The deductibility of expenses with amortization of goodwill from the calculation basis of the Corporate Income Tax (IRPJ) and Social Contribution (CSLL)^[1] is a topic that has long been discussed in the judgment sessions of the Administrative Board of Tax Appeals (Carf).

A careful analysis of recent precedents allows us to affirm that, despite the maturity of the discussion, the case law is not yet settled as to the definition of the limits of the corporate restructuring considered valid for goodwill deductibility purposes.

Carf, an administrative court recognized for the technical quality and depth of its discussions, has always had on its agenda debates that are very relevant to taxpayers. In relation to goodwill and related matters, it can be seen that the history of the case law has unfolded in three distinct phases, whose results were defined according to the judgment criteria adopted at each moment.

The first phase took place between the 2000s and early 2015. During this period, there was a transition from the Taxpayers Board to the Administrative Board of Tax Appeals, currently Carf, created in 2008.^[2] In this first phase, the validation criteria adopted by the administrative court were based on three requirements:

• Goodwill transactions formed in acquisitions between unrelated parties;
• the so-called "economic sacrifice" - as the cash payment came to be known by the court; and
• the presence of a report supporting the future profitability of the stake acquired.

In this phase, therefore, the presence of a transaction between unrelated parties was essentially valued, even if followed by internal restructuring.

It imposed the penalty of non-deductibility to the transactions styled as "internal goodwill", that is, the goodwill formed in acquisitions of an equity interest without the presence of independent parties. The precedents existing at the time were handed down by ordinary panels, since the Superior Chamber of Tax Appeals had not yet reviewed the issue.

With the resumption of judgment sessions at the end of 2015, after the suspension of the agency’s sessions for almost a year, the second phase of the analysis of goodwill cases at Carf began. The ordinary panels and the 1st Panel of the Superior Chamber of Tax Appeals, with significantly changed membership, are now reviewing the prior case law of the board and the criteria for validating the transactions that enable the deductibility of goodwill.

More specifically, the courts have started to adopt concepts imported from abroad, where anti-avoidance rules are established, such as "economic substance" or "business purpose".^[3]

This phase was also marked by the invocation of requirements foreign to the legislation governing goodwill (Law 9,532/97 and Law 12,973/14) - "transfer of goodwill", "actual acquirer", "economic sacrifice", among others - as a substitute for payment. As a result, in this second phase, the cases decided by the 1st Panel of the Superior Chamber of Tax Appeals, with two exceptions,^[4] had the deductibility of goodwill from the IRPJ and CSLL tax basis refused.

Regarding the qualification of the ex-officio fine, the 1st Panel of the Superior Chamber began to impute the 150% qualified penalty to identification of civil offenses, such as abuse of right and sham transaction, fraud against the law, or simply the presence of "artificiality". In this second phase, little value was placed on strictly including the facts in the concepts of evasion, fraud, or collusion, which authorize application of the aggravated penalty under the terms of article 44, I, together with paragraph 1, of Law 9,430/96 and Law 4,502/64.^[5]

The third phase began in the early months of 2020, marked by suspension of in-person sessions due to the pandemic and the extinguishment of the casting vote promoted by Law 13,988/20.

After an initial halt in the judgments, Carf resumed the sessions virtually. A limitation was set on the amount of cases that could be included in the agenda. This circumstance limited the examination of goodwill cases because they usually involve high values.

With the increase in the values assigned to cases and inclusion of more cases on the agenda, the first trials on the topic began, with the casting vote already extinguished. These precedents, which were decided as of the second half of 2021, are marked by a more detailed analysis of the specific case and a review of the criteria that had been guiding the second phase.

Transactions involving the so-called "internal goodwill" continue to be invalidated by the 1st Panel of the Superior Chamber of Tax Appeals, even in the face of a casting vote in favor of the taxpayer.^[6]

This is a point of intersection between the three phases, because corporate acquisitions and reorganizations without the presence of independent parties have never been accepted by Carf's case law.

The panel also recently decided, in April of 2022,^[7] a case involving the amortization of goodwill using a "vehicle company". Despite the favorable outcome for the taxpayer on that occasion, we believe that the issue needs to be debated further to consolidate a trend in the case law.

The conduct of the Superior Chamber of Tax Appeals, however, indicates the end of phase two and the beginning of a phase in which the legal concepts already established by law are guiding the subsumption of the facts under analysis.

With regard to the qualification of the ex-officio fine, the precedents identified show a clear change in the position of the panel, which detaches itself from the concepts provided for in the civil law in order to impose the increase and, consequently, a greater subsumption of the analysis into the conduct provided for in Law 4,502/64.

In a case on the subject,^[8] decided in September of 2021, the 1st Panel of the Superior Chamber provides a detailed analysis of the criteria of lawful and unlawful avoidance, as well as evasion, for the purposes of applying the qualified fine.

From an analysis of this and other precedents, the expectation is that the case law will consolidate to this effect. In other related topics, the suppression of the casting vote has guided a favorable outcome for the taxpayer in proceedings arising from tax assessment notices.^[9]

Despite this mostly favorable survey, the current Carf scenario is one of uncertainty. The suspension, since January, of trial sessions due to the adhesion of the board members representing the National Treasury to the strike of the category, in line with the change in the chairmanship of the body and the indecision as to the resumption of the sessions in person, generates doubts among taxpayers as to the unfolding of the judgments.

The first in-person session of the 1st Panel of the Superior Chamber of Tax Appeals after the pandemic will take place in July. In an optimistic view, it is expected that in the second half of the year in-person sessions will effectively be resumed, enabling a return of the judgment of goodwill issues for the consolidation of administrative case law on the subject.

^[1] Provided for in Laws 9,532/97 and 12,973/14.

^[2] After the promulgation of Executive Order 449, of December 3, 2008, converted into Law 11,941/2009.

^[3] There was an attempt to introduce anti-tax rules incorporating these concepts into MP66/02, which was rejected by the Brazilian Congress.

^[4] Appellate Decision 9101-003.610, of June 5, 2018, Appellate Decision 9101-003.208, of November 8, 2017.

^[5] Article 44. In cases of an ex-officio assessment, the following fines shall be applied:

I - seventy-five percent (75%) on the total or difference in tax or contribution in cases of lack of payment or collection, lack of declaration, and in the case of inaccurate declaration;

Paragraph 1. The fine percentage mentioned in subsection I of the head paragraph of this article shall be doubled in the cases provided for in articles 71, 72, and 73 of Law 4,502, of November 30, 1964, regardless of other applicable administrative or criminal penalties.

^[6] For example, Appellate Decision 9101-005.778, decided on September 9, 2021.

^[7] Appellate Decision 9101-006.049, of April 4, 2022.

^[8] Appellate Decision 9101-005.761, of October 26, 2021.

^[9] According to ME Ordinance 260/20.