Real Estate Investments in Brazil: Supreme Court Rules Out Tax on Property Transfers Made as Capital Contributions

On October 19, 2026, the Brazilian Supreme Federal Court (STF) issued its ruling
on whether companies engaged in the purchase, sale, or leasing of real estate may be
subject to tax when receiving real estate assets from their shareholders as capital
contributions. By a substantial majority, the Court held that such contributions are not
subject to the tax.

The tax at issue is the Real Estate Conveyance Tax (ITBI), a municipal tax generally
levied on transfers of real property ownership for consideration, such as purchase and
sale transactions. Its rate typically ranges from 2% to 3% of the property’s value. In the
City of São Paulo, the rate is 3%, making the tax a significant cost in any large-scale real
estate transaction.

Article 156, paragraph 2, item I of the Brazilian Federal Constitution of October 5,
1988 prohibits the collection of ITBI in two circumstances. The first is the contribution of
real estate assets to a company’s share capital. In this type of transaction, a member or
shareholder transfer a property to the company in exchange for the shares subscribed,
rather than contributing cash. The second is the transfer of assets resulting from a merger,
consolidation, spin-off, or dissolution of companies. This is a tax immunity: the
Constitution itself prohibits the collection of the tax, unlike a statutory exemption, which
may be revoked by ordinary legislation. The purpose is to prevent the tax from burdening
the organization and restructuring of companies. However, the constitutional provision
includes an exception: the benefit does not apply when the acquiring company’s
predominant business activity is the purchase and sale of real estate, the leasing of real
estate, or financial leasing.

For companies whose predominant business activity is not real estate-related, the
application of the immunity to capital contributions was not in dispute. The controversy
concerned real estate companies and the scope of this exception. Several municipalities
maintained that the restriction applied to both situations. Under this interpretation, a real
estate company or a family-owned or group-owned holding company established to hold
and manage real estate assets would be required to pay ITBI when receiving properties
from its shareholders. Taxpayers, in turn, argued that the exception applied only to
corporate restructuring transactions, such as mergers, consolidations, spin-offs, and
dissolutions.

Following conflicting decisions by state courts, the matter reached the STF through
Extraordinary Appeal No. 1.495.108, which originated from a writ of mandamus filed by
a company engaged in managing its own assets, i.e., an asset-holding company,
challenging a tax assessment issued by the Municipality of Piracicaba. The case was heard
under the general repercussion procedure (Theme 1.348), under which the STF’s ruling
must be followed by other courts in Brazil in cases involving the same legal issue.

The position adopted was that of reporting Justice Edson Fachin, who held that the
constitutional immunity applicable to capital contributions is unconditional, regardless of
the business activities carried out by the company receiving the property. The restriction
relating to a company1s predominant real estate activity applies only to mergers,
consolidations, spin-offs, and dissolutions. Justices Gilmar Mendes and Flávio Dino
dissented, arguing that the exception should also apply to capital contributions in order
to prevent the use of the immunity through corporate structures established exclusively
to reduce tax liabilities.

In his leading opinion, the reporting Justice also stated that Articles 36 and 37 of
the Brazilian Tax Code were not received by the 1988 Constitution to the extent that they
condition the tax immunity, in the case of capital contributions, on the absence of a
predominantly real-estate related business activity. These provisions have served as the
legal basis for municipal requirements that taxpayers demonstrate their predominant
business activity by analyzing operating revenue during the fiscal years preceding and
following the acquisition of the property. These provisions have served as the legal basis
for municipal requirements that taxpayers demonstrate their predominant business
activity by analyzing operating revenue during the fiscal years preceding and following
the acquisition of the property. With this legal basis rejected, such requirements are
expected to no longer be enforceable against taxpayers in capital contribution
transactions, which should reduce not only the tax burden but also the time and
documentation required for the process before municipal authorities and the real estate
registry.

The decision, however, does not eliminate all limitations on the tax immunity. First,
the understanding settled by the STF in 2020 under Theme 796 remains applicable: the
immunity covers only the portion of the property’s value effectively allocated to payment
of the share capital. For example, if a property valued at R$ 10 million is transferred to a
company to pay in R$ 6 million of share capital, with the remaining R$ 4 million recorded
as capital surplus, the municipality may levy ITBI on the excess amount. Furthermore, the
thesis itself expressly preserve the municipalities’ ability to establish, on a case-by-case
basis, the existence of sham transactions or fraud, such as situations in which a company
is organized solely to facilitate the immediate sale of a property to third parties without
payment of the applicable tax.

The Court also did not address a related dispute that remains unsettled among the courts: whether a municipality may assess ITBI on the difference between a property’s market value and the amount at which it is contributed to capital. Accordingly, particular care should be taken in ongoing capital contribution transactions regarding the value assigned to the properties in the company’s articles of association or bylaws, as well as the documentation supporting the transaction’s economic purpose.

For foreign investors, the main practical implication is the potential reduction in the cost of structuring real estate investments through Brazilian companies. Consequently, an international group seeking to consolidate operational real estate assets or income-generating properties in a Brazilian subsidiary, or a shareholder wishing to contribute such assets to a real estate leasing company, may do so without incurring ITBI on the portion allocated to capital, provided that the transaction has economic substance. For the same reason, the ruling reinforces the use of asset-holding companies, entities established to consolidate and manage assets, for real estate management and succession planning purposes. It is important to note that this immunity applies exclusively to ITBI. Other potential tax consequences of the transaction, such as the recognition of capital gains by the member or shareholder transferring the property, require a separate analysis.

The Court did not order any modulation of the effects of its ruling when announcing the outcome. The appellate decision has yet to be published, and only then will it be possible to determine its final wording and whether a request for modulation of effects is raised through a motion for clarification. With the publication of the official minutes on October 22, 2026, the Court’s position is already available as a reference for other judicial bodies, regardless of whether the decision has become final and unappealable.

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For more information on the above or other matters, please contact Maristela SA Rossetti (mar@rraa.com.br) or Gilberto Rossetti (gmr@rraa.com.br).

This article is based on publicly available information and given for informational purposes only. It is not intended as legal advice or as a comprehensive analysis of the matters referred to herein.