CARF Decision No. 1301-008.010 · 1st Section / 3rd Chamber / 1st Ordinary Panel · Session of December 17, 2025 | Administrative Proceeding No. 10980.723507/2014-14 · Reporting Councilor: José Eduardo Dornelas Souza · Appellant: Indústria de Móveis Nordeste Ltda.

A unanimous decision upheld a multimillion-real tax assessment for failure to withhold IRRF, found accounting fraud, and reduced the aggravated penalty from 150% to 100% under Law No. 14,689/2023.

Brazil’s Administrative Council of Tax Appeals (CARF) unanimously upheld a tax assessment against a limited liability company that, between 2008 and 2012, paid personal expenses of its members and their relatives, including residential rent, credit card bills, school tuition, a beach house, and the maintenance of a horse farm, recording the amounts under accounts such as “Members’ Current Account,” “Advances,” or profit distributions.

The case is significant not only because of CARF’s legal reasoning, but also because of the assessment’s financial scale: the consolidated tax liability stated in the record reached BRL 10,844,179.51, including penalties and interest.

The panel found that the payments constituted indirect compensation, or salary in kind, subject to Brazilian withholding income tax (IRRF), rather than a lawful distribution of profits. The 150% aggravated penalty was upheld in nature but reduced to 100% under Law No. 14,689/2023, retroactively applied pursuant to Article 106, II(c), of the Brazilian National Tax Code.

Core holding: the tax exemption for profit distributions requires proper accounting records and compliance with the members’ proportional ownership interests, unless the articles of association or a valid resolution provide otherwise. Direct payments of personal expenses that are disproportionate and lack adequate corporate authorization are not dividends and may be reclassified as taxable income.

The case

Technically, the dispute concerned more than the validity of a profit distribution. It also involved the payer’s failure to withhold IRRF from amounts that the tax authorities considered compensatory in nature. Because the violation was identified after the individual beneficiaries had filed their annual adjustment returns, the assessment against the company focused on penalties and interest arising from the failure to withhold.

The accounting mechanism was the central issue. According to the tax authorities, the company used liability accounts labeled “Members’ Current Account” to record the members’ personal expenses, while separately recording credits derived from management compensation and profits available for distribution. CARF held that this structure did not reflect an ordinary financial relationship between the company and its members, but an attempt to give the payment of personal expenses a regular accounting appearance.

The tax authorities also found that the beneficiaries held very small ownership interests, ranging from 0.42% to 2.54% of the company’s capital, yet received amounts inconsistent with those percentages and contrary to contractual provisions requiring profits to be divided in proportion to capital ownership.

The decision’s legal grounds

The decision consolidated three lines of reasoning likely to be relevant in future tax audits:

1. Substance prevails over form. Regardless of the accounting label used—liability, advance, current account, or profit distribution—the payment’s economic nature determines its tax treatment. Strictly personal expenses paid by the company, particularly when connected with the activities of managing members, may be treated as indirect compensation.
2. Disproportionate payments without contractual support or a valid resolution jeopardize the exemption. Profit distributions may be disproportionate when supported by the articles of association, a specific resolution, and adequate documentation. The problem arises when payments do not reflect ownership interests, lack valid corporate authorization, and, above all, directly cover the members’ personal expenses.
3. An accounting device may constitute fraud. Repeated use of liability or advance accounts to conceal compensatory payments was treated as intentional misconduct warranting the aggravated penalty. For CARF, an excusable accounting classification error is one thing; systematic simulation intended to conceal the taxable event is another.

CARF also rejected the claim that the company had been denied due process and found that an expert examination was unnecessary. In the panel’s view, the company’s own accounting records and the documents showing the nature of the expenses established the relevant facts. The dispute therefore concerned the payments’ legal characterization, not whether the payments had occurred.

Note: the decision also confirmed that late-payment interest applies to the ex officio penalty under CARF Precedent No. 108, which can materially increase the liability in audits covering long periods.

Why does this matter now?

The decision has additional relevance in light of the new taxation of profits and dividends introduced by Law No. 15,270/2025. Beginning in 2026, profits and dividends paid by the same legal entity to the same individual resident in Brazil in excess of BRL 50,000 in the same month are subject to IRRF withholding at a 10% rate, subject to the applicable statutory and regulatory rules.

This new environment may encourage companies and their members to seek alternative ways to transfer funds in order to reduce or avoid IRRF on dividends. CARF’s decision points in the opposite direction: it shows that the tax authorities can reclassify transactions that formally appear to be profit distributions, current-account entries, or advances, but in substance constitute compensation or a personal economic benefit.

The risk is not limited to IRRF. In this case, CARF referred to related administrative proceedings involving social security contributions on the same facts, in which payment of the members’ personal expenses was also treated as potential indirect management compensation.

The decision also reflects a broader trend seen in other recent precedents: tax authorities and courts are increasingly willing to examine the economic substance of distributions made to company members. In a case before the São Paulo Court of Appeals (TJSP), a disproportionate profit distribution without a business justification was treated as a gift subject to ITCMD (Appeal / Mandatory Review No. 1017523-31.2025.8.26.0196 | 12th Public Law Chamber of the TJSP | Reporting Judge: Jayme de Oliveira | Decision dated February 20, 2026). In the CARF case, payment of personal expenses was reclassified as indirect compensation subject to IRRF.

What limited liability companies should review

Limited liability companies that compensate their members through hybrid arrangements—including management compensation, profit distributions, members’ current accounts, advances, and indirect benefits—should review their corporate and accounting documentation before an apparent tax saving becomes a substantially greater tax exposure.

CARF’s decision does not establish an entirely new rule: reclassification of irregular distributions and indirect benefits was already a known enforcement practice. What has changed is the context. Because the new taxation of profits and dividends creates a concrete economic incentive to reorganize how company members are compensated, audits of distributions, advances, and personal expenses are likely to become even more important in practice.

The central issue, therefore, is not to prevent profit distributions or the members’ private autonomy, but to ensure that the legal form adopted is consistent with the transaction’s economic substance. When a company pays personal expenses, disregards contractual proportionality, and uses artificial accounting labels, the risk is no longer merely corporate; it becomes tax, social security, and enforcement risk.

By Maria Luisa Teixeira

Corporate Law | CPDMA Team