The São Paulo State Court of Justice (TJSP), in a recent decision by the 4th Chamber of Public Law, concluded that the absence of a business purpose in the disproportionate distribution of profits characterizes it as a disguised donation, thus attracting the application of the Tax on Causa Mortis and Donation (ITCMD).

Disproportionate distribution is understood as when a partner’s share in the company’s profits does not occur in proportion to their respective shares. Therefore, as provided in Articles 1,007 and 1,008 of the Brazilian Civil Code, partners must deliberate on disproportionate distribution as authorized in the respective social contract, and the suppression of a partner’s right to participate in profits and losses is prohibited.

In turn, under Article 538 of the Brazilian Civil Code, a donation is characterized as a contract where a person, by liberality (animus donandi), transfers assets or advantages from their patrimony to another’s. Thus, unlike disproportionate profit distribution, there is no business basis in a donation.

In the case recently examined by the TJSP, the controversy originated from the disproportionate distribution of dividends by parents (administrative partners holding a combined 98% of the company’s shares) in favor of their two children (each holding 1% of the shares).

Upon analyzing the actions taken, the Fiscal Authorities of the State of São Paulo concluded that there was a disguised donation of disproportionate dividend distribution, motivated solely by the liberality of the parents, as administrators, in transferring part of their assets to their children, with no business purpose justifying the distribution and thus preventing the application of the ITCMD.

Following the issuance of the corresponding Notices of Infraction and Imposition of Fine (AIIM), demanding the ITCMD from the children as donees, the assessment was upheld by the Court of Taxes and Fees (TIT), prompting the taxpayer to file a writ of mandamus to remove the said demand.

Below, we highlight relevant aspects of the precedent in question:

• Summary of the Petitioner’s Grounds: (i) carrying out the disproportionate distribution based on the autonomy of private will and contractual freedom; (ii) compliance with legal requirements (i.e., contractual provision), with a link to the business interest and the activities undertaken by the children (donees) in pursuing the business; (iii) absence of liberality for donation characterization purposes, since the dividend distribution was based on a business premise.

• Decisions in First and Second Instance: In the first instance, the motion to remove the ITCMD incidence from the disproportionate distribution was denied, and the position was upheld by the 4th Chamber of Public Law of the TJSP.

• Alignment with Other TJSP Precedents and SEFAZ/SP Manifestations: The position upheld by the 4th Chamber of Public Law of the TJSP aligns with other unfavorably positioned precedents from the Court and the expressly stated understanding by the SEFAZ/SP through a Tax Consultation Response.

Thus, it is apparent that, for the non-incidence of the ITCMD, the following elements are required, in summary: (i) compliance with legal requirements (i.e. forecasted disproportionate distribution in the social contract and deliberation among partners); (ii) proof of a link between distributed values and the activities developed by partners within business activities, capable of supporting the business purpose of the disproportionate distribution.

Such requirements are also evidenced in isolated decisions favoring taxpayers by the TJSP and TJSC. In the Higher Courts, there are still no merit-based decisions specifically on the subject.

• Tax Reform – Attempt to Introduce Specific Provisions on the Subject through PLP 108/2024: Similar to the jurisprudential understanding presented, the basic text of Complementary Bill No. 108/2024 (PLP 108/2024) proposed the application of the ITCMD on corporate acts resulting in disproportionate benefits for a partner or shareholder practiced by liberality and without a verifiable business justification (cf. art. 160, §5°, I). However, such provisions were excluded from the final text approved by the Chamber of Deputies on October 30, 2024, currently pending Senate approval.

Therefore, disproportionate profit distribution is a legally permitted instrument, providing efficient business arrangements for conducting business activities and structuring patrimonial and succession planning.

However, it is advisable that its implementation be carried out with caution, highlighting the business aspects of the acts performed and removing elements that might characterize them as donations, if interpreted as transfers of assets by liberality.

For more information on the topic, learn about the tax practice of Loeser & Hadad Advogados.

References:
(1) Civil Appeal No. 1089011-58.2023.8.26.0053; (2) TJ-SP – Civil Appeal: 10876881820238260053 São Paulo, Rapporteur: Maria Olívia Alves, Judgment Date: 02/12/2025, 6th Chamber of Public Law, Publication Date: 02/12/2025; (3) Tributary Consultation Response 20952M1/2019 (provided on 06/01/2020); (4) TJ-SP – Judicial Review: 10269391020188260506 SP 1026939-10.2018.8.26.0506, Rapporteur: Loredana Henck Cano de Carvalho, Judgment Date: 08/31/2022, 4th Civil Chamber, Publication Date: 08/31/2022; (5) Appeal / Necessary Review | 0311916-16.2018.8.24.0023, Body: TJ-SC. Rapporteur: Jorge Luiz de Borba. Judged on 05/28/2024, Published on 05/28/2024.

Notes:

ITCMD: Tax on Causa Mortis and Donation.
TJSP: São Paulo State Court of Justice.
SEFAZ/SP: São Paulo State Finance Secretariat.
PLP: Complementary Bill.