Seed sector obtains a victory and the Brazilian Revenue Service (IRS) stops limiting royalty deductions

In the first half of 2024, companies in the seed sector, clients of MOA Advogados, obtained important decisions in the first administrative instance, to reverse notices of deficiency worth millions that still affect this agribusiness sector.

In recent years, the Brazilian Revenue Service, under an erroneous interpretation of the law, has started to prevent the deductibility of royalties paid to holders of biotechnology used in the seed production chain, which has resulted in huge tax notices of deficiency for the sector.

MOA Advogados Associados, in partnership with seed clients, has looked into the issue and helped associations in the sector to review transactions and contracts, so as to demonstrate to the IRS that such royalties are not to be confused with those subject to the deductibility limits, and has thus filed several administrative proceedings on the matter.

As a result, in March 2024 the first favorable administrative decisions were handed down by the Brazilian Federal Revenue Office (DRJ), which recognized the taxpayers' right to full deductibility of the amounts, thus ending these charges. So far, there have been few favorable results like these, which have ended the discussion and undue collection of the amounts.

On the subject, it is worth remembering that the Brazilian Revenue Service had been preventing seed multipliers, including soybean producers, from deducting the amounts paid to biotechnology holders from the Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL) calculation basis, when calculating the Taxable Income, on the grounds that such expenditures would be subject to the deductibility caps laid down in article 74 of Law No. 3470/1958 and article 12 of Law No. 4131/1962, in addition to often requiring contracts to be registered at the INPI.

After strong action by the sector to demonstrate that the royalties in question are not to be confused with the royalties dealt with in the law that provides for the deductibility caps, as well as the presentation of detailed defenses on the subject, Law No. 14689/2023 was published in September 2023, which, among other relevant changes, brought about the correct interpretation of the law that deals with the caps on the deductibility of royalties when calculating the taxable income of legal entities that operate in seed multiplication.

Paragraph 3, Article 13 of Law no. 9249/1995 establishes that the deductibility caps provided for in Article 74 of Law No. 3470/1958 and Article 12 of Law No. 4131/1962 does not apply to payments and transfers made by seed multipliers to third parties for the exploitation or use of transgenic technology or the licensing of cultivars, nor does it dispense with the requirement to register such contracts at regulatory agencies and inspection agencies.

Therefore, seed multipliers are guaranteed the right to deduct the full amounts (100%) paid as royalties from the IRPJ and CSLL calculation base, and the limitations set out in article 74 of Law No. 3470/1958 and article 12 of Law No. 4131/1962, of five percent (5%).

Thus, Law No. 14689/2023 settles the discussions on the matter that began in the past, provided that the nature of the royalties paid to biotechnology holders is demonstrated, given that Law No. 14596 (of June 14, 2023) had already revoked article 74 of Law No. 3470/1958, and article 12 of Law No. 4131/1962, which established the deductibility caps, with effect as of 01/01/2024.

However, the publication of the law did not automatically put an end to the ongoing inspections and the notices of deficiency already issued, so the decisions obtained in the first half of 2024 are unprecedented and have been eagerly awaited by the sector, even though numerous cases discussing the issue are still pending conclusion.

Therefore, we believe that the correct interpretation of the law brought in by Law No. 14689/2023 represents greater security for the seed sector, but it is worth keeping an eye on the issue, especially in relation to ongoing cases, which are awaiting the conclusion of the dispute.

For the above reasons, MOA Lawyers are able to clarify any doubts on the matter, as well as assist you if necessary. Contact us