ITBI: Perpetual legal uncertainty

The Brazilian Supreme Court (STF) reaffirms the ITBI (Tax on the Transfer of Real Estate) exemption for capital contributions made with real estate, but reservations regarding fraud and inactivity create legal uncertainty for taxpayers.

Article 156, §2, item I of the Federal Constitution established the ITBI exemption in cases of real estate transfers as capital contributions to a legal entity, as well as in corporate operations such as spin-offs, dissolutions, mergers, and incorporations, provided that the acquirer’s predominant revenue is not related to real estate activity.

To regulate the recognition of ITBI exemption, Article 37, §§1 and 2 of the Brazilian Tax Code (CTN) defined the predominant activity as when more than 50% of the operating revenue of the legal entity receiving the real estate as capital contribution derives from real estate transactions.

The predominant activity must be analyzed in the two years before and the two years after the real estate contribution, for legal entities already existing at the time of the operation. In the case of legal entities created less than two years prior to the incorporation of the property into their assets, operating revenue must be analyzed over the three years following the transaction.

Regarding the contribution of real estate to share capital, the Brazilian Supreme Court (STF) has already ruled on this matter in the judgment of RE 796.376/SC (General Repercussion Theme 796), concluding that “ITBI (Property Transfer Tax) does not apply to the value of the property given as payment for the capital subscribed by the partner or shareholder of the legal entity,” except in cases where the value of the property exceeds the amount of the paid-in share capital.

Currently, the STF is judging RE 1.495.108/SP (General Repercussion Theme 1348), with Justice [name] as the rapporteur. Edson Fachin presented a vote along the same lines as Topic 796, guaranteeing the right to ITBI (Property Transfer Tax) immunity in the capitalization of share capital, even in the case of companies whose predominant activity is the purchase and sale or rental of real estate, restricting the exemption only to the limit of the share capital to be paid up. The rapporteur was joined by Justice Alexandre de Moraes and Justice Cristiano Zanin; subsequently, the judgment was suspended at the request of Justice Gilmar Mendes.

The vote of Justice Cristiano Zanin is noteworthy, as he made the following reservation: “I agree with the vote of the eminent rapporteur, emphasizing, however, that the thesis now established does not preclude the possibility that municipal tax authorities, based on the particularities of the case and through adequate evidentiary proceedings, may demonstrate any practice of simulation or fraud against the law with the objective of unduly benefiting from the tax immunity in question.”

We hope that this caveat does not prevail in the Supreme Federal Court’s (STF) ruling on the matter, as it generates legal uncertainty on the subject and possible interpretations of the “spirit of the law” by the Judiciary, reinforcing erroneous understandings by various State Courts, especially when the contribution of real estate to capital involves a legal entity without operational activities, the so-called asset and/or family holding companies.

In the case of the Court of Justice of São Paulo (TJ/SP), for example, an IRDR – Incident for Resolution of Repetitive Demands – was initiated to analyze the ITBI (Property Transfer Tax) exemption in cases of contribution of real estate to the assets of a business entity when the legal entity is inactive during the period covered by Article 37, §1 and §2 of the National Tax Code (CTN).

The decision that recognized the IRDR demonstrates two distinct understandings regarding the recognition of ITBI exemption:

(i) a legalistic position, which understands that the inactivity of the company during the periods established by art. ( i) Article 37, paragraphs 1 and 2 of the Brazilian Tax Code (CTN) do not limit the recognition of ITBI (Real Estate Transfer Tax) immunity, since the only impediment would be to obtain revenue predominantly from real estate activity;

(ii) a more restrictive position, arguing that the absence of operational revenue, thus characterized as inactivity of the company, represents a deviation from the purpose of tax immunity, since the recognition of the constitutional benefit would depend on the analysis of the legislator’s intention (spirit of the law), which would have been to foster economic and social development through the exercise of business activity.

However, the law is written to guarantee clarity, predictability, and equality in the application of rules to society, and in it, the lack of operational activity of the company (which for some means inactivity) does not represent a reason for excluding ITBI immunity.

The legislator was quite clear in specifying that the only condition capable of limiting the recognition of ITBI immunity is the existence of operational revenue predominantly originating from real estate activity.

It is not within the purview of the Judiciary to establish a new condition for the recognition of ITBI (Property Transfer Tax) immunity; it should only limit itself to verifying concrete issues already provided for by law.

In this regard, the judgment of the TJ/SP (Court of Justice of São Paulo) in the appeal 1003616-19.2021.8.26.0587 can be highlighted, which presented a concrete situation to be analyzed by the Judiciary for the recognition of ITBI immunity, namely, the occurrence of asset commingling between the assets of the legal entity and its partners.

At the time, the ruling stated that “even if there is no operating revenue, the properties constitute the company’s fixed assets and are subject to accounting entries regarding depreciation of the building, variation in the value of the land, and the incidence of periodic charges such as property tax and condominium fees. As for expenses, if they were paid by the company, there would be operating revenue (negative), which would negate inactivity.”

Therefore, even if the legalistic position for recognizing ITBI (Property Transfer Tax) immunity in the case of inactive companies (without any revenue, whether positive or negative) is ignored, there is no reason to revoke the ITBI immunity of companies that bear operating expenses with their own resources (contribution from partners with the due payment of share capital) and that incur losses, since this situation would not characterize asset commingling or misuse of purpose capable of hindering the recognition of immunity.

It is in this scenario, where the “spirit of the law” can have more than one interpretation, leading to enormous legal uncertainty for taxpayers, that the IRDR (Incident of Resolution of Repetitive Demands) will be judged by the TJ/SP (Court of Justice of São Paulo), which must be very cautious in order to (a) not contradict the understanding of the STF (Supreme Federal Court) in General Repercussion Themes 796 and 1348, validating the unconditional immunity of ITBI (Tax on the Transfer of Real Estate) in cases of capital contribution with real estate and, (b) not exceed the establishment of concrete criteria, such as the verification of the commingling of assets between the legal entity and its partners, as provided for in some decisions of the São Paulo Court, under the pretext of analyzing the spirit of the law.

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This article was written by our lawyer Gabriel da Costa Manita and published on Migalhas.