New Precedents Confirm the Unconstitutionality of the Tax on Presumed Minimum Income

On September 30, 2010, the Court of Appeals ruled on the “Molisur SA” case.  In this case, the Tax Authority assessed the Tax on Presumed Minimum Income.

The company argued for the absence of the Minimum Presumed Income Tax Law because the constitutional process of enactment of laws was violated. Moreover, the company claimed not to be subject to the Tax due to the lack of ability to face the tax payment.

The Federal Tax Court decided on the enforcement of the law and confirmed the assessment of the Tax Authority, since it understood that mere existence of losses does not prevent the application of tax.

The company appealed the Federal Tax Court’s decision. The Court of Appeals confirmed the enforcement of the law and held that it is valid to use a presumption to determine the tax, but stressed the resulting inequity when the presumed income is proved not to exist.

In this case, the Court of Appeals considered the accounting audit report conclusions. The accounting audit report brought about the following conclusions regarding the situation of Molisur:

a. The company was partially financed by the realization of fixed assets;
b. The company’s projection proved a lack of obtaining operating income. This situation was worsened by the lack of assets to be sold;
c. During the fiscal years under discussion, the company showed a high-degree of indebtedness, freezing of assets and a lack of short and long-term cash.
d. Sale of real estate for the cancellation of debts at the end of the period subject to tax assessment and consequent sharp increase in liquidity ratios;
e. Lack of income from various sources other than the sale of assets.
f. Operating losses and negative extraordinary results in the balances;
g. Impact of 62% over the net assets of 2005 of the tax on presumed minimum income.

Despite the limited power of the Court to revise the evidence, according to the accounting audit report conclusions, the Court of Appeals revoked the decision of the Federal Tax Court. The Court of Appeals declared for the unconstitutionality of the tax because the rational basis test was dishonored.

On August 23, 2010, the Attorney General analyzed the legal matter in the “Tren de la Costa” case, although he understood that the requirements for the intended action for a declaratory judgment were not satisfied.

The Attorney General stated that the evidence provided proved the existence of fiscal and business losses and that the company’s exploitation was carried out in compliance with reasonable parameters for a business person. In consequence, holding that the Supreme Court’s doctrine in the “Hermitage” case was applicable by analogy (please see “The Federal Supreme Court declares the unconstitutionality of the tax on presumed minimum income”).

It should be mentioned that in the “Hermitage” case, the Attorney General’s opinion was in the opposite direction. Since the Attorney General’s decision in re “Tren de la Costa” it seems that the criterion has changed, following the Supreme Court’s opinion.