By Tax Area

The 2nd Panel of the Upper Chamber of the Administrative Council of Tax Appeals recognized the non-levy of the Individual Income Tax on the operation regarding merger of shares, as it understands that the operation does not represent an equity gain (Order No. 9202-009.948).

The merger of shares, governed by Law No. 6.404/1976 (Stock Corporations Act) allows the shares of a company (acquired company) to be fully acquired by another company (surviving company), in order to make the acquired company a wholly-owned subsidiary of the surviving company. With this operation, the holders of the acquired shares receive, from the surviving company, the shares they are entitled to.

In the tax sphere, the discussion involves the moment when the shareholder of the acquired company receives the shares of the surviving company. This occurs because, on that occasion, it is asked whether or not there would be a tax on capital gain in relation to the difference between the quoted value of the shares of the surviving company and the value of the shares previously held in the acquired company. 

In this context, CARF understood that, as the simple receipt of equivalent shares by the holders of the acquired shares, by itself, does not generate financial availability, therefore, there would be no incidence of capital gain. This is because, given that the taxable event of the Income Tax for individuals is the effective increase in equity, known as the Cash Basis, in addition to legal and economic availability, the incidence of the tax would only be justified if there was financial availability of the gain earned by the taxpayer.

It is therefore concluded that, for the purposes of IRPF (Individual Income Tax) to be levied, there shall be financial availability of the income, otherwise the presumption of gain will be taxed, thus violating the constitutional ability-to-pay principle.

We warn that, despite the lack of a consolidated understanding on the matter in the administrative jurisprudence, the aforementioned order represents an important precedent favorable to taxpayers.