Court Keeps Real Estate Capital Contributions Tax-Free

Transferring real estate to a Brazilian company as an “in kind” capital contribution is a common way to capitalize an entity. Under the right conditions, the transfer is exempt from ITBI, Brazil’s municipal real estate transfer tax. But that doesn’t always stop municipalities from trying to collect it.

A recent decision from the São Paulo Court of Appeals reinforced this ITBI exemption. The court held that a municipality couldn’t tax the difference between the value assigned to the property for purposes of the capital contribution and its higher market value. The municipality had argued that ITBI applied to the difference because both the property records and the owner’s tax return reflected the higher value.

The court rejected that argument and distinguished the case from Brazilian Supreme Court precedent involving capital reserves. In that case, only part of the property’s value was used to pay up the company’s capital, while the remainder was allocated to a capital reserve. The Supreme Court held that the amount assigned to the reserve wasn’t protected by the exemption.

Here, however, no amount was allocated outside the company’s capital. The municipality was simply trying to create a taxable excess by substituting a higher market valuation for the value used in the transaction.

This decision is particularly relevant when structuring real estate contributions to Brazilian companies. As long as you meet the requirements, including the restrictions for companies primarily engaged in real estate activities, a municipality can’t use a higher property valuation to impose ITBI on part of the contribution.