New normative instruction consolidates regulation on special tax regime applicable to real estate developments

Normative Instruction No. 2179 of the Brazilian Federal Revenue (“RFB”), published on March 07, 2024, aimed to consolidate the regulation regarding the special tax regime (“RET”) in line with legislative amendments relating to:

• Appropriated real estate developments;
• Social interest residential construction and real estate developments within the scope of Brazil’s affordable housing program (“Minha Casa, Minha Vida”), aimed at families whose income is framed under the “Urban 1” Range.
• Construction of housing units under the Minha Casa, Minha Vida and Casa Verde e Amarela programs, in line with the latest legislative amendments within this scope.

Adherence to RET-Incorporação (Special Tax Regime for Real Estate Development) remains irrevocable and valid while the developer’s credit rights and obligations are in force before the acquiror of real estate involved in the development.

We emphasize that the land and accessions that are the subject of a real estate development under RET-Incorporação, as well as any other assets and rights that are bound to it, will not be liable for the developer’s tax debts regarding the Corporate Income Tax (“IRPJ”), Social Contribution on Net Income (“CSLL”), Social Integration Program Tax (“PIS”) and Social Security Financing Tax  (“COFINS ”), except for debts calculated on monthly revenues obtained within the scope of the respective development and subject to the unified rate of the federal taxes mentioned above, which may vary from 1% to 4%, as the case may be.

Normative Instruction No. 2179 also provides for the following RET-Incorporação adhesion requirements:

• Appropriation of land and accessions that are the object of the real estate development;
• Adherence to the Electronic Tax Domicile (“DTE”) system;
• Tax regularity of the legal entity’s parent company regarding taxes under the competence of the Special Secretariat of Brazil’s Federal Revenue Office, the social security contributions and the Federal Government’s delinquent taxpayer registry governed by Office of the General Counsel for the Federal Treasury (“PGFN”).
• Regular collection of the Guarantee Fund for Length of Service (“FGTS”);
• No unpaid debts from federal agencies and entities;
• No convictions resulting from administrative improbity actions against the majority shareholder or manager;
• No criminal and administrative sanctions against a majority shareholder or manager resulting from harmful actions against environment;
• Submission of the Special Regime application form.

Effective RET-Incorporação adherence will be granted through a decision order by an RFB tax auditor, which taxpayers can access on the RFB’s website from July 01, 2024.

Below, we highlight the main amendments that Normative Instruction No. 2179 provides for regarding real estate developments:

• The SCP (a form of unincorporated joint venture, “silent partnership”) whose special equity includes real estate developments can adhere to RET-Incorporação, provided that legal requirements are met, and subject to compliance by the managing partner (ostensible partner) with the regime’s requirements and any obligations relating to the SCP;
• RET-Incorporação will be applied until the payment of the full amount relating to the sales of all units that make up the building code compliance documents registered with the registrar of deeds, regardless of its sale date. In the case of construction contracts, it will be applied until the payment of the full amount provided by the contract, valid since December 27, 2019. This, together with the practice of developers directly funding acquirors after the delivery of the keys, contributes to dismiss controversy regarding the taxation of such amounts, which are included in the special regime. In addition, it resolves the issue relating to developments planned to be carried out in different phases, with the subdivision of real estate developments under the terms of article 6 of Law 4,864/65;
• RET-Incorporação cannot be applied to revenue obtained from real estate units sold after the completion of the respective construction, if this has occurred by December 27, 2019;
• The application of RET-Incorporação to subdivision of land executed from June 28, 2022, frames such estate as a real estate development, provided that all other legal requirements are met and that the sale of lots in this subdivision are bound to the construction of detached or semi-detached houses; and
• RET-Incorporação will not apply to subdivisions prior to June 28, 2022, even if they are contractually bound to the option of building housing units, according to projects previously approved by the competent body.

Demarest’s Real Estate and Tax teams are available to provide any further clarifications that may be necessary.