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Philanthropic Trust Managing Companies and Answer to Advance Tax Ruling Request 178 of 2021

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The so-called trusts are separate structures used as instruments to invest in the capital market for purposes of subsequent distribution of their incomes to philanthropic institutions. More specifically, such trusts with philanthropic purposes seek to establish a long-term source of funds, through the preservation of the principal and investment of the incomes thereof for the purpose of promoting causes of public interest. 

The managing organizations of such trusts, according to art. 2 of Law 13.800, of January 04, 2019, are non-profit private organizations established as private association or foundation with the purpose of operating exclusively for a trust in raising and managing donations made by individuals and legal entities and the constituted estate.  

In this context, through recent COSIT Answer to Advance Tax Ruling Request n. 178 of September 29, 2021 (SC 178 of 2021), the Federal Revenue Service spoke in favor of the unenforceability of the exemption from taxation, provided for in art. 150, VI, c, of the Federal Constitution, to trust managing companies. SC 178 of 2021 emphasized that managing companies were not mentioned at all in the constitutional article, where only political parties, including their foundations, labor trade unions, non-profit education and social welfare institutions were included in its writing.

According to the aforementioned answer to advance tax ruling request, even if, as provided for in the sole paragraph of art. 1 of Law 13.800/2019, trust managing companies support institutions related to education, sciences, technology, research and innovation, culture, health, environment, social welfare, sports, public safety, human rights and other purposes of public interest”, such managing companies are not to be mistaken for entities supported for being separate legal entities.

Contrary to the complete removal of the tax exemption described above, SC 178 of 2021 has proven to be a bit more flexible regarding the exemption provided for in article 15 of Law 9.532, of December 10, 1997. That is, in the case of said tax exemption, the answer to advance tax ruling request reminds that the exemption is only applicable to company income tax and social contribution on net income, not covering incomes and capital gains obtained in fixed income or variable income financial investments.

Thus, SC 178 of 2021 also acknowledged the validity of the rule that establishes the incidence of PIS/PASEP on payrolls of institutions of philanthropic, recreational, cultural, scientific nature and associations, provided for in art. 13, IV of Provisional Presidential Decree 2.158-35 of August 24, 2001.

Regarding the potential exemption of COFINS, SC 178 of 2021, when mentioning the exemption on own-source revenue of institutions of philanthropic, recreational, cultural, scientific nature and associations (art. 13, IV c/c art. 14, both of Provisional Presidential Decree 2.158-35 of 2001), had some reservations.

More specifically, the answer to advance tax ruling request stated that not all revenues may be considered as a result of those described in art. 23 of Normative Instruction no. 1911, of October 11, 2019. That is, revenues from contributions, donations, annuities or monthly payments established by law, meeting or by-laws, received from members or donors, without direct consideration, intended for the funding and development of corporate objectives, cannot be considered.

Therefore, for the purpose of taxation by COFINS, the managing company is responsible for separating revenues whose nature differ from those mentioned above, or that are considerations, but for activities that do not result from the exercise of the essential purpose of the entity.

Despite the restrictive interpretation, SC 178 of 2021 understood that there is no specific prohibition in the legislation regarding the maintenance of the trust’s principal, managed by the abovementioned managing companies, in assets abroad.

By declaring its bond with Answer to Advance Tax Ruling Request no. 121 of September 13, 2021, SC 178 of 2021 stated that owning interest in business company changes the nature of the non-economic purpose. That is, the mere fact that the trust invests in the increase of its estate through financial investments is considered an impeditive fact to enjoy the lack of taxation. In this regard, the final philanthropic purpose of the increase of estate is irrelevant to change the view of the Brazilian tax administration.

On the other hand, SC 178 of 2021 understands that donations to trust managing companies can be deducted in up to 2% of the proportionate profit of the donating legal entity, prior to the calculation of the deduction. However, it highlights that the deduction of such donations shall only be valid if ‘all other legal requirements’ are complied with. For ‘all other requirements’, the taxpayer should understand that the restrictive reading of the legal requirements documented in SC 178 of 2021 should always be considered.


Written by Roberto P. Vasconcellos, Senior Tax Consultant at Drummond Advisors

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