Should creditors of borrowers that are undergoing judicial recovery have tax advantages? How can the deduction of losses interfere in the receiving of credits? In a crisis scenario, in which all losses become relevant, knowing what decisions to make can be very helpful in minimizing losses. Tax benefits due to losses may cause a financial effect (reduction of taxes owed) of 34% and 40% (for certain financial institutions) if losses are deducted from the corporate taxpayer’s income tax (IRPJ) or Social Contribution on Net Profit (CSLL), pursuant to the deduction criteria of Law 9430/96.

One of the criteria is receiving credit after declaring insolvency. However this criterion cannot be considered in case of judicial recovery, which is an economic-financial crisis of the borrower. Another hypothesis is unsecured credit, with deduction if the amount is: up to R$5,000, with the maturity date expired for more than six-months, with or without billing processes; between R$5,000 and 30,000, with maturity expired for more than one year, with at least administrative collection; or higher than R$30,000, with maturity date expired over one year and after judicial measures have been taken and sustained. There is also credit as guarantee, with the maturity date expired over two years, after judicial measures have been taken and sustained or after a provisional attachment of collateral has taken place.

As an example, we will analyze unsecured credit above R$ 30,000, with maturity date expired for more than a year and with judicial measures. In this case, the creditor will have probably deducted the loss form taxes, if the borrower undergoes judicial recovery, the initial deduction must be reevaluated, because there the judicial debt collection cannot be given up before five years after the maturity date.

As the recovery suspends lawsuits and foreclosures involving the debtor, it can be inferred that the judicial procedure is not maintained. However, there is no judicial abandonment if the credit is subject to judicial recovery (the creditor is in the list of creditors or is approved for the process). Judicial recovery is carried out judicially in all its stages, thus, the acts of the creditor are judicial procedures. Complying with this requirement, deducted losses, may, theoretically, be maintained.

There is also the case in which the creditor has not deducted the loss (said criteria has not been met), and the debtor begins recovery. In this case, it is best to verify the bankruptcy criteria. As recovery was established by Law 11.101/05, the previous Law 9.430/96 could not determine it. However if peculiarities are respected, judicial recovery is similar to what was previously considered bankruptcy. Thus, even if the law only mentions bankruptcy, it should apply to recovery. However this rule states that the deduction is only for the value that exceeds what the debtor agrees to pay. The amount that has not been included in the recovery deal is, at this moment, deductible. Any prior deduction is only possible if the credit criteria with or without guarantees has been met.

Lastly, if the losses have already been deducted, judicial recovery is not sufficient to reverse them, because judicial procedure must be maintained. However, once the amount to be paid is defined in the agreement, the prior deduction must be reversed and taxed, with the legislation being silent if this takes place at the time of the agreement or when the value agreed upon is received. Finally, if the amount agreed upon is not honored, then the part that has not been paid may be effectively deducted (complying with the criteria of secured or unsecured credit).

Thus, even though the criteria demand detailed analyses, they are essential in case of bad debt, before or after judicial recovery of the debtor, because the deduction of losses from income tax and the CSLL may interfere significantly in the financial effects of the creditors’ payment agreements.