Brazil launches public consultation on charging real estate tax on concession assets

Brazil’s public prosecutor (AGU) started a public consultation on imposing real estate tax IPTU on facilities linked to concessions, including in the infrastructure segment.

Normally, property owners pay the municipal IPTU tax annually, which finances local government. In theory, the tax amounts to 1% of property value, but in reality it is usually 0.5% due to exemptions.

Especially airport concessionaires have opposed the tax, as municipalities tried to charge it.

"The public consultation is based on a demand received by the AGU's chamber for the promotion of legal certainty in the business environment (Sejan) made by the National Transport Confederation, but which impacts several sectors. Sejan works to identify situations of legal uncertainty and propose solutions to encourage investment in the country," AGU said in a statement.

"The main point of the debate is whether the tax should be paid by the company that provides the public service, even when there is no provision for this type of payment in the bidding studies or in the companies' business plan, or whether the reciprocal tax immunity provided for in the constitution covers properties that are part of public service concessions and permissions," the statement said.

The consultation will remain open through May 22. Comments will be received from individuals and legal entities, such as affected agents and associations representing municipalities, states and infrastructure concessionaires.

After the public consultation, AGU will announce an official stance on the issue.

"A formal opinion from the AGU, being a federal government body, has the power to serve as a key legal basis for local court decisions, in the case of city halls deciding to go to court to charge IPTU, which is a municipal tax," Paulo Dantas, an infrastructure and project financing specialist at law firm Castro Barros Advogados, told BNamericas.

"In any case, this discussion raises important legal risks for companies, since if there is room for city halls to charge property tax on airport terminals, for example, in addition to other facilities from companies that work with concessions, this will represent an increase in the cost of current contracts. Not to mention that future concession contracts will also have to include this additional cost with IPTU in their economic models, which was previously not considered an issue," said Dantas.

“Local administrations always want to collect more taxes. If the collection of IPTU in concession contracts is authorized, also affecting existing contracts, we will see a lot of contract re-balancing, since when the contracts were offered, there was no provision for IPTU collection,” Alberto Sogayar, an infrastructure lawyer at Sogayar e Alcântara Advogados, told BNamericas.

"If an IPTU charge is chosen, the best thing would be to impose a rule that this would only be for new contracts, so investors and operators would include it in their economic models before bidding."