Equity Holding has been a topic constantly addressed by professionals who carry out tax and inheritance planning. In fact, it is one of the main planning mechanisms, given the benefits provided, especially inherent to the Income Tax on revenues from the rental or sale of properties, as well as their disposal.

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The purpose of this article is to present the main information regarding taxation, corporate types and accounting standards that relate to the Equity Holding.

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1. What is Equity Holding?

 

Despite the English name and, consequently, the feeling of being something complex, the Equity Holding consists of a company with the specific purpose of managing assets of one or more people, whether natural or legal.  

 

The word comes from the English “to hold” which, in simple translation, means to ensure or control something. This control may occur through corporate control in other companies that own assets or, directly, manage the assets.

 

Although the subject has, in fact, become more widespread in recent years, the Holding emerged in Brazil in 1976 through the Corporations Law (S/A) [Law 6.404], which in its Article 2 § 3rd enacts that: “The company may have as its object to participate in other companies; even if not provided for in the bylaws, participation is provided as a means of carrying out the corporate purpose, or to benefit from tax incentives.”

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2. Holding corporate types:

 

Two types of structure are foreseen in Law: Simple Society and Business Society. Although there is no restriction on the type of structure, the most common formats in Brazil are Limited Liability Companies (LTDA and EIRELI) and Corporations (S/A).

 

At E&G, we advise our clients – generally – to opt for a limited liability company. The main advantages are:

 

• Low cost for its constitution;

• Provides greater protection to the family group against the entry of third parties into the corporate structure;

• Little accounting and legal bureaucracy. It is exempt from publications required by Corporations.

• Liability limited to its share capital in the event of a future financial crisis or a lawsuit.

 

EIRELI, an Individual Limited Liability Company, can be used as an Equity Holding. This usually occurs when the holder of assets does not have heirs, or does not wish to carry out succession planning, specifically aiming to enjoy tax advantages.  

 

Another situation in which EIRELI can be used is when the holder considers using a foreign company as the holder of that company. Using a foreign company in asset planning, especially those headquartered in tax havens (offshore companies), can guarantee tax savings of 100% of the ITCMD (Transmission Cause Mortis and Donation Tax), as well as extinguish the need for inventory through a clause in the articles of incorporation of the company abroad (clause of “ Joint Tenancy with right of survivorship ”).

 

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3. The assets paid in to the Equity Holding:

 

If a holding company is set up with the purpose of managing the real estate of a family, the following corporate objects must be included:

 

• Rental of own, residential and non-residential properties;

• Purchase and sale of own properties.

 

It is important to highlight a great tax advantage when transferring the properties to the Equity Holding: The monetary value of the real estate to be transferred and paid in the Holding's share capital will be those contained in the Individual Income Tax Declaration of the current calendar year, and not by the market value of the properties.

 

Regarding vehicles, vessels and aircraft, we advise that specific Holdings be created for each of them, in view of the risk of involvement in accidents and the consequent civil liability on the part of their owner, in this case the Holding, regarding the payment of indemnities .

 

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4. The tax regimes of the Equity Holding:

 

Companies that have the CNAE (National Code of Economic Activity) as administrator of their own and third-party assets, the Simples Nacional is prohibited. Companies that have a foreign individual or legal entity in the corporate structure cannot opt for Simples Nacional either.

 

Presumed Profit: It is the second tax regime with more companies in Brazil and, in a way, it is a simplified model. According to the company's activity, a fixed calculation basis will be assumed and the calculation of taxes will be carried out presumably.

 

Taxable Income: Taxation is calculated based on the company's monthly or quarterly invoicing. It is levied on the net income obtained during the calculation period.

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5. The Equity Holding and the properties acquired in the plant:

 

Property acquired in the plant, even if in installments, may be paid into the Holding's share capital, even if they do not have a definitive registration. In other words, payment is allowed only with the purchase and sale contract signed with the construction company. It is enough that the property is properly described in the contract.

 

In this case, the amount for payment will be the value of the installments paid up to the time of incorporation of the Holding, and not the total amount in the purchase and sale commitment. Some construction companies require the payment of a rights transfer fee that can vary between 2% and 5% of the total contract value.

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6. The Equity Holding and the financed properties:

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It is possible for a financed property to be paid up in the capital of a Holding Company. The financial institution must consent or the mortgage will need to be transferred.

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7. Taxation of the Equity Holding:

 

IRPJ - Corporate Income Tax

 

The IRPJ on income earned from leases at the rate is 15%. The calculation basis is 32% of the calculated gross revenue. Thus, the tax cost is 4.8%.

 

The portion that exceeds the amount resulting from the multiplication of R$ 20 thousand by the number of months of the respective calculation period, will be subject to the levy of additional income tax at the rate of 10%. In this way, the Equity Holding that earns monthly income greater than R$ 20 thousand per month, or greater than R$ 60 thousand quarterly, must calculate this additional amount. However, it is important to emphasize that the 10% will apply only to the amount that exceeds the established limit.

 

Even though the Equity Holding has the incidence of CSLL, PIS and COFINS, the taxation of income by the legal entity is extremely less onerous compared to the taxation that is levied on the income obtained by the individual.

 

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ITBI - Tax on the transfer of real estate

 

ITBI is a municipal tax that is levied whenever the transfer of real estate during life occurs. However, the collection of the tax will not be levied on the payment of capital stock, with exception when the main activity of the Holding is the purchase and sale and/or rental of real estate.

 

Even in situations where the ITBI will apply, the constitution of the Equity Holding is viable and advantageous compared to leaving them in the natural person(s) of its holder(s). es).

 

In order to validate this premise, it is enough for us to make a comparison of the taxation that falls on the income of the legal entity (Holding) with that which falls on the individual. ITBI will be compensated in a short time, with a considerable reduction in Income Tax.

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CSLL - Social Contribution on Net Income

 

The Equity Holding rate opting for the Presumed Profit will be 9% on the base calculation basis of 32%. Therefore, the final tax cost will be 2.88%.

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PIS and COFINS

 

The Equity Holding will be subject to taxation of PIS at a fixed rate of 0.65%, and COFINS, at a fixed rate of 3%, both on the gross revenue earned.

 

The activity of renting properties will cause the Equity Holding to have its income taxed at 11.33%. Thus, we can conclude that setting up an Equity Holding, presents a considerable reduction, considering that the income earned by individuals with the activity of real estate leasing is taxed by the Progressive Table, which may reach up to 27.5%.

 

 

ITCMD – Death and Donation Transmission Tax

 

The ITCMD is a state tax that is levied when the transfer of assets and rights occurs as a result of donation or Causa Mortis. Thus, we draw attention to the incidence of the ITCMD on the donation of quotas with usufruct reservation in the Equity Holding.

 

In comparison with the inventory process, if the assets are in the name of an individual, in the event of the death of the holder of the assets, the estate will be revalued by the State and taxed on the market value, and must be paid in full at that time. In addition, there will be costs inherent to the Judiciary Fee and attorney's fees.

 

In São Paulo, the state where E&G is headquartered in Brazil, taxation is governed by Law No. 10.705/2000. The rate in São Paulo, provided for in article 16 of the aforementioned law, is fixed at 4%. For the donation of shares in the State of São Paulo, the ITCMD will be arranged as follows:

 

• 2/3 at the time of donation;

• 1/3 in the occurrence of Causa Mortis.

 

In some plans, we use corporate structures headquartered abroad, the well-known offshore companies, which will allow savings of up to 100% of the ITCMD in the transmission as a result of Causa Mortis. Therefore, each situation must be individually assessed by a specialized team.

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8. Comparison to the taxation levied on the activities of the Equity Holding:

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Property Lease: Individuals: 27.5% x Equity Holding: 11.3% 

Capital gain on the sale of real estate:  Individual: 15% x Equity Holding: 6.73%

 

 

E&G Financial Group is a company specializing in the preparation of wealth planning with an emphasis on tax and succession issues. In addition, we have a team of specialists in Brazil and abroad, allowing us to offer our clients a full range of services that range from the incorporation of local and foreign holding companies, to advising on opening international bank accounts, forming private trusts , support in the process of obtaining European citizenships and carrying out foreign exchange operations.

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