The Integration between Corporate Taxation and Shareholder Taxation

What is the Role of Expense Deductibility Rules Applied to Transactions with Shareholders?

Abstract

The objective of this paper is to relate two fundamental themes regarding the taxation of corporate income: (i) the integration between corporate taxation and shareholder-level taxation, and (ii) the deductibility of expenses. In this context, this paper aims at addressing the following question: do rules that restrict the deductibility of expenses incurred by the company in operations involving its shareholders fulfill an integrative function? After analyzing the Brazilian Tax Law related to corporate income taxation and examining the integration methods generally pointed out by legal scholars, the question is answered negatively. Non-deductibility of expenses, considered by itself, has the potential to aggravate the double taxation of the same wealth. In other words, it has a dissociative tax effect. Given this finding, the paper concludes that rules implying non-deductibility of expenses should always be accompanied by other legal mechanisms aimed at avoiding double taxation of the same wealth. Only then will it be possible to ensure integration between the company and the shareholder.