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Rural family holding guide myths, risks and tax reform

Guia holding familiar rural mitos riscos e a reforma tributria.png
The term Holding, comes from the English hold, which means to hold, maintain or control. Therefore, it is a company that controls other companies, that is, it holds equity interest in other companies.

These Holdings can be pure, those whose purpose is only to participate in other companies, or mixed, where in addition to controlling companies, it performs other activities.

In rural areas, it is common to think of the creation of a “Family Holding” as an instrument to control the assets now belonging to individuals. Therefore, such a company does not necessarily control other companies, but rather controls the assets of the business family.

According to some authors, the popularization of Family Holdings is due to the discovery of societal benefits in the clear distinction between assets, family and business management, which greatly contributes to the professionalization, maturity and longevity of the family business.

I fully agree that these are, in fact, the greatest benefits, but we cannot leave out of the analysis of such popularity an economic issue: the expectation of tax savings in the succession of assets through this tool.

Let's go to some facts about taxes:

  • The tax on the donation or inheritance of individuals is levied on the market value of the goods on the date of donation or death, respectively.
  • Until the year of 2015, approximately, the states and the Federal District, which are responsible for collecting these taxes, understood that, in the case of a legal entity, the incidence would be on the nominal value of the quotas that, according to the legislation, could be the amount that was included in the income tax for these goods at the time the company was created. Thus, paying taxes in the succession in life, through donation or in the succession after death, in inheritance, in the case of a family holding company was more taxable than if these properties belonged to individuals, since the calculation basis was not taken the evaluation of the market value and, effectively, the tax on the property ended up being levied on the value informed in the income tax return, generally out of date due to the constant valuation of the properties, mainly in rural areas.
  • But in 2015 the country went through a major crisis, with a drop in GDP of 3.8%, affecting tax collection. At the time, it was the biggest drop since 1990, when savings accounts were confiscated in the government of Fernando Collor de Mello and GDP dropped by 4.35%. As a comparative effect, in 2020, at the height of the COVID-19 pandemic, GDP shrank 4.1%.

It is noted that the year 2015 was very similar, economically, to the recent year of 2020. As a curiosity, the agribusiness GDP grew in both periods, 1.8% in 2015 and 2% in 2020, but it did not prevent the largest economic downturns since 1990.

With the economic downturn came the need to increase revenue. During this period, ITCMD rates (tax on donations and inheritances) were encumbered in some states, with many of them reaching the possibility of the maximum rate provided by the Senate, which is 8%.

In addition, there was another possibility within the companies to increase revenue. Therefore, it was not necessary to change any legislation, just a change in accounting criteria when assessing the quotas made by the states in donations and inheritances.

Instead of evaluating the shares at their nominal value, or by the shareholders' equity present in the balance sheets of the companies, the market value of these shares began to be determined, adjusting the company's shareholders' equity by the criterion of revaluation of assets and liabilities by value present, including the restatement of assets to market value on the date of the triggering event.

In practice, this means that in most Brazilian states, the assessment of company quotas is equivalent to the real value of the land, as determined by individuals.

As practical examples, I highlight the states of Goiás and Mato Grosso do Sul, which changed the legislation making the assessment criteria clearer, and Santa Catarina, which even without changing the provisions, issued a statement in 2015 on the correct way to assess quotas (based on the company's market value) and in 2016, the “Family Holding” operation was launched, aiming at combating tax evasion in the opening of companies to pay a lower tax.

Therefore, today, it can be said that this tax savings in succession through family holdings is a myth, but its contribution to the current popularity of the legal instrument is undeniable.

Speaking of myths, the term patrimonial shielding is also quite present when it comes to the topic, but it doesn't actually exist. There may be protection for the family business' assets and scale through clauses provided for in the holding company's social contract, but there is no actual shielding. For example, unwanted third parties do not enter the company, but if they are entitled to shares by inheritance or if there is a pledge of a partner's shares due to personal debt, these third parties will receive their rightful amounts. If there is no cash on hand, the company will need to dispose of equity to cover the obligations.

A greater clarification regarding these two myths, helps the producer to visualize the real benefits that a Rural Family Holding can bring to your business.

But, although minor, some points of attention that are difficult to deal with and, mainly, great risks involved, which are not always perceived, must also be evaluated. With these elements in hand, it is possible to know if the constitution of this company is really the best way, since each case is very particular and specific: the holding can bring great benefits to a neighbor and enormous inconvenience to the producer who decides to create it based on the success of others, as there is no ready-made formula or recipe.

Main benefits:

  • Professionalization;
  • Heritage organization;
  • Segregation of activities;
  • Protection of founders;
  • Forecast of entry and exit of partners;
  • Quota sale rule;
  • Division of goods facilitated;
  • Savings on inventory costs;
  • Conflict reduction;
  • New possibilities for corporate and tax structuring of the business.

Some points of attention

  • Increased operational complexity;
  • Accessory statements in greater volume;
  • Possible cost increase with the counter;
  • Higher income tax on financial investments;
  • Need for official pro-labore for partners, with due charges.

Major risks involved

  • Just create the holding and not operate correctly;
  • The company does not actually exist, does not have its own life or purpose to exist;
  • Equity confusion between the company and the partners;
  • Distribution of profits not deliberated and/or without the necessary formalities;
  • Lack of contracts for the proper use of real estate;
  • Incidence of income tax on the payment of goods and improvements in rural activities;
  • Risk in the succession of assets in life with death outside the natural order;
  • Tax may be higher on property sales if there is no planning;
  • ITBI charge risk at opening (attenuated by recent decisions, but not yet completely removed);
  • Possible legislative changes.
  • As for possible legislative changes, it is impossible not to think about tax reform, a recurrent and much-needed theme for the simplification of the complex Brazilian tax system. In this regard, it is clear that it is necessary to analyze all the scenarios that may impact the business and be aware of changes, but we must always work with current legislation. In other words, evaluating the possible impacts and possibilities of changing routes according to scenarios that may materialize in the reforms, but not taking decisions solely and exclusively because there is one project or another in progress. A concrete example of what I'm talking about is the possible taxation of profits and dividends.

Taxation of profits existed from 1926 until 1995 and in 1999 there was already the first bill trying to tax them again. Until today, numerous other bills for taxation of profits have been processed in the chamber and the senate. None have been converted into law so far.

Therefore, the risk of taxation of profits has existed for 22 years. We have even had projects in years of crisis similar to the one we are in, as in 2015, with a high probability of approval, but which also ended up not coming out of the paper. However, companies continued to be open and it could not be different.

Therefore, if the producer manages to see the real benefits of the holding, it will not be a tax reform that will make the opening of the company unfeasible, as well as the changes in the interpretation of states and municipalities that I mentioned, both definitive and temporary, also did not make it unfeasible.

Now, if you are thinking only about tax issues, I am sorry to inform you: the holding company does not fit for you.

By:

Hugo Monteiro da Cunha Cardoso - Tax Consultant / Professor of Law and Tax Planning and author of the book “O Novo Guia da Gestão Rural”

Mariely Biff - Consultant on Succession and Family Governance for Agribusiness, co-author of the Women of Agro book

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