Non-Incidence of ITBI in Asset Holding Company

The establishment of a real estate holding company, with the capitalization of real estate assets, is often used as the initial step in implementing various legal structures, whether in the context of operational asset restructuring or in the context of estate and succession planning. All of these typically aim to achieve tax efficiency and governance.

This corporate transaction is protected by the Brazilian Constitution of 1988, which, in its Article 156, when delegating to municipalities the authority to impose the tax on the transfer of real estate (“ITBI”), ensures that taxpayers are exempt from the tax on assets or rights incorporated into the assets of a legal entity as a capital contribution, as well as on the transfer of assets or rights resulting from mergers, incorporations, demergers, or liquidation of legal entities, except in cases where the primary activity of the acquiring entity is the sale of such assets or rights, real estate leasing, or financial leasing.

In this regard, it is the responsibility of the municipality where the property is located to regulate the ITBI and the procedures for requesting the application of the exemption, which generally reflect the principles established in the Brazilian Constitution of 1988. Consequently, each of the approximately 5,570 municipalities in the country has its own rules, with their own systems for calculating and issuing tax payment slips, as well as technical teams that evaluate and monitor requests for tax exemption.

It is important to emphasize at this point that, despite the discretion of municipal entities in regulating the collection of ITBI, they cannot exceed or innovate upon the provisions set forth in Article 156 of the Brazilian Constitution of 1988, under penalty of unconstitutionality. However, in many cases, the immunity is not respected in practice.

Those who work in the field are familiar with the operational difficulties that can arise when a transaction involves properties in different municipalities. It is common to encounter non-standardized systems and municipal legislation that often diverge significantly in terms of deadlines and operational procedures. Some municipalities require the prior submission of the corporate document and the already issued CNPJ number by email for the issuance of the tax payment slip. In others, there are digital systems for submitting the transmission declaration and issuing the slips. All of this is done in compliance with municipal laws, which establish different deadlines for the payment of ITBI, varying from the date of signature to 30 days from the date of the private instrument of property contribution. Therefore, depending on the structure being implemented, some prefer to anticipate and establish the holding company as a preliminary step, obtaining the CNPJ number upfront, thus providing flexibility for subsequent transactions.

When the issue involves requesting an exemption from ITBI, the variations increase significantly. Some municipalities even set a deadline for submitting the exemption request (by the end of the current year of the corporate transaction), with failure to comply resulting in denial. In large municipalities, it is possible to obtain provisional approval for the ITBI exemption within a week, while in smaller municipalities, the process could take months.

Furthermore, there are certain precautions and formalities that need to be observed concerning the holding company, as many municipalities have been applying interpretative conditions regarding the approval of the tax exemption that, in our view, exceed reasonableness and constitutional requirements.

As a rule, municipalities, after reviewing the corporate documentation related to the transaction, provide the taxpayer with a “Provisional Declaration of ITBI Non-Incidence Approval,” which certifies that the municipal authority has been properly informed of the transaction and that, up to that point, the requirements of Article 156 of the Federal Constitution of 1988 have been met for the tax exemption to be applicable. With this declaration, the taxpayer can proceed with the registration of the property transfer at the respective notary office.

These declarations, being provisional, allow the Municipality to audit the compliance with the conditions related to ITBI non-incidence for a period of 5 (five) years, with the main condition being the verification of whether real estate activity is predominant in the taxpayer’s operations.

According to Article 37 of the National Tax Code (“CTN”), the verification of preponderance is carried out by determining whether the companies do not have real estate revenues exceeding 50% of their total operational revenues. This analysis must cover the two years preceding and the two years following the non-incidence request. For companies established less than two years before the request, the analysis will be conducted for the three years following the non-incidence request.

Thus, the usual procedure of the Municipalities is to request, within 3 to 4 years of the non-incidence request, the company’s accounting documentation (Income Statement, Detailed Balance Sheet, and Trial Balance) to examine the company’s revenues for the period.

Or, at least, that’s how it should be…

In recent years, there has been a trend among municipalities to restrict the granting of ITBI exemptions for the integration of real estate into capital, with some municipalities being quite meticulous in analyzing requests, examining in detail the accounting and operations of holdings.

This approach often leads to the denial of requests due to issues that may be considered routine (or overlooked) by business owners/consultants in the context of real estate integrations, particularly regarding ITBI, as an initial step in a more complex operation that would require attention to other fiscal/operational aspects. The consequence is the issuance of a notice of infraction with a fine (typically 50% of the tax amount), plus interest and monetary correction from the date of the integration.

In this regard, there are several administrative decisions made in the last decade that hold the view that strict compliance with the provisions of Article 36, item I, of the CTN is not sufficient for the recognition of ITBI exemption. In other words, it is not enough for the accounting to demonstrate the absence of predominant real estate activity; it must also provide accounting proof of the effective management of the property by the holding company.

In this line, there have been instances where municipalities have denied holding companies’ requests, indicating that the absence of revenue or the failure to record certain expenses in the accounting tarnishes the verification of their predominant activity and is sufficient grounds for not recognizing the tax exemption being addressed.

Below, we provide excerpts from two recent statements by one of the largest municipalities in the country on this topic:

During the analysis period, from 2018 to 2021, the company did not show any revenue, meaning it remained virtually inactive with no changes in its assets. The constituent legislator, by exempting the transmission of assets or rights incorporated into the assets of a legal entity as a capital contribution (Art. 156, § 2, I of the CF), intended exclusively to encourage the growth of the company, preventing the collection of ITBI from becoming a disincentive to business formation. Any misuse of the constitutional provision, aimed at directly benefiting the shareholders, must be prevented. The documentary evidence reveals, in the examined case, more than just the mere realization of capital for the purposes of the legal entity, showing that the incorporation of the properties into the company’s assets ultimately aimed to transfer the assets without paying the municipal tax. (…) Additionally, the company did not account for any expenses related to the properties incorporated on 08/06/2018, which indicates that the accounting, not presented, does not accurately reflect the changes in the company’s assets during the analyzed period. The expenses are incompatible with its real estate assets. We found no expenses such as water, electricity, property tax, condominium fees, registration expenses for the properties, depreciation, etc. Thus, SEFaz understands that the presented accounting does not correctly reflect the taxpayer’s asset evolution during the analyzed period and thus issued two infraction notices for the collection of ITBI amounts due related to the property included through the Private Instrument (Articles of Incorporation) (…).

8. Thus, the constitutional immunity rule aims to promote economic development through free enterprise and fiscal neutrality, meaning that the legislator intended to encourage property owners to invest such assets into productive capital rather than using them for rental, leasing, or buying/selling. 9. The balance sheets and income statements from 2014 to 2018 show that the only expenses recorded were accounting fees. There were no recorded expenses for property taxes or any other costs associated with the maintenance and conservation of the property. 10. By not accounting for these expenses, the Appellant failed to record the source of the funds used to pay them and the consequent impact on the assets that should have been accounted for by the company. 11. In the absence of such information, it is conceivable that these expenses may have been paid with unaccounted revenues, as the accounting records did not reflect the reality of the Appellant’s asset movements. 12. According to Art. 226 of the Civil Code, accounting that is flawed in its records serves as evidence against the company and does not accurately reflect the changes in the Appellant’s assets during the analyzed period. 13. It should be noted that the absence of any revenue characterizes a deviation from the purpose of the constitutional benefit aimed at promoting free enterprise and economic development through fiscal neutrality to encourage property owners to apply their assets into productive capital. 14. Furthermore, as declared by the Appellant itself, the purpose of the property is residential and is not used for the company’s business objectives.

It is observed that, in the cases above, the municipality understood that the lack of recorded expenses for the property in the accounting is a reason for denying the request for exemption from ITBI, undermining the purpose of Art. 156, §2°, I, of the CF/88 and the reliability of the financial statements.

In another case, an administrative decision from a different municipality blatantly reveals, in its own opinion, the municipal intervention in taxpayers’ relations, arguing that “the partners belong to the same family nucleus, with indications of asset planning.” On this point, it is important to emphasize that asset planning is not (and should never be) a hindrance to obtaining recognition of ITBI exemption. In fact, it is precisely one of the reasons for seeking ITBI exemption, as the holding will not generate income from real estate activities, and the operation is based on a larger objective concerning the economic group/partner involved.

Despite recent positions from municipalities, state courts have shown a significant number of favorable rulings for taxpayers, as highlighted in excerpts from judgments by the São Paulo State Court of Justice (“TJ/SP”): “Although the expenses are the responsibility of the bare owner, they are not criteria that can trigger tax incidence, as Article 37 of the CTN only considers operational revenue as a criterion for assessing the predominant activity (Appeal No. 1047646-29.2020.8.26.0053 – Judgment Session of 21/11/2022).” “Request for ITBI Exemption on the capital increase through property transfer – Admissibility – Tax Immunity (CF, Art. 156, §2º, Inc. I) that should be recognized – Company that has not generated revenue since its incorporation – Mere inactivity of the company does not prevent recognition of immunity – Interpretation of Art. 37, §2º, of the CTN (Appeal No. 1007470-03.2023.8.26.0053 – Judgment Session of 06/11/2023).” It is important to note, however, that there are also Panels/Judges with more restrictive interpretations.

Therefore, taxpayers need to pay attention to details that were previously neglected in order to avoid potential tax enforcement actions by certain municipalities. It is also worth noting that unfavorable municipal administrative decisions can be overturned in state courts, but it is advisable to act proactively to avoid future legal disputes due to complex corporate transactions.

Therefore, it is crucial to record all property-related expenses, such as property tax (IPTU), condominium fees, and other applicable utility bills, from the moment the property is incorporated into the company’s accounts. This ensures accounting regularity in the completed transfer and the property management. If the expenses are paid directly by the holding’s shareholders, an alternative would be to record these amounts as a loan or credit from the shareholder to the company.

Another important point is updating the property with the municipality for the purpose of updating the property tax (IPTU) payment book, as well as registering the transfer in the property registry.

In municipalities with an Electronic Taxpayer Domicile (“DEC”) system, such as São Paulo, notifications regarding requests for exemption from ITBI are made exclusively through this system, which can only be accessed using the company’s digital certificate. It is crucial to monitor this system weekly and pay close attention to the email linked to the DEC, as failure to respond could lead to the issuance of a fine, as illustrated by a recent municipal enforcement excerpt:

As noted in the process, the required documentation was not provided, despite regular notifications via DEC, resulting in a compromised analysis.

In view of the above, and also considering the provisions of Articles 28, 34, and 79 of Law No. 14,107/05, we have proceeded with the issuance of the ITBI-IV infraction notices accompanying this report, related to the real estate transactions carried out, as the analysis of the predominant activity of the legal entity was compromised, thus the tax is due.

In conclusion, it should be emphasized that the transfer of property is a common and crucial act for the development of taxpayers’ economic activities. Furthermore, it is essential that Municipal entities respect constitutional requirements in applying the ITBI immunity when properties are contributed, without creating revenue-raising obstacles.

Article published in Migalhas: https://www.migalhas.com.br/depeso/409760/nao-incidencia-de-itbi-em-holding-patrimonial