theme 117, the STF upheld the constitutionality of the limitation, considering that the offset of tax losses constitutes a tax benefit.

Now, the STF is set to examine the matter under the general repercussion regime (with binding effects on similar cases) in situations where a legal entity will be extinguished as a result of a corporate transaction.

The main argument raised by taxpayers is that, since such legal entities will no longer generate future profits to offset remaining tax losses, the 30% limitation should not apply.

No date has yet been set for the trial of the case.

Considering that a favorable decision for taxpayers would represent a shift in the courts understanding, the likelihood of modulation of the decision's effects is high. For this reason, it is important to assess the convenience of filing a lawsuit on the matter before the STF's judgment.

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