The Administrative Tax Appeals Council (CARF) ruled in favor of an individual that sold shares of a legal entity held by him through a private equity fund, resulting in the payment of less income tax over capital gain.

The precedent refers to an individual who served as chairman of the board of directors of a legal entity (“Target”), whose shares were sold for another legal entity (“Purchaser”) in 2011, by the amount of BRL 1,000,000,000.

According to the Federal Revenue Service, individual was fined in view of transfer of his shares in the Target for a private equity fund, prior to the sale of the Target’s shares for the Purchaser. From such transaction, the private equity fund (jointly with Target’s other shareholders) has taken the management control of the Target and decided to sell its shares in the Target for the Purchaser. If individual’s shares have been sold directly, income tax over capital gain will be levied on the percentage between 15% and 22,5% at the time of the closing of the transaction. Since individual’s shares has been transferred to the private equity fund prior to the closing of the transaction, the income tax over capital gain will be levied on the percentage of 15% at the time of the redemption of quotas of the private equity fund.

At the time of the judgement, the Panel held, by unanimous decision, that transfer of individual’s shares in the Target for the private equity fund prior to the closing of the transaction was performed in view of a specific negotiation purpose. Hence, the Panel has cancelled the collection of income tax over capital gain imposed on the individual by the Federal Revenue Service.