Foreign investment, vehicle companies and capital gains

On a final ruling by the Administrative Council of Tax Appeals, the federal tax authorities dropped the charges against Companhia Siderúrgica Nacional (CSN) and Nacional Minérios (NAMISA) for improper deductions in their income tax, as well as in their social contribution on net income returns. NAMISA, a mining company, was a wholly-owned subsidiary of CSN, a steel maker. In 2008, CSN formed a strategic partnership with a group of Japanese and South Korean investors (ITOCHU Corporation, Nippon Steel Corporation, JFE Steel Corporation, POSCO, Sumitomo Metal Industries, Kobe Steel and Nisshin Steel) for a stake in NAMISA. The investment was carried out through a vehicle company, Big Jump Energy, which was incorporated in Brazil and operated as a holding for the foreign investors. Later on, in 2009, Big Jump was merged into NAMISA, thus leaving the foreign companies as shareholders together with CSN.

As of 2012, federal tax authorities investigated several aspects of this operation. Huge charges and penalties were levied. In reviewing those charges, first the Federal Revenue Office, and then the Administrative Council of Tax Appeals, found no problem with how capital gains were declared and paid throughout the following years.

The facts of the case were stated as follows: (i) CSN released to the market, on several occasions, relevant information concerning the deal, which was presented as being a sell of 40% of its stake in NAMISA; (ii) Big Jump existed for just a little more than sixteen months, with no headquarters, no phone or electricity bills and no valid address; (iii) Big Jump took most of the money the Japanese and the South Korean companies had invested and passed it along, on the same day, to NAMISA, by way of subscription of its shares, and partly to CSN; (iv) NAMISA, on that same day, took all the money it received and transferred it to CSN, as anticipated payment in a 33-years contract for porting services and supply; (v) following the merger of Big Jump into NAMISA, the latter amortized the rather significant premium Big Jump had originally paid when buying NAMISA’s shares.

Against this background, one would think the deal CSN had announced to the market had actually taken place: 40% of its stake in NAMISA went to the group of foreign investors. However, no income tax or social contribution on net income were paid by CSN in regards to capital gains, since the premium on the price of the shares was amortized by NAMISA after Big Jump had been merged into it.

The Council found that Big Jump's role was indeed to render possible all the necessary negotiations involved in the deal. Furthermore, as a holding company, Big Jump needed not to perform operational activities; and under articles 7 and 8 of Federal Law No. 9.532, of December 10th, 1997, the premium it had paid could be amortized by NAMISA.

Acórdão Nº 14-01-001.240, Board Rapporteur: Alexandre Antônio Alkmin Teixeira. In Portuguese here.