Capital gain on stock sales to foreigners

A common tip regarding corporate reorganizations is to transfer the corporate control of a Brazilian company through an international stock sales agreement executed abroad between two foreign companies.

For example: the U.S. Google may sell its stocks in the Brazilian Google to the Irish Google, in order to pay less overall taxes.

It works pretty well when the goal is only to change the control.

The problem is when this mechanism is used for tax planning purposes.

Check below the case of one of our clients (the specific data were modified).

Operation summary:

The companies 2 and 3 (both located abroad) incorporated the company 4.

The company 2 will sell its shares in the company “A” to the company 4. This operation will be completely executed abroad.

The company “A” has a great surplus reserve.

There will be no capital increase in the company “A”. There will be no profits distribution regarding company “A”’s reserves.

There will be no remittance of any amount from Brazil to foreign locations.

Here in Brazil we will issue a quotaholders resolution communicating the exit and entry of quotaholders and we will transfer the company 2’s capital registry to the company 4 before the Brazilian Central Bank. The quotas/stock’s nominal value shall apply in this transfer, without any indication of the profits’ reserve.

Whereas that the approval will be executed between companies of the same economic group, that will be not capital remittance to foreign localities and that the whole economic operation will be executed abroad, I ask:

Will there be taxation on this operation?

(oh, this question…)

It is evident that I won’t give the answer as a Christmas gift. But it would be interesting to muse about this a little bit.

i) If the companies located abroad were not related, would the company 2 give to another company a Brazilian company “stuffed” with profits without charging for it?

ii) All the companies that have foreigners shareholders are obliged to register periodic reports before the Brazilian Central Bank. Wouldn’t it look strange, towards the Brazilian Central Bank, that the company was sold by the nominal value of its quotas and that the accumulated profits remained in Brazil as a gift for the future owner?

iii) May international stock sales agreement be consider valid in Brazil before being registered here? If yes, to what extent?

iv) If the profit remittance to foreign locations does not have a specific taxation, what would be the advantage of an operation like that?

I leave you with these questions.

  

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