Tax Liability for Succession in Drop Down Transactions

Abstract

In drop down transactions, the transfer of assets, or part thereof, occurs to an existing company or one specifically created to receive them. Typically, the assets involved in the transaction are necessary for the operational activities of the transferring company. The transaction is implemented through the contribution of assets to the share capital of the receiving entity. The similarities between this transaction and spin-offs and the sale of business assets raise questions about the applicability of the tax liability provisions set forth in Articles 132 and 133 of the Brazilian National Tax Code (CTN) to this type of legal arrangement. Based on the dualist theory of obligations, where tax liability serves as a guarantee, it will be demonstrated that this transaction is distinct from those provided for in the CTN and, therefore, cannot serve as a basis for imposing tax liability on the company whose capital is being contributed.