CARF decides not to tax amounts deposited in escrow accounts
Daniela Floriano
In a recent decision, the 2nd ordinary panel of the 2nd chamber of the 2nd section of the administrative department of tax appeals (Conselho Administrativo de Recursos Fiscais — CARF) found that no individual income tax is to be levied on amounts deposited in escrow accounts until an actual capital gain is confirmed.
According to appellate decision No. 2202-002.859 — formalized after the analysis of the request for mandatory review filed by the tax authority in view of a first administrative level decision (rendered by Delegacia Regional de Julgamento de São Paulo) — individual income tax can only be levied when the deposited amounts effectively become economically or legally available.
Pursuant to the decision, in escrow accounts, “the parties to the contract subject future payments to the occurrence of events that are either uncertain or not quantifiable at the time of the acquisition, but that, in a way, can take place in the future. This is a way to protect the buyer, because the future payments are subject to the fulfillment of certain conditions.”
Therefore, individual income tax on capital gains arising from the sales of assets or rights relating to values deposited in escrow accounts will only be levied when (and if) these values become economically or legally available to the seller, that is, when the conditions to which the legal transaction is subject are fulfilled.