Bill No. 4,458/2020, which amends the Bankruptcy Law, was recently (11/25) approved by the Plenary of the Federal Senate and now only awaits presidential sanction to be enacted.

If not vetoed, the so-called New Bankruptcy Law (“NLF”) will establish several changes in the procedures related to the judicial recovery and bankruptcy of companies, as already highlighted in a recent article produced by our office.

From a tax perspective, the changes are also significant, giving the NLF greater power to the Tax Authorities to influence the outcome of the judicial recovery, while also establishing mechanisms to encourage tax regularization in the context of the judicial recovery.

Below, we summarize the main impacts, from a tax point of view, that the NLF will bring, if sanctioned under the terms in which it is approved by the Legislature.

Installment of debts managed by the National Treasury

Number of installments:    up to 120 (one hundred and twenty);

Nature of debt:     tax or non-tax, constituted or not, registered or not in active debt; and

Date of the triggering event: debt existing up to the date of the filing of the initial petition for judicial recovery

Use of tax losses, negative CSLL balance and own credits in installments

Although it does not allow any reduction in fines and interest, the installment plan allows the use of up to 30% (thirty percent) of the consolidated debt with the use of credits arising from tax losses and negative CSLL calculation basis.

Furthermore, the taxpayer is allowed to settle the same percentage of the consolidated debt (30%) with other credits related to taxes administered by the Brazilian Federal Revenue Service (“RFB”). This mechanism can represent an important instrument for companies that often have significant credits resulting from anti-taxation actions, the use of which is usually restricted to the due installments of their tax obligations before the RFB.

In both situations, the remaining amount may be paid in up to 84 (eighty-four) installments.

Possibility of joining extraordinary installments

The NLF also provides the possibility for taxpayers undergoing judicial recovery to join extraordinary installment programs or to migrate their debts already paid in installments as provided for by law to such special programs.

The fact that such a point is expressly included in the Bill provides legal certainty regarding the tax possibilities of taxpayers undergoing judicial recovery, removing any questions or doubts regarding the applicability of special debt installment regimes to companies in such conditions.

However, even if they choose to join/migrate to an extraordinary installment plan, companies must sign a commitment term, committing to comply with the following conditions:

• providing the RFB and the National Treasury Attorney General's Office (“PGFN”) with banking information, including information on fund statements or financial investments and on any potential commitment of receivables and other future assets;
• amortize the outstanding balance of the installment plan with a percentage of the proceeds from each sale of assets and rights forming part of the non-current assets carried out during the period of validity of the judicial recovery plan;
• maintain tax regularity; and
• regularly comply with obligations to the Service Time Guarantee Fund (“FGTS”).

Installment of unincorporated debts and installments due

The taxpayer may also pay off debts not yet due (up to the date of filing of the request for judicial recovery) with the National Treasury in up to 24 (twenty-four) installments. For micro and small businesses, the deadline may be up to 20% longer.

Tax transaction

As an alternative to the installment payment of debts, the taxpayer whose judicial recovery process has been approved may submit to the PGFN a proposal for a transaction relating to debts already registered in the Federal Government's Active Debt.

In this case, the following criteria were defined:

Number of installments:    up to 120 (one hundred and twenty);

Nature of debt:     registered in the Union's Active Debt; and

Reductions:           up to 70% (seventy percent) of the total updated amount of the debt.

As observed in relation to the installment plan, there are several commitments that must be undertaken before the PGFN as a condition for the effectiveness of the tax transaction in the context of judicial recovery. They are:

• provision of banking information, including information on fund statements or financial investments and on any potential commitment of receivables and other future assets;
• maintain tax regularity;
• maintain certification of regularity with the FGTS; and
• demonstrate the absence of loss resulting from the fulfillment of obligations undertaken with the conclusion of the transaction in the event of disposal or encumbrance of assets or rights forming part of the respective non-current asset.

Furthermore, States, Municipalities and the Federal District are authorized to establish tax transactions under the same conditions as above in relation to the debts they manage.

Competence to replace constraints arising from tax debts

In line with the prevailing legal understanding, the NLF establishes that it is up to the court of judicial recovery “determine the replacement of acts of constriction that affect assets essential to the maintenance of business activity”, even if these arise from tax debts, which must be done through “jurisdictional cooperation” with the tax enforcement court.

In this regard, the NLF is correct, as it expressly sets the limits of the jurisdiction of the judicial recovery and tax enforcement courts in relation to tax debts. Not infrequently, the high degree of intersection between the jurisdictions assigned to the aforementioned courts ends up causing undesirable obstacles, impacting the management of tax liabilities under enforcement.

Powers of the federal tax authorities to request the bankruptcy of the company

Finally, attention is drawn to the provision contained in section IV of § 4º-A, of art. 10-A to be added to Law nº 10.522/2002, according to which, one of the consequences of the exclusion of the installment plan provided for in the NLF is “the ability of the National Treasury to request the conversion of judicial recovery into bankruptcy”.

Without going into the merits of the possibility of extensive interpretation of the aforementioned provision in relation to extraordinary installments and tax transactions – which, despite our disagreement, may be the subject of future questions and demands – it seems unattractive to taxpayers to adhere to a tax installment plan without any reduction, having as a counterpart the granting of powers to the PGFN, depending on discretionary criteria, to request its bankruptcy in the event of incurring any of the causes for exclusion from the installment plan.

In practice, such a condition, precisely because it implies a clear imbalance between adherence to the ordinary installment plan of the NLF compared to other existing forms of (re)negotiation of tax debt, tends to remove the normative effectiveness of the device in question.

Furthermore, establishing such a possibility only in relation to the National Treasury Attorney General's Office is anti-isonomic, since, due to the lack of legal provision, the attorney general's offices of municipal or state tax authorities that are creditors of the company undergoing judicial recovery will not have the same prerogatives, even if their credits have exactly the same nature as those administered by the PGFN.

This fact illustrates some of the technical flaws observed in some sections of the NLF.

Conclusions

While the NLF brings important changes in order to encourage tax compliance, it fails to establish overly rigid conditions in relation to some points of the regularization mechanisms provided for, which goes against what should be the spirit of the rule: to establish conditions that allow the company to recover and maintain its activities.

From this perspective, some of the instruments designed by the PL may have their effectiveness mitigated.

Finally, from a technical and formal perspective, reassessments of the NFL text would be welcome, especially with regard to tax issues.