1. 1 INTERNATIONAL TAXATION OF GOODWILL AND INTANGIBLES IV CONGRESSO INTERNACIONAL DE DIREITO TRIBUTÁRIO – IBDT RICARDO MARIZ DE OLIVEIRA MARIZSIQUEIRA.COM.BR

2. 2 DEFINITIONS “GOODWILL: A business’s reputation, patronage, and other intangible assets that are considered when appraising the business, esp. for purchase; the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets. Because an established business’s trademark or servicemark is a symbol of goodwill, trademark infringement is a form of theft of goodwill. By the same token, when a trademark is assigned, the goodwill that it carries is also assigned” (Black’s Law Dictionary)

3. 3 DEFINITIONS “GOODWILL: An intangible asset which represents the favorable attitude of clients or customers of a business toward the operation of the business; the value of a business enterprise, above and beyond the value of the business’ tangible assets, which represents the enterprise’s reputation with the public and its managerial ability” (Gilbert Law Summaries – Law Dictionary)

4. 4 DEFINITIONS SOME DICTIONARIES DEFINE FUNDO DE COMÉRCIO AS GOODWILL AND VICE-VERSA MANOEL PINHO’S PWC DICIONÁRIO DE TERMOS DE NEGÓCIO: “GOODWILL - FUNDO DE COMÉRCIO; INTANGIBLE ASSETS, LIKE THE VALUE OF GOOD CLIENT RELATIONS, THE HIGH REGARD IN WHICH STAFF ARE HELD, A BUSINESS’S GOOD REPUTATION, GOOD LOCATION, ETC., WHICH EXCEED THE BUSINESS’S NET TANGIBLES ASSETS”

5. 5 DEFINITIONS GOODWILL = FONDS DECOMMERCE = AVVIAMENTO IN BRAZIL = FUNDO DE COMÉRCIO

6. 6 DEFINITIONS IN BRAZIL, SEVERAL AUTHORS CONSIDER FUNDO DE COMÉRCIO = ESTABELECIMENTO (ESTABLISHMENT) BUT AN ESTABLISHMENT IS ALSO A PLACE OF BUSINESS OR PART OF AN ENTERPRISE (A HEADQUARTERS, A BRANCH, A PLANT, A WAREHOUSE, ETC.)

7. 7 DEFINITIONS BRAZILIAN LEGAL DEFINITION OF ESTABLISHMENT (BRAZILIAN CIVIL CODE, art.1142) “Any complex of goods organized by an entrepreneur or an enterprise for the conduct of a business”

8. 8 DEFINITIONS ALL MEANS OF PRODUCTION (CAPITAL, WORK-FORCE, EXPERTISE) MAKE UP AN ESTABLISHMENT FUNDO DE COMÉRCIO IS ONLY ONE OF THOSE MEANS, BUT IS NOT AN ESTABLISHMENT ITSELF

9. 9 DEFINITIONS HOWEVER, AN ESTABLISHMENT IS NOT ONLY A PHYSICAL PLACE OF BUSINESS (PART OF AN ENTERPRISE) (which is another meaning for the same word), BUT A PLACE OF BUSINESS IN OPERATION, A GOING CONCERN GOING CONCERN: “A commercial enterprise actively engaging in business with the expectation of indefinite continuance” (Black’s Law Dictionary)

10. 10 DEFINITIONS TAX SUCCESSION BRAZILIAN TAX CODE (art. 133) STATES THAT THE ACQUIRER OF A FUNDO DE COMÉRCIO OR AN ESTABLISHMENT IS LIABLE FOR ITS OUTSTANDING TAX DEBTS THUS, FOR TAX PURPOSES, A FUNDO DE COMÉRCIO IS NOT NECESSARILY EQUAL TO AN ESTABLISHMENT, ALTHOUGH BOTH MAY EXIST TOGETHER AND MAY BE SOLD TOGETHER (or separately)

11. 11 DEFINITIONS FUNDO DE COMÉRCIO IS A COMPLEX OF INTANGIBLES (e.g., TRADEMARKS, PATENTS, KNOW-HOW, STRATEGIC LOCATION, ETC.) WHICH ARE USED BY AN ENTERPRISE OR A PARTICULAR ESTABLISHMENT TO EARN INCOME FUNDO DE COMÉRCIO IS NOT ANY OF THOSE INTANGIBLES BUT ALL OF THEM TAKEN AS A WHOLE AND USED FOR THE BUSINESS’S OPERATIONAL ACTIVITIES

12. 12 DEFINITIONS POSSIBLE TRANSACTIONS THUS, A FUNDO DE COMÉRCIO IS A KIND OF COLLECTIVE GOOD IN THE MEANING OF AN UNIVERSITAS FACTI AND ALSO AN UNIVERSITAS JURIS THEREFORE, IT IS POSSIBLE TO BREAK UP A FUNDO DE COMÉRCIO IN ORDER TO REMOVE ITS SEVERAL COMPONENTS AND TRANFER OR USE EACH ONE SEPARATELY

13. 13 POSSIBLE TRANSACTIONS ALSO, IT IS POSSIBLE TO TRANSFER OR TO EXPLOIT A FUNDO DE COMÉRCIO AS A WHOLE IT IS ALSO POSSIBLE TO SELL AN ESTABLISHMENT WHERE THERE IS NOT AN IDENTIFIABLE FUNDO DE COMÉRCIO

14. 14 DEFINITIONS - ACCOUNTING TANGIBLE ASSETS ARE NOT PART OF A FUNDO DE COMÉRCIO, ALTHOUGH THEY MAY BE PART OF AN ESTABLISHMENT TANGIBLE ASSETS ARE ACCOUNTED FOR AS FIXED ASSETS (Law 6,404, art. 179-IV); A FUNDO DE COMÉRCIO AS INTANGIBLE ASSETS (art. 179-VI)

15. 15 POSSIBLE TRANSACTIONS THUS, WHEN AN ESTABLISHMENT IS SOLD IN ITS ENTIRETY IT INCLUDES THE EXISTING TANGIBLE ASSETS AS WELL AS ANY INTANGIBLE ASSETS WHICH MAY FORM THE RELEVANT FUNDO DE COMÉRCIO

16. 16 ACQUISITION OF A COMPANY WHEN A CONTROLLED COMPANY IS ACQUIRED, A PREMIUM (ágio) MAY BE PAID OR A DISCOUNT (deságio) MAY BE EARNED (JUST AS WHEN A SUBSTANTIAL PROPORTION OF CAPITAL IS ACQUIRED) SAID PREMIUM OR DISCOUNT MUST BE ACCOUNTED FOR AS PART OF THE COST OF ACQUISITION

17. 17 DEFINITIONS ACQUISITION OF A COMPANY FOR ACCOUNTING PURPOSES, A PREMIUM OR DISCOUNT IS THE DIFFERENCE BETWEEN THE TOTAL COST AND THE GOODWILL FOR TAX PURPOSES, IT IS THE DIFFERENCE BETWEEN THE TOTAL COST AND THE EXPECTED FUTURE EARNINGS, OR THE MARKET VALUE OF THE GOODS, OR THE VALUE OF THE FUNDO DE COMÉRCIO, OR THE VALUE OF ANY INDIVIDUAL INTANGIBLE ASSET, OR SOME OTHER ECONOMIC JUSTIFICATION

18. 18 DEFINITIONS THUS, EXPECTED FUTURE EARNINGS ARE NOT THE SAME AS FUNDO DE COMÉRCIO FUNDO DE COMÉRCIO IS A MEANS TO EARN FUTURE PROFITS, AS WELL AS FIXED ASSETS, CAPITAL, THE WORK- FORCE AND OTHER TOOLS WHICH ARE USED TO GENERATE THOSE EARNINGS

19. 19 DEFINITIONS REMEMBERING BLACK’S DEFINITION OF GOODWIL: the ability to earn income in excess of the income that would be expected from the business viewed as a mere collection of assets THUS, IF FUNDO DE COMÉRCIO IS NOT THE SAME AS GOODWILL, THEY ARE AT LEAST SIMILAR TO EACH OTHER AS THEY BOTH ENABLE A BUSINESS TO EARN INCOME

20. 20 JUST TO KNOW FOR ACCOUNTING PURPOSES, A PREMIUM IS NOT SUBJECT TO AMORTIZATION WHILE A DISCOUNT IS COUNTED AS INCOME FOR THAT YEAR FOR TAX PURPOSES, A PREMIUM IS DEDUCTIBLE AND A DISCOUNT IS TAXED ACCORDING TO METHODS OF AMORTIZATION (based on the income generated or the use of the goods) ONLY IF THE AQCUIRING COMPANY MERGES WITH THE ACQUIRED ONE; IF NOT, THEY ARE PART OF THE ACQUISITION COST WHEN CALCULATING CAPITAL GAIN OR LOSS

21. 21 CAPITAL GAINS CAPITAL GAIN EARNED BY A PERMANENT ESTABLISHMENT DERIVED FROM THE TRANSFER OF INTANGIBLE ASSETS MAY BE TAXED IN THE COUNTRY WHERE IT IS LOCATED, OR IF THEY ARE SOLD TOGETHER WITH THE ESTABLISHMENT (OECD MODEL CONVENTION, ART.13, § 2) OTHERWISE, THEY ARE TAXED ONLY IN THE OWNER´S STATE OF RESIDENCE (§ 5)

22. 22 CAPITAL GAINS WHEN BRAZIL HAS JURISDICTION TO TAX: TRANSFER OF INTANGIBLE ASSETS AND/OR AN ESTABLISHMENT ABROAD OR IN BRAZIL BY RESIDENTS IN BRAZIL: CAPITAL GAIN IS TAXABLE (15% FOR INDIVIDUALS AND 34% FOR LEGAL ENTITIES) THE SAME IS TRUE FOR TRANSFER OF INTANGIBLE ASSETS AND/OR AN ESTABLISHMENT IN BRAZIL BY NON- RESIDENTS (15% FOR BOTH INDIVIDUALS AND LEGAL ENTITIES)

23. 23 CAPITAL GAINS TRANSFER OF INTANGIBLES EXISTING IN BRAZIL, BY A NON-RESIDENT INDIVIDUAL OR ENTITY, TO ANOTHER NON-RESIDENT TAX DUE MUST BE PAID BY THE RESIDENT REPRESENTATIVE OF THE ALIENATOR

24. 24 INCOME FROM GOODWILL INCOME DERIVED FROM THE EXPLORATION OF INTANGILE ASSETS BY A PERMANENT ESTABLISHMENT MAY TAXED IN THE COUNTRY WHERE THE ESTABLISHMENT IS LOCATED (OCDE MODEL CONVENTION, ART. 7) OTHERWISE, THEY ARE TAXABLE ONLY IN THE OWNER´S STATE OF RESIDENCE (ART. 21)

25. 25 INCOME FROM GOODWILL AND INTANGIBLE ASSETS INCOME FOR THE LICENSE OF SOME INTANGIBLE ASSETS (ROYALTIES) IS TAXABLE ONLY IN THE COUNTRY OF THE OWNER’ RESIDENCE (OCDE MODEL CONVENTION, ART. 12, § 1) WHEN THEY ARE PART OF THE INCOME OF A PERMANENT ESTABLISHMENT, IT IS TAXABLE ONLY IN THE COUNTRY WHERE THE ESTABLISHMENT IS LOCATED (§ 3)

26. 26 INCOME FROM GOODWILL AND INTANGIBLE ASSETS WHEN BRAZIL HAS JURISDICTION TO TAX: RESIDENT INDIVIDUALS - 27,5% RESIDENT CORPORATE TAX – 34% NON-RESIDENTS – 15% (POSSIBLE 10% CIDE ADDITIONAL)

27. 27 FOREIGN TAX CREDIT ALWAYS GRANTED TO RESIDENT ENTITIES FOR RESIDENT INDIVIDUALS, IF THE SAME RIGHT IS GRANTED BY THE SOURCE COUNTRY

28. 28 GOODWILL EXPENSES EXPENSES FROM THE USE OF GOODWILL OWNED BY A THIRD PARTY IS NORMALLY DEDUCTIBLE FROM THE INCOME SUBJECT TO BRAZILIAN CORPORATE INCOME TAX IF PAYMENTS ARE DUE TO RELATED PARTIES OR TAX HAVENS RESIDENTS, ARM’S LENGTH TRANSACTION OR TRANSFER PRINCING RULES MAY APPLY

29. 29 INTANGIBLE ASSET EXPENSES EXPENSES FROM THE USE OF INTAGIBLE ASSETS OWNED BY A THIRD PARTY ARE NORMALLY DEDUCTIBLE FROM INCOME SUBJECT TO BRAZILIAN CORPORATE INCOME TAX IF PAYMENTS ARE DUE TO RELATED PARTIES OR RESIDENTS IN TAX HAVENS, ARM’S LENGTH TRANSACTION OR TRANSFER PRINCING RULES MAY APPLY

30. 30 INTANGIBLE ASSET EXPENSES EXPENSES RELATED TO PATENTS, TRADEMARKS AND TECHNOLOGY TRANSFERS MAY BE DEDUCTED FROM INCOME SUBJECT TO BRAZILIAN CORPORATE INCOME TAX BUT ARE SUBJECT TO LIMITATIONS BASED ON THE NET REVENUE ACQUIRED THROUGH THE USE OF THOSE INTANGIBLE ASSETS (RATES VARY ACCORDING TO THE ESSENTIALITY OF THE PRODUCTS SOLD, UP TO A MAXIMUM OF 5%; 1% FOR TRADEMARKS) – PAYMENTS RELATED TO TECHNOLOGY ARE DEDUCTIBLE ONLY DURING 5 YEARS, BUT AN EXTENSION MAY BE GRANTED

31. 31 INTANGIBLE ASSET EXPENSES EXPENSES RELATED TO PATENTS, TRADEMARKS, AND TECHNOLOGY TRANSFERS ARE NOT SUBJECT TO ARM’S LENGTH OR TRANSFER PRICING RULES PAYMENTS OF SUCH EXPENSES DUE TO NON-RESIDENTS IN BRAZIL ARE SUBJECT TO 15% WITHOLDING INCOME TAX AND A 10% LOCAL TAX (CIDE) DESTINED TO FINANCE TECHNICAL INOVATION